TaxTMI 
TaxTMI 
TaxTMI 
2020 (11) TMI 567
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....a. 2.1 The directions of the Dispute Resolution Panel (DRP) - 2, Bengaluru ('DRP') and the consequential final assessment order is erroneous in so far as assessing the international shipping income from freight operations as income taxable in India under section 44B of the Act. 2.2 The AO / DRP ought to have appreciated that as per the provisions of Article 8 of the India - Singapore DTAA, any shipping income of a non-resident is taxable only in the country of residence, i.e. Singapore and as such cannot be assessed to tax in India. 2.3 The AO / DRP ought to have appreciated that the essential conditions for invoking the provisions of Article 24 of the DTAA is not satisfied and therefore it cannot be invoked. 2.4 The AO / DRP erred in imputing conditions for applicability of a tax treaty which are not present anywhere in the India-Singapore DTAA and therefore the order of the AO read with DRP Directions is ultra vires. 2.5 The AO / DRP ought to have appreciated that merely because international shipping income is exempt in one contracting state (i.e. Singapore), it does not alter the taxing rights of the said income so as to shift the same to the other contracting....
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.... that the assessee M/s. Bengal Tiger Line Pte Limited is a resident of Singapore and involved in the business of operation of ships in International Traffic. The assessee was the freight beneficiary in respect of various vessels which sailed from ports in the Indian sub-continent and South East Asia during the financial year 2014- 15. The assessee has claimed exemption from tax on income received from shipping operations in India in pursuant to the India-Singapore tax treaty on the ground that as per Article 8 of India-Singapore DTAA, tax resident of Singapore involved in the operations of ships in international traffic, is assessable to tax in Singapore on global income received [including income earned in India] from its shipping business. The assessee has filed its return of income for the assessment year 2015-16 on 28.09.2015 declaring exempt income of Rs. 19,48,19,987/-. The case was selected for scrutiny and notice u/s.143(2) and 142(1) of the Act were issued. In response to notice, the authorized representative of the assessee appeared from time to time and filed various details as called for. In this case, a draft assessment order was passed u/s.143(3) r.w.s.144C(1) of the....
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.... the AO in draft assessment order came to the conclusion that Article 24 of DTAA between India and Singapore is applicable to the assessee, because shipping income earned from operations in India was specifically exempted from tax u/s.13F of the Singapore Income Tax Act and consequently, the assessee cannot claim the benefit of relief provided under DTAA. The DRP further held that undoubtedly, by virtue of the tax payer being fiscally domiciled in Singapore, income received in India by shipping operations are liable to tax in the place of tax residency, but then as has been held 'liable to tax' is not the same thing as 'subject to tax'. The factum that the income was actually exempt from tax in Singapore is sheet anchor to the decision about applicability of Article 24 of the India Singapore treaty. No doubt under Article 8 of India Singapore DTAA, profit derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic will be taxable only in that state. Since, the assessee being tax resident of Singapore, global income from operation of ships is taxable only in Singapore. But, because of specific exemption as per Section 13F of the S....
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....n India u/s.44B of the Act. The AO, has threadbare discussed Article 8 and 24 of India Singapore DTAA, Section 13F of Singapore Income Tax Act and other relevant provisions in light of various averments made by the assessee before arriving at a conclusion that shipping income earned in India does not qualify for tax exemption in India as per the provisions of Article 24 of India Singapore DTAA and therefore, relief claimed by the assessee under DTAA in incorrect. The relevant findings of the AO are as under:- 5. Since the assessee is claiming relief from taxation by virtue of the provisions of the DTAA, it would be prudent to begin our discussion there. Every agreement is entered into because two or multiple parties are desirous of achieving some purpose. The agreement therefore flows from that purpose and provides context to it. Any reading of an agreement without keeping in mind that purpose will be incomplete and flawed. The Vienna Convention en. the Law of Treaties in Article 31 has clearly established the significance of "purpose" of a Treaty. It states that, "I. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms....
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.... 9. On the reading of the above it is clear that the assessee had claimed exemption of S$ 4,019,449 under Section 13F of SITA for the profits earned by way of International Shipping operations. In this circumstance the assessee was asked to provide the details of freight income received from India which is included in section 13F of the Singapore ITA. The assessee's submission clearly shows that the assessee had received freight income of Rs. 259,75,99,821/- from vessel operation in India and Computed profit of Rs. 19,48,19,987/- under provisions of Section 172 of the Income Tax Act, 1961. 10. The assessee in his submission has stressed on the wording "Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State ". The main thrust of the assessee's argument is that only the country of residence of a shipping company has exclusive rights to tax the income from operation of ships in international waters. This however, is a skewed interpretation. The DTAA seeks to prevent a situation where both the signatory countries lay claim to taxation rights on the same income. In such a scenario, ....
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....hipping Income of the Singaporean assessee is "neither exempt from India nor taxed at reduced rate". The assessee itself accepts that the income received by way of freight of shipping business is exempt from tax in Singapore. Thereby it cannot be said to be have been subjected to tax in Singapore. As per section 1O(1)(a) of Singapore Income Tax Act (SITA), Charge of income tax 10.-(I) Income tax shall, subject to the provisions of this Act, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore in respect of- (a) gains or profits from any trade, business, profession or vocation, for whatever period of time such trade, business, profession or vocation may have been carried on or exercised; 14. From the above it is clear that income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore in respect of profits from any trade or business is chargeable to Tax. Since the assessee claimed exemption 13F of Singapore Income Tax Act, the income earned from Indian operations neither taxed at Singapore....
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....ase, what is referred to as exemption under article 20, 21 and 22 of India Singapore tax treaty in the source country are conditional exemptions subject to the riders, whereas an income exempt under Article 8 is plain vanilla provision. Whether an income is taxed only in the residence country or whether an income is exempt from tax in the source country, the effect on exemption of income in the source country is the same particularly in the context of the treaty benefit being dependent on the taxation in the residence country is concerned. The wordings may differ but the impact is the same, and that is all the more clear when seen in the context in which the issue arises. Even if the meaning canvassed by the assessee was to be defined in the statute or the treaty itself, in view of the contextual requirements, such a meaning was to be discarded. 18. According to provisions of Section 172 of the Income Tax Act, 1961, in the case of any ship, belonging to or chartered by a non- resident, which carries goods shipped at a port in India seven and a half per cent of the amount paid or payable on account of such carriage to the owner or the charterer or to any person on his behalf, whet....
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.... of income to the residence country...." "......The provisions of article 24 of the India - Singapore DTAA would apply only for incomes which are "exempt" from tax as per the tax treaty. As has been clarified above, it may be noted that Article 8 is unambiguously not an exemption provision but only a provision which provides a taxing right to the country of residence. We submit that the international shipping income earned by the assessee is not per se exempt in India whereas it is taxable only in the country of residence i.e Singapore. We therefore submit that the exclusive right of taxation in one contracting state is not the same as a specific exemption being available in the other contracting state. There is a fundamental conceptual difference between right of taxation and specific exemption." "......The shipping income dealt with under Article 8 states that profits derived by an enterprise of a contracting state from the operation of ships in international traffic shall be taxable only in that state i.e resident state. The word only debars the other contracting state to tax the shipping income, that is India is precluded from taxing the shipping income even if it is source....
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....ndia and Singapore is rejected. Further the DRP noted that the assessee has filed its return of income computing the income as per the provisions of section 44B of the Income tax Act, 1961. As the assessee itself opted for an assessment order under normal provisions under section 44B of the Income Tax Act, the DRP has issued directions to modify and make assessment of the total income as per normal provisions under section 44B by taking the Gross Freight Income attributable to India Operations." 7. The Ld.AR for the assessee submitted that the Ld.DRP / AO erred in not appreciating the provisions of Article 8 of the India Singapore DTAA, which specifically provides that any shipping income of a non-resident is taxable only in the country of residence i.e., Singapore and as such cannot be assessed to tax in India. The Ld.AR further submitted that the Ld.AO / DRP ought to have appreciated that the essential conditions in invoking the provisions of Article 24 of DTAA is not satisfied and in order to invoke the provisions of Article 24, the first condition is that income sourced in a Contracting State and such income should be exempt or taxed at a reduced rate by virtue of any article ....
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....ady in existence since 01.04.1991 and as such the agreement between India and Singapore on 27.05.1994 specifically including Article 8 is very much clear that the competent authorities of both the Contracting States is fully aware of such provision and hence, choose not to alter the taxing right of shipping income which is generally available only to the country of residence. The Ld.AR for the assessee further submitted that the Hon'ble Gujarat High Court has considered an identical issue in the case of M.T. Maersk Mikage v. DIT(IT), 72 taxamann.com 359, where it has explained interplay between Article 8 and 24 of India Singapore DTAA and held that in view of clear provisions contained in Article 8 of the India Singapore DTAA, shipping income earned by the assessee in India from shipping operations in international waters is always taxable in the country of residence but not in the country of source. The Ld.AR for the assessee has also argued on the issue of provisions of Section 13F and Section 10(1) of Singapore Income Tax Act and with the help of certain judicial precedent including the decision of Hon'ble Supreme Court in the case of UOI vs. Azadi Bachao Andolan, 132 Taxman 373....
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....the Tribunal over such orders by the Special Bench which is yet to be constituted by the Tribunal. This is in consequent to the order of the Hon'ble Jurisdictional High Court in the case of M/s. India Trimmings Pvt. Ltd. vs. DCIT (Tax case No.118 of 2018). Therefore, before going to the merits of the case, the primary issue raised by the Revenue needs to be addressed by the Bench. 10. As regards, merits of the issue involved in present appeal, the DRP as well as the AO has brought out clear facts that the entire income earned by the assessee in India is taxable in India as the said income has been sourced in India and hence accrued in India for income tax purpose. The LD.DR further submitted that the purpose of DTAA between two sovereign states is only to avoid double taxation of the same income and not facilitating the purpose of double non-taxation. Moreover, since the shipping income of the assessee is not subject to tax in Singapore, which is the source state, Article 8 read with Article 24 of the India Singapore DTAA, clearly mandates, that the assessee should not be allowed treaty benefits and granted exemption from tax in the Contracting State i.e. India. The DR further sub....
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....he court has declined to comment as the said issue was raised for the first time before the Hon'ble court. Therefore, the case laws relied upon by the assessee has no benefit to the assessee. The Ld.DR further referring to the arguments advanced by the Ld.AR in the light of DIT Relief Certificate submitted that the same was issued for the purpose of tax deduction at source and it is only that once the certificate is issued, the Revenue cannot hold the deductor to be in default for whatsoever reason, but that does not serve as a bar on the income of the assessee being assessed in its hands. Therefore, we submit that there is no error in the findings recorded by the authorities below including DRP to come to the conclusion that shipping income of the assessee earned in India is liable to tax in India by virtue of Article 24 of India Singapore DTAA. 12. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below along with various case laws cited by both the sides. As regards preliminary issue raised by the revenue regarding jurisdiction of the bench to decide this appeal, on the issue of whether the Tribunal is havi....
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....he first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State. From the combined reading of Articles 8 and 24 of India -Singapore DTAA, it is very clear that article 8 provides exclusive right of taxation to country of residence, i.e. Singapore on accrual basis. Similarly, article 24 limits the exemption, in case income is exempt or taxed at reduced rate in source country, i.e. in India and further such income is taxable in country of residence on receipt basis. The AO, referring to Article 24 of the tax treaty, was of the opinion that although global shipping income of a Singapore tax resident is taxable only at resident State, but by virtue of Article 24 exemption would apply only to the extent of the amount repatriated / remitted to Singapore. In our view, the above conclusion of the AO is under the misconception of the provisions of India Singapore tax treaty, because as per Article 8 of India Singapore tax treaty, it was clearly specified that only the resident country has the right of taxation of freight income earned from operation of ships in international traffic. As may be seen from the provisions ....
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....ving said so, let us examine the applicability of Article 24 of India Singapore DTAA. Article 24 of India Singapore DTAA contemplates twin conditions for its applicability. The first condition is that income sourced in a Contracting State and such income should be exempt or taxed at a reduced rate by virtue of any article under the India Singapore DTAA. As we noted earlier Article 8 of India Singapore DTAA does not provide for exemption or reduced rate of taxation of such income. It is crucial to note that Article 8 of India Singapore DTAA contemplates the taxation rights of a particular income in particular State. As per said article, the country of residence is having exclusive right over taxation of shipping income and that being the case, the assessee being resident of Singapore vest with right to tax such income under the Singapore Income Tax laws. Accordingly, the shipping income earned in India is neither exempt nor taxed at reduced rate as per Article 8 of DTAA which is a condition precedent for applicability of Article 24. This fact has been clarified by the IRAS vide its letter dated 17.09.2018, where it was specifically sated that provisions of Article 24 of India Singa....
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....hat in every case of non-remittance of income to the Contracting State, Article 8 would not apply irrespective of tax treatment such income is given. The Hon'ble court while arriving at the above conclusion has taken support from the letter issued by Singapore Revenue Authority clarifying the taxation position of global shipping income of tax resident of Singapore and held that when shipping income of a tax resident of Singapore was taxable at Singapore on the basis of accrual, the very basis of applying Article 24 would not survive. This issue was further considered by the Mumbai Bench of ITAT in the case of APL Co. Pte Ltd vs. ADIT, 78 taxmann.com 240, where it was held that in order to invoke provisions of Article 24, two conditions need to be fulfilled. Firstly, income earned from source State (India) is exempt from tax or is taxed at a reduced rate in source State (India) as per DTAA; and secondly as per the laws in force of resident state (Singapore), such income is subject to tax by reference to amount thereof which is remitted to or received in resident State and not by reference to full amount thereof. The Tribunal further noted that the key phrases which need to be borne ....
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....the taxing rights of particular streams of income, the provisions of such agreement should be merely given effect to and as such the action of the AO to claim taxing right over the said income which is not provided in the treaty is ultravires the power of the AO and will amount to dishonoring the bilateral agreement between two sovereign nations. We further noted that the AO has taken support from 10(1) of Singapore Income Tax Act to argue that any income of a Singaporean resident that is accrued or received in Singapore is chargeable to tax in Singapore at the specified income tax rates. But, fact remains is that although profits derived by an international shipping enterprise is exempted from taxation as per Section 13F of Singapore Income Tax Act, but such income is always liable to tax in Singapore. The exemption provided u/s.13F of the Singapore Income Tax Act is only on a case to case basis for a limited period of time and it is subject to certain conditions. Therefore, we are of the considered view that the liability to taxation is not dependent on whether taxes are actually paid in the said jurisdiction. This fact is strengthened by the decision of the Hon'ble Supreme Court....
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....ome and the second way is providing 'exclusive right of taxation' to one country and thereby double taxation can be avoided. In the present case, Article 8 provides exclusive right of taxation of shipping income to Singapore in order to avoid double taxation method where India has given up its right of taxation of international shipping income of a Singaporean resident and as such Singapore has reserved its exclusive right to tax the same. Once the country of resident is having exclusive rights to tax a particular income by way of separate Article, then limiting or denying such benefit by interpreting the other Articles which are provided for limiting the benefit in case such income is exempt or taxed at reduced rate of tax in other Contracting State is contrary to the purpose and object of DTAA. 18. In this case, the Assessing Officer has denied the benefit only on the simple ground that the income of the assessee received in India is exempt by virtue of separate provisions of Singapore Income Tax Act and on the misconception of law to come to the conclusion that once a country of residence has exempts particular income from tax, the other Contracting State (source country) can l....
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....he order of the Assessing Officer and the directions of the DRP and also the judgements relied on by the AR. In the present case it is not in dispute that the assessee/appellant is a foreign company and has its effective management in Cyprus. The AR has placed on record a copy of DTAA between India and Cyprus. A perusal of Article 7 of the DTAA shows that Article 7 relates to business profits of an enterprise having permanent establishment in India. Article 7 specifically states that such profits shall be taxable only in that State unless the enterprise carries on business in other contracting State through a permanent establishment situated therein. The Article 8 of DTAA deals with shipping and air-transport business. Article 8 provides that profits derived by enterprise registered and having headquarters (i.e. effective management) in a Contracting State from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in that State i.e. profits from operation of ships or aircrafts in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated, which in the pr....