TaxTMI 
TaxTMI 
2023 (1) TMI 1226
X X X X Extracts X X X X
X X X X Extracts X X X X
....puhar Shipping Corp. Ltd. (PSCL) dated 18.04.2018 for transporting coal from Paradeep port to Tutucorine in Tamil Nadu, through its ship 'MV Eastern View'. The said contract was a period of 13 months. The assessee in turn has chartered the vessel 'MV Eastern View' from M/s Power Overseas Investment LLC, again on Time Charter Basis. The assessee has disclosed the receipts of transporting coal from port to port from (PSCL) as shipping business and offered to tax u/s 44B of the Act, i.e. @ 7.5% of the gross receipt attributable to shipping operations carried out in India. 4. Ld. AO after analyzing the contract between the assessee and M/s PSCL, deduced that assessee is simply letting out the vessel and PSCL has hired the vessels for the period of 13 months for carrying out coal from Paradip port to Tuticorin, Tamil Nadu. He held that PSCL is paying the assessee for the use/right to use by way of leasing or letting out the vessel and therefore, the same is to be taxed under 'royalty' u/s 9(1)(vi). AO observed that assessee is being paid fixed amount irrespective of fact, whether the vessel is being used by the charter or not. He held that assessee is not being paid for transporting ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt opinion from the opinion of the assessing officer. Therefore, the ground of objection no. 1 is dismissed. 6. Before us, Ld. Counsel for the assessee submitted that, first of all, assessee has rightly offered the income u/s 44B of the Act for the reason that assessee is a non-resident company engaged in the business of operation of ships and therefore, income derived from business of operation of ships has to be taxed under the special provision. He submitted that from the perusal of the time charter agreement between the assessee and PSCL, it can be seen that the assessee is a vessel owner and was responsible for the crew as being the vessel master. The ship was under the control of the assessee company and the PSCL has only taken on a time charter basis for transporting the coal from one port to another. Even the vessels stowage plan was to be made under the Master's supervision and the master shall co-operate with the charters to load and stow the charter's intended cargo. Even the freight calculation was based on the quantity of the load which has to be assessed by the surveyor of charter and based on that the payment was made to the assessee company. The assessee, i.e., o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee is used for transporting of coal and has operated a ship on time charter basis by PSCL, therefore it has be subjected to tax under the special provision of section 44B of the Act. Whereas, the case of the revenue is that the ship is equipment which has been let out by the assessee and hired by the charter. The receipts are in the nature of hire charges, therefore, it is the use of the equipment and accordingly, the judgment of Hon'ble Madras High Court is squarely applicable. 10. First of all, we have to see whether the income earned by the assessee was in the nature of 'royalty' within the meaning of section 9(1)(vi) r.w. Explanation (iva). Clause (iva) to Explanation 2 of section 9(1)(vi) reads as under:- (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44B. 11. What is to be seen is, whether the assessee has given use or right to use the ship to PSCL and the payment received for time charter services falls within the ambit and definition of Clause (iva) (supra) or not. The relevant clauses of Time Charter agreement as noted and analysed by the AO reads as under:- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ers at the port of re-delivery, shall take over and pay for all fuel remaining on board the vessel. e) Clause 4 - That the charterers shall pay for the 'use and hire of the said vessel at rate of USD 13100/- per running day 24 hrs per calendar month including overtime commencing on and from the day her delivery, as aforesaid^, and at and after-the same rate for any part of a month, hire to continue until the hour of the day of her re-delivery in like good order and condition wear tear expected, to the Owners (unless lost) at a safe berth.. As per above clause, the Charterer is making payment for the use and hire of the vessel at the rate of charter hire USD 13,100 PDPR (per day pro-rata). f) Clause 6- That the cargo or cargos be laden arid/or discharged in any dock or at any wharf or place that charterers or their agents may direct, g) Clause 7 - That the whole reach of the vessel's holds, decks and usual place of loading (not more than she can reasonably stow and carry), also accommodations for supercargo, if carried shall be at the charterer's disposal, reserving only proper, and sufficient space for Ship's officers, crew, tackl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....under the instruction and direction of the Charterer. 12. The preamble which has been interpreted by the AO that it is for letting up the vessel and hiring by the charterer cannot be treated as giving up the vessel for hiring simplicitor or that the owner has agreed to be a captive service provider to the charter for transporting the coal between the ports. The vessel which has been stated to be at the disposal of the charterer means that the vessel during the period of time charter cannot be made available to any other party as the same is for the use of the charter for that period. In so far as clause1, it stipulates that it is the owner who is responsible for everything right from the wages, salaries for crew and insurance and stows and for counselor shipping and discharging the fees of the crew and maintaining the vessel in a proper state. This inter alia state that the vessel is in possession and ownership and maintenance of the assessee and not that the charterer. In so far as clause 2 is concerned, it only shows that expenses for usage which is valuable cost is that of the charterer and the cost of any excess fuel on the expiry of contract will be back to the charter part....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o satisfy various requirement. However, the vessel continues to the owned, operated and maintained by the vessel as owner as per the requirements of the charterer for which the compensation /remuneration has been agreed on certain basis which is fixed on cost + margin depending upon the load of the carriage. Though the payment may accrue whether the charterer requires it or not, but the compensation is paid to the owner for the transportation of the coal depending upon the load by the charterer. Even from the clause which has been referred by the AO that it is the lease or let out of a ship to the charter who is using the ship for the period of charter in the manner he desires on independent basis with no control of the owner is incorrect inference and does not envisage that the charterer has any control of the ship except for carrying the coal as per the requirement of the charterer and all time the ownership and control is with the owner which is evident from the terms of the agreement. The compensation is merely to decide the quantity of load on the ship by the charterer and not otherwise. To fall within the ambit of use or right to use equipment, it is sine qua non that the hir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce levels of the vessel. Even as per this clause specifically clause (d) load capacity is relevant to determine the compensation. It also provides for damages on account of delay in delivery or behind the lay days i.e., days on which the vessel is laid off. Interestingly, even for this the amounts are calculated based on the loading capacity of the Vessel and the loading capacity lost and based on this the damages are deducted from hire charges or to be recovered from the Owner. • Clause 38: As per this clause, the Owners warrant the suitability of the vessel for loading and transporting coal meaning the fitness of the vessel for transporting coal is determinative for the purpose of the agreement. • Clause(s) 44, 45: As per these clauses, the compensation for non-adherence to loading rate is provided for. Further, the compensation for incapacitation or breakdown of the vessel is also provided, as per which the said loss / compensation would be on owners account. The said loss / damage / compensation would be calculated on the basis of ocean freight charges. These clauses clearly indicate that the hire charge is not independent of the loading capacity / loa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d-freight calculations; 1. Charter period from RFA previous discharge port to RFA next discharge port ....... Days ....... Hours ...... Minutes x charter hire per day 2. Bunker consumption for the above voyages FO MT x Rs....... (at current price) HFHSD MTx Rs....... (at current price) 3. Actual port charges levied by the port(s) Load port = Rs, Discharge port = Rs, 4. Miscellaneous expenses -Rs. ..... Total cost (X) = Rs. Total cargo loaded (Y) - mt 5. Cost per tonne (Z) = (X) Total expenses incurred for one round voyage =Rs. (Y)Total cargo loaded 6. Cost to be recovered towards of dead freight = Z x dead freight quantity The short loaded quantity as assessed by charterer surveyor at load port shall be taken for dead freight calculation. Due allowances shall be given for dock water density, excess bunkers on board, limitation at the berth due to draughi restrictions, charterer's / agents instruction on specific voyages to sail short loaded in order to catc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eding any further, it may be relevant to point out that the fact that the assessee during the year under consideration had not constituted any PE in India is not in dispute before us. For a fair appreciation of the issue under consideration, it would be relevant to cull out the definition of the term 'royalty' as contemplated in 'Explanation 2' to Sec. 9(1)(vi) of the Act, AND Article 12(3)(b) of the India-Singapore tax treaty. The term 'royalty' as defined in the 'Explanation 2' of Sec. 9(1)(vi) of the Act, reads as under: "Explanation 2.-For the purposes of this clause, "royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'Capital gains") for- (i) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee by time charter of its vessel viz. 'Smit Borneo' were inextricably connected with prospecting, extraction and production of mineral oils, the consideration therein received from the charterer being in the nature of amounts referred to in Sec. 44BB of the Act, would thus fall within the exclusion carved out in the definition of the term 'royalty' as contemplated in clause (iva) of the 'Explanation 2' to Sec.9(1)(vi) of the Act. We shall first deal with the second limb of the aforesaid contention advanced by the ld. A.R before us. As observed by us hereinabove, it is the claim of the assessee that as the time charter receipts were covered by Sec. 44BB of the Act, the same would thus fall within the exclusion carved out in the definition of the term 'royalty' as contemplated in clause (iva) of the 'Explanation 2' to Sec. 9(1)(vi) of the Act. We are unable to persuade ourselves to accept the aforesaid claim of the assessee. As had been observed by us hereinabove, in the absence of the assessee's PE in India, the aforesaid time charter receipts could not have been brought to tax under Sec.44BB of the Act. In fact, the assessee had itself not offered the aforesaid amount for tax un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t to use the ship for an economic benefit is given to the assessee, the consideration for the use of the industrial, commercial and scientific equipment is 'royalty', assessable under Explanation 2(iva) to Section 9(1)(vi) of the Income Tax Act. Thus, for the purposes of Income Tax Act, under the time charter, the payment made being for the use of the ship, the same comes within the meaning of the word "royalty" xxx 106. Section 9(1)(vi)(b) states that income by way of royalty payable by a person who is a resident arising or accruing whether directly or indirectly through or from business connection in India shall be deemed to accrue or arise in India. Sub-clause (b) states that the income by way of royalty is payable by a person who is a resident. The only exception herein is that the royalty is payable in respect of any right, property or information used or services utilised for the purpose of business or profession carried on by such person outside India, or for the purpose of making or earning any income from any source outside India alone is excluded in 9(1)(vi) of the Income Tax Act. In other words, royalty payable by a resident in India to a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB and the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films, the payment would be considered as 'royalty'. As rightly pointed out by the Revenue, as far as the use or right to use is concerned, even going by the OECD commentary, even with the possession of the ship with the owner, the right to use being part of bundle of rights that the owner has and this parted with for a consideration, the Revenue need not take the assistance of Explanation 5 to substantiate its case. With the Explanation, the case of the Revenue becomes more firm on the issue of 'royalty'. xxx 118. Referring to BC Mitra in his Law of Carriage by Sea in the decision reported in (1978) 113 ITR 307 (Union of India V. Gosalia Shipping Pvt. Ltd.), the Apex Court pointed out t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... alone stands excluded. The Explanation has brought in clarity and made it more explicit to the law already in existence. The payment towards the employment of the vessel is clearly in the nature of 'royalty'. The use or right to use the ship for a consideration means and relates to the economic aspect of the equipment as a business asset, and the exploitation of the earning potential of the Vessel. Hence, we have no hesitation in holding that the consideration paid under the time charter fits in with the definition of 'royalty' under Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. 21. Thus, the Hon'ble High Court has categorically held that under the time charter agreement, the ownership and compensation of the vessel remain with the owner but are separated from the use of the ship which is granted to the charterer and thus any payment towards employment of the vessel is clearly in the nature of royalty. The use or right to use the ship for consideration means relates to the economic aspect of the equipment as a business asset and the exception of the earning potential of the vessel. One important observation of Hon'ble Apex Court in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was calculated on the basis of daily freight and load capacity. ii. The assessee though the owner of the ship but was never separated from the use of the ship nor granted the ship to the charterer, which is generally is in the case of typical time charter. iii. If the agreement provides that the charterer will pay for the use and hire of the said vessel per running day of 24 hours per calendar month, it means that the payment was to be calculated on per day basis which is a kind of voyage freight. This is also further evident from the method and manner of freight calculation and dead freight calculation. If freight is calculated on pro-rata basis, then under no circumstances, it can be inferred that use or right to use of the ship is given to the charterer. iv. It was never the condition that the ship itself, and the control over the working and navigation was transferred for the time period to the charterer who used the vessel and there was never a transfer of ship and the control over navigation to charterer, which was one of the condition laid down in the aforesaid judgement. Even though, pressing of compensation or functional control and custody of v....