TaxTMI 
TaxTMI 
2024 (2) TMI 1238
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....the appeals are being taken up together. We shall first take up the appeals filed by the Assessee and the Department for A.Y. 2003-04 and our observations would apply to other years as well, as may be applicable. 2. The assessee has taken the following grounds of appeals:- "1. On the facts and in the circumstances of the case, the learned CIT(A) erred by rejecting the appellant's relevant grounds of appeal raised before him of not treating the "Time Charter Hire Charges" as Royalty and not taking into consideration the factual situation and clarification given by CBDT, Department of Revenue, Government of India to all the Indian National Ship Owners Association (INSA) members in the correspondence between the INSA, Ministry of Finance & Ministry of Shipping, of not treating the Time Charter Ships as Equipments, and in turn not treating "Time Charter Hire Charges" as Royalty payments. It is the bounden duty of the field officers to abide with the instructions of CBDT, and by ignoring such instructions, or not taking into Consideration CBDT's Instructions, the International Taxation Division has acted in an arbitrary manner and against the law. Therefo....
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....on and other maritime activities. During the course of proceedings under Section 201(1) / 201(1A) of the Act, the Tax Officer observed that the assessee company had taken dredgers for the purpose of its business from a non-resident company M/s. Miller Dredging Company Inc., British Virgin Islands in pursuance to agreements entered with such company since 2002. The assessee company had taken these dredgers from M/s. Miller Dredging Company on a long term charter basis alongwith crew who were carrying out their activities at the command of the assessee in relation to dredging operation of the assessee at various places in India. During the year under consideration, the assessee had remitted a sum of Rs. 15,69,37,334/- as time charter hire charges for the above dredgers which were being used in India by the assessee. However, the assessee did not deduct tax at source at the time of making payments to M/s. Miller Dredging Company Inc. The Tax Officer observed that no order under Section 195(2) / 195(3) / 197 of the Act was obtained by the assessee from the Assessing Officer with respect to payment made to the non-resident recipient with respect to non-deduction of tax at source. The Ta....
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....nilateral decision that the payment made by him are not sums chargeable to tax. To take that view, the concurrence of the Assessing Officer as provided in sub-Section (2) of Section 195 is a sine qua non. 5. The conclusions and the findings recorded by the ADIT may be summarized as under: "(1) The AO observed that the time charter hire charges paid to Miller Dredging Inc. are chargeable to tax under the Income Tax Act, 1961, as the dredgers owned by the aforesaid foreign company have been operating in Indian territorial waters for sufficiently long period of time. (2) Technical staff was maintained by the foreign company on the dredgers, which proves that the foreign company has a business connection, and therefore, the hire charges received by the foreign company are in the nature of business income chargeable to tax u/s 9(1)(i), and accordingly tax was required to be deducted under Section 195 by the Appellant Company at the applicable rates. (3) The AO further held that the non-resident company derived income from a source in India having regard to the fact that the dredgers owned by the foreign company are continuously operating in India and regula....
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....assessee qualified as "royalty" within the meaning of Section 9(1)(vi) of the Act and the assessee was under an obligation to deduct tax at source on such royalty payments. Further, CIT also held that the overseas payee company is not eligible for tax treaty benefits since it did not produce the relevant documents before the tax officer. Further, CIT also held that the assessee did not disclose the vital fact that the payee was Tax resident of British virgin Island and not UK and this fact was not disclosed to RBI or to its Auditors. The CIT observed that the assessee also did not disclose this important fact of the residential status of the recipient before the assessing officer in 201 proceedings as well. Therefore, the benefit of tax treaty was not available to the assessee in the instant facts. Further, CIT rejected the claim of the assessee that it was under a bona fide belief that it was not liable to deduct tax at source and held that in case of doubt, the assessee should have approached the concerned, assessing officer for clarification regarding non-deduction of tax source. While passing the order, CIT made the following observations:- "7.4 I have given careful co....
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....wn the terms and conditions of the charter - in the instant case, the protocol is signed in New York. Even on renewal of charter agreement, if any, are signed by Miller Dredging Co. outside India. (d) The rights and obligations of each party, including charter hire rates, place of delivery, place of arbitration, obligations of each party for complying with national laws, etc., are clearly defined in the Charter Party. "CHARTER PARTY" is the term used for referring to the Contract/ Agreement between the two parties for chartering ships. (e) The place of arbitration is New York as mentioned in the charter party between the Appellant and Miller Dredging Company, Inc.. (f) The payment of charter hire is made by the Indian company in an account outside India, The amount is remitted directly. The receipt of charter payment is therefore outside India, (g) All legal and regulatory obligations under the Merchant Shipping laws of India, are to be complied with and dealt with by the Indian Company (Jaisu). The foreign owner has absolutely no role in this matter, (h) The Indian company has to first apply for permission to In-Charter the foreign flag....
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....an company has to obtain the clearance from the Indian custom authorities for the chartered dredgers. Bill of entry in this regard has to be filed by the Indian Company only. The non-resident company has nothing at all to do with this process. Customs duty, if any payable on the deployment of the chartered Dredgers in Indian coastal waters during the period of hire, has to be paid by the Indian company. (s) Security clearance in respect of the chartered dredgers is obtained from the Indian Naval and other Government Authorities by the concerned port, based on information and details submitted by the Indian company alone. Once again, the foreign company has no role to play in the processes of obtaining security clearance, without which the chartered foreign flags dredgers cannot operate in Indian coastal waters. (t) Port clearance has to be periodically obtained by the Indian Company from the concerned port where the foreign flag dredger is deployed. Such clearance has to be obtained only by the charterer, that is the Indian company alone. (u) Some important terms of charter of agreement are reproduced below (from the order of the AO) : (i) Owners....
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....l, distance run and the consumption of fuel." (vi) Owners shall maintain the cargo handling gear of the ship which is as follows: As efficacy providing gear (for all derricks or cranes) capable of lifting capacity as described. Owners shall also provide on the vessel for night work lights as on board, but all additional lights over those on board shall be at Charterers expense. The Charterers shall have the use of any gear on board the vessel. If required by Charterers, the vessel shall work night and day and all cargo handling gear shall be at charters disposal during loading and discharging." (vii) Navigation "Nothing herein stated is to be constructed as a demise of the vessel to the Time charters. The owners shall remain responsible for the navigation of the vessel, acts of pilots and tug boats, insurance, crew, and all other similar matters, same as when trading for their own account" Considering the above mentioned factual position and several other submissions made on behalf of ,the appellant company elaborated above, besides the issue of business connection, it has to be seen was there any activity of the nature of business of th....
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....criterion, in para 69 of its order, while referring to the judgement of Hon'ble Karnataka High Court in the case of Lakshmi Audio Visual Inc. v. Asstt. CCT [2001] 124 STC 426 while deciding whether an equipment is leased out or services are provided by the owner as follows: "69. We may also refer to the following distinction brought out by the Karnataka High Court between leasing out of equipment and the use of equipment by its customer. This was done in the case of Lakshmi Audio Visual Inc. (supra) in the following terms: "9. Thus if the transaction is one of leasing/hiring/letting simpliciter under which the possession of the goods, i.e., effective and general control of the goods is to be given to the customer and the customer has the freedom and choice of selecting the manner, time and nature of use and enjoyment, though within the frame work of the agreement, then it would be a transfer of the right to use the goods and fall under the extended definition of "'sale". On the other hand, if the customer entrusts to the assessee the work of achieving a certain desired result and that involves the use of goods belonging to the assessee and rendering of sev....
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....e belonging to the transport operator being delivered to the customer and the customer is given the exclusive and effective control of the vehicle to be used in any manner as it deems fit; and during the period when the lorry is with the customer, the transport operator has no control over it. The transport operator renders no other service to the customer. Therefore, the transaction involves transfer of right to use the lorry and thus be a deemed sale." In the instant case, the lessee has full control over the equipment and the staff and the operation of the equipment. It is similar to (even more clear case as the payment is not assured minimum but is fixed irrespective of the actual usage) case (ii) cited by hon'ble Karnataka High Court as reproduced above. The transfer of right to use the Dredger itself, is clearly transferred for a period (not outright sale); and therefore the payment would be of the nature of Royalty. The Captain (although appointed by the owners) shall be under the orders and directions of the Characters as regards employment and agency. In so much so that if dissatisfied with his services, the lessee can get him changed as per the agreement itse....
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.... that extent, therefore, the orders of the ADIT are reversed. Coming to the next question as to whether the payments can be said to be in the nature of royalty income, after considering the entire facts and circumstances, the provisions of law and the cases cited, I am of the firm view that these payments are in the nature of royalty as per the amended provisions of sec. 9(1)(vi). The decision of ITAT, Cochin in the case of M/s. Kin Ship Services India Pvt Ltd is not good law as the amended provisions of sec. 9(1)(vi) rw explanation 2 clause (iva) were not bought to its notice and it failed to consider that now the use or right to use any industrial, commercial scientific equipment is covered under Royalty. As per the discussion above, therefore, it is held that the appellant company was under an obligation to deduct tax at source applicable to royalty payments., particularly as per the amended provisions wherein now the non-resident need not have residence or place of business or business connection in India nor services are necessarily to be rendered in India for the royalty to be deemed taxable in India u/s 9(1)(vi). 7.5 Now, whether, having regard to the relev....
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....x need not to be deducted at source from this payment." In all the certificates received from the bank similar assertion was made by the assessee for each remittances." Clearly, the fact that the payee was resident of a tax haven i.e. British Virgin Island and not UK, was not even disclosed to the RBI. I have not admitted the additional evidences in the form of Audit Reports and proceedings before the AO [the AO having jurisdiction over the assessee's assessments is different from the present AO who has passed the order u/s. 201(1)] sought to be filed before me, primarily because these are immaterial; because nowhere has the assessee shown that the important fact of the residential status of the payee was correctly disclosed before the auditor or the AO. Any opinion of the auditor or the AO, even if formed [I have not examined the material evidences, as I have not admitted it]; formed on the basis of incomplete disclosure of facts cannot be allowed to be relied upon by the assessee. Further, the decision of ITAT, Cochin in the case of M/s. Kin Ship Services India Pvt Ltd is not good law as the amended provisions of sec. 9(l)(vi) rw explanation 2 clause (iva) w....
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....ers on time charter basis from M/s. Miller Dredging Company Inc., British Virgin Islands. As per the terms and conditions of the relevant agreement, these dredgers are to be delivered at one of the Ports of India by the foreign company. As per the agreement, the dredgers are hired out alongwith navigational staff of the foreign company including the Captain of the vessel. 8. During the course of assessment proceedings the Assessing Officer held that time hire charges were in the nature of "Royalty" under the provisions of Section 9(1)(vi) of the Act. 9. In appeal, Ld. CIT(A) confirmed the order passed by Assessing Officer and held that the payments qualify as "Royalty" under Section 9(1)(vi) of the Act. After analysis of the relevant facts, the Ld. CIT(A) formed the view that the contract for providing dredgers is essentially a contract of lease of dredger. The fact that generally the dredgers have to be maintained as per the lessor's requirement and to be handled under its trained staff is only with a view to ensure that in case of temporary hiring of costly specialized equipment, the same should be received back in a good working condition and that there is no unwarranted d....
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....ng that payments qualify as "Royalty" under Section 9(1)(vi) of the Act. 11. Before us, the assessee filed its written submission and placed reliance on the case of Kin Ship Services (India) (P.) Ltd. 31 SOT 375 (Cochin), wherein the ITAT held that payments made by way of hire charges of ships could not be said to be in the nature of "Royalty" within the meaning of Section 9(1)(vi) of the Act. The assessee further placed reliance in the case of Isro Satellite Centre 307 ITR 59 (AAR) in which the AAR ruled that by leasing of transponding space by earmarking a space segment capacity of the transponder for the use of the applicant, assessee did not got any possession of the equipment nor did it use any equipment and hence payment made by the applicant cannot be regarded as being made for the "use" of the equipment. Further, the assessee also placed reliance in the case of Asia Satellite Telecommunications Co. Ltd. 332 ITR 340 (Delhi), in which it was held that there is a well-known distinction between lease of equipment and use of equipment, while ruling that lease of transponder space is not "Royalty" as the assessee was the operator of the satellite and continued to be in control....
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....erted a Clause in the Income Tax Act in the definition of "Royalty" for payments arising from the use or right to use any industrial, commercial or scientific equipment. It would be useful to reproduce the relevant extracts of the Income Tax Act, Section 9(1)(vi) for ready reference:- "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 licence) 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, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) t....
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....clauses in a time charter agreement and pointed out that the conclusion that one would draw from the terms is that the payment by time charterers to the owners of the ship was not one payable on account of the carriage of goods, but was payable on account of the use and hire of the ship. Pointing out that the charter party was approved by the New York Produce Exchange and that there is no warrant for supposing that though the payment which the charterers bound themselves to make to the owners of the ship is on account of the carriage of goods, the parties described it as payable for the use and hire of the Vessel, in order to avoid the payment of Indian Income Tax. Referring to the clause on the liberty reserved to the charterers to sub-let, and the captain of the ship should be under the orders and directions of the charterers as regards employment and agency, the Supreme Court pointed out "the character of the payment cannot change according to the use to which the charterers put the ship or according as to whether the ship is loaded with goods in a port in India. What is payable as hire charges for the use of the ship cannot transform itself into an amount payable on account of ....
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....in Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 (SC) and pointed out to the attributes in right to use goods for the purposes of attracting the charge to hold that a transfer of right to use goods implied transfer of effective control for use. In that context, going by the charging provisions under Section 3A of the Tamil Nadu General Sales Tax Act, this Court held that in a time charter party, there being no transfer of effective control for use, the transactions would not attract Section 3A of the Tamil Nadu General Sales Tax Act. 66. Learned senior counsel appearing for the assessee submitted that the view of this Court in the decision Essar Shipping Ltd. (supra) squarely covers the case on hand, particularly as regards the phrase 'use or right to use' and hence, when the transaction is one of service in nature, the question of attracting Clause (iva) to Explanation 2 does not arise. 67. We do not agree with the submission of the assessee. On the expression 'use or right to use' appearing under Explanation 2(iva) to Section 9(1)(vi), the decision of this Court in Essar Shipping Ltd., (supra) is distinguishable. We may note that t....
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....d to make use of the machinery for the purpose of execution of the work of the owner, namely, Rashtriya Ispat Nigam Ltd. and there was no transfer of right to use as such, in favour of the contractor. The High Court pointed out as follows: 'An owner of property has a bundle of rights in it, namely, right to possess, right to use and enjoy, right to usufruct, right to consume, to destroy, to alienate or transfer, etc. In law it is not only possible but also permissible that the various rights and interest may be vested in various persons. While remaining the owner of a property, a person may create a charge on the property, mortgage it or lease it. In the transaction of sale, all the rights of the owner are transferred to the purchaser and it is said that the property in the goods passes to the purchaser. In a lease of immovable property, there is a transfer of a right to enjoy such property; "a lease of land and a bailment of chattels are transactions of essentially the same nature." (Salmond on Jurisprudence -Twelfth Edition at page 424) Section 148 of the Contract Act defines "bailment" in the following terms : "148. 'Bailment', 'bailor&....
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.... the Apex Court held that the transaction did not involve transfer of right to use the machinery in favour of the contractors and in the absence of satisfying that essential requirement of Section 5-E, the hire charges collected by the assessee from the contractors were not exigible to sales tax. 73. In the decision Aggarwal Brothers (supra), the question of hiring as amounting to transfer of right to use goods again surfaced with reference to Haryana General Sales Tax Act. This case related to hiring of shuttering materials to builders for use in the course of construction of buildings. The Supreme Court pointed out that the definition of "sale" in the Act includes the "transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration". The provision expressly speaks of "transfer of the right to use goods" and not of transfer of goods, and transfer of right to use goods for consideration is deemed to be sale. Where the transfer of a right to use is for consideration, the requirement of law is satisfied and is deemed to be a sale. The Supreme Court rejected the contention of the assesse....
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....nsaction is a lease, and here too there is a transfer of possession. So far the two are very similar, though whereas the lessor always retains what is misleadingly called 'possession', a bailor who bails goods for a fixed term loses possession... 69. The Halsbury's Laws of England describes 'Hire of chattels' Fourth Edition, Volume 2, Para 1551 thus : "Hire is a class of bailment. It is a contract by which the hirer obtains a right to use the chattel hired in return for the payment to the owner of the price of the hiring. The proprietary interest in the chattel is not changed, but remains in the owner, although upon delivery the hirer becomes legally possessed of the chattel hired, so that if it is lent for a time certain, even the true owner is debarred during that time from resuming possession against the hirer's will and, should he do so, becomes liable in damages for the wrongful seizure. 70. We can with advantage refer to 'Bailment by Palmer'. The learned author refers to the classification of bailment made by Holt C.J. in Coggs v. Bernard 1703 (92) ER 107 into six categories of which the third is relevant on the facts in the c....
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...., Sub-clause (d) is wider import than a mere leasing of films. It applies to all kinds of leasing/hiring of goods, for example, leases of plants, machinery, computers, cars, planes, furniture etc, 73. A sale of any goods is complete when the property in the goods passes to the purchaser pursuant to a contract of sale of those goods. So also, a deemed sale of goods under Sub-clause (d), as has been pointed out above, will be complete when the control of the goods in which the right to use is transferred, passes to the transferee under the contract of transfer." 76. Thus a reading of the decisions of the Apex Court shows that for the purpose of levy of sales tax on a deemed sale, there must be a transfer of right to use goods, which contemplates delivery of possession, so that, the transferee has a control over the economic benefits over the property. For the purpose of understanding 'royalty' under Clause (iva), we do not find any such necessity of emerging termination of rights of the owner and so long as the assessee has the custody and has the right for economic exploitation of the ship on payment of charges, we do not find the decision under the Sales T....
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....e is concerned, 'royalty' means the consideration paid for "the use or right to use". Irrespective of whether there is any transfer or not, the consideration paid for use or right to use simpliciter is sufficient for the consideration being called as 'royalty'. The presence or absence of possession effective/general control and custody with the assessee, even though may be matters of agreement, are not of any relevance to decide the character of payment. The assessee, as per the agreement, had the right to use the ship, selecting the time and the decided route as per its requirement, for which it paid the foreign enterprise, the consideration and we have no hesitation in holding that the character of payment is nothing but royalty." 17. Further in the case of West Asia Maritime Ltd. vs. ITO 111 ITD 155 (Chennai) the ITAT held that ship being an "equipment" under Article 12, hire charges for user of ship partook the character of royalty for use of equipment under provisions of Section 9(1)(vi) and, hence, exigible to tax in India. 18. Further, we are unable to accept the argument of the assessee that the assessee company merely availed the facility of dredger w....
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.... What is the "reasonable period" would depend upon the facts and circumstances of each case and, therefore, as a general principle it may not be possible as well as feasible on the part of the Court to say definitely that a period of 4 years would the period of limitation for the purpose of passing an order under Section 201(1) or 201(1A) of the Act, when the Legislature has consciously not prescribed any such limitation. 23. We have heard the rival contentions on this issue. In our considered view, it is not an inadvertent omission in the Act as to the non-provision of any specific time limitation for initiating proceedings under Section 201(1) and 201(1A) of the Act in respect of payment made to a non-resident entity. In our view, Ld. CIT(A) has correctly observed that the Calcutta High Court in the case of Bhura Exports Ltd. vs. ITO in ITA No. 116 of 2011 held that there is no time limit for initiating withholding tax proceedings during the period 1st April 1989 to 3rd March 2010. The High Court held that the order passed by the Assessing Officer under Section 201 of the Act is not barred by limitation since the Act did not specify any specific time limit for treating a tax p....
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....rovisions of Limitation Act, 1963 to the Act since the Supreme Court in the case of Rao Bahadur Ravulu Subba Rao [1956] 30 ITR 163 (SC) held that the Act is a self contained code and its provisions show an intention to depart from the common rule. * Relying on the three-judge Bench Supreme Court's decisions in the case of Uttam Namdeo Mahale v. Vithal Deo and ors AIR [1997] SC 2695 and Ishar Singh AIR [1984] SC 171, the Calcutta High Court observed that if no period of limitation is prescribed under the Act for taking action and the Limitation Act does not apply then there cannot be any prohibition of the period of limitation for taking action under the Act." 25. In the case of CIT vs. Idea Cellular Ltd. 158 taxmann.com 163 (Telangana), the High Court held that since there is no specific period of limitation prescribed for initiating proceedings under Section 201(1) and 201(1A) and that "reasonable period" would depend on facts and circumstances of each case and therefore, where CIT(A) and also Tribunal held that show-cause notice issue by Assessing Officer initiating proceedings under Section 201(1) against assessee after 4 years was barred by limitation, same could no....
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....ered view that Ld. CIT(A) has correctly held that looking into the instant facts, the aforesaid proceedings are not barred by limitation. 28. In the result, Ground No. 2 of the assessee's appeal is dismissed. 29. Ground No. 4 of the assessee's appeal is general in nature and does not require any specific adjudication. Further, despite a large number of opportunities, the Counsel for the assessee has not caused appearance before us and pointed out to specific infirmity in the order of Ld. CIT(A) wherein any specific document was not considered by Ld. CIT(A) while passing the order. Accordingly, Ground No. 4 of the assessee's appeal is dismissed. Ground No. 5:- Non-deduction of taxes at source were attributable to a bona fide belief on part of the assessee. 30. In this ground the assessee has submitted that non-deduction of tax at source by the assessee was on account of a bona fide belief that there was no legal liability on the assessee to deduct tax at source. The assessee placed reliance on various decisions in support of it's contention that once the assessee is under a bona fide belief that no taxes are liable to be deduct tax at source, order passed under Section 2....
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....n India to a non-resident or to a foreign company, if tax is not deducted at source from the payments of such sums. [Para 22] The Apex Court in the case of Transmission Corporation of AP Ltd. v. CIT [1999] 239 ITR 587 / 105 Taxman 742 has clearly elucidated the scheme and purpose of deduction of tax at source under section 195 as well as the duty of the taxpayer for the payments made to non-resident. [Para 23] Keeping in view the decision of the Apex Court (supra ), the meaning, scope, limitations, rights and duties of payer and the payee under the provisions of section 195 can be laid down as under: (a) Section 195 deals with the deduction of tax at source by the payer, i.e., assessee if the payments are to be made to a non-resident. (b) The payer/assessee is required to deduct income-tax on such payments made to non-resident at the specified rates in force. (c) If the parties feel that either the deduction of tax at source by the payer is required to be at a rate lower than the prescribed rate or no deduction is required to be made, they are required to file an application before the Assessing Officer for obtaining such certificate. In....
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....rescribed rates because in either of the conditions the payer/ assessee has to part with the whole of the payment required to be made to the non-resident by him. More so when the deduction of the tax at source under section 195 is subject to regular assessment and the right of non-resident is not adversely affected because at the time of regular assessment if the payee/recipient succeeds in proving before the Assessing Officer that such receipts, from the payer/assessee, were not its income and so it was not bound to pay tax thereon, then such tax deducted at source by the payer/assessee and deposited with the Government is bound to be refunded or adjusted against the payment of tax, if any, to the recipient non-resident by the Assessing Officer at the time of regular assessment. [Para 28] To sum up, neither it is the duty nor it is desirable from the payer/assessee to examine whether any tax is deductible at source from the payments made to the non-resident. In case it feels that no tax is required to be deducted at source or required to be deducted at a lower rate, then it is required to obtain such certificate under section 195(2) from the Assessing Officer or for non-d....
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.... provisions of section 195, i.e., non-deduction of tax at source for the payments made to non-resident. [Para 33]" 32. Accordingly, in our view there is no reason as to why and on what basis the assessee could have formed a bona fide belief that it was not liable to deduct tax at source on the aforesaid payments. This is further coupled with the fact that the assessee was governed by the provisions of the Income Tax Act since the recipient was a tax resident of Virgin Island, with which India did not have a tax treaty. Accordingly, the argument of the assessee that it was under a bona fide belief for non-deduction of tax at source is hereby rejected. 33. In the result, Ground No. 5 of the assessee's appeal is dismissed. 34. In the result, the appeal of the assessee is dismissed for A.Y. 2003- 04. Now we shall discuss the Department's appeal for A.Y. 2003-04 (in ITA No. 62/Rjt/2012) 35. The Department has raised the following grounds of appeal:- "(i) The Ld. CIT(A) has erred in holding that the activity of M/s. Miller Dredging Company is not a business activity but mere leasing of dredger and hence can not be taxed as such. (ii) The Ld. CIT(A) erred ....
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....act that dredger was registered outside of India has no bearing so long as it is a source of business for the foreign company in India. The Assessing Officer was further of the view that the case of Hon'ble Supreme Court (R.D. Agarwal and Company) relied upon by the assessee is distinguishable because it discussed the taxability of a foreign company in the case of a stand alone or solitary transaction. However, the Assessing Officer observed that the assessee had been making substantial payments to the overseas company continuously for a period of over 9 years. The Assessing Officer was of the view that the dredgers were taken by the assessee on wet lease basis and alongwith dredgers, the operators / coordinators / Captain were also supplied by the non-resident entity to the assessee company. Further, the Assessing Officer observed that the Captain of the dredger is appointed by the owner (non-resident) and that the captain will supervise the activities of the charterers i.e. the assessee. The Assessing Officer held that M/s. Miller Dredging Company Inc. had derived income from business connection in India from wet lease of dredgers which it had provided to the assessee company on ....
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.... any dredging activity in India on it's own account. The staff of the overseas company acts under the command of the assessee so far as the dredging activities is concerned, including where, when and how much to dredge. In this case, the CIT(A) held that the assessee company has full control over the equipment and the staff and the operation of the equipment. The fact that non-resident company does not have a business connection in India is also evident from the fact that it shall receive payments on a fixed basis from the lessee, irrespective of the period of use of the dredgers by the assessee company in India. The Ld. CIT(A) observed that the payment for hiring of dredgers was not subject to actual user of dredgers, which also supports the fact that the non-resident company did not have a business connection in India. The CIT(A) was of the view that there was no common interest between the assessee company and the foreign company, and the two do not have a revenue sharing agreement or arrangement. With these observations, the Ld. CIT(A) was of the view that the non-resident company did not have a business connection in India. While passing the order Ld. CIT(A) made the following....
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....ning dredgers, with a view to ascertain availability of a suitable Indian Flag Dredger. Only if no Indian Flag Dredger is allowable (of the specifications described by the Indian Co.), can the Indian Company apply to DG(S). (j) The Indian party has to obtain No Objection Certificate (NOC) from "Indian National Shipping Owners Association (INSA)" before the company can hire foreign owner ships. Such NOC from INSA has to be submitted to DG(S) along with the application for in-chartering any foreign flag dredger. (k) Based on the above inquiries and NOC from INSA, the Indian Company has to apply to DG Shipping for permission, specifying the proposed hire charter rates. (I) Only if the DG Shipping grants permission for IN-Chartering, can the Indian Company take the ship / dredger on charter. As per existing laws, the foreign ship owner / dredger owner cannot make the application to the DG Shipping, He has no role to play in this process. (m) Only if the DG Shipping has granted IN-Chartering permission, can the Indian Company remit the charter hire charges through an authorized' foreign exchange dealer. RBI rules clearly stipulate this. (....
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.... service. (ii)"Vessel shall be placed at the disposal of the Charterers W.C.I. Probably at Sikka port. In such dock or at such berth or place where she may safely lie. always afloat" (iii) "The captain shall prosecute his voyages with due dispatch, and shall render all customary assistance with ship's crew and boats. The Captain (although appointed by the owners) shall be under the orders and directions of the Characters as regards employment and agency; charterers are to perform all cargo handling at their expense under the supervision of the Captain, who is to sign the bills of lading for cargo s presented in conformity with mate's or tally clerk's receipts. However, at Charterers option, the charterers or their agents may sign bills of lading on behalf of the Captain always in conformity with mate's or tally clerk's receipts. All bills of lading shall be without prejudice to this charter and the charterers shall indemnify the owners against all consequences or liabilities which may arise from any inconsistency between this charter and any bills of lading or waybills signed by the charterers or their agents or by the captain at their request.....
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....g work. The contact is essentially for lease of dredger. The fact that generally it has to be maintained as per lessor's requirement and to be handled under its trained staff as to its genera! running, is what which any prudent lessor would ensure in case of temporary hiring of costly specialized equipment as it would like it be received back in good condition and further from the lessee's perspective to safeguard its high stakes it would like the hired equipment not only at its command but in an well maintained running condition. This does not tantamount to providing of services but is corollary to hiring of equipment itself. Lessor has no control on dredging activity as such. The dredging contract is taken by the assessee, the permissions in this regard are all to be taken by the assessee, the lessor in his own authority cannot partake any dredging activity on its own account, the staff of the dredger acts under the command of the appellant as far as the dredging activity is concerned, including where, when, and how much to dredge. In fact the Finance Act, 2001 inserted a new item in the IT Act for which royalty would be payable, which is payments arising from the use or ....
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....m Ltd. v. Commercial Tax Officer. Illustration: (i) A customer engages a carrier (transport operator) to transport one consignment (a full lorry load) from place A to B, for an agreed consideration which is called freight charges or lorry hire. The carrier sends its lorry to the customer's depot, picks up the consignment and proceeds to the destination for delivery of the consignment. The lorry is used exclusively for the customer's consignment from the time of loading, to the time of unloading at destination. Can it be said that right to use of the lorry has been transferred by the carrier to the customer? The answer is obviously in the negative, as there is no transfer of the "use of the lorry" for the following reasons: CO the lorry is never in the control, let alone effective control of the customer; (ii) the carrier decides how, when and where the lorry moves to the destination, and continues to be in effective control of the lorry; (Hi) the carrier can at any point (of time or place) transfer the consignment in the lorry to another lorry; or the earner may unload the consignment en route in any of his godowns, to be picked up later by some other lorr....
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....ee, it has acquired right to control and command the dredger for the purpose of its business as per his requirement. The assessee has complete control on the manpower working on the dredger, including its Captain to direct them to carry out specific activities as required for its business." Not only this, the other criteria which may have taken the activity of the lessee into the zone of providing service (doing dredging itself on behalf of assessee as referred to in OECD Commentary) are not satisfied in this case. Once the hired dredger is placed at the disposal of the appellant, the payment to the lessor does not depend at all on the dredging activity undertaken. Even if the dredger does not work for a single hour, the payment to the lessor would be same. Further, the equipment has been given only to one user i.e. the assessee and the lessor or his crew is not negotiating and giving the dredger to others in India during this time. Once the activity of M/s. Miller Dredging Co., is not a business activity, not even being a service, there is no question of it being taxed under the head business even if there was a business connection. In this case, even there is no business....
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....raw useful reference to the case of Maersk A/s vs. ACIT 86 taxmann.com 77 (Delhi - Tribunal) in which the ITAT held that where the assessee, a Denmark based company gave a vessel under charter hire arrangement for ONGC's operation of exploration and exploitation of oil and natural gas, since crew of board did not work under the direction and control of non-resident assessee and, moreover, decision relating to assessee's business were also taken in Denmark it can be said to have a permanent establishment in India in terms of Article 5(2)(a) of India-Denmark DTAA. In this case, the brief facts were that the assessee was a non-resident company incorporated under the laws of Denmark. During relevant year, the assessee entered into agreement with ONGC in terms of which it gave a vessel under charter hire arrangement for ONGC's operation of exploration and exploitation of oil and natural gas in offshore area of operation in India. In the return of income, assessee company showed "NIL" taxable income on the reasoning that no part of receipts from ONGC was taxable in India as the non-resident assessee did not have any permanent establishment in India "PE" in terms of Article 5 of DTAA. The....
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.... agreement, it was obvious that the hire charges would be 'E' 34,500.00 per week for 'double shift' and for single shift 'E' 29,950.00 per week. The agreement further provided that the cost of insurance would be paid by the assessee for insuring the hired equipment, namely, dipper dredger. The owner of the dipper dredger would also provide operators and co-ordinators. However, the cost of providing such operator and co-ordinator including salary, food, residence, etc., would be borne by the assessee. The agreement further clearly said that the crew would work under the management of the hirer as per the direction and instructions and responsibility of the hirer. Article 10B of the agreement between the assessee and the Netherlands company clearly showed that the work had to be executed by the assessee under its responsibility and the assessee had to pay hire charges for the dipper dredger on the basis of its utility for single shift or double shift besides the payment for co-ordinator, operator and the crew. The operator, co-ordinator and crew were to work under the direction and control of the assessee. Therefore, it was clear that dredging at inner harbour channel at Visakhapatna....
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..... Otherwise the dipper dredger could not be used effectively. The provisions for residence and latest communication facility were for the purpose of effective usage of the dipper dredger. By any stretch of imagination, it could not be construed as PE. [Para 17]" 39. Accordingly, looking into the instant facts and the judicial precedents cited above, we are of the considered view that the Ld. CIT(A) has correctly held that the non-resident company does not have a business connection in India. Accordingly, we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. 40. In the result, all grounds of appeal of the Department are dismissed for A.Y. 2003-04. Now we come to the Assessee's Appeal for A.Y. 2004-05 41. The assessee has raised the following grounds of appeal:- "1. On the facts and in the circumstances of the case, the learned CIT(A) erred by rejecting the appellant's relevant grounds of appeal raised before him of not treating the "Time Charter Hire Charges" as Royalty and not taking into consideration the factual situation and clarification given by CBDT, Department of Revenue, Government of India to all the Indian National Sh....
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....as no legal liability on the appellant-company to deduct tax at source and, therefore, on that ground the Assessing Officer was not justified in passing the impugned order u/s. 201(1)/201(1A) of the I.T. Act and accordingly such order is rendered bad in law. 6. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal." 42. The grounds raised by the assessee for A.Y. 2004-05 are similar to grounds raised by the assessee for A.Y. 2003-04. 43. In the result, our observations made for A.Y. 2003-04 would apply to A.Y. 2004-05 as well. 44. In the result, the appeal of the assessee is dismissed for A.Y. 2004- 05. Now we come to the Department's Appeal for A.Y. 2004-05 45. The Department has raised the following grounds of appeal:- "(i) The Ld. CIT(A) has erred in holding that the activity of M/s. Miller Dredging Company is not a business activity but mere leasing of dredger and hence can not be taxed as such. (ii) The Ld. CIT(A) erred in placing reliance on the pre-contractual activity of M/s. Jaisu Shipping Co. Pvt. Ltd. rather than the obligation i....
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....onfirming Time Charter Payments as Royalty, deserved to be quashed. 2. On the facts and in the circumstances of the case, the learned CIT(A) erred in rejecting the appellant's relevant grounds of appeal raised before him contending that the learned Asst. Director of Income-tax (International Taxation) erred in passing the impugned order u/s. 201(1) and section 201(1A) of the IT. Act, 1961 beyond reasonable period being four years from the end of the relevant financial year and, therefore, the order passed by him is bad in law, being time barred and the same deserves to be quashed. 3. On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the Time Charter Hire charges paid by the appellant-company to the non-resident dredger owner in respect of dredgers taken on Time Charter Hire were in the nature of "royalty" as per provisions of section 9(1)(vi) of the I.T. Act and, therefore, the appellant-company was liable to deduct tax at source u/s. 195 of the IT. Act at the rates applicable to royalty payments. 4. On the facts and in the circumstances of the case, the learned CIT(A) erred in not admitting evidence assumed b....
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....cumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. It is, therefore, prayed that the order of the Ld. CIT(A) may be cancelled and that of Assessing Officer may be restored to the above extent. (vi) The appellant craves leave to add/alter/modify/delete any of the grounds of appeal at the time of hearing." 54. The grounds raised by the Department for A.Y. 2005-06 are similar to grounds raised by the Department for A.Y. 2003-04. 55. In the result, our observations made for A.Y. 2003-04 would apply to A.Y. 2005-06 as well. 56. In the result, the appeal of the Department is dismissed for A.Y. 2005-06. Now we come to the Assessee's Appeal for A.Y. 2006-07 57. The assessee has raised the following grounds of appeal:- "1. On the facts and in the circumstances of the case, the learned CIT(A) erred by rejecting the appellant's relevant grounds of appeal raised before him of not treating the "Time Charter Hire Charges" as Royalty and not taking into consideration the factual situation and clarification given by CBDT, Department of Revenue, Government of India to all the Indian National Ship Owners Association (I....
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.... the appellant-company to deduct tax at source and, therefore, on that ground the Assessing Officer was not justified in passing the impugned order u/s. 201(1)/201(1A) of the I.T. Act and accordingly such order is rendered bad in law. 6. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal." 58. The grounds raised by the assessee for A.Y. 2006-07 are similar to grounds raised by the assessee for A.Y. 2003-04. 59. In the result, our observations made for A.Y. 2003-04 would apply to A.Y. 2006-07 as well. 60. In the result, the appeal of the assessee is dismissed for A.Y. 2006- 07. Now we come to the Department's Appeal for A.Y. 2006-07 61. The Department has raised the following grounds of appeal:- "(i) The Ld. CIT(A) has erred in holding that the activity of M/s. Miller Dredging Company is not a business activity but mere leasing of dredger and hence can not be taxed as such. (ii) The Ld. CIT(A) erred in placing reliance on the pre-contractual activity of M/s. Jaisu Shipping Co. Pvt. Ltd. rather than the obligation in the actual contract in....
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....ayments as Royalty, deserved to be quashed. 2. On the facts and in the circumstances of the case, the learned CIT(A) erred in rejecting the appellant's relevant grounds of appeal raised before him contending that the learned Asst. Director of Income-tax (International Taxation) erred in passing the impugned order u/s. 201(1) and section 201(1A) of the IT. Act, 1961 beyond reasonable period being four years from the end of the relevant financial year and, therefore, the order passed by him is bad in law, being time barred and the same deserves to be quashed. 3. On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the Time Charter Hire charges paid by the appellant-company to the non-resident dredger owner in respect of dredgers taken on Time Charter Hire were in the nature of "royalty" as per provisions of section 9(1)(vi) of the I.T. Act and, therefore, the appellant-company was liable to deduct tax at source u/s. 195 of the IT. Act at the rates applicable to royalty payments. 4. On the facts and in the circumstances of the case, the learned CIT(A) erred in not admitting evidence assumed by him to be in the natur....
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....the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. It is, therefore, prayed that the order of the Ld. CIT(A) may be cancelled and that of Assessing Officer may be restored to the above extent. (vi) The appellant craves leave to add/alter/modify/delete any of the grounds of appeal at the time of hearing." 70. The grounds raised by the Department for A.Y. 2007-08 are similar to grounds raised by the Department for A.Y. 2003-04. 71. In the result, our observations made for A.Y. 2003-04 would apply to A.Y. 2007-08 as well. 72. In the result, the appeal of the Department is dismissed for A.Y. 2007-08. Now we come to the Assessee's Appeal for A.Y. 2008-09 73. The assessee has raised the following grounds of appeal:- "1. On the facts and in the circumstances of the case, the learned CIT(A) erred by rejecting the appellant's relevant grounds of appeal raised before him of not treating the "Time Charter Hire Charges" as Royalty and not taking into consideration the factual situation and clarification given by CBDT, Department of Revenue, Government of India to all the Indian National Ship Owners Association (INSA) members in the corr....
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....o deduct tax at source and, therefore, on that ground the Assessing Officer was not justified in passing the impugned order u/s. 201(1)/201(1A) of the I.T. Act and accordingly such order is rendered bad in law. 6. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal." 74. The grounds raised by the assessee for A.Y. 2008-09 are similar to grounds raised by the assessee for A.Y. 2003-04. 75. In the result, our observations made for A.Y. 2003-04 would apply to A.Y. 2008-09 as well. 76. In the result, the appeal of the assessee is dismissed for A.Y. 2008- 09. Now we come to the Department's Appeal for A.Y. 2008-09 77. The Department has raised the following grounds of appeal:- "(i) The Ld. CIT(A) has erred in holding that the activity of M/s. Miller Dredging Company is not a business activity but mere leasing of dredger and hence can not be taxed as such. (ii) The Ld. CIT(A) erred in placing reliance on the pre-contractual activity of M/s. Jaisu Shipping Co. Pvt. Ltd. rather than the obligation in the actual contract in arriving at a decision ....
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....rved to be quashed. 2. On the facts and in the circumstances of the case, the learned CIT(A) erred in rejecting the appellant's relevant grounds of appeal raised before him contending that the learned Asst. Director of Income-tax (International Taxation) erred in passing the impugned order u/s. 201(1) and section 201(1A) of the IT. Act, 1961 beyond reasonable period being four years from the end of the relevant financial year and, therefore, the order passed by him is bad in law, being time barred and the same deserves to be quashed. 3. On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the Time Charter Hire charges paid by the appellant-company to the non-resident dredger owner in respect of dredgers taken on Time Charter Hire were in the nature of "royalty" as per provisions of section 9(1)(vi) of the I.T. Act and, therefore, the appellant-company was liable to deduct tax at source u/s. 195 of the IT. Act at the rates applicable to royalty payments. 4. On the facts and in the circumstances of the case, the learned CIT(A) erred in not admitting evidence assumed by him to be in the nature of "additional evidenc....
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....have upheld the order of the Assessing Officer. It is, therefore, prayed that the order of the Ld. CIT(A) may be cancelled and that of Assessing Officer may be restored to the above extent. (vi) The appellant craves leave to add/alter/modify/delete any of the grounds of appeal at the time of hearing." 86. The grounds raised by the Department for A.Y. 2009-10 are similar to grounds raised by the Department for A.Y. 2003-04. 87. In the result, our observations made for A.Y. 2003-04 would apply to A.Y. 2009-10 as well. 88. In the result, the appeal of the Department is dismissed for A.Y. 2009-10. Now we come to the Assessee's Appeal for A.Y. 2010-11 89. The assessee has raised the following grounds of appeal:- "1. On the facts and in the circumstances of the case, the learned CIT(A) erred by rejecting the appellant's relevant grounds of appeal raised before him of not treating the "Time Charter Hire Charges" as Royalty and not taking into consideration the factual situation and clarification given by CBDT, Department of Revenue, Government of India to all the Indian National Ship Owners Association (INSA) members in the correspondence between the I....
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....nd, therefore, on that ground the Assessing Officer was not justified in passing the impugned order u/s. 201(1)/201(1A) of the I.T. Act and accordingly such order is rendered bad in law. 6. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal." 90. The grounds raised by the assessee for A.Y. 2010-11 are similar to grounds raised by the assessee for A.Y. 2003-04. 91. In the result, our observations made for A.Y. 2003-04 would apply to A.Y. 2010-11 as well. 92. In the result, the appeal of the assessee is dismissed for A.Y. 2010- 11. Now we come to the Department's Appeal for A.Y. 2010-11 93. The Department has raised the following grounds of appeal:- "(i) The Ld. CIT(A) has erred in holding that the activity of M/s. Miller Dredging Company is not a business activity but mere leasing of dredger and hence can not be taxed as such. (ii) The Ld. CIT(A) erred in placing reliance on the pre-contractual activity of M/s. Jaisu Shipping Co. Pvt. Ltd. rather than the obligation in the actual contract in arriving at a decision that no business activit....
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....T(A) deserves to be deleted and that of the AO restored. 6. Any other ground that may be urged at the time of hearing." ITA No. 27/Ahd/2014 (A.Y. 2010-11) "1. The Ld. CIT(A) has erred in law and on facts in holding that the activity of Clashmore Holding is not a business activity but mere leasing of dredger and hence cannot be taxed as such. 2. The Ld. CIT(A) erred in placing reliance on the pre-contractual activity of M/s. Jaisu Dredging & Shipping Ltd., rather than the obligation in the actual contract in arriving at a decision that no business activity was performed by Clashmore Holding. 3. The CIT(A) has further erred in holding that the foreign company did not have any business connection or any source of business income in India in spite of clear evidence to the contrary. 4. The Ld. CIT(A) has erred in law and on facts in holding that the entire establishment of the foreign party within the Indian territorial waters did not constitute PE of the foreign party for the purpose of section 9 of the I T Act, 1961. 5. Therefore the order of the Ld. CIT(A) deserves to be deleted and that of the AO restored. 6. An....