2014 (7) TMI 296 - AT - Income Tax

Computation of income from shipping business u/s 44B - taxability in the hands of managing firm whereas ship is owned by two separate companies Held that - Following Deputy Director of Income-tax Versus AP Moller Maersk 2013 (11) TMI 827 - ITAT MUMBAI - the assessee firm on behalf of the companies have been making applications from time to time at the beginning of every financial year for obtaining annual double income tax relief / port clearance certificate - the assessee firm is the managing owner and in that capacity only, it manages the affairs of these two companies for which it is remunerated as per the relevant terms agreed between the parties - it cannot be held that whatever income accrues during the carrying on such business belongs to the assessee firm - once the entire infrastructure including the vessels which are deployed in the international traffic belongs to the two companies, then it cannot be said that the income accruing from exploiting I deployment of such assets / vessels belong to the assessee firm - the assessee firm is separate and distinct from two companies and any income accruing on account of shipping operations does not belong to the assessee, but to these two companies only. The status in the return of income as well as in the assessment orders has always been held to be that of non-resident corporate company and not as a partnership firm. From the assessment year 2004 05, two sets of returns of income are being filed, one by the assessee firm on managing commission / fees which is being claimed as non taxable and second return of income in the name of these two companies which has now been merged referred to as A.P. Moller Maersk A/S showing shipping income - the shipping income belongs to these companies only and not in the hands of the assessee firm which is only a representative of these companies and is carrying out its obligation for filing of the return of income as well as managing the entire affairs. Fees from managerial services treated as fees for technical services Held that - Following Deputy Director of Income-tax Versus AP Moller Maersk 2013 (11) TMI 827 - ITAT MUMBAI - for taxing the royalty and fees for technical services in case of a non-resident under the Indo Denmark DTAA, the basic condition is that there has to be a P.E. or fixed base in connection with which such a liability has been incurred the payment has not been made by any P.E. to the assessee firm albeit the payment has been made by non-resident company i.e., two Danish companies to another non-resident i.e., a partnership firm established under the laws of Denmark the payment cannot taxed as FTS in case of the assesse - the payment of management fee cannot be subjected to tax in India by virtue of Article-13(6) thus, the additions made are liable to be set aside Decided against revenue.

Summary

Issues Involved:
1. Validity of reassessment proceedings.
2. Taxability of shipping income.
3. Taxability of management fees as fees for technical services.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The reassessment proceedings for A.Y. 2003-04 were initiated by the Assessing Officer (A.O.) after noticing that freight income was wrongly reduced, leading to escaped income. The A.O. reopened the assessment under section 147 of the Income Tax Act, 1961, and issued a notice under section 148. The assessee challenged the validity of the reassessment, arguing that all material facts had been disclosed in the original return and no fresh tangible material was brought on record. The CIT(A) upheld the assessee's contention, declaring the reassessment invalid as it was initiated after four years without any new material. The Tribunal agreed with the CIT(A), rendering the reassessment invalid and the issue raised by the Revenue on this ground infructuous.

2. Taxability of Shipping Income:
The assessee, a partnership firm registered in Denmark, acted as the managing owner for two Danish shipping companies, '1912' and 'Svendborg'. The A.O. added Rs. 1,07,76,560/- to the assessee's income, treating it as income from feeder freight under section 44B of the Act. However, the CIT(A) and the Tribunal held that the shipping income belonged to the two Danish companies and not the assessee. The Tribunal based its decision on its earlier order for assessment years 1997-98 to 2002-03 and 2003-04, where it was established that the shipping income was chargeable to tax in the hands of the two companies, benefiting from the DTAA between India and Denmark. The Tribunal reiterated that the assessee was merely a representative of the two companies, and the shipping income was not taxable in India.

3. Taxability of Management Fees as Fees for Technical Services:
The A.O. added Rs. 52,02,535/- as fees for managerial services, treating it as fees for technical services (FTS) under section 9(1)(vii) of the Act. The CIT(A) dismissed the assessee's appeal on this ground, but the Tribunal found that the issue was already decided in favor of the assessee in earlier years. The Tribunal referred to Article 13(6) of the Indo-Denmark DTAA, which exempts such fees from being taxed in India unless they are connected to a Permanent Establishment (P.E.) in India. Since the management fees were paid by the Danish companies to the assessee in Denmark, with no connection to a P.E. in India, the Tribunal held that the fees were not taxable in India. This decision was consistent with the Tribunal's earlier rulings for the assessee's previous assessment years.

Conclusion:
The Tribunal allowed the appeals of the assessee for A.Y. 2003-04 and 2008-09, deleting the additions made by the A.O. on account of shipping income and management fees. The appeal of the Revenue for A.Y. 2003-04 was dismissed. The Tribunal's decisions were based on consistent application of the DTAA provisions and earlier rulings in favor of the assessee, affirming that the income from shipping operations and management fees were not taxable in India. The order was pronounced in the open court on 18th June, 2014.