2015 (3) TMI 93 - AT - Income Tax

Benefit of Article 22 of DTAA between India and Switzerland - taxability of the profits from the operation of ships in international traffic earned by the assessee in India - Whether the property in respect of which international shipping income was received by the assessee company through shipping business carried on in India through the P .E. situated therein i.e. ships was effectively connected with such permanent establishment? - Held that - Article 22(2) brings profits of the PE within the scope of Article 7 only if the relevant income of the PE arises from a right or property effectively connected with such relevant income of the PE arises from a right or property effectively connected with such PE which necessarily refers to the ship itself as the property which generates the income is the ship. In the circumstances when the ships clearly do not form part the assets of the PE in India but are the assets of the non-resident shipping company abroad, the same cannot be said to be effectively connected to such PE. Where the ships are owned or chartered by the non-resident shipping company abroad and the agency PE merely clears inbound cargo and books outbound cargo and carries out similar functions, the ships are clearly not the assets of the PE nor are they any other way effectively connected with the PE. Thus concluded that the provisions of Article 22(1) of the treaty would be applicable and the profits of shipping operations in international traffic in the case of non- resident shipping company would be taxable in the country of residence i.e. Switzerland and not in India. - Where the ships are owned or chartered by a non-resident shipping company and the agency PE merely clears inbound cargo and books outbound cargo and carries out similar ancillary functions, the ships are clearly not the assets of the PE nor are they is some other way effectively connected with a permanent establishment. - Decision in the case of Assistant Director of Income-tax, (International Taxation) -3(2) Versus Mediterranean Shipping Co. 2012 (11) TMI 326 - ITAT MUMBAI followed - Decided in favour of assessee. Interest income received from the Income Tax Department on refund as per the Article 11 of the Indo-Swiss Treaty - CIT(A) directing to tax @ 10% - Held that - Respectfully following the ratio laid down in ACTI Vs. Clough Engineering Ltd. 2011 (5) TMI 562 - ITAT, DELHI that refund of income-tax is taxable under Article 11 i.e. @10% - Decided against revenue. Charging of interest u/s 234B - Held that - This ground is also covered by the decision of Hon ble Bombay High Court in the case of NGC Network LLC (2009 (1) TMI 174 - BOMBAY HIGH COURT). It has also been brought to our notice that in assessee s own case, the Tribunal in A.Y. 2007-08 as decided this issue in favour of the assessee which has been confirmed by the Hon ble High Court also. - Decided against revenue.

Issues Involved:
1. Taxability of profits from the operation of ships in international traffic under the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland.
2. Determination of whether MSC Agency (India) Pvt. Ltd. constitutes a Permanent Establishment (PE) of the appellant in India.
3. Tax liability of the appellant in India despite the arm's length commission paid to its Indian agent.
4. Taxation of interest income received from the Income Tax Department on refunds.
5. Imposition of interest under section 234B of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of Profits from the Operation of Ships in International Traffic:
The primary issue is whether the profits from the operation of ships in international traffic earned by the assessee, a Swiss resident, should be taxed in India. The assessee argued that under Article 22 of the India-Swiss DTAA, such profits are taxable only in Switzerland. This position was initially accepted by the Indian tax authorities for the assessment year 2002-03 but was later contested. The Tribunal upheld the assessee's position, citing that Article 22, introduced in 2001, governs the taxability of income not specifically dealt with by other articles of the treaty. The Tribunal rejected the Revenue's argument that the exclusion of shipping profits from Articles 7 and 8 implied taxation under domestic law, emphasizing that Article 22 should be applied as it explicitly covers such income.

2. Permanent Establishment (PE) of MSC Agency (India) Pvt. Ltd.:
The Tribunal examined whether MSC Agency (India) Pvt. Ltd. constituted a PE of the assessee in India. The AO had treated MSC Agency as a dependent agent, thus constituting a PE. The Tribunal agreed with this assessment, noting that the agency performed extensive duties for the assessee and was legally and economically dependent on it. This dependency and scope of authority indicated that MSC Agency was a PE under the Indo-Swiss treaty.

3. Tax Liability Despite Arm's Length Commission:
The Tribunal considered whether the arm's length commission paid to MSC Agency extinguished the tax liability of the assessee. It concluded that even though the commission was at arm's length, the profits attributable to the PE (MSC Agency) were taxable in India. This was because the ships, the property generating the income, were not effectively connected with the PE, thus falling under Article 22, making the income taxable only in Switzerland.

4. Taxation of Interest Income on Refunds:
The department's appeal contested the CIT(A)'s direction to tax interest income on refunds under Article 11 of the Indo-Swiss treaty at 10%. The Tribunal dismissed this ground, following the Special Bench decision in Clough Engineering Ltd., which held that such interest is taxable under Article 11 at 10%.

5. Imposition of Interest under Section 234B:
The Tribunal addressed whether interest under section 234B should be imposed on the assessee. The CIT(A) had ruled against imposing this interest, stating that when the payer is responsible for tax deduction at source, the payee cannot be penalized under section 234B. The Tribunal upheld this view, referencing the Bombay High Court's decision in NGC Network LLC and confirming that the assessee's shipping receipts were not taxable in India, thus negating the need for advance tax payments.

Conclusion:
The Tribunal ruled in favor of the assessee on all major issues, confirming that the shipping income was not taxable in India under the DTAA and that the interest income on refunds should be taxed at 10%. The department's appeal was dismissed, and the assessee's appeals were allowed. The Tribunal's decision was consistent with previous rulings in the assessee's case for earlier years, reinforcing the application of Article 22 for the taxability of international shipping profits.

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