2015 (3) TMI 148 - AT - Income Tax

Benefit of Article 22 of Indo-Swiss treaty.- taxability of the profits from the operation of ships in international traffic earned by the assessee in India - Only Article 22 is applicable for shipping business and no income of the assessee is taxable in India under Article 22(2) of the tax Treaty as held by CIT(A) - Held that - In the present case, such endeavor was made by the competent authorities of Switzerland and India and the doubt arising as to the interpretation of Article 22 was resolved by mutual agreement whereby both the competent authorities agreed that international shipping profits of the assessee company are covered by Article 22. Having perused the relevant clauses of the agreement between assessee company and M/s MSC Agency India Pvt. Ltd. we find ourselves in agreement with the view of the AO and the learned CIT(Appeals) that M/s MSC Agency India Pvt. Ltd. was legally and economically dependent agent of the assessee company and since the assessee company was managing and controlling some of its business operations in India through the said dependant agent, it constituted the permanent establishment of the assessee company in India in terms of the Indo-Swiss treaty. Keeping in view the relevant portion of the OECD commentary on Model Tax Convention on Income and on Capital (condensed version) published in July, 2010 we are of the view that the right or property in respect of which the shipping income is earned by the assessee i.e. ships cannot be said to be effectively connected with the permanent establishment in India. Such income, therefore, will not fall under Article 22(2) but will fall under Article 22(1) and accordingly shall be taxable only in the State of residence of the assessee company i.e. Switzerland and not in India. In that view of the matter, we uphold the impugned order of the learned CIT(Appeals) holding that the international shipping profits of the assessee company are covered by Article 22 of the Indo-Swiss treaty and although the assessee company had a PE in India in the year under consideration, the ships i.e. the property in respect of which shipping income was paid to the assessee company being not effectively connected with that PE, the case of the assessee will be out of paragraph No. 2 of Article 22 and will fall in paragraph I of the said article. Consequently, the same will be taxable in the country of residence of the assessee company i.e. Switzerland and not in India. - Decided in favour of assessee As regards the alternative contention of assessee that no portion of the international shipping profits earned by the assessee in any case can be taxed in India as the commission paid to M/s MSC Agency India Pvt. Ltd. which constituted its PE is admittedly at an arm's length, it is observed that this alternative claim of the assessee has now become academic in view of our decision accepting the main contention of the assessee that the international shipping profits are chargeable to tax only in Switzerland as per Article 22(1) and not in India. - Decided against assessee.

Issues Involved:
1. Applicability of Article 22 of the Indo-Swiss Double Taxation Avoidance Agreement (DTAA) for shipping business.
2. Taxability of shipping profits under Indian domestic law.
3. Determination of Permanent Establishment (PE) in India.
4. Taxation of interest income from the income-tax department on refunds.

Issue-wise Detailed Analysis:

1. Applicability of Article 22 of the Indo-Swiss DTAA for Shipping Business:
The primary issue was whether Article 22 of the Indo-Swiss DTAA, which deals with "Other Income," applies to the shipping profits of the assessee, a Swiss company. The CIT(A) held that Article 22 is applicable for the shipping business and that no income of the assessee is taxable in India under Article 22(2) of the tax treaty. The Tribunal upheld this view, stating that the introduction of Article 22 in 2001 altered the previous position, making it necessary to determine if shipping profits were dealt with by any other article of the treaty. Since Articles 7 and 8 excluded shipping profits, these profits were not dealt with by any other article and thus fell under Article 22, making them taxable only in Switzerland.

2. Taxability of Shipping Profits under Indian Domestic Law:
The Assessing Officer (AO) contended that the treaty was silent on the taxation of shipping profits, and thus, these profits should be assessed under the Indian Income Tax Act, 1961, specifically under Section 44B. However, the Tribunal rejected this view, emphasizing that the introduction of Article 22 meant that shipping profits not dealt with by any other article of the treaty were governed by this residuary article, making them taxable only in the state of residence, i.e., Switzerland. The Tribunal noted that this position was accepted by the AO in the assessee's case for the assessment year 2002-03.

3. Determination of Permanent Establishment (PE) in India:
The AO held that MSC Agency (India) Pvt. Ltd. constituted a PE of the assessee in India under Articles 5(1) and 5(2)(c) of the DTAA, and thus, the freight income earned by the assessee was effectively connected to this PE. The CIT(A) agreed that the assessee had a PE in India but held that the income was not taxable in India as the ships were not effectively connected to the PE. The Tribunal upheld this view, stating that the property (ships) generating the income was not effectively connected with the PE in India, as the economic ownership of the ships remained with the assessee company and not with the PE.

4. Taxation of Interest Income from the Income-tax Department on Refunds:
The CIT(A) directed that the interest income received from the income-tax department on refunds be taxed as per Article 11 of the Indo-Swiss Treaty at 10%, whereas the AO had taxed it at 40% under the Indian Income Tax Act. The Tribunal did not specifically address this issue in detail, as the primary contention regarding the applicability of Article 22 was upheld, making the other issues secondary.

Conclusion:
The Tribunal dismissed both the appeal of the Revenue and the cross-objection of the assessee, upholding the CIT(A)'s decision that the shipping profits were taxable only in Switzerland under Article 22 of the Indo-Swiss DTAA and that MSC Agency (India) Pvt. Ltd. constituted a PE in India, but the ships were not effectively connected to this PE. The Tribunal's decision was based on the interpretation of the DTAA, previous assessments, and mutual agreements between the competent authorities of India and Switzerland.

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