2015 (11) TMI 274 - AT - Income Tax

Assessment under section 172(4) - vessel voyage returns filed by the Atlantic Shipping Pvt Ltd, under section 172(3) - validity of orders passed under 172(4) challenged without issuing a draft order as required under section 144C as the assessee is an eligible assessee under section 144(15)(b)(ii) - denial the benefits of India Denmark Double Taxation Avoidance Agreement - Held that - The point of dispute being whether or not the course of action 144C was permissible, a decision in favour of the assessee is to be essentially followed with an opportunity being given to the assessee to be allowed to traverse that path. However, having held so in principle, on the peculiar facts of this case and for the reasons we will now set out, this conclusion is somewhat academic as we see no need to remit the matter back to the Assessing Officer for the reason that the assessee deserves to succeed on merits. As evident from the Directors report of Torm A/s which is filed before us in the paperbook, the assessee has incurred a clearly unsatisfactory loss before tax of USD 579 million in 2012 . This report also states that the assessee incurred an operating loss of USD 253 millions which was stated to be on account of adverse market conditions. When assessee is incurring losses, in respect of its global operations, there cannot be an occasion to pay tax on the income. In these circumstances, if the freight receipts from India are not actually brought to tax in Denmark, it is not because of the profits from these receipts not being taxable in Denmark, it is because there are no profits embedded in these receipts. However, so far as Article 4(1) of Indo Danish tax treaty is concerned, all that is required of a Danish company to be entitled to treaty protection in India, is that its profits, on global basis, should be liable to tax in Denmark- irrespective of whether or not the assessee indeed earns any profits taxable in Denmark or whether or not such profits are actually subjected to tax in Demark. That condition, in our considered view and for the detailed reasons set out above, is clearly satisfied. As for the place of effective management being in Denmark, as required under Article 9(1), we have already taken note of the evidences in support of the place of effective management being in Denmark. In view of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that the profits embedded in the freight receipts in question were not taxable in India. In this view of the matter, the Assessing Officer indeed erred in bringing the same to tax in India. The CIT(A) should have deleted the same. We, therefore, vacate the stand of the authorities below and delete the impugned tax demands. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of orders passed under Section 172(4) without issuing a draft order as required under Section 144C.
2. Denial of benefits under the India-Denmark Double Taxation Avoidance Agreement (DTAA).

Issue-wise Detailed Analysis:

1. Validity of Orders Passed Under Section 172(4) Without Issuing a Draft Order as Required Under Section 144C:

The appellant challenged the validity of the orders passed under Section 172(4) without first issuing a draft order as required under Section 144C. It was argued that the assessee, being a foreign company, should be treated as an 'eligible assessee' under Section 144C(1), which mandates the Assessing Officer to forward a draft of the proposed order of assessment to the eligible assessee if any variation in income or loss returned is prejudicial to the interest of such assessee. The Tribunal noted that an order under Section 172(4) is indeed an 'assessment order' as it involves the computation of income, and thus, the requirements of Section 144C apply. This conclusion was supported by precedents, including the Delhi High Court's decision in Emirates Shipping Line FZE Vs ADIT and the Supreme Court's decision in A S Glittre Vs CIT, which emphasized that an order under Section 172(4) is a summary assessment but still an assessment order.

However, the Tribunal acknowledged practical difficulties in implementing this conclusion, particularly regarding the time limits for passing orders under Section 172(4A). The Tribunal suggested that the references to Sections 153 and 153B in Section 144C should be read as illustrative rather than exhaustive, implying that the time limit for passing orders under Section 172(4A) should also be relaxed. The Tribunal remitted the matter back to the Assessing Officer to follow the path envisaged in Section 144C, allowing the assessee to traverse that path.

2. Denial of Benefits Under the India-Denmark Double Taxation Avoidance Agreement (DTAA):

The appellant also challenged the denial of benefits under the India-Denmark DTAA. The Assessing Officer had denied treaty protection on the grounds that there was no evidence of the effective place of management of Torm A/s being in Denmark and that the freight amounts billed in India were received by LR2 Management K/S, not Torm A/s. The Assessing Officer also noted that some directors and shareholders of Torm A/s were outside Denmark and that there was no proof of the income being taxed in Denmark.

The Tribunal found that the principal freight beneficiary was Torm A/s, a Danish tax resident, and LR2 was merely a commercial manager acting on behalf of Torm A/s. The Tribunal emphasized that the core issue was who bore the entrepreneurial risk, which in this case was Torm A/s. The Tribunal also noted that Torm A/s was effectively managed from Denmark, as evidenced by its articles of association, board meetings, and directors' reports. The Tribunal rejected the Assessing Officer's reliance on the AAR ruling in M A Rafik In Re, stating that treaty entitlements are not triggered by actual taxation of income in the other contracting state but by being liable to tax on a global income basis in the residence jurisdiction.

The Tribunal concluded that the profits embedded in the freight receipts were not taxable in India and that the Assessing Officer erred in bringing them to tax in India. The Tribunal vacated the stand of the authorities below and deleted the impugned tax demands.

Conclusion:

The Tribunal allowed the appeal, holding that the orders under Section 172(4) should have been preceded by a draft order as required under Section 144C, and that the appellant was entitled to benefits under the India-Denmark DTAA. The matter was remitted back to the Assessing Officer to follow the correct procedure under Section 144C, but the Tribunal also decided on the merits, concluding that the profits were not taxable in India.