2017 (11) TMI 1924 - AT - Income Tax

Assessment under section 172(4) - freight income received from India been taxed in Singapore - declined the benefit of Article 8 of the Indo Singapore DTAA - scope of subject to tax - additional evidence submitted by the assessee - HELD THAT - It is not in dispute that the income embedded in the freight receipts from India was not actually subjected to tax in Singapore even though it was liable to be taxed there by the virtue of fiscal domicile of the assessee. As to what is the scope of subject to tax , we find guidance from UK s HMRC International Manual (https //www.gov.uk/hmrc-internal-manuals/international-manual/intm162090) which, inter alia, states that It should be noted that the term subject to tax is different from being liable to tax . Liable to tax means that the customer only needs to be within the general scope of tax in the UK- On the other hand, subject to tax means that the relevant income has to be actually taxable and the customer cannot be exempt from tax on that income. Clearly, therefore, the relief granted in the judicial precedents in question may have been based on an erroneous impression of the fact regarding actual taxability, in Singapore, of the income embedded in the freight receipts from India, particularly as the income was actually exempt from tax in Singapore as well. As regards the plea that assessee s income embedded in freight receipts from India is not exempt from tax in India, such a plea is contrary to the scheme of thee India Singapore tax treaty. While assigning meaning to a term employed in the tax treaty, one must not lose sight of article 3(2) which gives primacy to the context in which the term is used.The context in which expression exempt from tax is set out in article 24, it essentially implies that the treaty benefit of non-taxation of an income, or its being taxed at a lower rate, in a contracting state depends on the status of taxability in another contracting state. In such a situation, to hold that only income covered by article 20, 21 and 22 can be said to be exempt in the source state because the expression exempt from tax is used therein, is plainly contrary to the context in which expression exempt from tax is used; it is the net effect not the wording which is relevant in the present context Whether an income is taxed only in the residence country or whether an income is exempt from tax in the source country, the effect on exemption of income in the source country is the same- particularly in the context of the treaty benefit being dependent on the taxation inn the residence country is concerned. The wordings may differ but the impact is the same, and that is all the more clear when seen in the context in which the issue arises. Even if the meaning canvassed by the learned counsel was to be defined in the statute or the treaty itself, in view of the contextual requirements, such a meaning was to be discarded in the present context. Having said that we are aware that there is a division bench which has taken a contrary view on the basis of a very erudite analysis of the treaty provisions, but, without taking into account the provisions of Article 3(2) and binding judicial precedent on the same. While we have highest respect and reverence for the view so adopted by the coordinate bench as well, it is just that we do not find ourselves in agreement with the same. To us, it appears that the view expressed by the coordinate bench is so much out of context that even the IRAS certificate from the residence country, which has been reproduced in the order itself, does not envisage treaty benefit in a situation in which the shipping profits in India are taxed on remittance basis in Singapore and the remittances to Singapore have not been made, but then, going by the analysis of the coordinate bench, the taxation in Singapore in such a situation is wholly irrelevant We have noted that the additional evidence submitted by the assessee was admitted by us and this additional evidence has not been considered by any of the authorities below, and that certain factual aspects of the matter have come to light only as a result of questions put by the bench and the authorities below, therefore, did not have any occasion to deal with these aspects in sufficient detail.- As additional evidence is submitted at the stage of proceedings before us and as the new facts have come to light at the stage of hearing before us, the parties also should have a full opportunity of presenting their case in the light of these facts, even though this situation has arisen due to their evasive and not so transparent conduct. Let all the relevant aspects be examined afresh in this light and the perspectives of both the parties be taken to the record and be analysed properly, particularly as this issue concerns a large number of Singaporean companies operating India. Appeal allowed for statistical purposes.

Issues Involved:
1. Denial of benefit under the Double Taxation Avoidance Agreement (DTAA) between India and Singapore.
2. Application of Article 8 of the DTAA concerning income from the operation of ships in international traffic.
3. Interpretation and applicability of Article 24 of the DTAA.
4. Requirement of actual remittance of funds to Singapore for DTAA benefits.
5. Misinterpretation of DTAA provisions by the Income Tax Officer (ITO).
6. Relevance of income being taxed on an accrual basis in Singapore.
7. Consideration of additional evidence and its impact on the case.
8. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Denial of DTAA Benefits:
The appellant challenged the correctness of the order denying the benefit of the DTAA between India and Singapore. The primary grievance was that the CIT(A) upheld the ITO's decision to deny the appellant the benefit of the DTAA, specifically Article 8, which pertains to the taxation of income from the operation of ships in international traffic.

2. Application of Article 8 of the DTAA:
The appellant, a Singapore-based company engaged in the operation of ships, claimed exemption under Article 8 of the Indo-Singapore DTAA for the income derived from freight receipts. The Assessing Officer (AO) rejected this claim, asserting that there was no evidence of the income being taxed in Singapore, as the funds were remitted to the USA instead of Singapore.

3. Interpretation and Applicability of Article 24 of the DTAA:
The AO invoked Article 24 of the DTAA, which limits relief to income that is either exempt from tax or taxed at a reduced rate in the source country. The AO contended that the freight income was outside the purview of chargeability in Singapore and thus denied the treaty benefits. The appellant argued that Article 24 was not applicable to Article 8 income and that the income should be assessed as nil in India.

4. Requirement of Actual Remittance of Funds to Singapore:
The CIT(A) upheld the AO's view that the benefit of the DTAA could not be granted as the funds were not remitted to Singapore. The appellant contended that the actual remittance of funds to Singapore was irrelevant for the application of Article 8, as the income was taxable on an accrual basis in Singapore.

5. Misinterpretation of DTAA Provisions by the ITO:
The appellant argued that the ITO misinterpreted the provisions of the DTAA by insisting on actual remittance to Singapore. The appellant maintained that the freight income had been offered for tax purposes and charged to tax in Singapore, and thus should be assessed to nil income in India.

6. Relevance of Income Being Taxed on an Accrual Basis in Singapore:
The appellant provided additional evidence, including a letter from the Inland Revenue Authority of Singapore, certifying that the freight income had been brought to tax in Singapore on an accrual basis. The Tribunal admitted this additional evidence and noted that the income was indeed taxed in Singapore, albeit the exemption under section 13F of the Singapore Income Tax Act was availed.

7. Consideration of Additional Evidence and Its Impact on the Case:
The Tribunal noted that the additional evidence had not been considered by the authorities below and that certain factual aspects emerged only during the hearing. The Tribunal deemed it fit to remit the matter to the CIT(A) for fresh adjudication in light of the new facts and additional evidence.

8. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant submitted that the matter arising out of the interpretation of the DTAA should not lead to the initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. This issue was also left open for reconsideration by the CIT(A).

Conclusion:
The appeal was allowed for statistical purposes, and the matter was remitted to the CIT(A) for de novo adjudication in light of the new facts and additional evidence. The Tribunal directed that all issues be examined afresh, considering the perspectives of both parties, and a speaking order be issued in accordance with the law.

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