2019 (11) TMI 1765 - AT - Income Tax

Order u/s. 172(4) - Assessment of shipping income - draft of the assessment order as is required u/s. 144C not issued - HELD THAT - Regarding contention of the assessee that order u/s. 172(4) of the income tax act 1961 is bad in law without first issuing draft of the assessment order as is required u/s. 144C of the act, we observed that the Co-ordinate Bench on identical issue on identical facts in the case of assessee itself LRS Management K/S (As foreign commercial manager/agent of principal freight beneficiary Maersk Tankers Singapore Pvt. Ltd. (MTSPL) Shipping Pvt. Ltd. vs. ITO (International Taxation) Rajkot Bench 2018 (8) TMI 674 - ITAT RAJKOT after following the decision in the case of LR2 Management K/S vs. Income Tax Officer 2015 (11) TMI 274 - ITAT RAJKOT Tribunal held that draft order u/s. 144C was required to be issued and for enabling the assessing officer for following the path envisaged in section 144C the matter was remitted back to the file of assessing officer. Thus remit this case to the file of assessing officer for framing fresh assessment order u/s. 172(4) after following the path envisaged in section 144C of the act. Therefore, at this stage, we are not dealing with other issues in appeal and the assessee is at liberty to raise all these issues in the set aside proceedings. With these observations, the matter has been restored to the file of assessing officer. Therefore, the appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:

1. Applicability of Article 24 of the DTAA between India and Singapore.
2. Requirement of issuing a draft assessment order under Section 144C of the Income Tax Act.
3. Taxability of shipping income under Article 8 of the DTAA between India and Singapore.
4. Interpretation of "subject to tax" versus "liable to tax" under the DTAA.
5. Jurisdictional adherence to judicial precedents and the principle of non-double taxation.

Issue-wise Detailed Analysis:

1. Applicability of Article 24 of the DTAA between India and Singapore:

The assessing officer invoked Article 24 of the DTAA, arguing it applies universally to all treaty articles, including Article 8, to prevent double non-taxation. The officer noted that Singapore follows a territorial system where foreign income is taxable only if received in Singapore. Since the shipping income was not remitted to Singapore, it resulted in double non-taxation, conflicting with the treaty's objective. The assessee contended that Article 24 was inapplicable, citing the Gujarat High Court's decision in favor of Maersk Tankers Singapore Pte. Ltd., and other judicial precedents. However, the assessing officer rejected these arguments, emphasizing that Article 24's limitation of benefit clause prevents misuse of the treaty to avoid double non-taxation.

2. Requirement of issuing a draft assessment order under Section 144C of the Income Tax Act:

The assessee argued that the assessing officer should have issued a draft assessment order under Section 144C before passing the final order under Section 172(4). The ITAT Rajkot, following its decision in LR2 Management K/S, held that an order under Section 172(4) is an assessment order and should follow the path envisaged in Section 144C. The Tribunal remitted the matter back to the assessing officer to issue a draft assessment order, allowing the assessee to raise all issues in the remanded proceedings.

3. Taxability of shipping income under Article 8 of the DTAA between India and Singapore:

The assessing officer disallowed the benefit under Article 8, invoking Article 24, and argued that the income was not subject to tax in Singapore due to specific exemptions under Singapore's Income Tax Act. The assessee contended that shipping income is taxable in Singapore on an accrual basis, not on remittance, and cited various judicial precedents supporting this view. The ITAT Rajkot noted that the assessing officer should have issued a draft assessment order under Section 144C and remitted the matter back for fresh adjudication, allowing the assessee to raise all issues in the remanded proceedings.

4. Interpretation of "subject to tax" versus "liable to tax" under the DTAA:

The assessing officer distinguished between "subject to tax" and "liable to tax," arguing that "subject to tax" requires actual taxation, while "liable to tax" means within the general scope of tax. The officer cited the UK case of Paul Weiser v HMRC and the decision of the AAR in General Electric Pension Trust, emphasizing that the income must be actually taxed to qualify for treaty benefits. The assessee's argument that income taxable on an accrual basis in Singapore is not subject to Article 24 was rejected, as the income was exempt under Singapore's specific provisions.

5. Jurisdictional adherence to judicial precedents and the principle of non-double taxation:

The assessee cited various judicial precedents, including decisions from the Gujarat High Court and ITAT Mumbai, supporting their claim that Article 24 does not apply to their case. However, the assessing officer and the CIT(A) emphasized that these precedents were based on an erroneous impression of the facts regarding actual taxability in Singapore. The CIT(A) highlighted the anti-abuse provision in Article 24 to prevent double non-taxation and upheld the assessing officer's decision. The ITAT Rajkot remitted the matter back to the assessing officer for fresh adjudication, allowing the assessee to raise all issues in the remanded proceedings.

Conclusion:

The ITAT Rajkot remitted the matter back to the assessing officer to issue a draft assessment order under Section 144C, allowing the assessee to raise all issues in the remanded proceedings. The Tribunal emphasized the need for a purposive interpretation of the DTAA to prevent double non-taxation and upheld the applicability of Article 24 in limiting treaty benefits where income is not actually taxed in the residence state.