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2017 (5) TMI 1219 - AT - Income TaxExclusion of the sum received or deemed to be received by the assessee on account of shipping business - Benefit of Article 22 of Indo-Swiss treaty - Held that - Tribunal in assessee s own case for the A.Y. 2004-05 2015 (3) TMI 148 - ITAT MUMBAI wherein held 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. 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. Exclusion of income from shipping in international traffic from taxation in India. 2. Constitution of a permanent establishment (PE) in India by MSC Agency (India) Pvt. Ltd. 3. Application of Article 22 of the Indo-Swiss DTAA to shipping profits. 4. Effective connection of ships with the PE in India. Issue-wise Detailed Analysis: 1. Exclusion of Income from Shipping in International Traffic: The Revenue contested the Dispute Resolution Panel (DRP)'s directive to exclude income from shipping in international traffic from taxation in India. The argument was based on the interpretation of Section 44BB of the IT Act, which does not prescribe the exclusion of sums received by the assessee on account of the shipping business. The Tribunal referred to its previous decision in the assessee's case for A.Y. 2004-05, which concluded that the profits from the operation of ships in international traffic are taxable only in Switzerland under Article 22 of the Indo-Swiss DTAA. This decision was based on the mutual agreement between the competent authorities of India and Switzerland, which clarified that shipping profits fall under Article 22 and are thus taxable only in the state of residence, i.e., Switzerland. 2. Constitution of a Permanent Establishment (PE) in India: The assessee challenged the CIT(A)'s decision holding that MSC Agency (India) Pvt. Ltd. constituted a PE in India under Article 5 of the Indo-Swiss DTAA. The Tribunal upheld the view that MSC Agency (India) Pvt. Ltd. was a dependent agent and constituted a PE in India. This conclusion was drawn from the agreement between the assessee and MSC Agency, which indicated that the agent was legally and economically dependent on the assessee and performed significant duties such as sales, marketing, bookings, and documentation exclusively for the assessee. 3. Application of Article 22 of the Indo-Swiss DTAA to Shipping Profits: The Tribunal reiterated its stance from previous years that Article 22 of the Indo-Swiss DTAA governs the taxability of shipping profits. The introduction of Article 22 in 2001 altered the position, making it clear that items of income not dealt with in other articles of the treaty, including shipping profits, are taxable only in the state of residence. The Tribunal rejected the Revenue's argument that the exclusion of shipping profits from Article 7 and 8 left them to be taxed under domestic law, emphasizing that Article 22 explicitly covers such profits. 4. Effective Connection of Ships with the PE in India: The Tribunal examined whether the ships, the property generating the shipping income, were effectively connected with the PE in India. It concluded that the ships were not effectively connected with the PE, as they were not part of the PE's assets and were owned and operated by the non-resident shipping company. This interpretation was supported by opinions from legal experts and the OECD commentary on the Model Tax Convention, which define "effectively connected" as involving economic ownership. Since the ships did not meet this criterion, the income from their operation fell under Article 22(1) and was taxable only in Switzerland. Conclusion: The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection, affirming that the shipping profits are 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 consistent with its previous rulings in the assessee's case for earlier assessment years.
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