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2018 (8) TMI 855 - AT - Income TaxExigibility of tax of the profits of the assessee from the operation of ships in international traffic - Article-22 of DTAA - the phrase other than the profits from the operation of the ships in international traffic occurring in Article-7 - Double Taxation Avoidance Agreement between India and Switzerland ( Tax Treaty ) - Held that - the issue involved in revenue s appeal is squarely covered in favour of the assessee by a series of the decision of the ITAT in assessee s own case. - Respectfully following the precedent, the appeals filed by the Revenue are dismissed. - Decided against the revenue.
Issues Involved:
1. Taxability of profits from the operation of ships in international traffic under the Indo-Swiss DTAA. 2. Interpretation of Article 22 of the Indo-Swiss DTAA. 3. Permanent Establishment (PE) status of MSC Agency (India) Pvt. Ltd. 4. Effective connection of ships with the PE. 5. Exclusion of service tax from gross freight collection. Detailed Analysis: 1. Taxability of Profits from the Operation of Ships in International Traffic: The primary issue was whether the profits from the operation of ships in international traffic by the assessee, a Swiss resident, are taxable in India or Switzerland under the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland. The Tribunal reiterated its previous decisions, holding that such profits are taxable only in Switzerland as per Article 22 of the Indo-Swiss DTAA. This was based on the understanding that Article 22 governs the taxability of income not specifically dealt with by other articles of the treaty. 2. Interpretation of Article 22 of the Indo-Swiss DTAA: Article 22(1) of the Indo-Swiss DTAA states that items of income not dealt with in the foregoing articles shall be taxable only in the state of residence. The Tribunal rejected the Revenue's contention that the exclusion of shipping profits from Articles 7 and 8 meant they should be taxed under domestic law. It concluded that the introduction of Article 22 altered the previous position, making it necessary to determine whether shipping profits were dealt with by any other article. The Tribunal held that shipping profits were not explicitly dealt with by any other article and thus fell under Article 22, making them taxable only in Switzerland. 3. Permanent Establishment (PE) Status of MSC Agency (India) Pvt. Ltd.: The Tribunal examined whether MSC Agency (India) Pvt. Ltd. constituted a PE of the assessee in India. It agreed with the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] that MSC Agency was a dependent agent and thus constituted a PE. The Tribunal supported this conclusion by referring to the agreement between the assessee and MSC Agency, which indicated significant control and exclusivity, fulfilling the criteria for a PE under the DTAA. 4. Effective Connection of Ships with the PE: The Tribunal analyzed whether the ships, the property generating income, were effectively connected with the PE in India. It referred to the opinions of legal experts and the OECD commentary, concluding that the ships were not effectively connected with the PE. The Tribunal emphasized that effective connection implies economic ownership, which remained with the assessee in Switzerland. Consequently, the income from the operation of ships did not fall under Article 22(2) but under Article 22(1), making it taxable only in Switzerland. 5. Exclusion of Service Tax from Gross Freight Collection: The Tribunal upheld the Dispute Resolution Panel's (DRP) direction to exclude service tax from the gross freight collection. This decision aligned with the principle that service tax, being a statutory levy, should not form part of the taxable income. Conclusion: The Tribunal dismissed the appeals filed by the Revenue and the cross-objections by the assessee, affirming that the profits from the operation of ships in international traffic are taxable only in Switzerland under Article 22 of the Indo-Swiss DTAA. The Tribunal also confirmed that MSC Agency (India) Pvt. Ltd. constituted a PE but held that the ships were not effectively connected with this PE, thus reinforcing the applicability of Article 22(1). The exclusion of service tax from gross freight collection was also upheld.
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