2022 (12) TMI 112 - AT - Income Tax

Income deemed to accrue or arise in India - Shipping income for voyages performed by the vessels u/s 172 - DTAA between India and Singapore - freight income earned from the voyage performed - qualify for tax exemption in India - As submitted freight income was not directly remitted to Singapore and the freight income was never subjected to tax in Singapore - HELD THAT - IRAS Authority have stated that the assessee company derives shipping income (charter income) from third party from export voyages from Indian ports. The assessee company would report the chartered income in its Singapore Tax Return for the years of Assessment 2017 and 2018. It is clarified that Article 24(1) of India-Singapore DTAA is not applicable to the charter income derived by the assessee on the voyages from Indian ports. For the reason that the income, if accruing in or derived from a business carried on in Singapore. The chartered income is, therefore, shipping income sourced in Singapore and assessable to tax at Singapore on accruing and not on remittances basis, for the Year of Assessment 2016 and 2017. It is further clarified that a physical flow of funds is therefore not relevant and the chartered income is subject to tax in Singapore on remittances basis. As clarified that Article 24(1) does not apply to the shipping income received by a Singapore Shipping Enterprises from Indian customers and the shipping income is taxable in Singapore, on an arising basis when the income is earned by the shipping enterprise regardless of whether the shipping income is received in or remitted to Singapore. Since Article 24(1) is not applicable, the provisions of Article 8(1) should apply without any limitation. As such the shipping profits derived by a Singapore resident shipping enterprise from the operation of ships in international traffic shall be taxable only in Singapore in accordance with Article 8(1) and the same does not confer the Indian Authorities to the right to tax such profits. We find this view has been followed by the Chennai Benches of the Tribunal in M/s. Bengal Tiger Line Pte. Ltd. 2020 (11) TMI 567 - ITAT CHENNAI We held that the Assessing Officer and Ld. DRP was not justified in denying the benefit of Article 8 by invoking the limitation of Article 24 between India and Singapore DTAA following Jurisdictional High Court judgment in M.T. Maersk Mikage v. DIT (International Taxation) ( 2016 (9) TMI 19 - GUJARAT HIGH COURT We are therefore of the considered opinion that the exercise under taken by the Assessing Officer and the Ld. DRP in co-relating the remittances and denying the certificate issued by the Singapore Tax Authorities is not proper and both the Assessing Officer and the Ld. DRP has not considered the Singapore Income Tax Returns filed by the assessee. In view of the above the order of the lower authorities namely final Assessment Order passed by the Assessing Officer and directions issued by Ld. DRP are hereby set-aside and they are directed to allow the benefit of Article 8 to all the voyages carried out by the assessee in this appeal. Appeals filed by the assessee are allowed.

Summary

Issues Involved:
1. Taxability of freight income earned by the assessee in India.
2. Applicability of Article 8 and Article 24 of the India-Singapore Double Taxation Avoidance Agreement (DTAA).
3. Interpretation of "subject to tax" versus "liable to tax".
4. Relevance and interpretation of certificates issued by the Inland Revenue Authority of Singapore (IRAS).
5. Initiation of penalty proceedings under Section 270A of the Income Tax Act.

Detailed Analysis:

1. Taxability of Freight Income Earned by the Assessee in India:
The assessee, a Singapore-based company, engaged in shipping operations, claimed exemption of its freight income under Article 8 of the DTAA between India and Singapore. The Assessing Officer (AO) initially denied this exemption, arguing that the income was not directly remitted to Singapore and was not subject to tax in Singapore due to an exemption under Section 13F of the Singapore Income Tax Act (SITA). The AO held that the income was liable to tax in India under Article 24 of the DTAA, which limits relief in cases of double non-taxation. The Dispute Resolution Panel (DRP) upheld this view, emphasizing that Article 24 overrides Article 8 in such cases.

2. Applicability of Article 8 and Article 24 of the India-Singapore DTAA:
Article 8 of the DTAA provides that shipping profits are taxable only in the state of residence (Singapore). However, Article 24 limits this relief if the income is not subject to tax in the resident state by reference to the full amount. The assessee argued that its income was taxable in Singapore on an accrual basis, not on a remittance basis, thus Article 24 should not apply. The Tribunal referred to the jurisdictional High Court's decision in M.T. Maersk Mikage v. DIT, which held that Article 24 does not apply if the income is taxable on an accrual basis in Singapore.

3. Interpretation of "Subject to Tax" versus "Liable to Tax":
The AO and DRP interpreted "subject to tax" to mean that the income must be actually taxed, not merely liable to tax. The Tribunal, however, relied on various judicial precedents, including the High Court's decision in M.T. Maersk Mikage, which clarified that income taxable on an accrual basis in Singapore satisfies the requirement of being "subject to tax."

4. Relevance and Interpretation of Certificates Issued by IRAS:
The assessee presented certificates from IRAS stating that the freight income was taxable in Singapore on an accrual basis, and Article 24 of the DTAA would not apply. The Tribunal accepted these certificates, noting that they were consistent with Singapore's tax laws and practices. The Tribunal emphasized that the IRAS certificates should be honored unless there is contrary evidence.

5. Initiation of Penalty Proceedings under Section 270A:
The AO initiated penalty proceedings under Section 270A for under-reporting of income. The Tribunal noted that the DRP did not have jurisdiction to consider objections related to penalty proceedings, and thus, this ground was not maintainable.

Conclusion:
The Tribunal allowed the appeals, holding that the assessee's freight income was taxable only in Singapore under Article 8 of the DTAA. It found that Article 24 did not apply, as the income was taxable on an accrual basis in Singapore. The Tribunal set aside the final assessment orders and directed the AO to allow the benefit of Article 8 for all voyages. The initiation of penalty proceedings was not addressed substantively due to jurisdictional limitations.