2023 (5) TMI 1207 - AT - Income Tax

Validity of reassessment proceedings - assessment of shipping freight income in India - documentation charges and vessel handling charges assessed as the income of the assessee - HELD THAT - Assessee is a Singapore based shipping entity and is governed by India-Singapore DTAA. The assessee claim that shipping income thus earned by the assessee is covered by Article-8 of DTAA which provide that only the resident country would have taxation right to tax the same. Accordingly, the assessee has availed the benefit of Article-8 and filed its return of income by taking benefit of DTAA on freight income. Whole dispute stem from the fact that the agent was subjected to survey action u/s 133(2A) wherein statement of key persons was recorded. The main issue emerged out of document / vessel handling charges stated to the received by the agent independently. The copies of statement taken during survey proceedings are on record and we have perused the same. The same has also been extracted in the reasons recorded by Ld. AO to reopen the case of the assessee. The fact of escapement of income is sine qua non to acquire this jurisdiction. Until and unless there is escapement of income, the reopening could not be resorted to under law. We find that in the present case, there are no reasons before Ld. AO to reach such a belief that documentation / vessel handling charges belonged to the assessee and the agent wrongly offered the same to tax. Secondly, there is no escapement of income since the income has already been offered to tax by the agent. Merely because tax rate was higher for principal, the same could not lead to a conclusion that there was escapement of income unless it was conclusively shown that the income of the principal was erroneously offered to tax by the agent. We find that there is no such material before Ld. AO to reach such a conclusion. There is no material to reach a conclusion that the aforesaid income belonged to the assessee. This being the case, reassessment jurisdiction, as acquired by Ld. AO, could not be said to be valid in the eyes of law and the same is, therefore, liable to be termed as bad-in-law. The fulfilment of primary conditions viz. reasons to believe and escapement of income is sine qua non to acquire the reassessment jurisdiction. If the same are not fulfilled, no valid jurisdiction could be said to have been acquired by Ld. AO. Simply because tax rate was higher for principal assessee, the same could not be a ground to tax the same in the hands of the assessee unless it was demonstrated that the said income was collected by the agent on behalf of the principal and this income belonged to principal only. We find that there is no material before Ld. AO to reach the said conclusion. Therefore, the assessment framed by Ld. AO is liable to be quashed on this score only. For every new issue coming before AO during course of proceedings of assessment or reassessment of escaped income and which he intends to take into account, he would be required to issue a fresh notice under section 148. If no disallowance was made for items which led to formation of belief of escapement of income then the reasons for initiation of reassessment proceedings would cease to survive and therefore, there was no justification to make addition on other account. This decision follows the ratio of decision of Hon ble Bombay High Court in Jet Airways (I) Ltd. ( 2010 (4) TMI 431 - HIGH COURT OF BOMBAY ). These case laws are binding on us. Therefore, in the absence of any contrary decision shown to us, it was to be held that since the reassessment fails on recorded reasons, the assessment of shipping freight income would be out of reassessment jurisdiction of Ld. AO and therefore, liable to be deleted. The reassessment proceedings as well as consequential assessment framed therein are unsustainable in law and accordingly, liable to be quashed - Decided in favour of assessee. Whether shipping income is taxable only in Singapore as per Article 8 of the India-Singapore? - DTAA Article 24 would have no application in the case of the present assessee but Article 8 would apply and the assessee would be eligible to claim the benefit of the same since it is more beneficial vis- -vis statutory provisions of Income Tax Act, 1961. The conditions of Article 24, in our considered opinion, have not been fulfilled in the present case and therefore, the invocation of the same against the assessee could not be held to be justified. Another line of agreement was that DTAA do not provide for double non-taxation of the income. However, we find that the provisions of Sec. 13F of the Singapore Income Tax Act were already in existence since 01-04-1991 whereas DTAA between the two countries has been signed subsequently on 27-5-1994. Despite that, both the authorities chose not to alter the taxation right of shipping income which is generally available to the country of residence. The DTAA is in the nature of bilateral agreement wherein the two countries have specifically agreed on the taxing rights of particular streams of income. The same has to be given effect to in full, whatever the consequences may be. Any income of a non-resident shipping company which is a tax resident of Singapore is liable to be taxed only in Singapore but not in India. The provision of Article-24 would apply to income which is exempt from tax as per the tax treaty which is not the case since the international shipping income earned by the assessee is not exempted in India. Therefore, the exclusive right of taxation in one contracting state is not the same as the specific exemption being available in other contracting state. Shipping income as dealt by Article-8 states that profits derived by an enterprise of a contracting state by operation of ships in international traffic shall be taxable only in the State of residence. The word 'only' debars the other contracting state to tax the shipping income so earned by the assessee even if it is sourced from India. When India does not have any taxation right on a shipping income of non-resident entity, exemption or reduced rate of taxation in the source state is of no relevance because once the taxing right has been given-off, the other conditions like exemption or reduced rate of tax has no bearing on the taxability of particular income in other contracting state. Therefore, the assessee being tax resident of Singapore, shipping income so earned from India on international waters is taxable only in Singapore on accrual basis.

Summary

Issues Involved:
1. Validity of Reassessment Proceedings
2. Taxability of Documentation Charges and Vessel Handling Charges
3. Taxability of International Shipping Income from Freight Operations
4. Levy of Interest under Section 234B of the Income Tax Act

Summary:

1. Validity of Reassessment Proceedings:
The assessee challenged the reopening of assessment under section 147 of the Income Tax Act, arguing that the primary condition of escapement of income was not fulfilled as the documentation and vessel handling charges were already offered to tax by its Indian subsidiary, BTIPL. The Tribunal concluded that there were no reasons before the Assessing Officer (AO) to believe that income had escaped assessment in the hands of the assessee. The income had already been offered to tax by the agent, and merely because the tax rate was higher for the principal, it could not be concluded that there was escapement of income. The Tribunal quashed the reassessment proceedings, holding them as bad-in-law.

2. Taxability of Documentation Charges and Vessel Handling Charges:
The AO assessed documentation and vessel handling charges as income in the hands of the assessee, arguing that these charges were collected by the agent on behalf of the principal. However, the Tribunal found that these charges were collected independently by the agent as per local trade practices and were offered to tax in the agent's books. The Tribunal concluded that these charges did not belong to the principal and taxing the same in the hands of the assessee would amount to double taxation. The Tribunal held that the documentation and vessel handling charges were not taxable in the hands of the assessee.

3. Taxability of International Shipping Income from Freight Operations:
The AO taxed the international shipping income from freight operations in India, invoking Article 24 of the India-Singapore DTAA. The Tribunal referred to Article 8 of the DTAA, which provides that profits derived by an enterprise of a contracting state from the operation of ships in international traffic shall be taxable only in that state. The Tribunal held that Article 8 allocates the taxation rights to the country of residence, and Article 24, which limits relief, was not applicable as the income was taxable in Singapore on an accrual basis. The Tribunal concluded that the international shipping income was not taxable in India.

4. Levy of Interest under Section 234B of the Income Tax Act:
The AO levied interest under section 234B of the Act. The Tribunal did not specifically adjudicate on this issue as it was consequential in nature and dependent on the outcome of the main issues.

Conclusion:
The Tribunal quashed the reassessment proceedings and held that the documentation and vessel handling charges were not taxable in the hands of the assessee. It also concluded that the international shipping income from freight operations was not taxable in India as per Article 8 of the India-Singapore DTAA. The levy of interest under section 234B was not specifically adjudicated.