1994 (9) TMI 117 - AT - Income Tax

Assessing Officer, Assessment Year, Indian Company, Mineral Oil, Permanent Establishment, Profits And Gains

Issues Involved:
1. Tax Deduction under Section 195(2) of the Income-tax Act, 1961.
2. Applicability of Double Taxation Agreement (DTA) between India and the UK.
3. Interpretation and application of Sections 5(2), 44B, 44BB, and 172 of the Income-tax Act, 1961.
4. Extension of Indian territorial waters under the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976.
5. Application of Article 7 and Article 9 of the DTA.

Detailed Analysis:

1. Tax Deduction under Section 195(2) of the Income-tax Act, 1961:
The department filed an appeal concerning the tax deduction from the payment of hire charges for a ship under Section 195(2) of the Income-tax Act, 1961. The Assistant Commissioner of Income-tax (ACIT) directed the respondent to deduct 65% of the hire charges towards Indian taxes, asserting that the hire charges received by the non-resident (NR) company accrued in India.

2. Applicability of Double Taxation Agreement (DTA) between India and the UK:
The respondent argued that the hire charges were not taxable in India due to the DTA between India and the UK. The CIT(A) agreed, noting the provisions of Article 9 of the DTA, which deals with the taxation of shipping income. The CIT(A) concluded that the respondent was entitled to the benefits under Section 44BB of the Act and that the DTA provisions prevailed over the Income-tax Act, as clarified by CBDT Circular No. 333, dated 2-4-1982.

3. Interpretation and application of Sections 5(2), 44B, 44BB, and 172 of the Income-tax Act, 1961:
The ACIT argued that the hire charges accrued in India under Section 5(2) and that Section 44BB did not apply as the NR was not engaged in the business of hiring ships for oil exploration. However, the CIT(A) found that the ship was used for oil exploration activities, making Section 44BB applicable. The CIT(A) emphasized that special sections like 44B, 44BB, and 172 override general provisions for computing business income.

4. Extension of Indian territorial waters under the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976:
The department contended that the extension of Indian territorial waters to 200 nautical miles under the 1976 Act meant that any commercial operation within this extended territory was taxable in India. The respondent countered that the extension of territory required constitutional amendment and that the ship's operations were related to oil exploration, not general commercial activities.

5. Application of Article 7 and Article 9 of the DTA:
The department argued that Article 9 of the DTA, covering shipping income from international waters, was inapplicable as the ship operated within extended Indian territory. The respondent asserted that Article 7, covering business profits, applied since the NR had no permanent establishment in India. The Tribunal agreed with the respondent, stating that the hire charges were business income taxable in the UK under Article 7, as the NR had no permanent establishment in India.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that the hire charges were not taxable in India under the DTA. The appeal of the revenue was dismissed, affirming that the provisions of the DTA prevailed and that the hire charges were business income taxable in the UK under Article 7 of the DTA. The Tribunal did not find it necessary to delve into the academic discussion on the extension of Indian territory under the Territorial Waters Act, 1976.

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