2002 (12) TMI 198 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 195 of the IT Act for deducting tax on remittances made to non-resident ship owners.
2. Determination of whether the non-resident ship owners had a business connection in India.
3. Nature of payments made under the charter party agreements-whether they are charter hire charges or freight charges.
4. Place of accrual of income.
5. Applicability of CBDT circulars and instructions to the case.

Detailed Analysis:

1. Applicability of Section 195 of the IT Act:
The core issue raised by the Revenue was whether the assessee was required to deduct tax under Section 195 of the IT Act while remitting hire charges to non-resident ship owners. The AO concluded that the assessee was liable to deduct tax at source as per Section 195. The CIT(A) disagreed, holding that the remittances were not taxable in India under Section 195, as they did not constitute income accruing or arising in India.

2. Business Connection in India:
The Tribunal examined whether the non-resident ship owners had any business connection in India, as per Section 9(1)(i) read with Section 5(2)(b) of the IT Act. It was determined that the income could not be said to accrue or arise in India through any business connection or property in India. The Tribunal noted that the ship was registered under the flag of the Bahamas, and the location of the ship is considered the country where it is registered. Thus, no business connection in India was established.

3. Nature of Payments:
The Tribunal analyzed whether the payments made under the charter party agreements were charter hire charges or freight charges. It was concluded that the payments were for the hire of the vessel and not for the carriage of goods, distinguishing them from freight charges. The Tribunal referred to the Supreme Court's decision in Union of India vs. Gosalia Shipping Pvt. Ltd., which held that hire charges for a time charter do not constitute freight.

4. Place of Accrual of Income:
The Tribunal addressed the Department's argument that the place of accrual was in India because the remittances were made from a bank in India. The Tribunal referred to the Supreme Court's decision in CIT vs. Patney & Co., which clarified that the place of payment does not determine the place of accrual. Since the payments were made to a designated account outside India, the income did not accrue in India.

5. Applicability of CBDT Circulars:
The Tribunal considered the applicability of CBDT Instruction No. 1934 and other related circulars, which clarified that no income-tax is payable on freight for import cargo unless paid in India to a non-resident shipping company or its agent. The Tribunal held that these instructions were binding on the Revenue authorities and applicable to the assessee's case, as the remittances were made outside India.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the assessee was not required to deduct tax at source under Section 195 for the remittances made to non-resident ship owners. The appeals filed by the Revenue were dismissed.