2006 (6) TMI 182 - AT - Income Tax

Deduction of Tax At Source - remitting payments to various shipping companies under time charter agreements - HELD THAT - Once the amount of tax is deducted at source the person against whose income the tax is deducted could claim credit of that amount by filing the appropriate return. If tax is deducted on an amount which is not exigible to tax, the Assessing Officer makes refund of that amount after the completion of the assessment. Deduction of tax at source is a convenient method of tax collection since it effects early realization and is less painful to the person from whose income such tax is deducted. Moreover it saves time on the part of the revenue inasmuch as all calculation and other attendant work are performed by the person responsible for paying. It also acts as a check on tax evasion. In the present case it is found that the amount payable to the non-resident was exigible to tax. No tax was deducted on that amount. The Assessing Officer, therefore, rightly treated the assessee as an assessee in default in respect of the tax within the meaning of section 201 of the Act - the Commissioner (Appeals) took a correct view in the matter. Accordingly the impugned order for these two years upheld. For the same reasonings the order of the Commissioner (Appeals) for the assessment year 2003-04 reversed. Appeal of assessee dismissed.

Summary

Issues:
Whether the assessee was liable to deduct tax at source while remitting payments to various shipping companies under time charter agreements.

Analysis:
The appeals were filed against the common order passed by the Commissioner (Appeals) for the assessment years 2002-03 and 2004-05. The main issue raised was whether the assessee was required to deduct tax at source while making payments to foreign shipping companies under time charter agreements. The Assessing Officer held the assessee liable for not deducting tax at source, leading to orders under sections 201(1) and 201(1A) of the Income-tax Act, 1961. The Commissioner (Appeals) confirmed the orders for 2002-03 and 2004-05 but allowed the appeal for 2003-04.

The contention was that the payment made was not subject to tax as it did not fall under the definition of 'royalty' as per section 9(1)(vi) of the Act or the Double Taxation Avoidance Agreement. The argument was that time charter agreements do not involve hiring equipment, thus not attracting withholding tax under section 195 of the Act.

The definition of 'royalty' under section 9(1)(vi) includes consideration for the use of equipment. The debate centered on whether a ship qualifies as 'equipment.' Various dictionaries and legal interpretations were cited to support the argument that ships are considered equipment, especially in the context of tax treaties and industrial classifications.

The Tribunal referred to a previous case where it was held that a ship qualifies as equipment, making hire charges akin to royalty under section 9(1)(vi). The Tribunal emphasized that in the context of the shipping business, a ship can be construed as equipment. Additionally, the nature of time charter agreements was analyzed to differentiate between payment for ship usage and payment for transportation services.

The issue of permanent establishment for foreign shipping companies in India was raised, highlighting the presence of facilities exclusively for chartered ships as a form of permanent establishment. The argument that income of foreign companies is not taxable in the absence of a business connection in India was dismissed.

The Tribunal discussed the obligation to deduct tax at source under section 195(1) and the role of the Assessing Officer in determining the taxability of sums paid to non-residents. It was emphasized that doubts regarding tax liability should lead to tax deduction as a precautionary measure.

The Tribunal upheld the orders for 2002-03 and 2004-05, considering the payments to be subject to tax. However, the order for 2003-04 was reversed based on the analysis of the payment nature and tax liability. The appeals for 2002-03 and 2004-05 were dismissed, while the departmental appeal for 2003-04 was allowed.