2006 (5) TMI 152 - AT - Income Tax

Deduction of Tax At Source - failure to deduct tax at source in the context of payment made under the alleged Agreement for Bare Boat Charter-cum-Demise (BBCD) with Dolphin Maritime Co. Ltd. (DMCL) - HELD THAT - Under section 195 of the Act any person responsible for paying to a non-resident, including a foreign company, any income by way of interest or any other sum which is chargeable to tax in India, is required to deduct tax at source on such income at the time of payment. As per the mandate of the section tax is to be deducted at source with reference to the income element embedded in the payments. However, a non-resident including a foreign company may obtain from the Assessing Officer a certificate authorizing him to receive payment without deduction of tax at source. The expression 'any other sum' occurring in section 195(1) does not necessarily refer to sums which represent wholly income or profit. The scheme of tax deduction at source applies not only to the amount paid which wholly bears income character, but also to gross sums, the whole of which may not be income or profits of the recipient, such as payments to contractors and sub-contractors under section 194C and payment of insurance commission under section 194D. Section 195 takes within its sweep any sums paid to a non-resident which do not wholly represent income or profits chargeable under the Act but a portion of which only so represents. The Hon'ble Supreme Court took this view in the case of TRANSMISSION CORPORATION OF AP LTD. AND ANOTHER VERSUS COMMISSIONER OF INCOME-TAX 1999 (8) TMI 2 - SUPREME COURT The Hon'ble Calcutta High Court considered and interpreted a similar provision under section 18(3B) of the Indian Income-tax Act, 1922 in the case of PC. RAY AND CO. (INDIA) PRIVATE LTD. VERSUS AC. MUKHERJEE, INCOME-TAX OFFICER, AND ANOTHER 1958 (5) TMI 43 - CALCUTTA HIGH COURT and held If 'chargeable under the provisions of this Act' means actually liable to be assessed to tax, in other words, if the sum contemplated is taxable income, a difficulty is undoubtedly created as to complying with the provisions of the section. It is not open for a person making payment to a non-resident to take a unilateral decision that the payments made by him are not sums chargeable to tax. To take that view the concurrence of the Assessing Officer as provided in sub-section (2) of section 195 is sine qua non. Section 195 is for tentative deduction of income-tax subject to regular assessment. By the deduction of tax the rights of parties are not, in any manner, adversely affected. Where there exists a doubt as to the chargeability of income to tax, there also tax is to be deducted at source ex abundanti cautela. In the present case the attendant circumstances suggest that ex facie the amount paid is not for the acquisition of the ship, but for the user of the ship, as such taxable. Therefore the assessee cannot be exonerated from the obligation of deduction of tax at source. The appeals of the assessee stand dismissed.

Issues Involved:
1. Whether the assessee committed a default by not deducting tax at source on payments made under the Agreement for Bare Boat Charter-cum-Demise (BBCD) with Dolphin Maritime Co. Ltd. (DMCL).
2. Whether the payments made under the BBCD agreement can be classified as hire charges or as consideration for the purchase of the ship.
3. Applicability of Article 8 and Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Cyprus.
4. Whether the ship can be considered as "equipment" under Article 12 of the DTAA.
5. Applicability of Section 195 of the Income-tax Act, 1961, regarding the deduction of tax at source.

Detailed Analysis:

1. Default in Deducting Tax at Source:
The core issue revolves around whether the assessee defaulted by not deducting tax at source on payments to DMCL under the BBCD agreement. The revenue contended that the payments were hire charges and thus taxable in India, requiring tax deduction at source under Section 195 of the Income-tax Act.

2. Classification of Payments:
The assessee argued that the agreement was for the outright purchase of the ship, not mere hire, and thus payments should not be classified as hire charges. The agreement lacked a repossession clause, indicating a sale rather than hire. However, the Tribunal found that ownership remained with DMCL until the final balloon payment was made in January 2005, implying that the payments were indeed hire charges and not sale consideration.

3. Applicability of DTAA Articles:
The assessee claimed that the payments should be governed by Article 8 of the DTAA, which pertains to profits from the operation of ships in international traffic, and thus not taxable in India. However, the Tribunal noted that the ship was used in Indian coastal waters, not international traffic, making Article 8 inapplicable. Instead, Article 12, which deals with royalties, was applicable as the payments were for the use of the ship.

4. Ship as "Equipment":
The Tribunal examined the definition of "equipment" and concluded that a ship qualifies as industrial, commercial, or scientific equipment under Article 12 of the DTAA. Various dictionaries and legal precedents supported this interpretation, leading to the conclusion that hire charges for the ship constituted royalties.

5. Applicability of Section 195:
The Tribunal upheld that Section 195 of the Income-tax Act mandates tax deduction at source on payments to non-residents if such payments are chargeable to tax in India. The payments to DMCL were deemed royalties, thus chargeable to tax, necessitating tax deduction at source. The Tribunal cited the Supreme Court's decision in Transmission Corporation of A.P. Ltd. v. CIT, emphasizing that tax must be deducted even if the payment is not wholly income.

Conclusion:
The Tribunal dismissed the assessee's appeals, concluding that the payments made under the BBCD agreement were hire charges, taxable as royalties under Article 12 of the DTAA. Consequently, the assessee was obligated to deduct tax at source under Section 195 of the Income-tax Act. The Tribunal's decision was based on a thorough examination of the agreement, relevant DTAA provisions, and legal precedents.

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