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2025 (3) TMI 986 - AT - Income TaxTaxability of the payments received under consideration i.e. hire charges for bareboat dredgers - AO classified the said income of the Appellant as Royalty as well as Business Income - HELD THAT - Appellant merely supplies dredger to ISDPL on hire on bareboat basis. As evident from Article 12 of India-Netherlands DTAA that term Royalty does not include payments for the use or right to use industrial commercial or scientific equipment as mentioned by the AO in the SCN. The judgment in the case of Van Oord ACZ Equipment BV 2014 (11) TMI 605 - MADRAS HIGH COURT and Tribunal in the case of DDIT v. Nederlandsche Overzee Baggermaatsehappiji BV 2010 (5) TMI 674 - ITAT MUMBAI and M/s International Seaport Dreding Ltd. 2016 (7) TMI 1699 - ITAT CHENNAI also strengthen the argument of the assessee that hire charges of bareboat charter would not constitute Royalty and hence not taxable as Royalty under Article 12 of India-Netherlands DTAA. We also note that the word plant in India-Beligium DTAA under Article 12 is a typographical error for word plan . This factual error has been acknowledged in the Notification S.O.54 NO.20 (F.NO.505/2/89-FTD Dated 19.01.2001. Hence we are of the considered view that hire charges of bareboat charter does not fall under the garb of definition Royalty and hence not taxable as Royalty under Article 12 of India-Belgium DTAA. We have gone through the judgments in the cases of R.D. Aggarwal 1964 (10) TMI 9 - SUPREME COURT Carborandum Co. 1977 (4) TMI 2 - SUPREME COURT Ishikawajma-Harima Heavy Industries Ltd. 2007 (1) TMI 91 - SUPREME COURT Metror Sattellite Ltd. 1979 (6) TMI 25 - GUJARAT HIGH COURT and Netherlandsche Overzee Baggermaatsehappiji BV 2010 (5) TMI 674 - ITAT MUMBAI and also taking guidance therefrom it is clear from the above facts that the appellant has no business connection in India or PE. We also find that the AO without adherence to the principles laid by the Hon ble Courts in above referred cases has held that assessee has business connection and PE in India is devoid of merit. Since assessee does not constitute a PE in India therefore attribution of profits to PE does not arise. The issues in controversy revolve and hinges upon the survey carried out on M/s International Seaport Dredging Private Limited on 17.02.2017 and statements recorded. It is settled in the case of CIT v. S. Khader Khan Son 2013 (6) TMI 305 - SC ORDER affirming the decision of the materials collected and the statement recorded during the survey u/s 133A are not conclusive piece of evidence by itself. We also find that the persons whose statements were recorded by the revenue have not passed the muster of cross examination by the assessee. Hence what has been stated in the statement made u/s 133A of the Act in the case of other assessee cannot be treated as gospel truth. Therefore we refrain ourselves to endorse the same. Before parting with the order we must make it clear that we have somehow avoided reproducing the sections case laws and facts again. We have already narrated the sections case laws and facts while dealing with submissions of the parties. Appeal of the assessee is allowed.
1. ISSUES PRESENTED and CONSIDERED
The primary legal issues considered in this judgment include:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Classification of Income as "Royalty" - Relevant legal framework and precedents: The India-Belgium DTAA and section 9(1)(vi) of the Income Tax Act, 1961, were central to this issue. The definition of "royalty" under the DTAA does not include payments for the use of industrial, commercial, or scientific equipment. - Court's interpretation and reasoning: The Tribunal relied on precedents, including the case of Van Oord ACZ Equipment BV, which clarified that hire charges for dredgers do not constitute "royalty" under similar DTAAs. - Key evidence and findings: The Tribunal noted that the dredgers were hired on a bareboat basis, meaning without crew, and the appellant had no operational control in India. - Application of law to facts: The Tribunal concluded that the income from the hire of dredgers does not fall under the definition of "royalty" as per the India-Belgium DTAA. - Treatment of competing arguments: The Tribunal distinguished the facts from the Poompuhar Shipping case, emphasizing the bareboat nature of the hire. - Conclusions: The Tribunal held that the hire charges are not taxable as "royalty" under the DTAA. Issue 2: Existence of a Permanent Establishment (PE) - Relevant legal framework and precedents: Article 5 of the India-Belgium DTAA defines the conditions under which a PE is constituted. - Court's interpretation and reasoning: The Tribunal emphasized that a PE requires a fixed place of business or significant operational control, which was absent in this case. - Key evidence and findings: The Tribunal found no evidence of the appellant having a fixed place of business or significant control over operations in India. - Application of law to facts: The Tribunal applied the principles from the OECD Model Tax Convention, which clarified that mere leasing of equipment does not constitute a PE. - Treatment of competing arguments: The Tribunal rejected the AO's argument that the appellant had a PE based on the organizational relationship and reporting practices. - Conclusions: The Tribunal concluded that the appellant does not have a PE in India. Issue 3: Business Connection in India - Relevant legal framework and precedents: Section 9(1)(i) of the Income Tax Act, 1961, and the principles laid down in CIT Vs R.D. Aggarwal. - Court's interpretation and reasoning: The Tribunal noted the absence of a direct or indirect contribution to the appellant's profits from activities in India. - Key evidence and findings: The Tribunal found no continuous relationship or activity that would establish a business connection. - Application of law to facts: The Tribunal applied the principles from the Apex Court's rulings to determine that no business connection existed. - Treatment of competing arguments: The Tribunal dismissed the AO's claims of a business connection based on organizational ties. - Conclusions: The Tribunal held that the appellant does not have a business connection in India. Issue 4: Attribution of Profits to the Alleged PE - Relevant legal framework and precedents: Article 7 of the India-Belgium DTAA and the Supreme Court ruling in DIT vs. Morgan Stanley & Co. - Court's interpretation and reasoning: The Tribunal emphasized that once a transaction is at arm's length, no further attribution is needed. - Key evidence and findings: The Tribunal noted that the TPO had already confirmed the arm's length nature of the transaction. - Application of law to facts: The Tribunal found the AO's attribution of 25% profits arbitrary and without basis. - Treatment of competing arguments: The Tribunal rejected the AO's approach of re-determining FAR analysis post-TP order. - Conclusions: The Tribunal concluded that no additional profits could be attributed to the alleged PE. Issue 5: Validity of Survey Evidence - Relevant legal framework and precedents: Section 133A of the Income Tax Act, 1961, and the Supreme Court ruling in CIT v. S. Khader Khan Son. - Court's interpretation and reasoning: The Tribunal noted that statements recorded during surveys are not conclusive evidence. - Key evidence and findings: The Tribunal found the survey statements unreliable and not subject to cross-examination. - Application of law to facts: The Tribunal applied the principles from the Supreme Court to disregard the survey evidence. - Treatment of competing arguments: The Tribunal dismissed the DR's reliance on survey statements as the basis for assessment. - Conclusions: The Tribunal held that the survey evidence was inadmissible for the assessment. 3. SIGNIFICANT HOLDINGS - The Tribunal held that the hire charges for dredgers on a bareboat basis do not constitute "royalty" under the India-Belgium DTAA. - The Tribunal concluded that the appellant does not have a Permanent Establishment in India. - The Tribunal determined that there is no business connection in India for the appellant under section 9 of the Income Tax Act, 1961. - The Tribunal ruled that the attribution of profits by the AO was unjustified and contrary to the Transfer Pricing provisions. - The Tribunal found that the survey evidence was not admissible for the assessment. - The appeal of the assessee was allowed, and the assessment order was set aside.
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