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2012 (4) TMI 186 - AT - Income TaxPayments made by the assessee-company for subcontracting its works contract - payment of hire charges/charter fees to EMPL - royalty u/s 9(1) and article 12 of the DTAA between India and Singapore - Held that - the contract given to EMPL was in the nature of sub-contract to undertake on behalf of the assessee s dredging work with the equipment and manpower of EMPL - It is only hiring of the equipment and the assessee did not use the dredger or any part thereof on its own neither it was given any right to use - in order to assess the payment as business receipt of the EMPL it has to be established that there is a permanent establishment of EMPL in India which is not possible since the dredger Ketam has been operated in India for less than 183 days - the liability u/s 195 to deduct TDS depends upon changeability of tax in the hands of recipient and the assessee did not use the dredger or any part thereof on its own, nor had apparent acquired any right to use it
Issues Involved:
1. Whether the payments made by the assessee to M/s. East Marine Pvt. Ltd. (EMPL) constitute 'royalty' under section 9(1)(vi) of the Income-tax Act and Article 12 of the DTAA between India and Singapore. 2. Whether the payments made by the assessee to EMPL are business receipts not chargeable to tax in India due to the absence of a Permanent Establishment (PE) of EMPL in India. 3. Whether the assessee should be treated as in default under section 195 of the Income-tax Act for not deducting TDS on payments made to EMPL. Issue-wise Detailed Analysis: 1. Determination of 'Royalty': The Assessing Officer (AO) held that the payments made by the assessee to EMPL for the use of the dredger 'Ketam' were in the nature of royalty, relying on clause (iva) of Explanation 2 to section 9(1)(vi) of the Act, which includes payments for the use or right to use industrial, commercial, or scientific equipment. The AO argued that the payments were for the use of the dredger and, therefore, amounted to royalty under section 9(1) of the Act and Article 12 of the DTAA between India and Singapore. Consequently, the assessee was liable to deduct TDS under section 195 of the Act. 2. Nature of Payments and Permanent Establishment (PE): The CIT(A) and the Tribunal found that the payments made by the assessee to EMPL were contractual payments for the execution of a work contract and not for the use or right to use the dredger. The CIT(A) held that the dredger and other equipment remained under the control and supervision of EMPL, and the payments were for the job work done by the dredger operated by EMPL. Thus, the payments could not be construed as royalty under Article 12 of the DTAA or section 9 of the Income-tax Act. Furthermore, the CIT(A) concluded that Article 5 of the Indo-Singaporean treaty applies, and in the absence of a PE in India (as the dredger operated for less than 183 days), the payments could not be taxed as business receipts in India. 3. Assessee in Default under Section 195: The Tribunal upheld the CIT(A)'s decision that the payments made by the assessee to EMPL were not chargeable to tax in India, and therefore, the assessee was not required to deduct TDS under section 195. The Tribunal emphasized that the liability to deduct TDS depends on the chargeability of tax in the hands of the recipient. Since the payments were not for the use of the dredger but for the execution of a work contract, they did not fall within the definition of 'royalty' or 'fees for technical services' under the DTAA. Conclusion: The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s order that the payments made by the assessee to EMPL were not taxable as 'royalty' or 'fees for technical services' and that the assessee was not in default under section 195 for not deducting TDS. The payments were considered as hire charges for the execution of a work contract, and in the absence of a PE in India, they were not chargeable to tax in India.
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