2012 (11) TMI 326 - AT - Income Tax

International shipping profits - Indo-Swiss DTAA - whether a resident of Switzerland carried on the shipping business in India through a permanent establishment - Held that - Having held that the taxability of international shipping profits is covered by Article 22, it is necessary to ascertain whether the assessee company which received such income being a resident of Switzerland carried on the shipping business in India through a permanent establishment situated therein and whether the property in respect of which such income was paid i.e. ships is effectively connected with such permanent establishment. After having perused the relevant clauses of the agreement between assessee company and M/s MSC Agency India Pvt. Ltd. finding in agreement with the view of the AO and the CIT(Appeals) that M/s MSC Agency India Pvt. Ltd. was legally and economically dependent agent of the assessee company and since the assessee company was managing and controlling some of its business operations in India through the said dependant agent, it constituted the permanent establishment of the assessee company in India in terms of the Indo-Swiss treaty. Unable to accept the contention raised by Shri Dastur in this regard that M/s MSC Agency India Pvt. Ltd. had limited right to perform its activities and it, therefore, cannot be regarded as habitually exercising an authority to negotiate and enter into contracts for and on behalf of the assessee company which, is contrary to the relevant clauses of the agreement between the assessee company and M/s MSC Agency India Pvt. Ltd. defining the scope and authority of M/s MSC Agency India Pvt. Ltd. and its commitment to work exclusively for the assessee company and not to accept the representation of any other principle for the same services in the same region without the written consent of the assessee company. Keeping in view the relevant portion of the OECD commentary on Model Tax Convention on Income and on Capital (condensed version) published in July, 2010 and the ratio of the decision of Special Bench of this Tribunal in the case of Sumitomo Mitsui Banking Corporation & Ors. v. DDIT (2012 (4) TMI 80 - ITAT MUMBAI) the right or property in respect of which the shipping income is earned by the assessee i.e. ships cannot be said to be effectively connected with the permanent establishment in India . Such income, therefore, will not fall under Article 22(2) but will fall under Article 22(1) and accordingly shall be taxable only in the State of residence of the assessee company i.e. Switzerland and not in India. In that view of the matter, the impugned order of the learned CIT(Appeals) is upheld holding that the international shipping profits of the assessee company are covered by Article 22 of the Indo-Swiss treaty and although the assessee company had a PE in India in the year under consideration, the ships i.e. the property in respect of which shipping income was paid to the assessee company being not effectively connected with that PE, the case of the assessee will be out of paragraph No. 2 of Article 22 and will fall in paragraph 1 of the said article. Consequently, the same will be taxable in the country of residence of the assessee company i.e. Switzerland and not in India - in favour of assessee.

Issues Involved:
1. Taxability of profits from the operation of ships in international traffic.
2. Applicability of Article 22 of the Indo-Swiss DTAA.
3. Existence and implications of a Permanent Establishment (PE) in India.
4. Effective connection of ships with the PE.
5. Alternative contention regarding arm's length remuneration to the PE.

Detailed Analysis:

1. Taxability of Profits from the Operation of Ships in International Traffic:
The primary issue revolves around whether the profits from the operation of ships in international traffic earned by the assessee, a Swiss company, are taxable in India. The Revenue argued that such profits were taxable under section 44B of the Income-tax Act, 1961, which deems 7.5% of the aggregate freight amount as profits chargeable to tax. The assessee contended that these profits were not taxable in India based on the provisions of the Indo-Swiss DTAA.

2. Applicability of Article 22 of the Indo-Swiss DTAA:
The assessee argued that Article 22 of the Indo-Swiss DTAA, which deals with "Other Income," was applicable, making the profits taxable only in Switzerland. The Revenue contended that the exclusion of shipping profits from Articles 7 and 8 of the DTAA meant that such profits were to be taxed according to domestic laws. The Tribunal held that the introduction of Article 22 in 2001 altered the previous position and that shipping profits not dealt with in other articles of the treaty fell under Article 22, making them taxable only in the state of residence, i.e., Switzerland.

3. Existence and Implications of a Permanent Establishment (PE) in India:
The Revenue claimed that the assessee had a PE in India through M/s MSC Agency India Pvt. Ltd., which was an economically and legally dependent agent of the assessee. The Tribunal agreed that M/s MSC Agency India Pvt. Ltd. constituted a PE of the assessee in India, as it performed significant business operations exclusively for the assessee.

4. Effective Connection of Ships with the PE:
The Tribunal examined whether the ships, the property generating the income, were effectively connected with the PE in India. The Tribunal referred to the opinions of legal experts and the OECD commentary, concluding that the economic ownership of the ships did not lie with the PE. Therefore, the ships were not effectively connected with the PE, and the income from the operation of ships remained taxable only in Switzerland under Article 22(1) of the DTAA.

5. Alternative Contention Regarding Arm's Length Remuneration to the PE:
The assessee alternatively argued that even if the profits were taxable in India, no additional income could be attributed to the PE as the commission paid to M/s MSC Agency India Pvt. Ltd. was at arm's length. The Tribunal found this contention academic, given its decision that the profits were taxable only in Switzerland.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that the international shipping profits of the assessee were covered by Article 22 of the Indo-Swiss DTAA and were taxable only in Switzerland. The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection.

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