2014 (10) TMI 618 - AT - Income Tax

Non-deduction of tax for payment of ship charter hire charges - Royalty u/s 9(1)(vi) - Whether the payment made by the assessee is a royalty and whether it is taxable in India - Held that - The assessee entered into an agreement with Lots International Ltd, a company incorporated in Dubai, UAE for time charter of a vessel by name, M.V. Thekkadi - if the provisions in the DTAA are more beneficial to the assessee, then the provisions in the DTAA would prevail over the Indian Income-tax Act - Article 8 of the DTAA between government of India and Government of UAE would be applicable to the facts of the case, since it is more beneficial to the assessee - Article 8 of the DTAA, more particularly, sub clause 2 clearly says that the profit from operation of the ship in international traffic will also include the charter or rental of ships incidental to such transportation - the profit arising to the non -resident company on charter of the vessel has to be taxed only in the UAE in view of the DTAA between Government of India and Government of UAE, more particularly, Article 8(1) of the DTAA. The material filed by the assessee clearly shows that the vessel M.V. Thekkadi was operated between Tuticorin Port to Mali Port in Maldives. Therefore, it operates in international traffic/waters the distinction made by the CIT(A) between the charter hire and time charter is unwarranted - Since the material filed by the assessee discloses that the vessels were operated between India and Maldives in the international traffic, merely because there was a clause that the vessel would be delivered at Tuticorin Cochin Range after the expiry of the charter period in the agreement, that cannot justify for application of Explanation 5(c) to section 9(1)(vi) of the Act. The CIT(A) placed reliance on the Explanation 5 to section 9 of Indian Income-tax Act - Since the DTAA between Government of India and Government of UAE, is more beneficial to the assessee, the provisions of section 9(1)(vi) Explanation 5 is not applicable the order of the lower authorities is to be set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Non-deduction of tax for payment of ship charter hire charges.
2. Non-deduction of tax on audit fee.

Issue-wise Detailed Analysis:

1. Non-deduction of tax for payment of ship charter hire charges:

The primary issue in this case is the non-deduction of tax under Section 195 of the Income-tax Act for payments made by the assessee towards ship charter hire charges. The assessee, engaged in the business of import and export, hired a vessel named "M.V. Thekkady" from a Dubai-based company, Lots International Ltd, under a time charter agreement. The payments were made in US dollars to a bank in Dubai. The assessing officer classified these payments as "royalty," necessitating tax deduction under Section 195. However, the assessee contended that these payments were business income under the Double Taxation Avoidance Agreement (DTAA) between India and UAE, and not royalty, as the vessel was used in international waters.

The Tribunal examined the DTAA provisions, particularly Article 8, which states that profits from the operation of ships in international traffic are taxable only in the contracting state (UAE, in this case). The Tribunal found that the vessel operated solely between Tuticorin Port (India) and Maldives, thus qualifying as international traffic. Consequently, Article 8 of the DTAA, being more beneficial to the assessee, overrides the general provisions of the Income-tax Act, specifically Section 9(1)(vi) regarding royalty. The Tribunal concluded that the hire charges paid by the assessee were not taxable in India and thus, the assessee was not required to deduct tax at source.

The Tribunal also referenced previous decisions, including the Mumbai Bench in Essar Oil Ltd vs DCIT and its own decision in ACIT vs Kinship Services (India) Pvt Ltd, supporting the view that charter hire payments for international operations do not constitute royalty and are not taxable in India.

2. Non-deduction of tax on audit fee:

The second issue involved the non-deduction of tax on an audit fee amounting to Rs. 50,508. The assessee's representative did not press this issue, making an endorsement to that effect on the file. Consequently, the Tribunal upheld the assessing officer's addition on this ground, confirming that the non-deduction of tax on the audit fee was correctly addressed by the lower authorities.

Conclusion:

The Tribunal allowed the appeal of the assessee in part. It set aside the orders of the lower authorities regarding the non-deduction of tax for ship charter hire charges, holding that such payments were not taxable in India under the DTAA. However, it upheld the addition concerning the non-deduction of tax on the audit fee. The judgment emphasizes the precedence of DTAA provisions over the Income-tax Act when the former is more beneficial to the assessee.