2023 (1) TMI 1226 - AT - Income Tax

Income deemed to accrue or arise in India - amount received by the assessee on account of Time Charter of its ship as royalty‟ and taxing the same u/s 9(1)(vi) - assessee is a company incorporated in and tax resident of UAE and is engaged in the business of shipping operation as entered into Time Charter contract with M/s Poompuhar Shipping Corp. Ltd. (PSCL) for transporting coal from Paradeep port to Tutucorine in Tamil Nadu, through its ship MV Eastern View - whether the income earned by the assessee is to be taxed u/s 44B of the Act on the presumption basis as claimed by the assessee in the return of income; or whether the receipt should be taxed as royalty for use of an equipment in terms of clause (iva) to Explanation 2 to section 9(1)(vi)? HELD THAT - As payment was subject to load of the cargo and it was not simply for leasing or renting out the ship for the time charter period. Thus, from the reading of various clauses of the agreement, it cannot be inferred that it was purely fixed rental receipt by the assessee for lease of equipment. In fact all throughout the control of the equipment remained with the assessee and at no point of time owner has transferred the vessel to the charterer for carriage of goods. Albeit, the agreement envisages more of voyage charter by the vessel owner and therefore, in our opinion, the same cannot be fall strictly within the realm of definition provided of royalty in terms sub clause (iva) to Explanation 2. The concept of dominance or control over ship by the charterer on the equipment is paramount in determining the character of payment as payment of royalty and in absence of the same cannot be treated as royalty. This is also coupled of the fact that payment received by the owner from the charter is firstly, based on use of per running day; and secondly, calculation of dead freight was dependent upon the load per voyage. In such a situation, the payment received by the owner from the charterer has to be reckoned as payment from operations of carriage of goods from one port in India to another port in India, which falls under the ambit of carrying out shipping business or shipping operators. We find that this Tribunal in the case of Smit Singapore Pte Ltd. 2020 (11) TMI 415 - ITAT MUMBAI similar charter agreement was under consideration by a foreign resident owning a ship who has given it on a time charter to an Indian company. Thus, in our view, the payment received by the assessee cannot be treated as royalty u/s 9(1)(vi). Case of M/S. POOMPUHAR SHIPPING CORPORATION LTD. AND OTHERS VERSUS THE INCOME TAX OFFICER, INTERNATIONAL TAXATION II AND OTHERS 2013 (10) TMI 936 - MADRAS HIGH COURT is not applicable on assessee. The payment received by the assessee from M/s Poompuhar Shipping Corp. Ltd. is not in the nature of royalty and hence, the same is not taxable under section 9(1)(vi) of the Income Tax Act. Secondly, the agreement and the payment received by the assessee is for carriage of goods and for operating the ships, therefore the income of the assessee has rightly been offered to tax u/s 44B of the Act. Appeal filed by the assessee stands allowed.

Summary

Issues Involved:
1. Whether the income earned by the assessee is to be taxed under section 44B of the Income Tax Act or as "royalty" under section 9(1)(vi).
2. Interpretation of the Time Charter agreement and its implications on tax liability.

Detailed Analysis:

Issue 1: Taxation under Section 44B vs. Royalty under Section 9(1)(vi)

The primary issue revolves around whether the income earned by the assessee, a non-resident company engaged in shipping operations, should be taxed under the special provision of section 44B of the Income Tax Act or as "royalty" under section 9(1)(vi). The assessee argued that the income should be taxed under section 44B, which pertains to income from shipping operations, while the Revenue contended that the income should be classified as "royalty" for the use of equipment (the ship), as per section 9(1)(vi).

Issue 2: Interpretation of the Time Charter Agreement

The Time Charter agreement between the assessee and M/s Poompuhar Shipping Corp. Ltd. (PSCL) was scrutinized to determine whether the payments received were for the use of the ship (royalty) or for shipping operations (section 44B). Key clauses of the agreement were analyzed to understand the nature of the payments:

- Clause 1: The owner (assessee) is responsible for all provisions, wages, and maintenance of the vessel, indicating that the vessel remains under the control and possession of the owner.
- Clause 2: The charterer (PSCL) pays for fuel and port charges, suggesting operational costs are borne by the charterer.
- Clause 4: Payment for the use and hire of the vessel is based on a daily rate, implying a time-based remuneration rather than a flat lease fee.
- Clause 8: The captain, though appointed by the owner, follows the charterer's instructions regarding the voyage, indicating operational control by the charterer.
- Clause 26: Dead freight calculations are based on the cargo load, showing that payments are linked to the actual transportation of goods rather than mere leasing of the vessel.

Tribunal's Analysis and Findings:

1. Nature of Payments: The Tribunal concluded that the payments were not for the use or right to use the ship as equipment but were linked to the shipping operations, including the transportation of coal and operational control retained by the owner.
2. Control and Possession: The Tribunal emphasized that the vessel's control and possession remained with the owner, and the charterer did not have full control over the ship, which is a key requirement for classifying the payments as "royalty."
3. Economic Benefit: The Tribunal noted that the payments were not fixed but depended on the cargo load, indicating that the payments were for shipping services rather than leasing the vessel.

Judgment on Applicability of High Court Rulings:

The Tribunal distinguished the case from the Hon'ble Madras High Court's ruling in Poompuhar Shipping Corporation Ltd., where the payments were classified as "royalty." The Tribunal pointed out that in the present case, the payment structure and operational control differed significantly, making the High Court's ruling inapplicable.

Conclusion:

The Tribunal held that the payments received by the assessee from PSCL were not in the nature of "royalty" and thus, not taxable under section 9(1)(vi). Instead, the income was correctly offered to tax under section 44B as income from shipping operations.

Final Order:

The appeal filed by the assessee was allowed, and the income was to be taxed under section 44B of the Income Tax Act. The Tribunal's decision emphasized the importance of the nature of payments and operational control in determining the tax liability under the relevant sections of the Act.