2024 (2) TMI 1238 - AT - Income Tax

TDS u/s 195 - payment for time charter higher charges are Royalty u/s 9(1)(vi) - Non deduction of TDS - CIT(A) held that payments made by the assessee qualified as royalty within the meaning of Section 9(1)(vi) and the assessee was under an obligation to deduct tax at source on such royalty payments - HELD THAT - The criterion for determining Royalty under the said provision is that the resident should have control and have physical possession over the equipment. The equipment should be under the exclusive possession and control of the resident, in exclusion to others. In the instant case, the assessee has full control over the dredger and the staff and operation of the equipment. From the facts produced we are of the considered view that the right to use the dredger has been transferred to the assessee for the period of lease. The Captain of the ship although appointed by the owners shall work under the orders and directions of the assessee. Once the hired dredger is placed at the disposal of the assessee, the payment to the lessor does not depend on the dredging activity undertaken. Even if the dredger does not work for a single hour, the payment to the lessor would remain constant. Further, the dredger has been given only to the assessee for his exclusive use. Accordingly, the assessee is in effective control of the equipment. As in the case of West Asia Maritime Ltd. 2006 (5) TMI 152 - ITAT MADRAS-B ITAT held that ship being an equipment under Article 12, hire charges for user of ship partook the character of royalty for use of equipment under provisions of Section 9(1)(vi) and, hence, exigible to tax in India. We are unable to accept the argument of the assessee that the assessee company merely availed the facility of dredger without exercising any possessory rights over it. The assessee has placed reliance on various cases, however, the same are distinguishable on facts and the aforesaid cases as cited read with the plain language of the Statute are clearly applicable to the assessee facts. Thus the payments made by the assessee to M/s. Miller Dredging Company Inc. qualify as Royalty for use of equipments under Section 9(1)(vi) of the Act and the assessee was under an obligation to deduct tax at source as royalty payments at the time of making payments to the non-resident payee. Validity of Order passed u/s 201(1) and Section 201(1A) as barred by limitation - HELD THAT - In the instant case, the assessee had chosen not to furnish the correct details of the recipient entity (regarding the residential status of the non-resident recipient) and had also not approached the Tax Officer for determination of the correct amount of TDS u/s 195 / 197 of the Act and the assessee had taken the suo moto decision not to withhold taxes on continuous payments being made to the non-resident recipient entity M/s. Miller Dredging Company Inc., being a resident of British Virgin Islands, with whom India does not have a Tax Treaty, without deduction of tax at source for a period spanning over 10 years. We observe that notices under Section 201(1) and 201(1A) of the Act were issued by ADIT on the assessee, following survey proceedings in the case of the assessee. Accordingly, looking into the facts of the instant case and the conduct of the assessee as pointed out by the Ld. CIT(A) for not deducting tax at source on such payments, we are of the considered view that Ld. CIT(A) has correctly held that looking into the instant facts, the aforesaid proceedings are not barred by limitation. Non-deduction of taxes at source were attributable to a bona fide belief on part of the assessee - There is no reason as to why and on what basis the assessee could have formed a bona fide belief that it was not liable to deduct tax at source on the aforesaid payments. This is further coupled with the fact that the assessee was governed by the provisions of the Income Tax Act since the recipient was a tax resident of Virgin Island, with which India did not have a tax treaty. Accordingly, the argument of the assessee that it was under a bona fide belief for non-deduction of tax at source is hereby rejected. Assessee appeal dismised.

Issues Involved:

1. Whether "Time Charter Hire Charges" should be treated as Royalty.
2. Whether the order passed under Section 201(1) and 201(1A) of the IT Act is time-barred.
3. Whether the non-resident company has a business connection or permanent establishment (PE) in India.
4. Whether the non-deduction of taxes at source by the assessee was due to a bona fide belief.

Issue 1: Treatment of "Time Charter Hire Charges" as Royalty

The assessee argued that "Time Charter Hire Charges" should not be treated as Royalty, citing CBDT instructions and clarification given to Indian National Ship Owners Association (INSA). The CIT(A) and the Tribunal held that the payments made by the assessee to the non-resident dredger owner qualify as "Royalty" under Section 9(1)(vi) of the IT Act. The Tribunal observed that the contract is essentially a lease of dredgers and the assessee had full control over the equipment and staff, making the payments fall under the definition of "Royalty" as per the amended provisions of Section 9(1)(vi).

Issue 2: Time-Barred Order under Section 201(1) and 201(1A)

The assessee contended that the order passed under Section 201(1) and 201(1A) was time-barred, citing various judicial precedents that suggest a four-year limitation period. The Tribunal, however, upheld the CIT(A)'s view that no specific time limit is prescribed for initiating proceedings under Section 201(1) and 201(1A) in respect of payments made to non-resident entities. The Tribunal noted that the omission to prescribe a specific time limit is a well-thought-out decision by the legislature, considering the administrative difficulties in recovering taxes from non-residents.

Issue 3: Business Connection or Permanent Establishment (PE) in India

The Department argued that the non-resident company had a business connection in India, making the income taxable. The CIT(A) and the Tribunal concluded that the non-resident company did not have a business connection or PE in India. The Tribunal observed that the non-resident company only earned rental income from leasing dredgers to the assessee and did not carry out any active business operations in India. The operational staff and Captain worked under the control of the assessee, and the non-resident company had no control over the dredging activities.

Issue 4: Bona Fide Belief for Non-Deduction of Taxes at Source

The assessee claimed that non-deduction of taxes at source was due to a bona fide belief that there was no legal liability. The Tribunal rejected this claim, noting that the assessee did not disclose the true residential status of the non-resident recipient to the concerned authorities and took a unilateral decision not to deduct taxes. The Tribunal emphasized that the assessee should have sought clarification from the Assessing Officer if there was any doubt regarding the tax liability.

Conclusion:

All appeals filed by the Assessee and the Department were dismissed. The Tribunal upheld the CIT(A)'s findings on all issues, including the treatment of "Time Charter Hire Charges" as Royalty, the non-applicability of a specific time limit for orders under Section 201(1) and 201(1A), the absence of a business connection or PE in India for the non-resident company, and the rejection of the bona fide belief argument for non-deduction of taxes at source.

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