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TMI Blog2012 (11) TMI 326X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y dealing specifically with taxability of shipping profit, that article 7 of the said treaty dealing with business profits specifically excluded profits from the operation of ships in international traffic and that article 22 of the said treaty dealing with other income subjected to tax shipping profits only in the State of residence viz. Swiss confederation in its case. The stand of the assessee thus was that the international shipping profit was not taxable in India and the entire tax of Rs.9.33 crores paid was liable to be refunded. This stand of the assessee was not found acceptable by the AO in view of the CBDT Circular No. 333 dated 02-04-1982 whereby it was clarified that where there is no specific provision in the agreement, it is the basic law i.e. the Income Tax Act which will govern the taxation of income. According to the AO, the shipping profits of the assessee company, therefore, were taxable in India u/s 44B of the Income-tax Act, 1961 which provided that not-withstanding anything to the contrary contained in section 28 to 43A, in the case of an assessee, being a non-resident engaged in the business of operation of ships, a sum equal to 7 % of the aggregate of the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an independent agent of M/s Mediterranean Shipping Corporation in view of the information gathered by him. (iv) It is seen from the return of income for A.Y. 2003-04 that M/s Samsara Shipping Pvt. Ltd. has stopped showing agency income from M/s Mediterranean Shipping Corporation S.A. M/s Mediterranean Shipping Corporation has appointed another agent namely, M/s MSC Agency India Pvt. Ltd. as their agents. (v) It is seen from the return of income for AY 2003-04 of M/s Samsara Shipping Pvt. Ltd. and M/s MSC Agency India Pvt. Ltd., that most of the branches, which were being operated by M/s Samsara Shipping Pvt. Ltd. are transferred to M/s MSC Agency (India) Pvt. Ltd. (vi) From the return of income and the details filed by the Samsara Shipping Pvt. Ltd.. it is seen that all the assets inclusive of furniture fixture, computers electrical installation and vehicles are transferred from M/s Samsara Shipping Pvt. Ltd. to M/s MSC Agency India Pvt. Ltd. (vii) From the return of income of M/s Samsara Shipping Pvt. Ltd. for the A.Y. 2002-03, it is seen that they have recruited 204 new employees during the year and the salary expenditure has been increased by more than 50%. From t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO, the said clauses made it very clear that M/s MSC Agency India P. Ltd. was legally and economically dependent agent of the assessee company inasmuch as the assessee company was managing and controlling their business operations in India through M/s MSC Agency India P. Ltd. He, therefore, held that M/s MSC Agency India P. Ltd. constituted a permanent establishment of the assessee company in India as per Article 5(5) of the DTAA between India and Switzerland. He also held in this regard that M/s MSC Agency India P. Ltd. was carrying on the activities wholly and exclusively for the assessee company and it was merely a projection of the assessee company on the soil of India. Having held that M/s MSC Agency India P. Ltd. constituted a permanent establishment of the assessee company in India, the AO held that the shipping profits earned by the assessee company through the said PE were taxable in India u/s 44B of the Income-tax Act, 1961. Accordingly, such profits calculated at Rs.22.17 crores being 7.5% of the total collection of freight of Rs.295.63 crores was brought to tax in India by the AO in the hands of the assessee in the assessment completed u/s 143(3) vide an order dated 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(2) or not which provided that the provisions of Article 22(1) shall not apply to income, other than income from immovable property as defined in Article 6(2), if the recipient of such income, being a resident of contracting State, carries on business in the other contracting State through a permanent establishment therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. It was provided that in such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. In this regard, the learned CIT(Appeals) referred to the agreement between the assessee company and M/s MSC Agency India P. Ltd. and held that as per the relevant clauses of the said agreement, the agent had the authority to negotiate and enter into contracts for and on behalf of the assessee company. He also noted that there was nothing brought on record to prove that M/s MSC Agency India P. Ltd. was rendering any services to any other shipping company. He held that M/s MSC Agency India P. Ltd. thus was an independen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt aspect of the matter, the learned CIT(Appeals) held that although the assessee company had a PE in India in the form of M/s MSC Agency India P. Ltd., the right or property in respect of which the income was paid i.e. ships was not effectively connectively with such permanent establishment as envisaged in Article 22(2) and, therefore, Article 22(1) was applicable in the case of the assessee by which the profits from shipping business was taxable in Switzerland and not in India. Accordingly, the addition made by the AO on account of shipping profits in the hands of the assessee was deleted by the learned CIT(Appeals). Aggrieved by the order of the learned CIT(Appeals), the Revenue has preferred this appeal before the Tribunal while the assessee has also filed the cross objection disputing the decision of the learned CIT(Appeals) that M/s MSC Agency India P. Ltd. constituted its PE in India. 9. The learned standing counsel for the Revenue Shri. G.C.Srivastava submitted that the income derived by the assessee from the business of operation of ships in international traffic in India is chargeable to tax under section 44B (read with sections 4 and 5) of the IT Act, 1961 and the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 and the term used therein "Not dealt with" must not, therefore, be taken to mean "not unmistakably dealt with". It is also opined that the said Article is neither designed to remove difficulties of interpretation nor even less to settle them, in favour of the state of residence." 11. Shri Srivastava pointed out that the taxing rights in respect of shipping profits are now allocated in favour of resident state (Switzerland, in this case) by a second amendment of the DTAA in 2011 only after a prolonged negotiation between the two states by amending Article 8 to include profits from operation of ships in international traffic and Article 7 to drop the words and phrase " other than the profits from the operation of ships in international traffic". He submitted that the amendments made in 2011 thus have brought the Treaty provision in tune with model conventions and allocated taxing rights to Switzerland in this case. According to him, the shipping profits till 2011, however, continued to be taxed in accordance with domestic laws of each state and any suggestion to the contrary is a complete misreading of the terms of the DTAA as originally entered into and of the amendments carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rland that such agreement was reached. viii. In any case, it was an error of law in the order of assessment for that year and it would always open to correction by the A.O. ix. Hon'ble Supreme Court quoted with approval the observations of Lord Denning- "The doctrine of precedent does not compel your Lordships to follow the wrong path until you fall over the edge of the cliff. 13. Reliance was placed by Shri Srivastava on the decision of Authority for Advance Ruling in the case of Gearbulk AG reported in (2009) 184 Taxman 383 wherein while dealing with a similar issue it was held that income derived from operations of ships in international traffic is liable to tax in India in terms of the DTAA between India and Switzerland. He submitted that The Authority rejected the contention of the applicants in the said case that Article 22 of the DTAA applied to allocate taxing rights to the country of residence on the basis of the following reasoning: i. There was no dispute that such profits were taxable as per the domestic law of each state and there is nothing in the amendments made in 2001 to indicate that this position was intended to be changed. ii. Article 22 cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the international shipping profits are chargeable to tax in India as the same are not covered by Article 22 of the treaty and as an alternative, Shri. Srivastava contended that Para (2) of Article 22 provides that such profits can be taxed in the source country if the business operations are carried out by the foreign enterprise in the source country through a PE and the income from rights or property is effectively connected to the PE. He submitted that the learned CIT(A) in the present case has confirmed the finding of the A.O. that assessee had a PE in India which was based on the following: i. The entire business operations of the assessee are being carried out in India through its agent MSC Agency (India) Pvt. Ltd. The said Indian Co. is doing business only for the -assessee and is, therefore, fully covered as a dependent agent under Para(6) of Article 5 of the Indo-Swiss DTAA, which provides that it the activities of the agent are devoted wholly or almost wholly for the enterprise, he would not be regarded as an agent of independent status. ii. The scope of operations of the agent are defined in the Agreement entered into by MSC Agency (India) Ltd with the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase) must necessarily be owned by the PE (The Agent). If that were the intention, the language in the Treaty (Article 22(2)) would have been" right or property" " owned" by the PE and not " effectively connected" to the PE. He contended that "Effectively connected" is a much wider -expression than "owned". The effective connection could be by way of ownership or by the operation or maintenance of the property. It is not in dispute that the operation of ships and its repair and maintenance is done in India by the agent. Clause 3.20 clearly brings out this import. He contended that the agent thus is involved not only in the marketing and booking of the Cargo but also in the operation of the ships in India and it can not be said that the ship is not effectively connected to the PE (Agency PE). 16. As regards the reliance of the learned CIT(A) on the opinion of Sri Mukul Rohtagi and Mr. Phillip Baker, Shri. Srivastava contended that the same is clearly misplaced. He contended that both the learned experts have proceeded on a totally wrong premise that 'effectively connected' means the same as ownership. They have not taken into account the role of the agency PE into the operations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r submitted that the assessing officer for assessment year 2003-04 however has declined to follow his order for assessment year 2002-03 by relying on letter of the DGIT (Mt. Taxation) dated February 14, 2005 which stated that international shipping profits are not covered by Article 22 of the Indo Swiss Treaty and were taxable as per the domestic laws of India. Accordingly the assessing officer denied treaty benefit and held that international shipping profits of the Respondent are taxable under section 44B of the Act and that such profits are not entitled to any treaty benefit. He contended that the learned CIT(A) however has rightly allowed the claim of the assessee by inter alia placing reliance on the aforementioned letters exchanged between the competent authorities of the two countries. He submitted that in order to be covered by Article 22 of the Indo Swiss Treaty, the item of income must be such as has not been "dealt with" in the foregoing articles of Indo Swiss Treaty. IN this regard, his contention was that insofar as Assessment Years 2002-03 to 2012-13 are concerned, international shipping profits, having been excluded from the scope of Article 7 and are not "dealt with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the context of tax treaty "when an article provides for tax treatment (distribute taxing right) of a particular type of income, the article can be said to be dealing with such item of income". 21. Shri Dastur then referred to Article 7(1) of the treaty and submitted that when the underlined words in the opening sentence - "The business profits of an enterprise of a Contracting State, other than the profits from the operation of ships in international traffic, ..." appear before the statement of allocation of jurisdiction in favor of state of residence, it only means that international shipping profits do not enter Article 7 at all. His contention was that when business profits for the purposes of Article 7 mean other than international shipping profits, distributive rules of taxation prescribed in article 22 would apply to international shipping profits and not some distributive rules which can allegedly be imputed by virtue of exclusion from article 7. According to him, when a right had to be vested in the source state (India) to tax it, it has been specifically provided, how then can a mere exclusion from Article 7 be said to have conferred such a right. He also supported t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treaty. He submitted that the letter written by the competent authority of Switzerland dated 29 October 2003 and the final response from the competent authority of India vide letter dated 18 December 2003 unequivocally demonstrate that international shipping profits fall within the purview of Article 22 of the Indo-Swiss Treaty. He contended that the double tax avoidance agreement is nothing but a contract between two states, required to be interpreted in good faith and any subsequent clarification/understanding between the contracting parties must be given effect to. Reliance in this regard was also placed by him on the decision of the Hon'ble Calcutta High Court in case of CIT v. Arun Dua (186 ITR 494) wherein at Page 496 the High Court has held that if an agreement between two parties has been understood in a certain way and has been acted upon by them, it was not open to the tax officer to give another interpretation to the agreement. 23. As regards the Revenue's contention that the reason for exclusion of international shipping profits from the Indo-Swiss treaty is that Switzerland is a landlocked country and if the Indo-Swiss treaty were to provide for taxability of such p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held that international shipping profits are covered by Article 22(1) of the Indo--Swiss treaty and hence freight collected was allowed to be remitted without deduction / payment of any taxes. In this regard, he relied on the decision of the Hon'ble Supreme Court in case of Radhasoami Satsang v. CIT (193 ITR 321) wherein it was held at Page 329 that where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. He contended that the availability of benefit under a double taxation avoidance agreement is a fundamental aspect permeating through different assessment years. 25. As regards the applicability of Article 22(2), Shri Dastur submitted that the same is applicable only if the two conditions are satisfied i.e. the Respondent must have a PE in India and the income paid must be with respect to a right or property which is effectively connected to such PE. In this regard, he submitted that MSC Agency (India) Pvt. Ltd. does not constitute a PE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o such control in the present case can be or is exercised by MSC Agency (India) Pvt. Ltd. on any of the vessels owned by the assessee and as a matter of fact, the captain of the vessel and the crew are all employees of the assessee and not of MSC Agency (India) Pvt. Ltd. Reliance in support of his contention on this aspect was placed by Shri. Dastur on the decision of the Special Bench Mumbai, in case of Sumitomo Mitsui Banking Corporation Ors. v. DDIT (136 ITD 66) at Pages 687 and 688 of the report and the opinion of Mr. Philip Baker dated 23 December as well as that of Mr. Mukul Rohotgi, Additional Solicitor General of India, dated 25 February 2004. 27. As regards the decision of the Authority of Advance Ruling (Authority) in the case of Gearbulk AG In Re (184 Taxman 383) relied upon by Shri. Srivastava in support of the Revenue's case, Shri. Dastur submitted that the same is not a good law and does not deserve to be followed for the following reasons: - The Authority was not made aware of and hence has not considered the letters exchanged between the Competent Authorities (referred to above) on applicability of Article 22 to shipping profits in international traffic. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Authority has observed that tax treaties entered into by India with various countries show that whenever shipping profits was to be covered by the tax treaty a separate article was provided, hence in case of Switzerland, shipping profits are not meant to be covered by the Indo-Swiss treaty. This observation of the Authority is again incorrect since a foreign shipping company's income from domestic /coastal traffic is covered under Article 7(1), and therefore it would not be correct to say that "shipping profits" per se are not covered. - In any event, the ruling of the Authority is merely persuasive and not binding as is evident from section 245S and as has in fact been held by the Tribunal in case of ADIT v. Green Emirates Shipping and Travels (100 ITD 203) 28. Without prejudice to his main argument that Article 22(2) of the Treaty is applicable in the case of the assessee and not Article 22(2) and as an alternative, Shri. Dastue contended that even if Article 22(2) is held to be applicable in the case of the assessee, no portion of the international shipping profits earned by the assessee can be taxed in India inasmuch as the commission paid to MSC Agency (India) Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on fallacious assumptions and the opinions expressed by them being contrary to the decision of a judicial authority like AAR cannot be accepted. 30. As regards the alternative plea of Shri Dastur that the PE in India having been remunerated at Arms' Length for the services rendered, no further income can be brought to tax in the hands of the assessee under Article 22(2) of the DTAA, Shri. Srivastava contended that the risk in the present case is entirely borne by the assessee which aspect has obviously not been captured in the remuneration of the agent. He pointed out that this contention of the assessee has been rejected by the learned CIT(A) on the ground that unlike other treaties, Indo-Swiss DTAA has not incorporated the words "and the transaction between the agent and the enterprise are not made under arm's length conditions". He also pointed out that the tested party before the T.P.0. was the agent and even if the payment made to the agent may be at arm's length, it cannot go to suggest that the arm's length price for the risks undertaken by the assessee is also captured in the remuneration paid to the agent. 31. We have considered the rival submissions and also perused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of ships or aircraft in international traffic is taxable only in that State. He has contended that India and Switzerland, however, have agreed to modify Article 8 to exclude shipping profit from its scope. He has submitted that the shipping profits are also excluded from Article 7(1) which provides that the business profits of an enterprise of a contracting State shall be taxable only in that State unless the enterprise carries on business in the other contracting State through a PE constituted therein. He has contended that the combined effect of these modifications in Articles 7 and 8 makes it clear that the profits from the operation of ships in international traffic were left to be taxed by each contracting State according to its domestic law. He has contended that this was an undisputed position and understanding of the true import of the Indo-Swiss treaty till the year 2001 and the introduction of Article 22 in the treaty in 2001 did not alter this position. 33. The provisions of Article 22 introduced in the Indo-Swiss treaty in 2001 being relevant in the present context are reproduced hereunder : "1. Items of income of a resident of a Contracting State, wherever ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are covered in the residuary Article 22 and their taxability is governed by the said Article with effect from 01-04-2001. Articles 7 and 8 of the treaty therefore cannot be relied upon to say that by agreeing to exclude the shipping profits from said Articles, the shipping profits are left to be taxed by each contracting State according to its domestic law. It is no doubt true that this was the position prior to introduction of Article 22 in the Indo-Swiss treaty in the year 2001 but the same was altered as a result of introduction of the said article inasmuch as it became necessary to find out as to whether shipping profits have been dealt with in any other article of the treaty. Mere exclusion of shipping profits from the scope of treaty could have resulted in leaving the same to be taxed by the concerned contracting State according to its domestic law prior to introduction of Article 22. However, such exclusion alone will not take it out of the scope of Article 22 unless it is established that the shipping profits have been dealt with in any other article of the treaty. The language of Article 22(1) in this regard is plain and simple and the requirement for application of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 29th October, 2003 and 18th December, 2003 accepting that the taxability of shipping profits was governed by Article 22 of the Indo-Swiss treaty. As a matter of fact, this position was accepted by the AO himself in the assessment completed in assessee's own case for assessment year 2002-03 wherein the claim of the assessee that the shipping profit is chargeable to tax only in Switzerland and not in India as per Article 22 of the treaty was allowed by the AO. Even in the voyage assessment order passed on 10th June, 2005 u/s 172(4), the AO accepted that the international shipping profits of the assessee company for assessment year 2005-06 were governed by Article 22(1) of the Indo-Swiss treaty. In order to say that a particular item of income has been dealt with, it is necessary that the relevant article must state whether Switzerland or India or both have a right to tax such item of income. Vesting of such jurisdiction must positively and explicitly stated and it cannot be inferred by implication as sought to be contended by Shri. Srivastava relying on Articles 7 and 8 of the treaty. As rightly contended by the learned counsel for the assessee, the mere exclusion of internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this angle, an item of income can be regarded as "dealt with" by an article of DTAA only when such article provides for and positively vests the powers to tax such income in one or both States. The mere exclusion of international shipping profits from Article 7, therefore, cannot be regarded as vesting India with a right to tax international shipping profits and such profit, in our opinion, cannot be regarded as "dealt with" by the said article as envisaged in Article 22. 38. The stand of the Revenue is that by excluding the profits from the operation of ships in international traffic from Article 7(1), the same has to be regarded as dealt with by Article 7(1) and it, therefore, cannot fall under Article 22. It is contended that such profit, therefore, will be taxable in India as per the domestic law by applying the provisions of section 44B of the Income-tax Act, 1961. If this contention of the Revenue is accepted, the same, in our opinion, will lead to absurdity as rightly contended by the learned counsel for the assessee inasmuch as the profits from the operation of ships in domestic traffic, for example, freight earned for carriage from Goa to Mumbai will be eligible for tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e meaning of Article 7. It is, however, to be noted that the international shipping profits have been excluded from business profits within the meaning of Article 7. He has also relied on the comments of Professor Klaus Vogal that the expression "not dealt with" used in the said article must not be taken to mean "not unmistakably dealt with" as the said article is neither designed to remove difficulties of interpretation nor even lays to settle them in favour of the State of residence. In this regard, we have already referred to the correspondence exchanged with the competent authorities of India and Switzerland whereby it was mutually agreed to assign a certain specific interpretation to Article 22 in the context of international shipping profits and keeping in view this agreement arrived at between the two competent authorities, we are of the view that the Revenue authorities are not free to take any contrary view relying on the commentary of Professor Klaus Vogal. As regards the contention of Shri Srivastava that there is nothing in Article 22 to suggest that the position that existed till assessment year 2001-02 got altered or modified by the introduction of Article 22 in the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 001-02 not because of the exclusion contained in Article 7 but because of absence of any article prescribing specifically a tax treatment i.e. distributive rules in the Indo-Swiss treaty. This position, however, has changed as a result of introduction of residuary article 22 prescribing tax treatment or distributive rules for other income which has not been dealt with by any earlier articles of the treaty like the international shipping profits. 42. In assessee's own case, a similar issue came up for consideration for the first time in assessment year 2002-03 when Article 22 introduced in the Indo-Swiss treaty from 01-04-2001 became operative and applicable. For that year, the return was filed by the assessee declaring Nil income making a similar claim that under the beneficial provisions of Article 22 of Indo-Swiss treaty, it was not liable to tax in India on its international shipping profits. The stand of the assessee was that in the absence of any specific article in the DTAA dealing with taxability of profits derived from the operation of ships in international traffic, paragraph 1 of Article 22 of the DTAA was applicable and its shipping profits were taxable only in Switzer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 was sent by Professor Dr. R. Waldburger, Vice Director, Division for International Fiscal Law and Double Taxation Matters, Swiss Federation Tax Administration to the Joint Secretary (FT TR), Ministry of Finance, Government of India, the contents of which are reproduced below : "We write this letter to you in order to agree on the taxation of profits arising from operation of ships in international traffic in our respective countries in accordance with the provisions of our double taxation agreement. During our negotiation both contracting States decided to tax enterprises that operate in the shipping business according to the internal law of each Contracting State. The term "international traffic" in paragraph 1 subparagraph (i) of Article 3 therefore was limited to transport by an aircraft operated by an enterprises of a Contracting State. Consequently we have excluded shipping profits in Article 8 DTA-IND (which normally deals with profits arising from shipping and operation of aircrafts). According to paragraph 1 of Article 7 DTA-IND profits from the operation of ships in international traffic are not treated under the general concept of business profit attribution betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable to tax only in Switzerland unless the beneficial owner carries on business in India through a permanent establishment situated therein and the right or property in respect of such income is effectively connected with such permanent establishment. We hope that you interpret these provisions of our double taxation agreement in the same way and therefore will be able to confirm your agreement to us by returning a countersigned copy of this letter. (emphasis supplied in bold letters) We thank you for your cooperation in this matter and look forward to receiving your soon answer." 44. The immediate reply to the above letter was sent by Joint Secretary (FT TR) by a letter dated 10th December, 2003 communicating that India was not in agreement that income from shipping business in international traffic would be covered under Article 22 and reasons for the same were also given. However, immediately thereafter, a letter dated 18th December, 2003 was sent by the Joint Secretary (FT TR) to Shri Wardbarger clarifying the matter as under : "As regards the query raised in your letter dated 29.10.2003, I have already handed over a written reply to Ms. Silvia Frohofer. However, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r for necessary action. As already noted by us, letter dated 18th December,2003 was written by the Joint Secretary (FT TR) after 10th December, 2003 clarifying the matter further to the Competent Authority of Switzerland whereby it was agreed that profits from operation of ships in international traffic is not covered specifically by any of the articles of the treaty and that Article 22 of the treaty dealing with other income would fall to be applicable in respect of such income. The letter dated 14th February, 2005 of Joint Secretary (FT TR) relied upon by the AO to deny the treaty benefit to the assessee company thus was superseded by the letter dated 27th May, 2005 and the reliance of the AO on the letter dated 14th February, 2005 to deny the treaty benefit to the assessee company was clearly misplaced. 45. In Article 3 of Indo-Swiss treaty giving general definitions, the term "competent authority" is defined to mean in the case of India, the Central Government in the Department of Revenue or their authorized representative and in the case of Switzerland, Director of Federal Tax Administration or his authorized representative. Article 25 of the said treaty prescribes the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said agreement. 47. In support of the Revenue's case on the issue under consideration, Shri Srivastava has heavily relied on the decision of Authority for Advance Ruling in the case of Gearbulk AG (supra) wherein a similar issue has been stated to be decided in favour of the Revenue holding that income derived from operations of ships in international traffic is liable to tax in India as per domestic law rejecting the contention of the assessee that Article 22 of the Indo-Swiss treaty applies to such income and allocates taxing rights to the country of residence i.e. Switzerland. He has contended that although the said decision of Authority for Advance Ruling is not strictly binding on the Tribunal, it has a grate persuasive value and their being no decision of the Tribunal, High Court or the Supreme Court directly on the issue, the decision of Authority for Advance Ruling deserves to be followed by the Tribunal. We are unable to accept this contention of Shri Srivastava. A perusal of the judgment of the Authority for Advance Ruling passed in the case of Gearbulk AG (supra) shows that the letters exchanged between the Competent Authority of India and Switzerland explaining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial hierarchy cannot lay down a binding precedence. It was held that the ruling given by the Hon'ble Authority for Advance Ruling, therefore, has no precedence value in general. We are, therefore, unable to accept the plea of Shri Srivastava that the issue under consideration be decided in favour of the Revenue following the decision of the Authority for Advance Ruling in the case of Gearbulk AG (supra) . In our opinion, the item of income in question i.e. international shipping profit cannot be said to be dealt with in any other articles of the Indo-Swiss treaty and the taxability of the said income thus is governed by residuary Article 22 introduced in the treaty with effect from 01-04-2002. 49. 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. If both these conditions are satisfied, the internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d information, and to report on cargo bookings and use of space allocations. To announce sailing and / or arrivals and to quote freight rates and announce freight traffic and amendments, subject to the freight policies and instructions of the Principals. To provide regular reports and information concerning latest market trends and competition advice developments. 3.13 To arrange for public relations work (including advertising, press .agreed by the principles. 3.14 To issue, sign and stamp on behalf of the Principals to perform these duties. 5.00 Principals' Duties: 5.02 The Principals will provide the Agents with any necessary funds to cover creditors and any advance disbursements in respect of the Principal's business within the region, which may be specifically agreed as items not subtracted from the freight account. 5.03 To pay all statutory charges and taxes (as required by Law) levied by countries in the Region, payable by ship owners / operators / charterers whose ships call at ports in the Region. 6.00 Remuneration: 6.01 The Principals agree to pay the Agents, for the above services rendered by them, the commission set forth in Schedule A to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... common uses associated with the phrase. The assessee has filed opinion of Shri Mukul Rohotogi, Additional Solicitor General, Supreme Court of India wherein after referring to the meaning given in the "Webstors Revised Unabridged dictionary" and in the words and phrases, permanent edition, Shri Mukul Rohotogi has opined that the expression "effectively connected" must be understood to mean that there is a powerful, complete or thorough control of the ship by the agency. In his view, the shipping company, however, has no such control whatsoever over the ship and since it is only working as an agent who makes bookings and perform other ancillary services, it cannot be said that the ship has any effective connection with the agency. He has stated that to say that the ships are effectively connected with the agency would lead to absurd results inasmuch as the agency will be liable to pay tax whenever the ships are plied on international waters even if they do not come to or depart from Indian shores which would result in extending the territorial jurisdiction of Indian Tax Laws. According to him, Article 22(2) brings profits of the PE within the scope of Article 7 only if the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para 1, 2 and 3 shall not apply if the beneficial owner of the interest, being a resident of the contracting State carries on business in the other contracting State in which the interest arises, through a PE situated therein or performs in that other contracting State independent personal services from a fixed base situated therein and the debt claimed in respect of which the interest is paid is effectively connected with such PE or fixed base. In such a case, the provision of Article 7 or Article 4 as the case may be shall apply." 55. The Special Bench in this context noted that the provisions of Article 11(6) of the Indo-Japanese convention were pari-materia to that of Article 11(4) of the OECD Model Convention and after taking into consideration the purpose and scope of Article 11(4) of the OECD Model Convention as explained in paragraph No. 24 and 25.1 of the OECD commentary on Model Tax Convention on Income Tax and on Capital (condensed version) issue in July, 2010, the Special Bench held that the economic ownership of the debt claim not being allocated to the PE, it cannot be said that such debt claim is effectively connected with that PE. The Special Bench thus has taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... published in July, 2010 and the ratio of the decision of Special Bench of this Tribunal in the case of Sumitomo Mitsui Banking Corporation (supra) as also the opinion of Philip Baker and Mr. Mukul Rohotogi which conforms to the said ratio, we are of the view that 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, we uphold the impugned order of the learned CIT(Appeals) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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