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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 ..... of exports/imports on which a sum of Rs. 9.33 crores was paid towards the tax liability. In the return of income filed for the year under consideration on 28th November, 2003, the assessee, however, declared total income at Nil on the grounds as stated in the note attached with the said return that there was no article in the Indo-Swiss treaty 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 2002-03, it can be seen that M/s Samsara Shipping Private Ltd. is showing sundry creditors which include the liability of Rs.9,66,53,645/- towards the principals, M/s Mediterranean Shipping Co. S.A. (iii) The A.O. during the course of block assessment proceedings in the case of M/s Samasara Shipping Co. P. Ltd. has observed that it is an agent but not 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee that both M/s Sansara Shipping P. Ltd. and M/s MSC Agency India P. Ltd. were independent agents and did not constitute its PE in India as per Article 5 of the treaty. This submission of the assessee was not found acceptable by the AO keeping in view the relevant clauses of the agreement dated 01-04-2002 entered into by the assessee with M/s MSC Agency India P. Ltd.. According to the 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22 of the relevant tax treaty was applicable to the profits from shipping business of the assessee company. 6. After arriving at a conclusion that Article 22 of the relevant tax treaty was applicable for deciding the taxability of shipping profits of the assessee company in India, the learned CIT(Appeals) proceeded to examine as to whether the case of the assessee was covered under Article 22(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee company having no connection with agency PE in India save that the PE may clear inbound cargo and book outbound cargo which is carried on those ships. It was stated that the ships thus are clearly not assets of the PE nor are they in some other way effectively connected with a PE. 8. Relying on the opinion of Mr. Rohotogi and Mr. Philip Baker filed by the assessee as well as other relevant 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Treaties" has explained the scope of Article 22 which suggests that the scope of the Article is very narrow to apply to income like annuity, maintenance payment, damages, accident benefit, payment from business plan, scholarships, awards etc. and as asserted by the said author, Article 22 does not apply to items of income classifiable as business profits within the meaning of Article 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27th may 2005. But his assertion that the Govt. of India had not agreed to the position held the field. vi. It is unmistakably evident that India never accepted the position that prior to 2011, Article 22 was applicable to shipping profits. vii. Hence the error committed in the order of assessment for AY 2002-03 or in the order U/s 197 was caused due to wrong communication from the competent Authority of Switzerland 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt on the issue, the decision of AAR in the case of Gearbulk AG which deals the similar issue as arising in the present appeal exhaustively, has to be followed by the Tribunal having a great persuasive value. He contended that there are no distinguishing features to suggest that the said decision is not applicable to the facts of the case and there is also no perversity in the reasoning given by AAR for coming to the finding. 15. Without prejudice to his main argument that 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the A.O. after making a detailed discussion which runs from Para 3.14 to Para 3.32 of his impugned order. Shri Srivastava contended that the learned CIT(A), however, has erroneously come to the conclusion that the right or property is not effectively connected to the PE and hence income would not fall under Para(2) of Article 22. According to him, the learned CIT(A) and the assessee both have proceeded on a wrong premise that the expression "effectively connected" would mean that the property (Ship in this case) 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 ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted for assessment year 2002-03 by the Revenue vide a reasoned order passed under section 143(3) of the Act dated 9 March 2004 and the international shipping profits of the Respondent were not subjected to tax in India in view of Article 22 which finding was in line with the specific understanding reached between the competent authority of Switzerland (SFTA) and of India (CBDT) as contained in the former's letter dated 29 October 2003 and the latter's final concurrence dated 18 December 2003. 18. Shri Dastur 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied on the Commentary on Double Taxation Conventions (Third Edition) by Klaus Vogel wherein he has explained that article 21 of the OECD model convention (which is equivalent to article 22 of the Indo-Swiss treaty) is a part of the "distributive rules" contained in double tax avoidance agreements, meaning thereby that double tax avoidance agreements distribute jurisdiction. Further reliance was also placed by him on the book titled "Taxation of Cross-border Services" by Rawal wherein he has observed that 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 profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins as per their domestic laws, then providing for such dual right of taxation in Article 13 of Indo-US and Article 14 Indo-UK treaty was not necessary. Reliance was also placed by Shri. Dastur on the opinion of Mr. Philip Baker dated 25 June 2003 wherein Mr. Baker (an internationally acclaimed authority) has categorically opined that article 7 cannot be regarded as having dealt with international shipping profits and that such profits would be covered within the purview of article 22 of the Indo-Swiss 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle 22(1) of the Indo-Swiss treaty to international shipping profits has been accepted by the Revenue in the order passed under section 143(3) of the Income-tax Act, 1961 for Assessment Year 2002-03 in assessee's own case based on the bilateral letters exchanged between the competent authorities of India and Switzerland mentioned above. He submitted that the Revenue has also passed a voyage assessment order dated 10 June 2005 under section 172(4) of the Act for Assessment Year 2005-06 wherein it was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is paid viz. the ships cannot be regarded as being effectively connected to such PE and hence remain outside the purview of Article 22(2) of the Indo-Swiss treaty. He contended that for the "right or property" viz. the ships, to be effectively connected to the PE, the PE must economically own the ships, in that the PE must have full control over the ships, for example the PE should be in a position to decide the route that the vessel takes or where it will stop in transit etc. He submitted that no 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y states that it means a positive action and not lack of action. - The Authority has not considered the impact of definitions cited in the context of Azadi Bachao Andolan's case (supra) when it says that the object of tax treaties is to allocate jurisdiction, and in that context 'dealt with' must mean dealt with by allocating jurisdiction. - In Para 9.2, the Authority has referred to the argument of the difference between "dealt with" and "mentioned in" but has not give any reasoning for rejecting the submissions. - In Para 10, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and leaving it to be addressed by domestic law. He contended that the Subject was regarded as "dealt with" without any shadow of doubt till the year 2001 and it cannot become "Not dealt with" by mere introduction of Article 22 in the DTAA. He also contended that if the resident country was denied exclusive taxing rights under Article 7 and Article 8, it would be absurd to suggest that exclusive rights were given to the resident country under Article 22. As regards the opinions of Philip Baker and Mukul Rohtagi filed by the assessee, he submitted that the same have proceeded 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as per paragraph 1 of Article 22 of Indo-Swiss treaty. The first and foremost issue that is to be considered and decided thus is whether the taxability of profits from operation of ships in international traffic of the assessee company is governed by Article 22 of the Indo-Swiss treaty or not. 32. The learned Special Counsel for Revenue Shri G.C. Srivastava, has contended that the profits from shipping and air transport are specifically dealt with under Article 8 of OECD model convention according to which profits of an enter price of a contracting State from the operation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that by agreeing to exclude the shipping profits from Article 8 as well as Article 7 of the Indo-Swiss treaty, India and Switzerland had agreed to leave the shipping profits to be taxed by each State according to its domestic law and this undisputed position prevailing upto 2001 did not change as a result of introduction of Article 22 of the treaty with effect from 01-04-2001. We are unable to agree with this contention of Shri Srivastava. In our opinion, as a result of introduction of Article 22, the items of income not dealt with in the other articles of the Indo-Swiss treaty 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 whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as having dealt with international shipping profit and such profits would be covered within the perview of Article 22 of the Indo-Swiss treaty. 35. In support of his action in bringing to tax the profits from shipping to tax in India as per domestic law, the AO has relied upon the letter dated 14th February, 2005 issued by the Joint Secretary. However, as rightly contended by the learned counsel for the assessee, the said letter has been impliedly superseded by another letter dated 27th May, 2005 issued subsequently wherein reference was made to two letters written earlier dated 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the said article that technical services would have to go back to article 7 for determination of whether India can tax fees from such technical services. The stand of the Revenue that exclusion of an item of income from an article means that such item has been "dealt with" thus was not accepted by the Special Bench of ITAT by implication in the case of Mahindra & Mahindra. 37. As already observed, the expression "dealt with" used in Article 22 have to be read in the context of purpose of double tax avoidance agreement which is allocation of taxing jurisdiction. From 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the international shipping profits shall be taxable in the State of residence irrespective of whether the resident has a PE in the other State or not and whether the rights or property are effectively connected with such PE or not which was not the position earlier prior to 2012 even after insertion of Article 22. 40. Shri Srivastava has relied on the commentary of Professor Klaus Vogal wherein while explaining the scope of Article 22, the learned Commentator has stated that the said article does not apply to the items of income classifiable as business profits within the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which prescribes distributive rules with respect to items of income for which no rules have been prescribed in the earlier articles of the agreement. The taxability of capital gains earned by a resident of Malaysia in India thus will be governed by the distributive rules contained in Article 22 if they are more beneficial to the assessee than the relevant provisions contained in the Indian Income-tax Act. These examples will further support and substantiate the view that international shipping profits were being taxed in India under the domestic law upto assessment year 2001-02 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 fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO. In the year under consideration, he, however, has taken a different view relying on the letter dated 14th February, 2005 issued by the Joint Secretary. As pointed out by the learned counsel for the assessee, the said letter has been superseded by another letter issued on 27th May, 2005 wherein the Joint Secretary has made a reference to the letters exchanged between the competent authority of India and that of Switzerland dated 29th October, 2003 and 18th December, 2003. Copies of the said letters are placed on record. The first letter dated 29th October, 2003 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agraph 1 of Article 22 such income is taxable only in the country of residence, unless the beneficial owner carries on business in the other Contracting State through a permanent establishment and the right or property in respect of such income is effectively connected with such permanent establishment (paragraph 2 of Article 22). Considering these provisions, we are of the opinion, that income derived by a resident of Switzerland from India out of operation of ships in international traffic, shall fall under Article 22. Further, it is our understanding that such income would be liable 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rifying that India has not accepted that income from operations of ships in international traffic accruing to a resident of Switzerland will not be taxable in India in view of applicability of Article 22 of Indo-Swiss treaty and such income will be taxable only in accordance with the domestic law of the State. As pointed out by the learned counsel for the assessee, another letter dated 27th May, 2005 thereafter was written by Joint Secretary (FT & TR) to the DGIT, International Taxation enclosing the letters dated 10th December, 2003 and 18th December, 2003 issued in the matter 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9th October, 2003 issued by the Competent Authority of Switzerland and reply thereto given by the Indian Competent Authority by letter dated 18th December, 2003 agreeing that there being no other article of the treaty dealing with profits derived from shipping operations in international traffic, the taxability thereof was governed by Article 22. We are of the view that the revenue authorities in India therefore are not justified to take a different view by assigning different interpretation to the relevant clauses of the treaty than the one understood by both the parties to 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 alth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Azadi Bachao Andolan (supra) wherein it was held that the ruling given by the Authority for Advance Ruling is not even binding on the Commissioner of Income Tax and authorities sub-ordinate thereto in any case except in the case of the very assessee in which such a ruling was given and that too in respect of transaction in respect of which such ruling was given. It was held by the Tribunal that whatever be the respect and deference judicial authorities indeed have for the rulings given by the authority, the Authority for Advance Ruling not being a part of judicial 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 gover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Principals for the service in direct competition or with direct conflict of interest with the Principal's activities in section, without written consent, which shall not be unreasonably withheld by the Principals. 3.10 Marketing Sales and Documentation:-3.11 To provide marketing and sales activities for the services of the Principals in the Region, to canvass for and book cargo, to publicise the services and to maintain contact with Shippers, Consignees, Forwarding Agents, Port and other Authorities and trade organizations. 3.12 To provide statistics and 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 Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s context is whether the property in respect of which international shipping income was received by the assessee company through shipping business carried on in India through the P.E. situated therein i.e. ships was effectively connected with such permanent establishment. The expression "effectively connected" used in this context in the Article 22(2) of the Indo-Swiss treaty is not defined either in the said treaty or even in the domestic law i.e. Income-tax Act. The said term, therefore, has to be understood using the general principles of common law keeping in mind the 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 booking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y connected with a permanent establishment. According to him, the concept of "effectively connected" can be applied in practical terms where branch accounts are drawn up for the PE based upon the correct accounting principles where the ships are shown as assets of the branch. 54. In the case of Sumitomo Mitsui Banking Corporation (supra), the Special Bench of this Tribunal had an occasion to consider and interpret the meaning of the term "effectively connected" used in paragraph No. 6 of Article 11 of the Indo-Japanese treaty which reads as under : "The provisions of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE. It is stated that the economic ownership of a right or property in this context means the equivalent of ownership for income-tax purposes by a separate enterprise with the attended benefits and burdens (e.g. the right to the income attributable to the ownership of the right or property, the right to any available depreciation and judicial exposer to gains or losses from the appreciation or depreciation of that right or property). 57. 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 (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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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