9911796707
TMI Blog2013 (10) TMI 936X X X X Extracts X X X X X X X X Extracts X X X X ..... ship to a book, or medical equipment, every tool, apparatus, plant includes all equipment used by a business man for carrying on his business Therefore, ship comes under the fold of plant. Nature of expenditure as Revenue expenditure of Capital expenditure Royalty u/s 9(1)(vi) of Act - Whether payment made to the owner of vessel is in the nature of royalty charges or in the nature of purchase Held that:- Till the last month of the payment or the option exercised, the assessee was not the owner of the vessel. The assessee opted to make the balloon payment of US $2.75 million on 12.1.2005. A sale certificate was issued only on 12.01.2005. The consideration paid periodically was in the nature of hire charges for the use of the Vessel, as described in the agreement and not sale consideration Hire charges to be treated as revenue expenditure - By the exclusion Clause in Clause (iva) referring to cases falling under Sec 44 BB of the Income Tax Act. A payment made for the use or the right to use an equipment thus qualifies as royalty and in this case, considering the nature of time charter agreement and the rights and obligations of the charterer, for the privilege of using the ship, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication for a certificate of nil deduction at a lesser rate. Thus, as far as Section 160 is concerned, this is a procedural and enabling Section for the determination of the quantum of income of the non-resident assessee and the tax to be demanded. Reliance has been placed upon the judgment in the case of Transmission Corporation of A.P. Ltd. and another V. CIT reported in [1999 (8) TMI 2 - SUPREME Court] - Proceedings under Section 201 and 201A of the Income Tax act has nothing to do with the status of the assessee as an agent under Section 160 and 163 which would assume significance only for assessment purposes. Thus so long as the Revenue is able to show the receipt as falling under Section 9 of the Income Tax Act, provisions of Section 160 of the Income Tax Act would stand attracted - The contention that Sections 163 and 201 of the Income Tax Act cannot go together is not correct for the reason that they operate on different spheres. Section 195 casts an obligation on TDS on any person responsible for paying, whereas Section 163 is for assessment purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... he 1990s, in accordance with Ministry of Finance letter dated 19.10.92? 3. Whether payments made under the BBCD are exigible to tax in India, when the vessel is flying the cyprus flag, and is deemed to be flying the Indian flag only for the purpose of lifting Government cargo, under the provisions of the Merchant Shipping Act? 4. Whether the Tribunal's interpretation of Articles 7, 8 and 12 of the India-Cyprus Double Taxation Avoidance agreement is correct? 5. Whether the Tribunal's construction of BBCD is correct, especially in the light of position now abundantly clarified by Section 115V of the Act? T.C.(A)Nos.56 to 64 of 2013: "1. Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the assessee is not an agent of the foreign shipping companies to whom it has made payment towards hire charges for the vessels? 2. Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the lease of vessels by the assessee from the Foreign Shipping Companies is only on time charter? 3. Whether under the facts and circumstances of the case, the Income Tax Appellate Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Board, the assessee chartered foreign shipping vessels by entering into agreements in standard time charter form, approved by the New York Produce Exchange. As far as the foreign shipping vessels are concerned, the appellant entered into time charter agreement with the shipping companies having their vessels registered in different countries. The following table gives the name of the shipping company, chartered hire charges and the country of residence. Name of the Shipping Company Charter Hire Charges Country of Residence Setaf Segat 112,352,982 France Star Shipping 123,415,610 Norway Jing Feng Marine Inc 1,537,923 Hong Kong Handy Bulk AG, Germany 78,587,302 Germany Singapore Shipping Int. Pte. Ltd. 698,567 Singapore Western Bulk Carriers 113,723,125 Australia 4. In response to a query from the Assessing Officer on the details of payment made to the foreign shipping companies, under the time charter, the assessee gave the details. On going through the same, the Assessing Officer issued notice under Section 201 of the Income Tax Act calling upon the assessee to show cause as to why they should not be treated as assessee in default for non-deduction of tax a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. Referring to 'international traffic' as defined in DTAA, the Commissioner of Income Tax (Appeals) held that Article 8 of the DTAA would apply in a case where the shipping company itself derived profits from the transportation by sea of passengers etc., carried on by the owner. The profits covered by Article 8 of the DTAA included profits derived by an enterprise from rental of ships incidental to any activity directly connected with such transportation by sea of passengers, mail, livestock or goods carried on by the lessees or charterers of the ship. The first Appellate Authority held that the foreign vessels have been designated as coastal Vessels employed to trade between Ports in India and hence, would not come under international traffic, as defined under DTAA. The definition on 'international traffic' would apply where the journey of a ship or aircraft goes between a place in one Contracting State to a place in the other Contracting State and then continues to another destination also located in that other Contracting State. This definition would not apply when the ship is operated between two place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness; as such, in the context of the business, ship could be construed to be an equipment of the business. It further held that the word 'equipment' has got various shades of meaning, one such being, things which are needed for a particular purpose or activity. On the submission of the assessee that the time charter was not for the hire of the ship, but for rendering the services, the Tribunal held that the consideration was paid for the use of the ship; hence, the payments were liable to be held as 'royalty'. The Tribunal further rejected the arguments of the assessee on the aspect of permanent establishment and ultimately referred to Section 195 of the Income Tax Act and pointed out that it was obligatory on the part of the person responsible for making the payment to the non-resident to deduct tax at source in respect of any sum chargeable under the provisions of the Act. If there existed any doubt as regards the taxability of such income, the person responsible for deducting tax should make an application to the Assessing Officer in this regard and it was not for the assessee to decide on its own on the non-liability of the payment to tax. 10. Referring to the decision repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, he viewed that it was not one for affreightment. Referring to the decision reported in (1978) 113 ITR 307 (Union of India V. Gosalia Shipping Pvt. Ltd.), the Assessing Officer came to the conclusion that the payments made to the foreign shipping companies, which were put to use between the ports in the Indian coast were assessable as 'royalty' as per the provisions of the Income Tax Act. On the question of ship as equipment, the Assessing Officer also referred to the earlier order of the Tribunal, holding that ship was an equipment. Thus, the Assessing Officer held that hire charges were liable to tax under Section 115A read with Section 44D of the Income Tax Act or at the rates specified by DTAA, whichever is beneficial to the assessee. The assessment order in respect of all the assessment years under consideration are almost similar. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who considered the contentions under the common order. 14. On a perusal of the agreement, the Commissioner of Income Tax (Appeals) held that the nature of payments to the foreign companies was only for hiring of ships, which is similar of hiring a car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther direction given to initiate proceedings, either under Section 201 or under Section 195, applying the decision reported in (1982) 134 ITR 17 (Commissioner of Income-tax v. Premier Tyres Ltd.), is erroneous in law. The Tribunal rejected the contention of the assessee that the reopening of assessment under Section 148 of the Income Tax Act was barred by limitation and that the reopening was only a change of opinion. The Tribunal dismissed the assessee's claim on both counts holding that the Officer had valid reasons for reopening of the assessement and that there was no change of opinion in the reopening of the assessment. The Tribunal further held that once a notice was issued within the time limit, but served after the expiry of the time limit, the assessment could not be set aside as time barred. Aggrieved by the direction of the Tribunal, the present appeals are filed before this Court by the assessee. 16. We have already pointed out in the preceding paragraph, particularly with reference to T.C.(A)Nos.2206 to 2208 of 2006, that while rejecting the assessee's appeal on the aspect of royalty and treating the ship as an equipment, the Tribunal followed its earlier order in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, maintenance and operation, insurance and repairs, bank guarantee etc. The first Appellate Authority pointed out that a reading of the agreement showed that the assessee was not the owner of the vessel until the last month's hire instalment was paid to DMCL, in exchange of which, the owner would execute a bill of sale in favour of the assessee. The cost of the Vessel would vary depending on the date on which such option was to be exercised by the assessee. Thus, till the option to purchase and to make the balloon payment to the owner was exercised, ownership remained with DMCL. It was noted that the owner executed a bill of sale on 12.1.2005, acknowledging the receipt to 2.75 million US Dollars from the assessee. This bill of sale was executed in Nicosia, Cyprus. Thus, till 12.1.2005, ownership remained with DMCL; thus the consideration paid periodically was in the nature of hire charges for the use of the ship and was not the deferred payment of the consideration. In the circumstances, the first Appellate Authority rejected the argument of the assessee that it had purchased the ship on outright basis and hence, became the owner. He pointed out that till 12th January, 2005, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of or right to use of' is not defined in the Act or in the DTAA. So too the OECD Model. Yet, the commentaries make a clear distinction between the amount paid for the use of equipment called royalty and the payment constituting consideration for sale of equipment and for availing of the services. Time charter is not a contract for hire of the ship, but for provision of standard services which the owner of the ship provides through the ship, crew and the master. Time charter party merely gives the right to use the carrying capacity of a ship; hence, under a time charter, there is only a contract for services. Thus, referring to the meaning of the expression 'use or right to use' in the context of the time charter party internationally accepted, learned Senior Counsel submitted that neither Clause (iva) of Explanation 2 to Section 9(1)(vi) nor Section 9(1)(vi) of the Income Tax Act could cover a payment under time charter to hold the payment as 'royalty'. Referring to the provision of DTAA of Australia and the Model Code, he submitted that shipping income are separately dealt with under DTAA. 20. Referring to the provision in Clause (iva) of Explanation 2 to Section 9(1)(vi) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be understood in the manner in which it is commercially used and understood. In other words, ship cannot be called as 'equipment' in an ordinary commercial parlance and with the exclusion of the income falling under Section 44BB of the Income Tax Act, it is clear that the intention is not to treat ship an equipment. Placing reliance on the decision reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.,), particularly at page 226, he submitted that going by the said decision, which primarily dealt with the hiring of a ship under a time charter in the context of the liability on the transfer of right to use under Section 3-A of the Tamil Nadu General Sales Tax Act, there being no possession transferred to the hirer for use or right to use, the payments under the time charter cannot be treated as one for the use or right to use the ship as an equipment. Thus, apart from the fact that ship is not an equipment, Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act has no relevance to the receipts on time charter, which is essentially one of service. Thus the decision of this Court reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in. The agreement between the assessee and the Cyprus company is one covered by DTAA dated 26th November, 1995. According to learned senior counsel, the case of the assessee squarely falls under Article 8 of the DTAA and not under Article 12 of the DTAA relating to royalty, since 'royalty', even as per Clause (iva) of Explanation 2, applies to use or right to use of scientific, commercial or industrial equipment. 23. Taking us through Explanation 2 of Section 9(1)(vi) of the Income Tax Act, he submitted that read in the context of other Clauses in the said Explanation, 'equipment' referred to in Clause (iva) to Explanation 2 must be read as having relevance to those special equipment relating to intellectual property rights, which are of industrial, commercial and scientific nature; hence, not every kind of transaction, 'equipment', for use or right to use, is covered by Clause (iva) of Explanation 2. The attempt of the Revenue to include a Vessel given on time charter or by demise within the meaning of the term 'equipment' would only strain what is understood as 'equipment' and thereby 'royalty'. On the admitted fact that there is no definition of 'equipment' in the said Section, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Act, he submitted that with the definition given on bare boat charter-cum-demise, with the option given to the assessee to purchase the Vessel, the payment made has to be considered as deferred payment on the option for purchase of the vessel Thus Clause (iva) will not be of relevance to the case on hand. 26. In sum and substance, the contention of the learned senior counsel is that the policies of Ministry of Finance and Ministry of Surface Transport govern the purchase of a ship under BBCD. Thus the agreement was a means for acquiring the ship and not for hiring the ship simpliciter. In any event, ship not being an equipment, the payment cannot be brought under clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. Referring to the decision reported in (2000) 245 ITR 538 (Indian Hotels Co. Ltd. V. Income-tax Officer), he submitted that the Authorities should have given a meaningful reading to the expression 'equipment'. 27. Countering the submissions made by learned senior counsel appearing for the assessees, Mr.N.V.Balaji, learned standing counsel appearing for the Revenue in T.C.(A)Nos.2206 to 2208 of 2006 and 598 to 601 of 2013 and 56 to 64 of 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other contracting State, namely, India, income arising from the transaction on the coast is taxable in India; hence, the transaction does not fall within the meaning of 'international traffic' to be covered under Article 8 of the DTAA. Referring to the examples given under the Model Code, he thus pointed out that what is taxable is the traffic within India; hence, the assessee's case in West Asia Maritime Co. Limited would not fall for consideration under Article 8 of the DTAA. Thus, reading the Clauses in Article 8, on facts, he submitted that international traffic being absent, the receipts would not fall for consideration under Article 8 of the DTAA. 29. On the treatment of the receipts as royalty falling under Clause (iva)/Article 12, he referred to Article 12 of the OECD model (prior to amendment of the Article in the year 1992) as well as to the DTAAs that the definition of 'royalty' included receipts arising from use or right to use of industrial, commercial and scientific equipment. Thus, lease income receipts were included under royalty. However, after 1992, apart from consideration paid on the use right to use of copyright on literary, artistic or scientific work, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 44BB, even those ships would get covered under the definition of 'equipment'. 32. Referring to Law Lexicon 3rd Edition giving the meaning of the definition 'equipment', he submitted that vehicles, ships, or aircraft are treated as 'equipment' only. Referring to the contention based on the different depreciation rate in the schedule on which heavy reliance is placed by the assessee, thus drawing the inference that plant and ships are two distinct categories, learned standing counsel pointed out that the depreciation table is for the specific purpose of granting a deduction and the various entries in the schedules cannot be the basis for understanding the meaning of 'equipment'. Thus, wherever the statute thought of special treatment to a specific business or article, the Act contains special provisions either in the main Act or in the delegated Legislation; hence, depreciation schedule, which is a matter of administrative convenience, cannot be a tool for understanding the expression 'equipment'. 33. Taking us through the depreciation schedule as prevailing between 1984-85 and 1987-88, and for the period from 1988-89 to 2002-03, ship stood as falling under separate entry with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'use' under Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act, which language is also found in Article XII of the DTAA. 35. Referring to the reliance placed on the decision reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.,), he submitted that the said decision has no relevance to the provisions of the Income Tax Act. The expression 'use' under Section 3-A of the Tamil Nadu General Sales Tax Act is on transfer of right to use. Going by the chargeable event therein, where possession and control are sine qua non to attract chargeability and that the use under time charter being in the nature of the contracting party not having possession and control thereon and which attracted service tax liability, following the decisions of the Apex Court on similarly worded provision in other States' General Sales tax Acts, this Court held that the transaction did not attract the charge under Section 3-A of the Tamil Nadu General Sales Tax Act. 36. Referring to Section 68(105)(zzzj) on Service Tax provision under the Finance Act, 1996, he submitted that the supply on tangible goods for use without transferring the right of possession and effective c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip and the usage right being with the charterers, the consideration could only be seen as one for use or right to use. Thus, even prior to the amendment, the case would directly be covered by the expression 'use' in Clause (iva) of Explanation 2 and even without the aid of Explanation 5 to Section 9(1)(vi) of the Income Tax Act, the receipts could be properly brought under the above said Clause in Explanation 2. 39. Referring to the position post amendment, wherein Explanation 5 is introduced retrospectively, learned Standing counsel submitted that the insertion of Explanation 5 was introduced as a clarificatory amendment for the purpose of removing the doubts raised on certain aspects of the payment treated as 'royalty'. Couched in a language to give exhaustive meaning to the term 'royalty' in respect of any right, property or information, he submitted that the amendment made it clear that irrespective of the possession, control, direct use by the payer and the location of the right, property or information in India, the consideration paid for, would nevertheless be treated as 'royalty'. In Explanation 2, Clauses (i), (v) and (iva) deal with transfer of any right relating to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 to 2208 of 2006. 41. On the question as to whether the assessee Poompuhar Shipping Corporation could be treated as an agent of the non-resident under Section 160 read with Section 163(1)(c) and that there could not be a parallel proceedings with one under Sections 195, 201, 201(1A) and 160, he pointed out that Sections 195 and 195(2) are on TDS on non-resident and certificate of non-deduction to be obtained, that the income is not chargeable. The obligation to deduct tax at source is on any person liable to make payment. When a person contends or the recipient contends that receipts are not liable to be charged under the provisions of the Income Tax Act, necessary safeguard is provided for in the form of certificate to be obtained from the Assessing Authority under Section 195(2) of the Income Tax Act. Admittedly, neither the assessee nor the non-resident invoked Section 195(2) of the Income Tax Act. The mechanism on TDS is more a facility for recovery and at that stage, the question of that person being treated as an agent of the recipient does not arise. The question as to whether a person could be assessed as an agent or not in a representative capacity, hence, is a stage ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foreign enterprise, as has been contended by the assessee. Hence, it is immaterial whether the non-resident is the owner or the place is a rental one or otherwise, at the exclusive disposal of the enterprise, there need not be a formal legal right to use that place, for, even under Article 5, for a permanent establishment, what is contemplated is (a) business, (b) a fixed place of business and (c) the business to be carried on partly or fully therein. Referring to the OECD commentary, he submitted that the place of business need not be a fixed place fixed to geographical location and depending on the nature of business, it may vary, the only requirement being that there must be a close connection between the business needs and the geographical points. Thus, the ship docks used by several persons is also a place of permanent establishment; thus the ship dock, the berthing facility available for regular use, to wait and move on instruction, the facility being available for regular use by the non-resident, thus clearly show the existence of permanent establishment and the particular location within which the activities moved and identified, constituted a commercial and geographic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the 1977 model, which included payments "for the use or the right to use of industrial, commercial or scientific equipment" as falling under 'royalty' and subsequently deleted. To bring this apart from the income from container leasing under Article 7 or 8, as the case may be, rather than under Article 12, in other words, if the economic ownership of the property is permanently allocated to the permanent establishment, then, the property would form part of the 'business property' of the permanent establishment and the income would be taxable as 'business profits' under Article 7. 47. As to the contention of the assessee, particularly with reference to West Asia Maritime Co. Limited, as to whether income should fall under Article 7 or 8 or not, learned standing counsel replied that rental income as profits from the operation of the ship are clearly spelt out in the DTAAs, which are the results of the negotiation between the two Countries; wherever it is not negotiated, it would remain as 'business profit' and not as a profit from the operation of the ship, to fall under Article 8. As far as this case is concerned, as found out by the learned Commissioner of Income Tax (Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime. In fact, the UN model and the Income Tax Act are on the same lines and only post 1992 amendment, OECD model omitted "use or right to use industrial, commercial and scientific equipment" to substitute the same as "use or right to use industrial, commercial and scientific experience." Thus, practically, there is no conflict between DTAA and the Income Tax Act. Thus, wherever there is a DTAA and the receipt being 'royalty', there could be no dispute in applying DTAA to the assessee's case and going by the decision reported in (2003) 263 ITR 706 (Union of India and another V. Azadi Bachao Andolan & another), the effect of DTAA has to be given its full thrust. 50. On the assessee's argument that 'receipts' would fall under Article 8 and not as 'royalty' as argued by Mr.P.S.Raman, learned Senior Counsel appearing for West Asia Maritime Co. Limited, that income from shipping income could not be charged in the country of source, learned standing counsel submitted that the ships operated within Indian coastal waters and going by the meaning of 'international traffic', the movement being within the Indian coastal waters, Article 8 has no relevance. Wherever the treaty contemplated othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts derived from the operation of ships in the coastal traffic is distinguished from the international traffic. As regards the relevance of Article 12 relating to royalties, the Commissioner further pointed out that the provisions of Article 7 would be applicable only in case where the foreign company itself was in operation of ships for transportation of passengers/goods in the international traffic. Since the payments made were with reference to the hire charges for operating the ships on the Indian Coast, the same would be covered by Article 12 of the DTAA. The Commissioner of Income Tax (Appeals) also upheld the contention of the Revenue that ship was an equipment. Thus, on the facts found, learned standing counsel submitted that the contention of the assessee claiming hire charges as capital expenditure was clearly an after thought, the accounting treatment given clearly showed the assessee treating it as revenue expenditure. Once the accounts were placed before the AGM, it is no longer open to the assessee to shift its stand to wriggle out of the liability under Section 201 and 201(1A) of the Income Tax Act. Learned standing counsel adopted the arguments of Mr.N.V.Balaji, lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar to plant and machinery to become an 'equipment'. Since Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act is similar to OECD model and internationally, ship is not treated as an 'equipment', the attempt on the part of the Revenue to treat ship as an equipment for the purpose of attracting Clause (iva) is totally against the provisions of the Act. Further referring to Clause (iva) of Explanation 2, he pointed out that 'use or right to use' is with reference to industrial, commercial and scientific equipment. While industrial equipment relates to manufacturing and production aspect; commercial equipment relates to trade and commerce and scientific equipment relates to research equipment. Read in the context of the preceding Clauses, when Ship is not an equipment, the logical syllogism would be that the payment not being towards equipment, it could not be royalty. On the meaning of 'equipment', he referred to the decisions reported in AIR 1999 SC 1225 (CIT V. Venkateswara Hatcheries (P) Ltd and AIR 1980 SC 86 (P.C.Cheriyan V. Mst.Barfi Devi) and submitted that the disputed expression 'equipment' has to be construed in the context of the Scheme of the Act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no dominion over this place at the hands of the foreign enterprise, berth cannot be treated as a permanent establishment for the foreign enterprise. The berth reserved for TNEB was at the disposal of M/s.Poompuhar Shipping Corporation for operating its domestic as well as foreign ships. Thus, the same place cannot be a subject of relatable dominion and disposal. Referring to the time charter agreement, he submitted that in the absence of any certainty as to the permanency in carrying its operations or to the certainty of berthing in different places, there is no permanent establishment; consequently, Article 7 also fails in this case. 57. Touching on the submission of the Revenue that the decision of this Court reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.,) would have no relevance, he submitted that the consideration paid if at all to come under royalty, it must be for 'use or right to use' and in both cases, there must be a transfer. Referring to the decision of the Apex Court reported in (2004) 267 ITR 654 (Commissioner of Income Tax V. P.V.A.L., Kulandagan Chettiar) confirming the decision of this Court reported in (1994) 208 ITR 400 CIT v. V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident, (a)has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b); or (c)...... (vi)income by way of royalty payable by (a)the Government ; or (b)a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c)...... ........ Explanation 2. For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for (i)the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii)the imparting of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" : Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 44DA or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections. ......... Explanation. For the purposes of this section, (i) "plant" includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business; (ii) "mineral oil" includes petroleum and natural gas." SECTION 160: Representative assessee. 160. (1) For the purposes of this Act, "representative assessee" means (i) in respect of the income of a non-resident specified in sub-section (1) of section 9, the agent of the non-resident, including a person who is treated as an agent under section 163; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lace of business through which the business of an enterprise is wholly or partly carried on. 2.The term permanent establishment shall include especially : (a)a place of management; (b)a branch; (c)an office; (d)a factory; (e)a workshop; (f)a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g)a warehouse in relation to a person providing storage facilities for others; (h)a farm, plantation or other place where agricultural, pastoral, forestry or plantation activities are carried on; (i)premises used as a sales outlet or for receiving or soliciting orders; (j)an installation or structure, or plant or equipment, used for the exploration for or exploitation of natural resources; (k)a building site or construction, installation or assembly project, or supervisory activities in connection with such a site or project, where that site or project exists or those activities are carried on (whether separately or together with other sites, projects or activities) for more than 6 months. ARTICLE VII- Business profits - 1.The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment and transfer of a technical plan or design; but that term does not include payments or credits relating to services mentioned in sub-paragraphs (d) and (g) that are made; (h)for services that are ancillary and subsidiary, and inextricably and essentially linked, to a sale of property; (i)for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (j)for teaching in or by an educational institution; (k)for services for the personal use of the individual or individuals making the payments or credits; or (l)to an employee of the person making the payments or credits or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14. 61. As far as the assessee in T.C.(A)Nos.2206 to 2208 of 2006 and 598 to 601 of 2013 and 56 to 64 of 013 is concerned, this is a case on time charter and T.C.(A)Nos.2629 and 2630 of 2006 relates to bare boat charter cum demise. Since all the charter agreements are based on New York Produce Exchange, the common features relating to time charter may be noted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ship was not one payable on account of the carriage of goods, but was payable on account of the use and hire of the ship. Pointing out that the charter party was approved by the New York Produce Exchange and that there is no warrant for supposing that though the payment which the charterers bound themselves to make to the owners of the ship is on account of the carriage of goods, the parties described it as payable for the use and hire of the Vessel, in order to avoid the payment of Indian Income Tax. Referring to the clause on the liberty reserved to the charterers to sub-let, and the captain of the ship should be under the orders and directions of the charterers as regards employment and agency, the Supreme Court pointed out "the character of the payment cannot change according to the use to which the charterers put the ship or according as to whether the ship is loaded with goods in a port in India. What is payable as hire charges for the use of the ship cannot transform itself into an amount payable on account of the carriage of goods, by reason of the circumstance that the ship was loaded with goods in India." Thus, neither the one nor the other receive any amount on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Bharat Sanchar Nigam Ltd. V. Union of India) and pointed out to the attributes in right to use goods for the purposes of attracting the charge to hold that a transfer of right to use goods implied transfer of effective control for use. In that context, going by the charging provisions under Section 3A of the Tamil Nadu General Sales Tax Act, this Court held that in a time charter party, there being no transfer of effective control for use, the transactions would not attract Section 3A of the Tamil Nadu General Sales Tax Act. 66. Learned senior counsel appearing for the assessee submitted that the view of this Court in the decision reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.,) squarely covers the case on hand, particularly as regards the phrase 'use or right to use' and hence, when the transaction is one of service in nature, the question of attracting Clause (iva) to Explanation 2 does not arise. 67. We do not agree with the submission of the assessee. On the expression 'use or right to use' appearing under Explanation 2(iva) to Section 9(1)(vi), the decision of this Court reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.,) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given. To facilitate the execution of work by the contractors with the use of sophisticated machinery, the owner, namely, Rashtriya Ispat Nigam Ltd. had undertaken to supply the machinery to the contractors for the purpose of it being used in the execution of the contracted work. Thus the contractor was entitled to make use of the machinery for the purpose of execution of the work of the owner, namely, Rashtriya Ispat Nigam Ltd. and there was no transfer of right to use as such, in favour of the contractor. The High Court pointed out as follows: "An owner of property has a bundle of rights in it, namely, right to possess, right to use and enjoy, right to usufruct, right to consume, to destroy, to alienate or transfer, etc. In law it is not only possible but also permissible that the various rights and interest may be vested in various persons. While remaining the owner of a property, a person may create a charge on the property, mortgage it or lease it. In the transaction of sale, all the rights of the owner are transferred to the purchaser and it is said that the property in the goods passes to the purchaser. In a lease of immovable property, there is a transfer of a right to enj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at is provided is service on hire." 72. The above-said decision was appealed against by the State and in the decision reported in 126 STC 114 (Rashtirya Ispat Nigam Ltd. Vs. Commercial Tax Officer, Company Circle, Visakhapatnam), affirming the decision of the High Court, the Apex Court held that the transaction did not involve transfer of right to use the machinery in favour of the contractors and in the absence of satisfying that essential requirement of Section 5-E, the hire charges collected by the assessee from the contractors were not exigible to sales tax. 73. In the decision reported in (1999) 113 ITR 317 (Aggarwal Brothers V. State of Haryana and another), the question of hiring as amounting to transfer of right to use goods again surfaced with reference to Haryana General Sales Tax Act. This case related to hiring of shuttering materials to builders for use in the course of construction of buildings. The Supreme Court pointed out that the definition of "sale" in the Act includes the "transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration". The provision expressly speaks of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Roman law hire was nothing more than contract. In English law, however, it is much more. Here again we must distinguish between chattels and land. When a chattel is handed over by way of hire a bailment takes place, and thereby the hirer is put in possession of the thing. For land the corresponding transaction is a lease, and here too there is a transfer of possession. So far the two are very similar, though whereas the lessor always retains what is misleadingly called 'possession', a bailor who bails goods for a fixed term loses possession... 69. The Halsbury's Laws of England describes 'Hire of chattels' Fourth Edition, Volume 2, Para 1551 thus : "Hire is a class of bailment. It is a contract by which the hirer obtains a right to use the chattel hired in return for the payment to the owner of the price of the hiring. The proprietary interest in the chattel is not changed, but remains in the owner, although upon delivery the hirer becomes legally possessed of the chattel hired, so that if it is lent for a time certain, even the true owner is debarred during that time from resuming possession against the hirer's will and, should he do so, becomes liable in damages for the wrongfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sorting to the outright sale of a film, only a lease or transfer of the right to exploit the film is made. The device by way of lease of films has been resulting in avoidance of sales tax so to curb that device, Sub-clause (d) is inserted in Clause (29A). Even so, Sub-clause (d) is wider import than a mere leasing of films. It applies to all kinds of leasing/hiring of goods, for example, leases of plants, machinery, computers, cars, planes, furniture etc, 73. A sale of any goods is complete when the property in the goods passes to the purchaser pursuant to a contract of sale of those goods. So also, a deemed sale of goods under Sub-clause (d), as has been pointed out above, will be complete when the control of the goods in which the right to use is transferred, passes to the transferee under the contract of transfer." 76. Thus a reading of the decisions of the Apex Court shows that for the purpose of levy of sales tax on a deemed sale, there must be a transfer of right to use goods, which contemplates delivery of possession, so that, the transferee has a control over the economic benefits over the property. For the purpose of understanding 'royalty' under Clause (iva), we do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the transfer of right to use goods was that the possession given unaccompanied by transfer of right to use, in the sense of there being no effective control, would not bring the transaction within the four corners of the charging provision. Thus the decision reported in (2012) 47 VST 209 (State of Tamil Nadu V. Essar Shipping Ltd.) rested on the scheme, the charging Section and the decisions of the Apex Court on the similarly worded charging position. 78. As far as the present case is concerned, 'royalty' means the consideration paid for "the use or right to use". Irrespective of whether there is any transfer or not, the consideration paid for use or right to use simpliciter is sufficient for the consideration being called as 'royalty'. The presence or absence of possession effective/general control and custody with the assessee, even though may be matters of agreement, are not of any relevance to decide the character of payment. The assessee, as per the agreement, had the right to use the ship, selecting the time and the decided route as per its requirement, for which it paid the foreign enterprise, the consideration and we have no hesitation in holding that the character of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enforced idleness, which was solely on account of the charterers and it was clear during that time that the ship owners were only doing that, which the charterers had themselves suggested that they should do and the charterers approved of what the ship owners did, in fitting the degaussing apparatus. Thus, the Court held that the claim of the charterers could be saved of paying the hire during this period, was rejected. The Court pointed out that when the ship arrived at the Blyth, the ship could not be loaded immediately and the ship owner suggested fitting of degaussing apparatus. In the circumstances, the Court held that there was no breach of contract by the ship owners. The reference to the observation therein, hence, has to be understood in the context of the facts therein. Hence, we find that the judgment is not of any assistance to the assessee. 83. Both sides placed heavy reliance on the commentary on Article 12 on the meaning of the expression 'for the use of or right to use'. Leaving aside the arguments on 'equipment' for a moment, when we look at the commentary on Article 12, one would note in paragraph 8.2, taking the view that where a payment is for consideration fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V. P.V.A.L., Kulandagan Chettiar) in the context of the term "direct use or use in any other form" viewed that the disposal of the property or the capital asset itself is as much a form or method of use of the immovable property and that the expression 'direct use or use in any form' are sufficiently wide enough to include within its scope the transfer, sale or exchange of the property. Even though the said decision is in the context of the DTAA with Malayasia, the judgment gives a guidance as to how the phrases used in the DTAA should be understood in the absence of words of limitation. Thus the scope of the expression cannot be curtailed by the decisions under the provisions of the General Sales Tax Act. 85. As pointed out in the decision reported in (1990) 77 STC 182 (Rashtriya Ispat Nigam Ltd. V. Commercial Tax Officer, Company Circle, Visakhapatnam), delivery of possession of a thing must be distinguished from its custody; if on giving possession to the transferree, the transferor still has its control and custody, then certainly, the expression 'use or right to use' for the purpose of attracting charge on transfer of right to use will have its significance for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning in any particular case depends on the context in which it is employed (Refer Taylor J in City of Newcastle v. Royal Newcastle Hospital (1957) 96 CLR 493 at 515 as referred to by Stephen J in Ryde Municipal Council vs Macquire University reported in (1978) 139 CLR 633). 88. This takes us to the consideration on Article 12 under DTAA. Article 12 of the Australian DTAA deals with the jurisdiction of the State on the taxability of royalty. It states that ARTICLE VIII - Ships and aircraft - 1.Profits from the operation of ships or aircraft, including interest on funds connected with that operation, derived by a resident of one of the Contracting States shall be taxable only in that State. The definition of 'royalty' as given under Article 12(3) of the DTAA with Australia is the same as in the definition in the DTAA with France in Article 13, with Germany in Article 12; with Norway in Article 13; with Singapore in Article 12; with Switzerland in Article 12 and with U.S.A in Article 12. 89. The U.S.A DTAA specifically reads that 'royalty' would mean payments of any kind, as follows: "ARTICLE 12-Royalties and fees for included services-1.Royalties and fees for included services ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether 'Ship' could be considered as an equipment at all. Mr.P.S.Raman, learned senior counsel appearing for the assessee placed reliance on the meaning of the word "equipment" under the Merchant Shipping Act as well as tried to draw inspiration from the Schedule of rates for depreciation under Rule 5 and the schedule read with Section 32, only to emphasize the difference maintained between plant and machinery on the one hand and ship on the other hand under the said table and submitted that read in the context of the other sub-clauses, the expression "industrial, commercial and scientific equipment", must be in relation to what is enunciated under Clauses (i) to (iv) and (v) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. Thus, according to him, where ever the expression is intended to cover more than the common parlance meaning, the Section gave a very wide expansive meaning. In the absence thereof, 'equipment' cannot be held to include a ship. He also referred to Section 43(3) of the Income Tax Act, where the plant included ship. Thus going by the scope of the expression, we reject the arguments of the assessee based on the decision reported in (2012) 47 VST 209 (St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... word. In such a situation, the word has to be construed in the context of the provisions of the Act and regard must also be had to the legislative history of the provisions of the Act and the scheme of the Act. It is a settled principle of interpretation that the meaning of the words, occurring in the provisions of the Act must take their colour from the context in which they are so used. In other words, for arriving at the true meaning of a word, the said word should not be detached from the context. Thus, when the word read in the context conveys a meaning, that meaning would be the appropriate meaning of that word and in that case we need not rely upon the dictionary meaning of that word." 97. Keeping this in the background, we find that under Section 9, we do not have the definition of 'equipment'. We find the definition of 'plant' only under Section 43(3), which has relevance to Sections 28 to 41 relating to profits and gains of business or profession and Section 44BB. When we look at the depreciation granted under Section 32 of the Income Tax Act, we find that the same is granted in respect of a capital asset, which also includes intangible assets. Depreciation is held as n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to income of shipping companies under Chapter XIIG of the Income Tax Act . Section 115V of the Income Tax Act defines various terms like bare boat charter, bare boat charter -cum- demise, Director-General of Shipping, factory ship, fishing Vessel, etc. Thus, with reference to Sections 28 to 41 of the Income Tax Act as is evident from the inclusive definition in Section 43(3), the word 'plant' is widely defined to include a ship. The relevant test that is to be applied in finding out as to whether a particular thing is a plant or not, would be, to find out the operation that a particular thing performs in the business, as to whether it is a tool of the tax payer's trade and fulfils the function of the plant in the trading activity in the earning of income or profits or gains out of its operation in the business or profession. 99. Section 32(1) specifically states that depreciation is allowable in respect of building, machinery, plant or furniture, being tangible assets (2) know-how patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1st day of April, 1998. Sub-section (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of what "plant" is. The term 'plant' is judicially understood as meaning and referring to whatever apparatus is used by a business man for carrying on his business, including all goods and chattels, fixed or movable, which he keeps for permanent employment in his business but not including his stock-in-trade which he buys or makes for sale. In the decision reported in (1971) 82 ITR 44 (CIT V. Taj Mahal Hotel), the Supreme Court pointed out that "the word plant must be given a wide meaning having regard to the fact that articles like books and surgical instruments are expressly included in the definition of plant". 102. After tracing the Indian and English law, in the decisions reported in (1989) 175 ITR 154 (Commissioner Of Income-Tax vs Sri Krishna Bottlers Pvt. Ltd.,) and (1997) 227 ITR 646 (Commissioner Of Income-Tax vs Margadarsi Chit Fund (P.) Ltd.), the Andhra Pradesh High Court summed up the principles evolved in construing as to what constitutes plant, as follows: "31. From the aforesaid rulings, the following principles can be gathered; (1) "Plant" in section 43(3) of the Act is to be construed in the popular sense, namely, in the sense in which people conversant wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what 'equipment' would mean. Thus, with the inclusive definition on plant embracing within its fold so diverse a matter from a ship to a book, or medical equipment, every tool, apparatus, 'plant' includes 'all equipment' used by a business man for carrying on his business. Thus, we have no hesitation in accepting the plea of the Revenue that ship is an equipment, with which the assessees carried on their business, which they keeps for employment in their business. 104. The word "equipment" construed in the light of Section 9(1)(vi)(c) thus extends the normal meaning of the word, to cover even those specified categories of machinery or plant that would themselves not construed within its plain and ordinary meaning. As rightly pointed out by the Revenue, the only limitation that one may read into the word 'equipment' would be, that which is specifically excluded. 105. On the question as to whether 'ship is an 'equipment', and equipment is plant and machinery, the decision of House of Lords merits consideration. In the decision reported in (1988) AC 276 (Coltman and another V. Bibby Tankers Ltd.), the House of Lords considered the question as to whether Vessel is an equipment in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no doubt equipment frequently used may describe the appurtenances of some larger entity, yet, he felt in the background of the object of the legislation and the definition of the word on 'equipment', "he saw no reason either in logic or as a matter of language why its use should be so confined". The Judgment of the House of Lords appears to be the one and only judgment on the aspect as to whether ship is an equipment at all and in the context of the provisions of the Act, as well as going by the object of the legislation, the House of Lords held that ship is included in the definition of 'equipment'. 106. Section 9(1)(vi)(b) states that income by way of royalty payable by a person who is a resident arising or accruing whether directly or indirectly through or from business connection in India shall be deemed to accrue or arise in India. Sub-clause (b) states that the income by way of royalty is payable by a person who is a resident. The only exception herein is that the royalty is payable in respect of any right, property or information used or services utilised for the purpose of business or profession carried on by such person outside India, or for the purpose of making or earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... works, scientific apparatus and equipment used for the purposes of the sand business, the construction that one has to give Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act is that other than what is excluded by specific reference namely, to cases falling under Section 44BB, all other ships used in the business would be considered as included within the scope of Clause (iva) of the Act. 108. In this connection, he placed reliance on the decision reported in (1985) 2 SCC 670 = AIR 1985 SC 973 (Daman Singh and others V. State of Punjab and others). The said decision related to the challenge as to the provision of Section 13(8) of the Punjab Co-operative Societies Act which provided for the compulsory amalgamation of Co-operative Societies, if it is necessary in the interests of Co-operative Societies. The registration of the Co-operative Society made it a body corporate by the name under which it is registered having perpetual succession and common seal, and with power to hold property, enter into contract, institute and defend suits and other legal proceedings etc. On a question as to whether the Scheme of the Constitution made any difference to this position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the House of Lords, apparatus includes all chattels provided for the purposes of the business of a person other than the stock-in-trade. It is no doubt true that a plain ordinary meaning of the word may be elusive. But when the word has a potentially wider meaning in the context of the provisions, as pointed out in the decisions in the interpretation of the words, to quote, the House of Lords, there is a danger of mistaking the plain and ordinary meaning from the one most frequently used in practice. The question we have to hence ask oneself is what the word means in the context of the provisions therein. Thus, in the context in which the word 'equipment' appears and the exclusion of those referable to the income under Section 44BB, it is evident, that other than the excluded category, 'ship', otherwise, would fall as 'equipment'. Thus the word 'equipment' must receive a meaning in the widest sense in this context even in a sense, etymologically wider than what is popularly understood. 110. Learned senior counsel appearing for the assessee contented that in any event the word 'equipment' has to be read in the context of the preceding clauses i.e., as referable to those equipment h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the DTAAs as well, the use or right to use of any equipment is used. The use of the term ' any equipment' thus not being specifically restricted in its application to those having relevance to other Clauses. The only inference that one may draw out from this is that quite apart from what is enunciated in other Clauses as having relevance to what is stated as use or right to use of an equipment, there could be yet other categories on the use or right to use of any equipment and the payment for the use or right to use may rightly fall under the category of 'royalty'. This is thus made further clear by the exclusion Clause in Clause (iva) referring to cases falling under Sec 44 BB of the Income Tax Act. A payment made for the use or the right to use an equipment thus qualifies as 'royalty' and in this case, considering the nature of time charter agreement and the rights and obligations of the charterer, for the privilege of using the ship, the fee paid is royalty, falling under Clause (iva) of Explanation (2) to Section 9(1)(vi) of the Income Tax Act. 113. In these circumstances, in the absence of any word of limitation other than what is explicitly provided for, we do not find any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itation and it really means as "means and includes". 116. Explanation 5, inserted by Finance Act, 2012, with effect from 01.06.1976, begins with the phrase "for removal of doubts, it is hereby clarified that the royalty includes and has always included." Leaving aside this argument as to whether this is an expression of limitation or not, the Explanation is clear in its intent and clarifies that irrespective of whether the possession and control of right, property or information are with the payer or not, such right, property and information is used directly by the payer or not, whether the location on such rights, property or information is in India or not, 'royalty' includes and always included consideration in respect of any property, right or information. 117. Thus the Explanation clarifies that irrespective of control or possession or use or location in India such right, property or information with the payer; the payment made on the transfer of all or any rights, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; the use of any patent, invention, model, design, secret formula or process or trade mark or similar pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment is calculated according to the time stated in the agreement rather than the same is performed. The right to remuneration is unaffected by the lay off by the charterer. Thus with the possibility in law and permissible too under law that various rights and interest in a property may be vested in various persons, the Explanation merely recognises what is evident in law and thus clears whatever doubt one may have on the aspect of use or right to use, be it with regard to tangible or intangible property, rights and information. Consequently, we do not find any need for giving Explanation 5 a restrictive application to Clauses (i) to (iv) and (v) alone. In the circumstances, apart from the fact that the case of the Revenue could stand even without Explanation 5, the case of the Revenue stands reinforced with the Explanation, which according to us merely clarifies what is already there in the provision. 119. In the background of the above decision, we hold that ship is an 'equipment'. The consideration paid is for the use of the ship for which the assessee need not have possession and control of the ship. The specific exclusion of the income under Section 44BB clearly shows that w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to make the balloon payment of US $2.75 million on 12.1.2005. A sale certificate was issued only on 12.01.2005. The consideration paid periodically was in the nature of hire charges for the use of the Vessel, as described in the agreement and not sale consideration as was contended by the asessee. The Commissioner of Income Tax (Appeals) referred to the correspondence dated 31.03.1999 addressed to Marine Group of ICICI Limited, the financier, evidencing the intention of the assessee to acquire the vessel on BBCD basis. It stated that in addition to the BBCD hire, it had to pay balloon payment of US $ 2.75 million at the end of the charter period, so that, the owner could transfer the Vessel to the assessee. On the ICICI Limited agreeing to pay the hire charges quarterly, the assessee conveyed to DG (Shipping) vide letter dated 13.5.1999 that rental payment reasonableness was approved by ICICI. The assessee also treated the hire charges as revenue expenditure in their return of income. In the light of the above findings, we do not find any reason to disturb the findings of fact by the Tribunal, which also confirmed the same. On the issue as to whether the ship is an equipment or n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on based on Article 8(1), that the profits could be taxed only by the Contracting State where the enterprise is registered, even here, we do not agree with the assessee, given the definition on international traffic and that the vessel was not in international traffic at all as has been understood in the commentary on OECD model . 125. The commentary on OECD model definition on "international traffic" points out that the definition of the term "international traffic" is broader than is normally understood, so as to preserve for the State of the place of effective management the right to tax purely domestic traffic as well as international traffic between third States, and to allow the other Contracting State to tax traffic solely within its borders. The OECD commentary clarified this through an illustration which may beneficially be quoted herein too. "Suppose an enterprise of a Contracting State or an enterprise that has its place of effective management in a Contracting State, through an agent in the other Contracting State, sell tickets for a passage that is confined wholly within the first-mentioned State or alternatively, within a third State. The Article does not permit the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Revenue in the T.C.(A)Nos.56 to 64 of 2013 are different from what had been argued before the Tribunal on the aspect of permanent establishment, when specifically asked by the court as to whether this demanded a remand, learned senior counsel quickly answered in the negative and requested this Court to consider the questions in all perspective - the issue being legal in character and Section 260A of the Income Tax Act permitted such additional questions to be raised at the direction of the Court for a proper consideration of the issues involved on the admitted facts. Mr.P.S.Raman, learned Senior Counsel appearing for the assessee too expressed that he has no objection to this. 131. The Department's contention herein is that in the event of this Court not accepting the case of the Department as to the income not falling within the meaning of 'royalty', the same is liable to be treated as 'business income' under Section 9(1)(i) of the Income Tax Act, as the company has income arising /accruing through business connection in India, as defined in Explanation 2 to Section 9(1)(i) of the Income Tax Act and a permanent establishment as defined under Article 5 of the DTAA, and henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law, the same can be considered by this Court, since facts necessary for considering this is before this Court also and no fresh facts need to be considered. 133. According to the Revenue, the non-resident Indian Company also has permanent establishment to carry on the business which one finds through the berth where the ship docks, waits and on instruction it moves. The ship has the licence to move along the coast granted by the Indian Authority. To have a permanent establishment, it is not necessary it should be a fixed place of business, so long as there is a link between specific geographical point with which it moved. Thus the Port where the ship is docked is also a Permanent Establishment. For the moving ship, a specific geographical point is not necessary, considering the nature of the business. 134. Mr.Arvind P.Datar, learned Senior Counsel appearing for the assessee submitted that to have permanent establishment, the non-resident company must have dominant right of disposal of the place. According to the assessee, berth though fixed, is not a place of business. The berth is for use of the assessee's ships as well as those chartered by it. As such, the non-resident compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed for berthing of the ships. The agreement between French Company and the assessee and the assessee and the German Company shows that they had local agents employed in India. As per the definition under Article 5, 'permanent establishment' means a fixed place of business through which the business of the enterprise is wholly or partly carried on. Article 5(2) contains an inclusive definition to include a place of management, a branch, an office, a factory, a workshop and a mine an oil or gas well, a quarry or any other place of extract of natural resources. Sub-clause (3) deems certain places as permanent establishment. As per this Sub-Clause, a building site or construction or installation project constitutes a permanent establishment. Sub-Clause 4 of Article 5 gives the exclusion classes, which reads as follows: "4. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include: a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence between the place of business and a specific geographical point. This, however, ultimately depended on the nature of the business too. It observed as follows: "single place of business will generally be considered to exist where, in light of the nature of the business, a particular location within which the activities are moved may be identified as constituting a coherent whole commercially and geographically with respect to that business...... By contrast, where there is no commercial coherence, the fact that activities may be carried on within a limited geographic area should not result in that area being considered as a single place of business..... Conversely an area where activities are carried on as part of a single project which constitutes a coherent commercial whole may lack the necessary geographic coherence to be considered as a single place of business.... A place of business may, however, constitute a permanent establishment even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time. It is sometimes difficult to determine whether this is the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... establishment, but for the character of the receipt not being attributed as the income earned from the permanent establishment for it, to be assessable as business profits earned by its participation in the economic benefit of this Country, we do not find the case of the assessee could be brought under Article 7 to assess the income as business income. 141. It may be of relevance to note that under Article 12(4), it is specifically pointed out that provisions of paragraph 1 and 2 on Article 12 shall not apply to treat the receipts as royalty, if the person beneficially entitled to royalties carries on business in the other Contracting state, in which the royalties arise through a permanent establishment situated in the other contracting state or performs independent personal services from a fixed base therein and the property, right or service in respect of which royalties are paid or credited are effectively connected with such permanent establishment . In such a case, Article 7 or 14 would apply. Article 5 sub-clause (3)(c) states that an enterprise shall be deemed to have permanent establishment in one of the Contracting States and to carry on business through the permanent est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the non-resident including a person treated as an agent under Section 163 would be a representative assessee. 145. Section 195 relates to TDS on payment to a non-resident. The Section states "any person" responsible for paying to a non-resident would has to deduct tax at source. Section 195(2) states that the person responsible for deduction of tax at source can apply to the Assessing Officer for general or special order for determination of appropriate proportion of tax deductible, where the amount paid could not be fully taxable, the assessee responsible for TDS can ask for nil certificate. The non-resident or the agent could make an application for a certificate of 'nil' deduction at a lesser rate. Thus, as far as Section 160 is concerned, this is a procedural and enabling Section for the determination of the quantum of income of the non-resident assessee and the tax to be demanded. 146. In the decision reported in 239 ITR 587 (Transmission Corporation of A.P. Ltd. and another V. CIT), the Supreme Court pointed out that Section 195 deals with the deduction of tax in cases where the payment is made to a non-resident. It observed as follows: "The scheme of tax deduction at so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non resident, including a person who is treated as an agent under Section 163 in respect of the income of a non-resident specified in sub-Section (1) of Section 9. The fact herein is that the assessment in respect of each of the non-resident from whom the assessee is to be assessed in a representative capacity has been specifically quantified and that in each of the case of the non-resident, the assessee had been treated as a representative assessee. In the circumstances, we do not find any merit in the contention of the assessee that the order fails on this technical ground. 149. The contention that Sections 163 and 201 of the Income Tax Act cannot go together is not correct for the reason that they operate on different spheres. Section 195 casts an obligation on TDS on any person responsible for paying, whereas Section 163 is for assessment purposes. Therefore, the assessee's reliance on the decision of the Bombay High Court reported in 134 ITR 17 (Commissioner of Income-tax v. Premier Tyres Ltd.) is misplaced and consequently stands rejected. 150. In the circumstances, while dismissing the Tax Case (Appeals) filed by the assessees in T.C.(A) Nos.2206 to 2208 of 2006, 2629 and ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
