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TMI Blog2015 (3) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... d to such PE. Where the ships are owned or chartered by the non-resident shipping company abroad and the agency PE merely clears inbound cargo and books outbound cargo and carries out similar functions, the ships are clearly not the assets of the PE nor are they any other way effectively connected with the PE. Thus concluded that the provisions of Article 22(1) of the treaty would be applicable and the profits of shipping operations in international traffic in the case of non- resident shipping company would be taxable in the country of residence i.e. Switzerland and not in India. - Where the ships are owned or chartered by a non-resident shipping company and the agency PE merely clears inbound cargo and books outbound cargo and carries out similar ancillary functions, the ships are clearly not the assets of the PE nor are they is some other way effectively connected with a permanent establishment. - Decision in the case of Assistant Director of Income-tax, (International Taxation) -3(2) Versus Mediterranean Shipping Co. [2012 (11) TMI 326 - ITAT MUMBAI] followed - Decided in favour of assessee. Interest income received from the Income Tax Department on refund as per the Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Federal Tax Administration does not constitute a mutual agreement as contemplated by Article 25(3) of the Tax Treaty. 1b. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not appropriately taking into consideration the subsequent clarification dated May 27, 2005 issued by the CBDT regarding applicability of Article 22 of the Tax Treaty to shipping profits. 1c. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned DDlT in not granting to the appellant the benefit of the Tax Treaty, being a comprehensive agreement/legislation, despite the fact that the appellant is undisputedly a tax resident of Switzerland within the meaning of Article 4 of the Tax Treaty and, therefore, is clearly entitled to the benefits of the Tax Treaty. 1d. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned DDlT in denying the benefit of Article 22 of the Tax Treaty to the appellant by comparing the provisions of the Tax Treaty with the framework of other Double Tax Avoidance Agreements entered into by I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and no shipping income can be held to be taxable in India. In the A.Y. 2002-03, the assessing officer accepted that shipping income is covered by Article 22 and therefore, it is not taxable in India. However, from A.Y. 2003-04 on words, the assessing officer held that the shipping income would be taxable in India u/s 44B. He also pointed out that Article 7 of the treaty specifically excludes profits from the operation of the ships in international traffic from the business profit of the enterprise of contracting state (Switzerland). In this background, Mr. Dastur drew our attention to various observation and the finding of the Tribunal in assessee s own case for the A.Y. 2003-04, wherein this aspect has been discussed in detail. Accordingly, he submitted that the issue involved are squarely covered in favour of the assessee. Not only that in A.Y. 2004- 05, the Tribunal has again reiterated the same conclusion. Therefore, the same judicial is precedence should be followed. 2.1 Ld. DR also accepted this fact that so far as issue of taxability of shipping income is concerned the same is covered by the decision of the Tribunal. 3. After considering the relevant finding given in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Sbri G.C. Srivastava, has contended the profits from shipping and air transport are specifically dealt with under Article 8 of model convention according to which profits of an enterprice 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 profits from the operation of ships in international traffic were left to be taxed by each contracting Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, 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 whether shipping profits have been dealt with in any other article of the treaty. Mere exclusion of shipping profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 company for assessment year 2005-06 were governed by Article 22(1) of the Indo-Swiss treaty. In order to say that a particular item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 same has to be regarded as dealt with by Article 7(1) and it, therefore, cannot fall under Article 22. It is contende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resident has a PE in the ether State or net 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 net 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 maning 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 man not unmistakably dealt with as the said article is neither designed to remove difficulties of interpretation nor even lays to settle them in favour of the State of residence. In this regard, we have already referred to the correspondence exchanged with the competent authorities of India and Switzerland whereby it was mutually agreed to. assign a certain specific interpretation to. Article 22 in the context ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribed 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 up to 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 from 01- 04-2001 became operative and applicable. For that year, the return was filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 2ih May, 2005 wherein the Joint Secretary has made a reference to the letters exchange~ 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 according to the internal law of each Contracting State. The term international traffic in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 therefore will be able to confirm your agreement to us by returning a countersigned copy of this letter, (emphasis supplied in bold letters) We thank you for your cooperation in this matter and look forward to receiving your soon answer. 44. The immediate reply to the above letter was sent by Joint Secretary CFT TR) by a letter dated 10th December, 2003 communicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 company thus was succeeded by the letter dated 27th May, 2005 and the reliance of the AO on the letter date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 although the said decision of Authority for Advance Ruling is not strictly binding on the Tribunal, it has a grate persuasive value and their being no decision of the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner 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 ill 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 governed by residuary Article 22 introduced in the treaty with effect from 01- 04- 2002. 49. Having held that the taxability of international shipping prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 J or arrivals and to quote freight rates and announce freight traffic and amendments, subject t the freight policies and instructions of the Principals. To provide regular reports and information concerning latest market trends and competition advice developments. 3.13 To arrange for public relations work (including advertising, press agreed by the principles. 3.14 To issue, sign and stamp on behalf of the Principals to perform these duties. 5.00 Principals Duties:- 5.02 The Principals will provide the Agents with any necessary funds to cover creditors and any advance disbursements in respect of the Principal s business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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. Incometax 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 bookings and perform other ancillary services, it cannot be said that the ship has any effective connection with the agency. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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. The aforesaid decision and the conclusion of the Tribunal will apply mutatis mutandis in this year also and therefore, respectfully following the same, we hold that the issues as raised by the assessee in the grounds of appeal are allowed. 4. Now we will take up department s appeal, vide which following grounds have been raised:- On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing to tax the interest income received from the Income Tax Department on refund as per the Article 11 of the Indo-Swiss Treaty @ 10% ignoring the fact that the payment of interest is effectively connected with its PE in India and therefore it will be assessed as per Article 7 of the DTAA. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing to delete the interest u/s 234B of the I.T. Act, 1961 on the ground that when duty is cast on the payer to pay tax at source, no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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