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TMI Blog2015 (3) TMI 545X X X X Extracts X X X X X X X X Extracts X X X X ..... ent) Act, 2003 with retrospective effect from 1.4.1962 explaining that it is apparent that this Explanation is applicable only in a case where an undertaking is engaged in business of ship breaking and usance charges are payable outside India by that undertaking in respect of purchase of a ship from outside India. The decision of the Hon'ble Gujarat High Court has impliedly been approved by the Hon'ble Supreme Court in respect of Assessees who are engaged in the business of ship breaking. We, therefore, set aside the order of CIT(A) and allow the appeal of the Revenue. - Decided in favour of revenue. - IT APPEAL NO. 374 (PNJ.) OF 2013 - - - Dated:- 28-8-2014 - P.K. BANSAL AND D.T. GARASIA, JJ. For The Appelant : Kishor B. Phadke, CA For The Respondent : Nishant K. Ld., DR ORDER P.K. Bansal, Accountant Member - This appeal is filed by the Revenue against the order of CIT(A) dt. 18.09.2013 for A.Y 2007-08 by taking the following effective grounds of appeal: 2. The learned Commissioner of Income-Tax (Appeals) has not appreciated the fact that usance charges are in the nature of interest as defined in section 2(28A) and therefore assessee is liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of usance interest paid for purchase of the vessel for ship breaking ? According to the Department, TDS was deductible under section 195(1) whereas, according to the assessee, such interest partook of the character of the purchase price and, therefore, TDS was not deductible. Therefore, the key question which arose for determination was whether the assessee was in default for not deducting TDS under section 195(1) of the 1961 Act. It may be mentioned that we are not required to examine this question in the light of the impugned judgment because after the impugned judgment which was delivered on March 20, 2003, the Income-tax Act was amended on September 18, 2003, with effect from April 1, 1983. By reason of the said amendment, Explanation 2 was added to section 10(15)(iv)(c), which reads as under : Explanation 2.- For the removal of doubts, it is hereby declared that the usance interest payable outside India by an undertaking engaged in the business of ship-breaking in respect of purchase of a ship from outside India shall be deemed to be the interest payable on a debt incurred in a foreign country in respect of the purchase outside India. On reading that Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in respect of purchase of a ship from outside India. The nature of the business of the Assessee is not that of ship breaking. This Explanation is applicable only to ship breaking activity, not to other activities. Therefore, in our opinion, Explanation (2) to Sec. 10(15)(iv)(c) on which the ld. AR has heavily relied on, will not assist the Assessee. The nature of the usance charges has been discussed in detail by the Hon'ble Gujarat High Court in Vijay Ship Breaking Corpn. (supra). Except to the extent that the Assessee was engaged in ship breaking business and due to insertion of Explanation(2) to Sec. 10(15)(iv)(c), the Hon'ble Supreme Court allowed the relief to the Assessee but the Hon'ble Supreme Court did not reverse the finding of the Hon'ble Gujarat High Court in the case of Vijay Ship Breaking Corpn. (supra) in which the Hon'ble High Court has clearly held that usance interest paid by the assessee was not any part of the purchase price and was interest within the meaning of the definition of the term 'interest' u/s 2(28A). The usance interest was interest within the meaning of article concerning the taxation of the interest in the relevant D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of the Act. Even if the sum which was payable to the non-resident by the resident assessee is paid by the mode of releasing a letter of credit and received by the non-resident outside India from the negotiating/intermediary bank, such sum would be none the less income deemed to be accruing or arising to the non-resident in India. The letter of credit is a document issued by a bank as per instructions by a buyer of the goods, authorising the seller to draw a specified sum of money under specified terms, usually receipt by the bank of certain documents, within a given time. Acceptance by the seller of a commercial credit constituting absolute payment which would debar him from his ordinary right to pursue the buyer if the seller did not receive payment under the credit has to be expressed in clear terms in the absence of which the seller's rights against the buyer are not exhausted by the issue of credit. An irrevocable credit constitutes an independent contract between the issuing banker and the seller, and it is not qualified by or subject to the terms of the contract of sale or the contract between the issuing banker and the buyer. It is only a banking arrangeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words debt claim of every kind in the Double Taxation Avoidance Agreements with Indonesia (reproduced in [1988] 171 ITR (St.) 27, at page 35) or words to the same effect in the Double Taxation Avoidance Agreement with Philippines is explanatory and makes explicit what is implicit in the phrase debt claims of every kind , to prevent unnecessary arguments. Article 11 of the Double Taxation Avoidance Agreements with Singapore and article 12 of the Double Taxation Avoidance Agreements with the U. K. deal with interest and provide in clauses (1) and (2) that interest arising in a contracting State and paid to a resident of the other contracting State may be taxed in that other State. However, such interest may also be taxed in the contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other contracting State, the tax so charged shall not exceed the percentage of the gross amount of the interest specified therein. The term interest as used in these articles of the said two agreements means income from debt claims of every kind, whether or not secured by mortgage and whether or not carrying a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for 180 days usance period from the date of physical delivery of the vessel at safe anchorage Alang was agreed and the rate of interest was stipulated in para. 2 thereof flat at 6 per cent. per annum. The other vessel was purchased by the assessee from a Singapore party under the memorandum of agreement dated July 14, 1994, for a total purchase price which was agreed at US $ 3069416.5 calculated at the rate of US $ 166.06 per long ton. The ship had been manufactured in the U K. in 1969. Interest was stipulated to be paid at 7.25 per cent. from the date of notice of release for 180 days of usance period worked out on the purchase price of the ship. The total amount with interest was payable by confirmed irrevocable 180 days usance letter of credit with confirmation charges at seller's cost and acceptable to sellers through any nationalised Indian bank, to be established in favour of the sellers for the net amount by September 19, 1994. The Assessing Officer found that as per the terms of the memorandum of agreement, the assessee was making interest payment to the non-resident parties on account of credit facility availed of by it for the purchase of the ships. The Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip became due on notice of readiness or delivery. The stipulation in the memorandum of agreement showed that the purchase price became payable on the delivery being effected as per the notice of readiness when the risk passed to the buyer. These were not cases where the total amount payable under the memorandum of agreement included a mere estimate of interest loss made as an integral part of the purchase price on incremental basis. These were cases in which there existed conscious and deliberate stipulations of purchase price of the ship and the interest amount specifically calculated at the agreed rate for the period fixed. Thus, there was no scope for contending that the outstanding price of the ship was not a debt incurred within the meaning of section 2(28A) of the Act or not a debt claim under the article concerning taxation of interest in the Double Taxation Avoidance Agreements, on the date of delivery or that the interest payable thereon under the contract was part of the purchase price or incremental price of the ship. The usance interest paid by the assessees was not any part of the purchase price of the ships and was interest within the meaning of the definition of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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