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TMI Blog2017 (5) TMI 1219X X X X Extracts X X X X X X X X Extracts X X X X ..... in the year under consideration, the ships i.e. the property in respect of which shipping income was paid to the assessee company being not effectively connected with that PE, the case of the assessee will be out of paragraph No. 2 of Article 22 and will fall in paragraph I of the said article. Consequently, the same will be taxable in the country of residence of the assessee company i.e. Switzerland and not in India. - Decided in favour of assessee As regards the alternative contention of assessee that no portion of the international shipping profits earned by the assessee in any case can be taxed in India as the commission paid to M/s MSC Agency India Pvt. Ltd. which constituted its PE is admittedly at an arm's length, it is observed that this alternative claim of the assessee has now become academic in view of our decision accepting the main contention of the assessee that the international shipping profits are chargeable to tax only in Switzerland as per Article 22(1) and not in India. - Decided against assessee. - ITA No.539/Mum/2015, And CO No.137/Mum/2015 - - - Dated:- 25-5-2017 - SHRI R.C.SHARMA, AM AND SHRI SANDEEP GOSAIN, JM For The Revenue : Shri Narendra Kum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of Article 7(1). According to him, the said profits thus were taxable in India as per the domestic law i.e. Income-tax Act, 1961 and accordingly he brought the same to tax in the hands of the assessee in India by applying the provisions of section 44B at the rate of 7.5% of gross receipts. In this regard, he held that the assessee was having a permanent establishment in India in the form of M/s MSC Agency India. The learned CIT(Appeals) agreed with the AO to the effect that the assessee company was having a PE in India during the year under consideration. He, however, held that the taxability of the profits of the assessee company from operation of ships in international traffic is governed by Article 22 of Indo-Swiss treaty and although the assessee was having a PE in India, the right or property in respect of which the income was paid i.e. ships not being effectively connected with such PE, profits from operation of ships in international traffic is taxable only in Switzerland as per paragraph 1 of Article 22 of Indo-Swiss treaty. The first and foremost issue that is to be considered and decided thus is whether the taxability of profits from operation of ships in international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a Contracting State derives income from sources within the other Contracting State in the form of lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever, such income may be taxed in that other Contracting State. A reading of Article 22 especially paragraph 1 thereof makes it clear that the items of income of a resident of a contracting State i.e. Switzerland which are not dealt with in the foregoing Articles of the Indo-Swiss treaty shall be taxable only in that State. In the present case, the assessee company being a resident of Switzerland, the income, wherever arising, would fall within the scope of the residuary Article 22 if the same is not dealt with in any other Articles of the treaty. The question, therefore, is whether the shipping profits are dealt with in any other articles of the Indo-Swiss treaty or not. The contention raised by Shri Srivasava on behalf of the Revenue is that by agreeing to exclude the shipping profits from Article 8 as well as Article 7 of the Indo-Swiss treaty, India and Switzerland had agreed to leave the shipping profits to be taxed by each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in respect of business profits other than international shipping profits and it can, therefore, be said that such business profits are dealt with by Article 7. It is, however, not true in respect of international shipping profits as it does not prescribe distributive rules with respect to such profits. By exclusion of such profits from Article 7, it can be said that the same are left to be taxed by the contracting State as per their domestic laws as there was no article upto 01-04-2001 dealing with such income. However, as a result of introduction of the residuary Article 22 with effect from 01-04-2001, the items of income not dealt with by any other article are specifically covered in that article and since the taxability of such other income is now governed by Article 22, the same has to be dealt with reference to the said article. This conclusion gets support from the opinion of Mr. Philip Bekar dated 25th June, 2003 filed by the assessee wherein he has opined that Article 7 cannot be regarded as having dealt with international shipping profit and such profits would be covered within the perview of Article 22 of the Indo-Swiss treaty. 35. In support of his action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can at the most be said to have mentioned in Article 7 but the same cannot be said to have been dealt with in the said article. 36. In the case of Mahindra Mahindra 313 ITR (AT) 263, the issue before the Special Bench of the Tribunal was relating to taxability of fees paid by Mahindra Mahindra Ltd. to merchant bankers on account of services rendered by the merchant bankers in relation to a GDR issue floated by Mahindra Mahindra Ltd. in U.K. In this regard, the Special Bench took a view that since the services rendered by the merchant bankers did not make available any technical knowledge etc. to Mahindra Mahindra Ltd., such technical services would travel from Article 7 to Article 13. The Special Bench, however, took note of Article 7(9) of the DTAA between India and United Kingdom which provided that where profits include items of income which are dealt with separately in other articles of this convention, then the provisions of those articles shall not be affected by the provisions of this article and held in view of the said article that technical services would have to go back to article 7 for determination of whether India can tax fees from such technical ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered into tax treaties with several other Land locked countries such as Uganda, Kazakhstan Turkmenistan etc. which have not excluded shipping income. Moreover, even the Indo-Swiss treaty has now been amended in the year 2012 whereby the shipping income has been included in Article 8. We, therefore, find it difficult to accept the contention of Shri Srivastava that the international shipping profit were excluded from Indo-Swiss treaty for the reason that Switzerland is a land locked country. We are also unable to agree with the contention of Shri Srivastava that if the stand of the assessee for international shipping profits are not taxable in India but are taxable in Switzerland after the introduction of Article 22 in the Indo-Swiss treaty with effect from 01-04-2001 is to be accepted, the amendment with effect from 1st April, 2012 whereby such income is included in Article 8 thereby giving the State of residence the sole right to tax the same would render a futile exercise, because as a result of the said amendment made in the year, the international shipping profits shall be taxable in the State of residence irrespective of whether the resident has a PE in the other State or not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of section 90(2) of the Act being more beneficial to the assessee. This position, however, has changed as a result of introduction of Article 22 in the Indo-Swiss treaty which now governs the international shipping profits not being dealt with specifically by any other article of the treaty and if the provisions of Article 22 are beneficial to the assessee, the same are bound to prevail over the provisions of section 44B of the Act. In this regard, a reference can usefully be made to the DTAA between India and Libya which has no clause prescribing the tax treatment for capital gains nor any residuary clause such as other income clause. The capital gains earned by a resident of Libya in India thus is taxable in India if exigible as per the domestic laws in view of the absence of a more beneficial clause in the relevant treaty. This position can be further understood by reference to DTAA between India and Malaysia which has no clause prescribing a tax treatment for capital gains but has a residuary clause i.e. other income clause in Article 22 which prescribes distributive rules with respect to items of income for which no rules have been prescribed in the earlier articles of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hipping income from international traffic was not taxable in India and was taxable only in Switzerland. In support of this claim, a letter dated 30 1hJanuary, 2004 issued by Swiss Tax Authorities to the foreign consultant of the assessee was filed which clearly stated that the profits from operation of ships in international traffic was not covered specifically by any of the articles and, therefore, Article 22 would govern the taxability of such profits. The stand of the assessee was accepted by the AO and in the assessment completed u/s 143(3) vide an order dated 09-03-2004 for assessment year 2002 -03 he held that with the introduction of new Article 22 in the treaty, the income of the assessee from profits from shipping operation in international traffic were taxable only in the State of residence i.e. Switzerland and not in India. 43. There is no dispute that the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to assessment year 2002-03 wherein the claim of the assessee was accepted by the AO. In the year under consideration, he, however, has taken a different view relying on the letter dated 14th February, 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r this purpose, reads as follows: Article 22 Other income 1.Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State. 2.The provisions of paragraph I shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in the other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. Accordingly, any income derived by a resident of one of the Contracting States not specifically dealt with in any of the other Articles of our agreement falls under Article 22. According to paragraph I of Article 22 such income is taxable only in the country of residence, unless the beneficial owner carries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DTAA would apply and not Article 22. But paragraph 1 of Article 7 of the Treaty categorically says that the said Article is not applicable to profits from operation of ships in international traffic. Accordingly, if a Swiss shipping enterprise engaged in operation of ships in international traffic has a Permanent Establishment in India or if an Indian shipping enterprise engaged in operation of ships in international traffic has a Permanent Establishment in Switzerland then the income attributable to the activities carried out in the other country will be taxable in accordance with domestic tax laws of the said country. (emphasis supplied in bold letters). As is clearly evident, it was agreed by the Indian Competent Authority that profit from operation of ships in International traffic is not governed specifically by any of the articles of the treaty and that Article 22 of the DTAA dealing with other income would fall to be applicable in respect of such income. The AO, however, relied on the letter dated 14th February, 2005 written by Joint Secretary (FT TR) to DGIT, International Taxation clarifying that India has not accepted that income from operations of ships in int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other contracting State, with a view to avoidance of taxation which is not in accordance with the agreement. As per paragraph 3 of Article 25, the competent authorities of the contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the agreement. In the present case, such endeavor was made by the competent authorities of Switzerland and India and the doubt arising as to the interpretation of Article 22was resolved by mutual agreement whereby both the competent authorities agreed that international shipping profits of the assessee company are covered by Article 46. In the case of CIT vs. Arun Dua 186 ITR 494, it was held by the Hon'ble Calcutta High Court at page 496 of the report that if an agreement between two parties has been understood in a certain way and has been acted upon by them, it would not be open to the Tax Officer to give another interpretation to the agreement. In the present context, the Indo-Swiss treaty especially the scope of Article 22 thereof was understood in a certain way as expressed and clarified in the letter dated 2 91 h October, 2003 issued by the Competent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has overlooked the fact that the scope of Article 22 is narrower than the scope of Article 7 inasmuch as Article 22 covers the income which is in respect of a right or property effectively connected to the PE whereas Article 7 covers the profits attributable to the PE. The authority has also not considered the meaning of expression dealt with used in Article 22 of the treaty in the context of the purpose of tax treaties which is to allocate jurisdiction as held by Hon'ble Supreme Court in the case of Azadi Bachao Andolan. It has also not appreciated the different expressions i.e. dealt with and mentioned in used in different treaties and the effect thereof, although the said difference was specifically brought to its notice. 48. In the case of ADIT (International Taxation) vs. Green Emirate Shipping Travels 100 lTD 203 (Mum.), reliance was placed on behalf of the Revenue on the ruling given by the Authority for Advance Ruling in the case of Abdul Razak A. Meman 276 ITR 306 which was directly applicable to the issue under consideration. The Tribunal, however, declined to treat it as a covered matter relying on the decision of Hon'ble Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Pvt. Ltd. from assessment year 2003-04. The said information, gist of which is already given in the foregoing portion of this order, was confronted by the AO to the assessee who took a stand that both M/s Samsara Shipping P. Ltd. and M/s MSC Agency India Pvt. Ltd. were independent agents and did not constitute its PE in India. There was, however, nothing brought on record on behalf of the assessee to support and substantiate its stand. The AO, therefore, did not accept the stand of the assessee and treated M/s MSC Agency India Pvt. Ltd. as dependant agent of the assessee in India on the basis of the following clauses of the agreement dated 01-04-2002 between the assessee company and M/s MSC Agency India Pvt. Ltd. 2.00 General Conditions:- 2.01 The agreement covers all ports in the Region and /or inland agency work within the Region nominated in clause 11 and covers the following duties:- * Sales and Marketing * Bookings * Documentation * Equipment Control * Equipment Control * Inland Transportation * Operations cost control * Vessel Operations / Husbandry * Disbursements * Systems/IT 2.02 The Agents undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lauses of the agreement between assessee company and M/s MSC Agency India Pvt. Ltd. as given above, we find ourselves in agreement with the view of the AO and the learned CIT(Appeals) that M/s MSC Agency India Pvt. Ltd. was legally and economically dependent agent of the assessee company and since the assessee company was managing and controlling some of its business operations in India through the said dependant agent, it constituted the permanent establishment of the assessee company in India in terms of the Indo-Swiss treaty. We are unable to accept the contention raised by Shri Dastur in this regard that M/s MSC Agency India Pvt. Ltd. had limited right to perform its activities and it, therefore, cannot be regarded as habitually exercising an authority to negotiate and enter into contracts for and on behalf of the assessee company which, in our opinion, is contrary to the relevant clauses of the agreement between the assessee company and M/s MSC Agency India Pvt. Ltd. defining the scope and authority of M/s MSC Agency India Pvt. Ltd. and its commitment to work exclusively for the assessee company and not to accept the representation of any other principle for the same services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. He has 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 nonresident shipping company would be taxable in the country of residence i.e. Switzerland and not in India. 53. The assessee has also filed the opinion of Mr. Philip Baker where he has expressed a similar view saying that the property in respect of which the shipping income is paid is the ships which do not form part of the assets of the permanent establishment in India nor can they be said to be otherwise effectively connected with the permanent establishment in India. They are the assets of the shipping company and have no connection with any agency PE in India save that the PE may clear inbound cargo and book outbound cargo which is carried on those ships. Where the ships are owned or chartered by a non-resident shipping company and the agency PE merely clears inbound cargo an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a adopted by the Special Bench of this Tribunal in the case of Sumitomo Mitsui Banking Corporation (supra). Shri Srivastava has contended that the expression effectively connected is much wider than the expression owned . He has contended that effective connection could be by way of ownership or by the operation or maintenance of the property. We are unable to agree with this contention of Shri Srivastava in view of the decision of Special Bench of this Tribunal in the case of Sumitomo Mitsui Banking Corporation (supra) wherein the similar expression has been interpreted as to mean economic ownership. In any case, it cannot be said that the ships owned by the assessee company were exclusively operated or maintained by the PE in India and going by the scope of work to be done by the said PE which was limited. 56. In the OECD commentary on Model Tax Convention on Income and on Capital (condensed version) published in July, 2010, the term used in paragraph 21(1) of the Model Convention, (similar to Article 22(1) of the Indo-Swiss Treaty) viz, a right or property in respect of which income paid will be effectively connected with a permanent establishment has been explained. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admittedly at an arm's length, it is observed that this alternative claim of the assessee has now become academic in view of our decision accepting the main contention of the CONo.259/07 assessee that the international shipping profits are chargeable to tax only in Switzerland as per Article 22(1) and not in India. We, therefore, do not deem it necessary or expedient to dwell upon this alternative claim of the assessee. 59. In the result, the appeal of the Revenue and the cross objection of the assessee are dismissed. 14. We have also gone through the order of the Tribunal wherein the same ground raised by the Revenue as well as by assessee in its Cross Objection has been decided. We have also considered the additional evidence filed by learned Special Counsel for the Revenue under Article 29 of ITAT Rules. After going through the contents of the letter addressed by the CBDT to the Director General of Income Tax (International Taxation) New Delhi dated 29-8-2013, as filed by Special Counsel for Revenue, we found that there is nothing in the letter so as to persuade us to deviate from the conclusion drawn by the Tribunal in its order discussed above. As the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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