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TMI Blog2023 (1) TMI 1226X X X X Extracts X X X X X X X X Extracts X X X X ..... equipment. In fact all throughout the control of the equipment remained with the assessee and at no point of time owner has transferred the vessel to the charterer for carriage of goods. Albeit, the agreement envisages more of voyage charter by the vessel owner and therefore, in our opinion, the same cannot be fall strictly within the realm of definition provided of royalty in terms sub clause (iva) to Explanation 2. The concept of dominance or control over ship by the charterer on the equipment is paramount in determining the character of payment as payment of royalty and in absence of the same cannot be treated as royalty. This is also coupled of the fact that payment received by the owner from the charter is firstly, based on use of per running day; and secondly, calculation of dead freight was dependent upon the load per voyage. In such a situation, the payment received by the owner from the charterer has to be reckoned as payment from operations of carriage of goods from one port in India to another port in India, which falls under the ambit of carrying out shipping business or shipping operators. We find that this Tribunal in the case of Smit Singapore Pte Ltd. [ 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B of the Act, i.e. @ 7.5% of the gross receipt attributable to shipping operations carried out in India. 4. Ld. AO after analyzing the contract between the assessee and M/s PSCL, deduced that assessee is simply letting out the vessel and PSCL has hired the vessels for the period of 13 months for carrying out coal from Paradip port to Tuticorin, Tamil Nadu. He held that PSCL is paying the assessee for the use/right to use by way of leasing or letting out the vessel and therefore, the same is to be taxed under royalty u/s 9(1)(vi). AO observed that assessee is being paid fixed amount irrespective of fact, whether the vessel is being used by the charter or not. He held that assessee is not being paid for transporting coal form one port to another within India territory albeit for leasing the vessel. Therefore, it cannot be taxed u/s 44B of the Act. Thus, on these facts he strongly relied upon the judgment of Hon ble Madras High Court in the case of M/s Poompuhar Shipping Corp. Ltd. vs. ITO (360 ITR 257) and held that the amount received by the assessee is liable to tax under the head Royalty . 5. Ld. DRP had confirmed the draft order of the AO after observing as under:- 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the perusal of the time charter agreement between the assessee and PSCL, it can be seen that the assessee is a vessel owner and was responsible for the crew as being the vessel master. The ship was under the control of the assessee company and the PSCL has only taken on a time charter basis for transporting the coal from one port to another. Even the vessels stowage plan was to be made under the Master s supervision and the master shall co-operate with the charters to load and stow the charter s intended cargo. Even the freight calculation was based on the quantity of the load which has to be assessed by the surveyor of charter and based on that the payment was made to the assessee company. The assessee, i.e., owner of the vessel was obliged to keep the vessel and the crew up to date with complete certificate, approvals and equipment enabling the vessels to carry the cargo. Further, if on the delivery, the vessel was found more than the specified quantity of bunker resulting in short loading of cargo due to excess bunker on board, the pro-rata cost of short loaded cargo was to be charged to the owner s account. The owners had the liberty of flying their own house flag and this inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly applicable. 10. First of all, we have to see whether the income earned by the assessee was in the nature of royalty within the meaning of section 9(1)(vi) r.w. Explanation (iva). Clause (iva) to Explanation 2 of section 9(1)(vi) reads as under:- (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44B. 11. What is to be seen is, whether the assessee has given use or right to use the ship to PSCL and the payment received for time charter services falls within the ambit and definition of Clause (iva) (supra) or not. The relevant clauses of Time Charter agreement as noted and analysed by the AO reads as under:- Preamble - The agreement dated 18th April 2018 is between Nan Lian Ship 'Management LLC (Owner) and M/s Poompuhar Shipping Corpn Ltd., (charterer). That the said Owners agree to let, and the said charterers agree to hire the said vessel, from the time delivery, for a period of 9 months +3 months choption + 1 month at choption within below mentioned trading limits. Vessel to be placed at the disposal of the charterers, at thermal coal loading berth at Paradip any time day o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Owners (unless lost) at a safe berth.. As per above clause, the Charterer is making payment for the use and hire of the vessel at the rate of charter hire USD 13,100 PDPR (per day pro-rata). f) Clause 6- That the cargo or cargos be laden arid/or discharged in any dock or at any wharf or place that charterers or their agents may direct, g) Clause 7 - That the whole reach of the vessel's holds, decks and usual place of loading (not more than she can reasonably stow and carry), also accommodations for supercargo, if carried shall be at the charterer's disposal, reserving only proper, and sufficient space for Ship's officers, crew, tackle, apparel, furniture, provisions, store, and fuel. As per above clause, it is clear that the charterer has the whole vessel at its disposal except for space required for officers and crew. h) Clause 8 - The captain (although appointed by the Owner), shall be under the orders and direction of the charterers as regards employment and agency; and charterers are to load, stow, trim tally and discharge the cargo at their expense under the supervision of the captain, who is sign Mates receipt for cargo as presented in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e use of the charter for that period. In so far as clause1, it stipulates that it is the owner who is responsible for everything right from the wages, salaries for crew and insurance and stows and for counselor shipping and discharging the fees of the crew and maintaining the vessel in a proper state. This inter alia state that the vessel is in possession and ownership and maintenance of the assessee and not that the charterer. In so far as clause 2 is concerned, it only shows that expenses for usage which is valuable cost is that of the charterer and the cost of any excess fuel on the expiry of contract will be back to the charter party. The AO has strongly referred Clause 4 to interpret that charterer is making the payment for the usage and hire of the vessel at the rate of charter i.e. USD 13,100 per day pro-rata. This Clause very clearly shows that Charterer shall pay for the use and hire of the said vessel of USD 13,100, per running day of 24 hours per calendar month including the overtime commencing on and from the day of delivery, as aforesaid, and at and after the same rate for any part of a month, hire to continue until the hour of the day of her re-delivery in like good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is the lease or let out of a ship to the charter who is using the ship for the period of charter in the manner he desires on independent basis with no control of the owner is incorrect inference and does not envisage that the charterer has any control of the ship except for carrying the coal as per the requirement of the charterer and all time the ownership and control is with the owner which is evident from the terms of the agreement. The compensation is merely to decide the quantity of load on the ship by the charterer and not otherwise. To fall within the ambit of use or right to use equipment, it is sine qua non that the hirer or the charterer has complete control and ownership of the equipment for the period of lease and the owner is only earning passive income by simply letting out the equipment. 13. We have analysed further clauses of the time charter agreement between the assessee and the charterers which are enumerated here in after, clearly indicates that there is no absolute right to use of vessel has been given to charterer: Clause 24: As per this clause it has been provided that nothing in the agreement shall be construed as demise of the vessel to the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el for transporting coal is determinative for the purpose of the agreement. Clause(s) 44, 45: As per these clauses, the compensation for non-adherence to loading rate is provided for. Further, the compensation for incapacitation or breakdown of the vessel is also provided, as per which the said loss / compensation would be on owners account. The said loss / damage / compensation would be calculated on the basis of ocean freight charges. These clauses clearly indicate that the hire charge is not independent of the loading capacity / loading rate and therefore it is not a mere payment of hire for letting out of equipment as assumed by the Ld. AO. Clause 47: As per this clause, neither hire nor cost of bunker is payable by the Charterer in case the vessel is captured, seized, detained, etc. by any person. In case of simplicitor letting of the ship, this clause would not have beeen incorporated. Clause 58: This clause specifically excludes certain types of cargo to be loaded and transported. However, if it would have been a bare letting for use of the Ship, owners would not have a say in the matter. Further, the agreement specifically provides that the vessel cannot be used or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x dead freight quantity The short loaded quantity as assessed by charterer surveyor at load port shall be taken for dead freight calculation. Due allowances shall be given for dock water density, excess bunkers on board, limitation at the berth due to draughi restrictions, charterer's / agents instruction on specific voyages to sail short loaded in order to catch the tide or high water. Charterers shall also rely upon the cargo declarations made by Owners at the time of offer as the base figures for dead freight assessment. 16. This clearly shows that the payment was subject to load of the cargo and it was not simply for leasing or renting out the ship for the time charter period. Thus, from the reading of various clauses of the agreement, it cannot be inferred that it was purely fixed rental receipt by the assessee for lease of equipment. In fact all throughout the control of the equipment remained with the assessee and at no point of time owner has transferred the vessel to the charterer for carriage of goods. Albeit, the agreement envisages more of voyage charter by the vessel owner and therefore, in our opinion, the same cannot be fall strictly within the realm of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (v) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (vi) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or ( vii) the rendering of any services in connection with the activities referred to in sub-clauses (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourselves to accept the aforesaid claim of the assessee. As had been observed by us hereinabove, in the absence of the assessee s PE in India, the aforesaid time charter receipts could not have been brought to tax under Sec.44BB of the Act. In fact, the assessee had itself not offered the aforesaid amount for tax under Sec.44BB of the Act. Accordingly, in the backdrop of the aforesaid facts, now when the time charter receipts during the year under consideration had not been brought to tax, or in fact, could not have been subjected to tax under Sec. 44BB of the Act, therefore, the claim of the assessee that the same would fall within the scope and gamut of the exclusion carved out in the definition of term royalty as contemplated in clause (iva) of the Explanation 2 to Sec. 9(1)(vi) cannot be accepted, and is thus rejected. 18. Thus, in our view, the payment received by the assessee cannot be treated as royalty u/s 9(1)(vi). 19. Now coming to the judgment of Hon ble Madras High Court in the case of Poompuhar Shipping Corporation Ltd. (supra). In the bunch of appeals, in one of the bunch, the issue involved was, whether the payment made for taking ship on time charter ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services utilised for the purpose of business or profession carried on by such person outside India, or for the purpose of making or earning any income from any source outside India alone is excluded in 9(1)(vi) of the Income Tax Act. In other words, royalty payable by a resident in India to a non-resident in respect of any right, property or information used or services utilised for the purposes of business or profession carried on by him in India would satisfy the definition of 'royalty'. Explanation (2) defines what royalty is. Clause (iva) of Explanation 2 states that consideration paid for use or right to use any industrial, commercial, scientific equipment but not including the amounts referred to in Section 44BB would be royalty. Thus, one has to note that the royalty payment is among other things relates to use or right to use any industrial, commercial or scientific equipment for the purposes of business or profession carried on by the resident herein and the said royalty is payable to a non-resident foreign enterprise. It is no doubt true that Clause (iva) refers use or right to use of any industrial, commercial and scientific equipment and not plant and machiner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation, the case of the Revenue becomes more firm on the issue of 'royalty'. xxx 118. Referring to BC Mitra in his Law of Carriage by Sea in the decision reported in (1978) 113 ITR 307 (Union of India V. Gosalia Shipping Pvt. Ltd.), the Apex Court pointed out that a time charter party is one in which the ownership and also possession of the ship remain with the original owner whose remuneration or hire is generally calculated at a monthly rate on the tonnage of the ship. It further pointed out that sometimes the ship itself, and the control over her working and navigation are transferred for the time being to the persons who use her. In such cases, the contract is really one of letting the ship. The reading of the various time charter in the case on hand shows that hire is payable for the use of the ship for a specific period of time, irrespective of whether the charterer chooses to use it for carrying cargo or lays it up out of use. The ownership and possession of the vessel which remain with the owner are separated from the use of the ship, which is granted to the charterer. The agreement states that the charterer may send the vessel to safe berths, safe ports ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel is clearly in the nature of royalty. The use or right to use the ship for consideration means relates to the economic aspect of the equipment as a business asset and the exception of the earning potential of the vessel. One important observation of Hon ble Apex Court in the case Union of India V. Gosalia Shipping Pvt. Ltd.) (supra), as relied upon Hon ble High Court is that, time charter party is one in which the ownership and also possession of the ship remain with the original owner whose remuneration or hire is generally calculated at a monthly rate on the tonnage of the ship. It further pointed out that sometimes the ship itself, and the control over her working and navigation are transferred for the time being to the persons who use her. Thus, there is transfer of ship and the control over navigation to charterer. Hon ble High Court after going the various time charter in those cases revealed that hire was payable for the use of the ship for a specific period of time, irrespective of whether the charterer chooses to use it for carrying cargo or lays it up out of use. This is not the case here. Their Lordships held that to fall in the realm of royalty , ownership and posse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rer who used the vessel and there was never a transfer of ship and the control over navigation to charterer, which was one of the condition laid down in the aforesaid judgement. Even though, pressing of compensation or functional control and custody of vessel with the assessee is not relevant factor for deciding the equipment royalty, but then there has to be leasing and letting of the equipment with complete use or right to use of vessel giving to the hirer or charterer. There has to be some kind of economic benefit while giving use or right to use the ship to the charterer which here in this case is not fully satisfied. Had it been so, then the assessee would have only received fixed amount for the time period of the time charter agreement and nothing would have depending on loading capacity and freight calculation based on loading of carriage. The freight is not calculated when there is no carriage of goods due to certain circumstances and the charterer was not required to make any payment. v. Another important observation made by the Hon ble High Court while deciding this issue and on the reading of various charter agreements involved in those cases that hire was payable for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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