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TMI Blog2002 (12) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... 23,171 Let. Dt. Period of Hire Charges Amount to be remitted (US $) 6/6/94 31/5/94 & 1/6/94 to 22/6/94 314,929 1/7/94 11/17 155,242 8/7/94 1/7/94 to 1/8/94 425.000 5/8/94 1/8/94 to 1/9/94 425,000 ITA/6166/M/95 M/s A.P. Mollar, Denmark Gjertrud Mersk 15/2/94 US$25,66,666.20 23/4/94 31/3/94 to 30/4/94 420,000 27/5/94 30/4/94 to 30/5/94 420,000 27/5/94 30/5/94 to 29/6/94 30/6/94 to 29/6/94 4,20,000 4,20,000 2/7/94 29/6/94 to 29/7/94 4,20,000 4/8/94 29/7/94 to 28/8/94 4,20,000 29/8/94 28/8/94 to 30/9/94 466,666.2 ITA/6167/M/97 M/s A.P. Mollar, Denmark Gertrud Mersk 15/2/94 US$14,25,000 19/10/94 1/10/94 to 31/10/94 475,000 21/10/94 1/11/94 to 30/11/94 475,000 25/11/94 1/12/94 to 31/12/94 475,000 ITA/6168/M/95 M/s Inge Steenslane A/S Oslo, Norway Igloo Tara and Igloo Bergen 13/6/94 US$8,08,012.07 5/9/94 16/8/94 to 27/8/94 179,854.84 30/9/94 31/8/94 to 15/9/94 236,324.61 ITA/6169/M/95 M/s Inge Steensland A/S Oslo, Norway Igloo Tara and Igloor Bergen 13/6/94 US $12,15,039.18 26/10/94 9/10/94 to 19/10/94 208,472.30 28/10/94 16/8/94 to 12/10/94 312,714.76 10/11/94 21/9/94 to 2/10/94 198,066.94 16/11/94 17/10/9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly withheld. (f) Clause 19 provides that if the vessel is lost or missing, the hire charges shall cease from noon GMT on the day. (g) Clause 30 provides that the fuel is to be borne by the charterers. (h) Clause 32 provides that the flag of registry and/or the Belgium Government would be entitled to requisition the ship at any time on the fulfilment of prescribed condition. The flag under which the ship is registered is described in cl. 66 as the Bahamas. (i) Clause 43 describes the permitted cargoes which is commercial, fully refrigerated butane and/or propane and/or LPG mixture, ethylene, butadiene, propylene, VCM. These are all products utilized by the assessee in its production facilities. (j) Clause 60 provides the condition in which the vessel is to be delivered and redelivered normally in a condition where the goods of the assessee can be rightly loaded and redelivered after vapours of ethylene are duly cooled down. 5. In view of the provisions in the time charter agreement, the assessee sought to make a remittance of the charter party charges through proper banking channels without deducting tax at source. For this purpose, it filed a petition to the AO to issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under s. 44B(2)(ii) that the amount should have been on account of carriage of goods also fails in view of the decision of the Hon'ble Supreme Court in the case of Union of India vs. Gosalia Shipping Pvt. Ltd. 1978 CTR (SC) 76 : (1978) 113 ITR 307 (SC), wherein it was held that hire charges paid on time charter constitute payment for hire of ships and not for carrying of goods and, hence, not liable for payment of tax. 8. Shri Joe Sebastian, the learned Departmental Representative strongly supported the order of the learned AO. He drew our attention to s. 195 and submitted that s. 195(1) of the IT Act states that "any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force." He further submitted that s. 195 of the Act was amended by the Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Co. Ltd. (1979) 119 ITR 573 (Mad) (xi) Barendra Prasad Ray & Ors. vs. ITO (1981) 22 CTR (SC) 157 : (1981) 129 ITR 295 (SC) (xii) Hazoora Singh vs. CIT (1986) 52 CTR (P&H) 351 : (1986) 160 ITR 746 (P&H) He also read from Taxman's Direct Taxes Munual 3 of 2001 at p. 417. 10. Relying on the interpretation of the words "business connection" in the aforesaid judgments, the learned Departmental Representative submitted that the income arose to the non-resident through business connection. According to him, the judgment of the Hon'ble Supreme Court in the case of Union of India vs. Gosalia Shipping (P) Ltd. 1978 CTR (SC) 76 : (1978) 113 ITR 307 (SC) relied upon by the learned CIT(A) was not applicable, because according to the learned Departmental Representative, the provisions of s. 44B are not relevant at the stage of deduction of tax at source by the assessee, but only relevant at the assessment stage. It is because, the section under which the assessee's appeal before the learned CIT(A) was based is, s. 195 of the IT Act and not in assessment under s. 143(3) or 143(3) r/w s. 144 of the Act. Therefore, according to the learned Departmental Representative, any discussion regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the view that the charter charges are taxable in India, the arguments have been advanced by the learned Departmental Representative only on the issue of business connection in India. However, for the sake of completeness, the learned counsel for the assessee submitted that the provisions contained in s. 9(1)(i) cannot have application in the case of the assessee. The income cannot be said to accrue or arise in India whether directly or indirectly through or from any business connection in India or through or from any property in India namely, the ship which is registered under the flag of the Bahamas in Belgium. The learned counsel for the assessee submitted that it is well settled that the location of the ship is the country where the ship is registered. In this connection, he drew our attention to ED Rules and the circular issued by the CBDT, under WT Act and submitted that the income cannot be said to be accrued or arisen though or from any property in India. 13. The next limb of s. 9(1)(i) refers to income accrued or arisen through or from any asset or any source of income in India. According to the learned counsel for the assessee, this clause has no application inasmuch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessee submitted that the order of the learned CIT(A) deserves to be upheld. 16B. As a rejoinder, Shri Sebastian, the learned Departmental Representative reiterated that there was a business connection in India; that the payment was made inside India and further Instruction No. 1934 issued by the CBDT is applicable only for Government Departments and public sector undertakings and not for private companies of the like of the assessee and, hence, the orders of the learned CIT(A) deserve to be reversed. 17. We have considered the rival submissions and perused the facts on record. The first vital issue before us is whether the non-resident ship owners to whom the assessee-company had remitted the hire charges had any business connection in India. Although the learned AO had referred to s. 9(1)(i) r/w s. 5(2)(b) for holding that the charter charges are taxable in India, the arguments have been advanced by the learned Departmental Representative only on the issue of business connection in India. In our considered view, the provisions contained in s. 9(1)(i) cannot have application in the case of the assessee. The income cannot be said to accrue or arise in India whether dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court has held as under: "An isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of s. 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profits, such relationship does not constitute a business connection." This case also has no application as there is no continuity of business relations. 22. In the case of Carborandum Co. vs. CIT, relied upon by the learned Departmental Representative, this was a case where the technical information was furnished and the question arose as to whether this could be said to arise any business connection in India. The Court held that mere supply could not constitute a business connection. Similarly in the case of the assessee-company, the mere fact that the ship was made available to the assessee could not constitute a business connection in India. 23. In the case of Performing Right Society Ltd. vs. CIT relied upon by the learned Departmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty in the taxable territories which contributes directly or indirectly in earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories, a stray or isolated transaction is being normally regarded as a business connection. The expression "business connection" postulates real and intimate relation between the trading activity carried outside the taxable territory and the trading activity within the territories and the relation between the two contributing to the earning of income by the non-resident in his trading activity. Further, the Hon'ble Supreme Court in the case of Anglo-French Textiles Co. Ltd. has held that it is not every business activity of a manufacturer that comes within the expression "business connection". In a case where all that may be known is that a few transactions of purchase of raw material is taken place in British India, it could not ordinarily be said the isolated act whereby their nature 'operations' within the meaning of that expression. 26. In view of the above discussions, it can hardly be said that non-resident ship owners to whom the assessee-company had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Representative for this allegation but on the other hand, the assessee had filed invoices, bill of lading and other documents to establish the fact that the goods imported in the ships were acquired by the assessee outside India and were, thereafter, transported in the ships to India. The fact that the charter charges are not payment of freight are borne out by the following features of the agreement envisaged in the time charter party: (a) Clause 3 provides that that letting is for a specific period irrespective of whether the goods are carried or not. In the case of payment for freight the amount of charges recovered by freight carrier are always co-related to the quantum of goods carried, distance carried and other such features. In the case of the assessee on the other hand, the time charter party hire charges are payable irrespective of the quantum of goods carried or the distance carried. (b) Clause 6 provides that the appellant has to pay for all fuel, towage, pilot, agency fees, port charges, commissions, expenses or loading and unloading cargoes, canal dues, etc. Clearly, in a case of payment for freight carried by the carrier such charges are to be borne by the carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State Bank of India, overseas branch, Bombay, which is located in India and three post office cases mentioned in para 11 above were cited by the learned Departmental Representative. These cases dealt with a situation where cheques were posted from British India at the request of a non-resident and the question which arose for consideration was whether the income could be said to have received in India as the post office acted as agent for the non-resident. Here, it would be relevant to refer to cl. 56 of the charter hire which reads as under: "Hire payments to be made by telegraphic transfer to Kredietbank, Antwerp Branch: Telex No. 2207 KBAN BE Swift KRED BE 22 Account No. 410-0643208-24 Favour EXAMARNV With Kredietbank, Antwerp Branch Bank Kredietbank, New York V.A.T. Nr. 447.825.937 Free of VAT (Value Added Tax) According to art. 42 of the Belgian VAT Code." The various post office cases were considered by the Hon'ble Supreme Court in CIT vs. Patney & Co. (1959) 36 ITR 488 (SC). In that case, the agreement between the parties provided that commission was to be paid to Patney & Co., the agent company in Hyderabad State in cash or by cheque as the case ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Chief CIT's and Directors General of Income-tax as follows: "The question of income-tax being payable in respect of freight on import of cargo has been examined earlier and in OM dt. 12th April, 1984 the Department of Revenue had clarified that no income-tax was payable in respect of freight on import of cargo unless such freight is paid in India to non-resident shipping company or its agent. It has been clarified by the Ministry of Surface Transport that according to normal international practice and also according to the agreements with the foreign shipowners 90 per cent of the freight is to be paid within seven days of the vessel completing loading of Cargo and sailing from the loading port. The balance of 10 per cent is remitted after the import of cargo is unloaded in India. At the time of remittances of this 10 per cent, the normal practice has been to issue a no objection certificate for the remittance of 10 per cent without deduction of tax on the ground that income has not accrued in India. The Reserve Bank of India is, however, now insisting that an NOC should be obtained in respect of the entire 100 per cent of the foreign charges before the remittance is permitted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... convenience or office use. Sec. 119 of the Act only refers to the obligation of IT authorities to observe and follow such orders/instructions/directions of the Board. Accordingly, the above two circulars do constitute an order/instruction or direction as contemplated in s. 119 of the Act. 34. As regards the learned Departmental Representative's contention that the contents of the circular must be limited to Government departments and the public sector undertakings and autonomous bodies, we may point out explicitly the correct position of law as pointed out above and in any view, no circular can be discriminating between various taxpayers. We accordingly hold that the circulars merely lay down the position in law and are, therefore, applicable to the case of the assessee. Further, it has been brought to our notice by the learned counsel of the assessee-company, that Dy. CIT(TDS) Circle-I, Mumbai, in the subsequent years, i.e., financial years 1998-99 and 1999-2000, acting on the above circular of the CBDT, has authorized the assessee-company to make payments to non-resident companies without deducting tax under s. 195(1) of the Act. Copies of "Authorizations for payment of sums t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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