Bengal Tiger Line Pte Ltd. Vs DCIT (ITAT Chennai)
Conclusion: Income earned by assessee from shipping operations in India was not taxable in India by virtue of Article 24 of India Singapore DTAA as the conditions stipulated under Article 24 were not satisfied and the benefit of Article 8 of India Singapore DTAA was applicable and as per which shipping income of a resident of Singapore was taxable only in Singapore but not in India.
Held: Assessee-company was a resident of Singapore and involved in the business of operation of ships in International Traffic. It was the freight beneficiary in respect of various vessels which sailed from ports in the Indian sub-continent and South East Asia during the financial year 201415. It had claimed exemption from tax on income received from shipping operations in India in pursuant to the India-Singapore tax treaty on the ground that as per Article 8 of India-Singapore DTAA, tax resident of Singapore involved in the operations of ships in international traffic, was assessable to tax in Singapore on global income received [including income earned in India] from its shipping business. Assessee had filed its return of income for the assessment year 2015-16 on 28.09.2015 declaring exempt income of Rs.19,48,19,987/-. The case was selected for scrutiny and notice u/s.143(2) and 142(1) were issued. AO had denied the benefit of Article 8 of India Singapore DTAA and further, taxed income received from shipping operations in India u/s.44B on the ground that Article 24 of India Singapore DTAA limited the benefits of exemption, in case income received outside India was exempt from tax under Singapore Income Tax laws. Since, the income of the assessee from its shipping operations was exempt u/s.13F of the Singapore Income Tax Act, AO was of the opinion that the benefit of Article 8 of India Singapore DTAA was not applicable to the assessee because of specific restriction provided under Article 24 of India Singapore DTAA. It was held that Article 8 of India Singapore DTAA was applicable and as per which shipping income of a resident of Singapore was taxable only in Singapore but not in India. AO had made an attempt to deny the benefit of exemption claimed by assessee by invoking Article 24 of India Singapore DTAA, even though, the conditions stipulated under Article 24 were not satisfied. AO as well as DRP were erred in coming to the conclusion that income earned by assessee from shipping operations in India is taxable in India by virtue of Article 24 of India Singapore DTAA. Hence, AO was directed to delete the additions made towards shipping income of assessee earned in India.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by the assessee is directed against the final assessment order passed by the Assessing Officer u/s.143(3) read with section 144C(13 ) of the Income Tax Act, 1961 (hereinafter the ‘Act’) dated 22.11.2019, which in turn passed in pursuant to directions of the Dispute Resolution Panel (DRP)-2, Bengaluru u/s.144C(5) of the Act dated 23.09.2019 and pertains to assessment year 2015-16.
2. The assessee has raised the following grounds of appeal:-
1. The order of the Deputy Commissioner of Income Tax. International Taxation l(1), Chennai [“AO/Assessing Officer’] is contrary to law, facts and circumstances of the case.
2. International shipping income from freight operations assessed to tax in India.
2.1 The directions of the Dispute Resolution Panel (DRP) – 2, Bengaluru (‘DRP’) and the consequential final assessment order is erroneous in so far as assessing the international shipping income from freight operations as income taxable in India under section 44B of the Act.
2.2 The AO / DRP ought to have appreciated that as per the provisions of Article 8 of the India – Singapore DTAA, any shipping income of a non-resident is taxable only in the country of residence, i.e. Singapore and as such cannot be assessed to tax in India.
2.3 The AO / DRP ought to have appreciated that the essential conditions for invoking the provisions of Article 24 of the DTAA is not satisfied and therefore it cannot be invoked.
2.4 The AO / DRP erred in imputing conditions for applicability of a tax treaty which are not present anywhere in the India-Singapore DTAA and therefore the order of the AO read with DRP Directions is ultra vires.
2.5 The AO / DRP ought to have appreciated that merely because international shipping income is exempt in one contracting state (i.e. Singapore), it does not alter the taxing rights of the said income so as to shift the same to the other contracting state (i.e. India).
2.6 The AO / DRP ought to have appreciated that Article 8 of the DTAA is not an exemption provision but only an enabling provision which provides an exclusive right of taxation of income to the residence country and as such the provisions of Article 24 (Limitation of Benefit) will not apply to the income covered under Article 8 of the DTAA.
2.7 The AO / DRP ought to have appreciated that Article 8 of India – Singapore DTAA is unambiguous and clearly states that only the country of residence has the right of taxation of income earned by an Assessee from the operation of ships in international traffic.
2.8 The AO / DRP erred in rejecting the certificate issued by the Singapore Tax Authorities [i.e. Inland Revenue Authority of Singapore (IRAS)] which clearly states that international shipping income is taxable in Singapore only on accrual basis and not on receipt basis and therefore the provisions of Article 24 of the DTAA would not apply.
2.9 The AO / DRP ought to have appreciated that the provisions of Article 24 would apply only to incomes which are exempt from tax under the treaty and not to shipping income under Article 8 which grants a specific right of taxation to the residence country.
2.10 The DRP ought to have appreciated that the AO has already issued a DIT relief certificate under section 172 of the Act for the subject AY wherein the Appellant was granted relief under Article 8 of the India – Singapore treaty and as such the AO is precluded from subjecting to tax the same income under section 44B of the Act for the same AY.
2.11 The DRP ought not to have enhanced the assessed income from INR 18,22,82,012 to INR 19,48,19,987 without issuing a show cause notice which is against the principles of natural justice.
2.12 Without prejudice to the above. the DRP ought to have restricted the amount taxable in India by invoking the provisions of Article 24 of the India – Singapore DTAA to the amount of income claimed as exempt in Singapore.
3. The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra as also all consequential relief thereto.
4. The Appellant craves leave to add, alter, amend, substitute and / or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal.
3. Brief facts of the case are that the assessee M/s. Bengal Tiger Line Pte Limited is a resident of Singapore and involved in the business of operation of ships in International Traffic. The assessee was the freight beneficiary in respect of various vessels which sailed from ports in the Indian sub-continent and South East Asia during the financial year 201415. The assessee has claimed exemption from tax on income received from shipping operations in India in pursuant to the India-Singapore tax treaty on the ground that as per Article 8 of India-Singapore DTAA, tax resident of Singapore involved in the operations of ships in international traffic, is assessable to tax in Singapore on global income received [including income earned in India] from its shipping business. The assessee has filed its return of income for the assessment year 2015-16 on 28.09.2015 declaring exempt income of Rs.19,48,19,987/-. The case was selected for scrutiny and notice u/s.143(2) and 142(1) of the Act were issued. In response to notice, the authorized representative of the assessee appeared from time to time and filed various details as called for. In this case, a draft assessment order was passed u/s.143(3) r.w.s.144C(1) of the Act on 29.12.2018, and in the draft assessment order, the AO has denied the benefit of Article 8 of India Singapore DTAA and further, taxed income received from shipping operations in India u/s.44B of the Act on the ground that Article 24 of India Singapore DTAA limits the benefits of exemption, in case income received outside India is exempt from tax under Singapore Income Tax laws. Since, the income of the assessee from its shipping operations is exempt u/s.13F of the Singapore Income Tax Act, the Assessing Officer was of the opinion that the benefit of Article 8 of India Singapore DTAA is not applicable to the assessee because of specific restriction provided under Article 24 of India Singapore DTAA.
4. Against draft assessment order, the assessee preferred an application before the DRP and filed an intimation of filing the objections to the Assessing Officer. Before the DRP, the assessee has challenged the draft assessment order passed by the AO by raising various grounds and argued that the AO has erred in assessing international shipping income from freight operations as income taxable in India, ignoring the specific provisions of Article 8 of India Singapore DTAA, which categorically says that any shipping income of a non-resident is taxable only in the country of resident and as such cannot be assessed to tax in India. The assessee has also challenged the findings of the AO in invoking the provisions of Article 24 of the India Singapore DTAA and argued that the AO ought to have appreciated that the essential conditions for invoking the provisions of Article 24 of DTAA is not satisfied. The assessee further contended before the DRP that Article 8 of the India Singapore DTAA is not an exemption clause, but only an enabling provision which provides an exclusive right of taxation of income to the residence country and as such the provisions of Article 24 [limitation of benefit] will not apply to the income covered under Article 8 of the DTAA. The assessee has also challenged the action of the AO in rejecting the certificate issued by the Singapore Tax Authorities, which clearly states that international shipping income is taxable in Singapore only on accrual basis and not on receipt basis and therefore Article 24 of the DTAA would not apply.
5. The Ld.DRP after considering the submissions of the assessee and also by taking note of findings recorded by the AO in draft assessment order came to the conclusion that Article 24 of DTAA between India and Singapore is applicable to the assessee, because shipping income earned from operations in India was specifically exempted from tax u/s.13F of the Singapore Income Tax Act and consequently, the assessee cannot claim the benefit of relief provided under DTAA. The DRP further held that undoubtedly, by virtue of the tax payer being fiscally domiciled in Singapore, income received in India by shipping operations are liable to tax in the place of tax residency, but then as has been held ‘liable to tax’ is not the same thing as ‘subject to tax’. The factum that the income was actually exempt from tax in Singapore is sheet anchor to the decision about applicability of Article 24 of the India Singapore treaty. No doubt under Article 8 of India Singapore DTAA, profit derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic will be taxable only in that state. Since, the assessee being tax resident of Singapore, global income from operation of ships is taxable only in Singapore. But, because of specific exemption as per Section 13F of the Singapore Income Tax Act, the assessee lose the benefit of Article 8 of treaty but falls within the purview of Article 24 of India Singapore DTAA, which limit the treaty benefit to the extent of income being exempted in other Contracting State or income which is subject to tax at lower rates and which has been remitted or received in other Contracting State [country of residence]. Therefore, the DRP opined that assessee is not entitled for the benefit of Article 8 but subjected to tax in India as per Article 24 of India Singapore treaty which specifically limits the exemption. The DRP has also discussed the issue in light of various judicial precedents and interpreted India-Singapore treaty in the light of Vienna Convention. The DRP has taken support from the decision of Mumbai ITAT in the case of Hindalco Industries Limited vs. ACT [2005] 2 SOT 528 (Mum) and observed that the purpose of object of DTAA between two sovereign countries is to avoid double taxation of similar income in two countries. If you consider the purpose and object of DTAA, the benefit of relief is available only when a particular income is taxable in one Contracting State (source country) and the same income is subject to tax in another Contracting State (country of residence). If a particular income is exempt from tax in one Contracting State (country of residence) then the other Contracting State (source country) will bring particular income in to tax as per the laws of that Contracting State, but the benefit of relief can be availed by the assessee as per DTAA. Since, income of assessee from shipping operations is exempt under the Singapore Income Tax Act (country of residence), the other Contracting State (source country) is very much within its power to tax the particular income as per the laws of that country. Since income of non-residents is taxable u/s.172 of the Act, the assessee is liable to tax on income earned in India from shipping operations. The AO on the basis of relevant facts has rightly passed draft assessment order and denied the benefit of Article 8 of India Singapore DTAA and hence there is no reason to take different view. Accordingly, rejected objections filed by the assessee.
6. Consequent to DRP directions issued u/s.144C(5) of the Act, the AO has passed final assessment order u/s.143(3) r.w.s 144C(13) of the Act, on 22.11.2019 and taxed shipping income earned in India u/s.44B of the Act. The AO, has threadbare discussed Article 8 and 24 of India Singapore DTAA, Section 13F of Singapore Income Tax Act and other relevant provisions in light of various averments made by the assessee before arriving at a conclusion that shipping income earned in India does not qualify for tax exemption in India as per the provisions of Article 24 of India Singapore DTAA and therefore, relief claimed by the assessee under DTAA in incorrect. The relevant findings of the AO are as under:-
5. Since the assessee is claiming relief from taxation by virtue of the provisions of the DTAA, it would be prudent to begin our discussion there. Every agreement is entered into because two or multiple parties are desirous of achieving some purpose. The agreement therefore flows from that purpose and provides context to it. Any reading of an agreement without keeping in mind that purpose will be incomplete and flawed. The Vienna Convention en. the Law of Treaties in Article 31 has clearly established the significance of “purpose” of a Treaty. It states that,
“I. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”
6. Therefore the international standards of treaty interpretation treat the ‘object’ and ‘purpose’ of the treaty as the prism through which all treaties should be interpreted. The India- Singapore DTAA begins by enunciating the purpose of the treaty with the following lines:
“The Government of the Republic of India and the Government of the Republic of Singapore, desiring to conclude an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, Have agreed as follows:”
From the above mentioned introductory sentence of the India-Singapore DTAA it is clear that the ‘purpose’ of entering into this agreement is the “avoidance of double taxation” and “prevention of fiscal evasion”.
7. In simple terms, the meaning of “double taxation” is the taxation of the same income twice. In the parlance of International Taxation, this usually implies taxation of the same income by two different countries – the Resident State and the Source State. So the purpose of this DTAA is to prevent an income from being taxed twice. However, in a case where a certain category of income is not taxable at all in one state, then the question of double taxation would not arise at all.
8. On the basis of examination of documents received from Inland Revenue Authority of Singapore, the assessee has filed their return of income for FY 2015 before the Inland Revenue Authority of Singapore vide Tax Reference No 20081851 5R. In its return it claimed exemption of S$ 4,019,449 under Section 13F of ITA. The relevant section of Singapore Income Tax act is as follows;
“Exemption of International Shipping Profits
Section 13F. – (1) Subject to subsections (IA) and (2), there shall be exempt from tax the income of an approved international shipping enterprise derived
(‘a,) on or after 1st April 1991 from
i. the carriage of passengers, mail, livestock or goods from o outside the limits of the port of Singapore by any foreign ship;
ii. the charter of any foreign ship to any person where such ship is used by the person for the carriage of passengers, mail, livestock or goods outside the limits of the port of Singapore; and
iii. the carriage of passengers, mail, livestock or goods by any foreign ship to Singapore solely for the purpose of transhipment;
9. On the reading of the above it is clear that the assessee had claimed exemption of S$ 4,019,449 under Section 13F of SITA for the profits earned by way of International Shipping operations. In this circumstance the assessee was asked to provide the details of freight income received from India which is included in section 13F of the Singapore ITA. The assessee’s submission clearly shows that the assessee had received freight income of Rs. 259,75,99,821/- from vessel operation in India and Computed profit of Rs. 19,48,19,987/- under provisions of Section 172 of the Income Tax Act, 1961.
10. The assessee in his submission has stressed on the wording “Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State “. The main thrust of the assessee’s argument is that only the country of residence of a shipping company has exclusive rights to tax the income from operation of ships in international waters. This however, is a skewed interpretation. The DTAA seeks to prevent a situation where both the signatory countries lay claim to taxation rights on the same income. In such a scenario, the DTAA comes into picture only to clarify as to which country will have the first right of taxation. In other words, in a situation where both India and Singapore are laying claim to taxation rights on the shipping income of the assessee company, then in that case the country of residence, will have the exclusive right of taxation. However, in a situation where the country of residence itself is not taxing the income in question, then the question of double taxation does not arise in the first place and the other country i.e the source country (India) very much gets the right of taxation. All DTAAs have been entered into for the purpose of avoiding double taxation. The intention has never been to allow or enable ‘Double Non-Taxation’. What can be gauged from the above discussion is that there are certain pre-requisites that need to be satisfied to invoke the provisions of the DTAA:
