Case Law Details
Case Name : Gearbulk AG, In re. (Authority for Advance Rulings)
Appeal Number : AAR No. 803 of 2009
Date of Judgement/Order :
Related Assessment Year :
- The applicant is a non-resident shipping Company incorporated under the laws of Switzerland and is in the business of shipping contracts for the transportation of cargo worldwide. During the financial years 2007-08 and 2008-09, the applicant entered into a shipping contract for transportation of cargo from Indian ports to China.
- The amount of freight for transportation of cargo from the Indian port to a port outside India was invoiced and received by the applicant.
- For the relevant years the applicant appointed a port agent in India for handing the cargo. The port agent on behalf of the applicant, deposited tax at 7.5% of the freight charges received by the applicant, under section 172 of the Income tax Act, 1961(„the Act?)
- The applicant filed the returns of income through the port agent under Section 172(3) of the Act. An assessment order was passed by the Assistant Commissioner of Income Tax under Section 172(4) for the assessment year 2008-09.
Issues before the Authority for Advance Ruling (‘AAR’)
- Whether during the relevant years, the applicant, in the stated facts and circumstances, had a Permanent Establishment in India under Article 5 of India-Switzerland Double Taxation Avoidance Agreement (‘DTAA’) in relation to activity of charter of vessels for transporting cargoes from Indian ports to outside India?
- If the answer to the first question is negative, whether income of the applicant from such charter of vessels is not liable to tax in India under the DTAA
- Section 172 of the Act deals with Profits of non-residents from shipping business. It creates a tax liability in respect of shipping by making a special provision for the levy and recovery of tax in the case of a ship belonging to or chartered by a non-resident which carries passengers, livestock, mail or goods shipped at a port in India. The section brings to tax the profits made by them from shipping, by means of a summary assessment in which 7.5% of the gross amount received by them is deemed to be the assessable profit. Before the departure of the ship, the master of the ship has to furnish to the Income-tax Officer a return of the full amount paid or payable to the owner or charterer on account of the carriage of passengers, goods etc., shipped at the port in India since the last arrival of the ship at the port.
- Article 7 of the DTAA deals with business profits and specifically excludes profits from operations of ships.
- Article 8 of the DTAA specifically deals with profits derived from operation of aircraft in international traffic.
- Article 22 of the DTAA deals with other income not dealt with in the other articles in the DTAA and states that such income shall be taxed in county of residence of the assessee.
Contentions of the assessee
- The assessee contended that it does not have any presence in India, whether in the form of an office or any other place of business and none of the employees of the applicant visited India during the relevant years.
- Under provisions of Section 172(7) of the Act, an option is available to a non-resident compute its total income be made in accordance with the other provisions of the Act. Accordingly, the applicant “elected” for assessment of its total income in accordance with the other provisions of the Act.
- Relies on Section 90 (2) of the Act with Article 7 and Article 22 of the Agreement for avoidance of double taxation between India and Switzerland.
- Income derived from the shipping of cargo from the Indian ports cannot be subjected to tax at all having regard to the fact that the applicant has no permanent establishment in India.
- Item of income can be said to have been dealt with in an Article of the DTAA only if it defines its scope as well as allocates the right to tax such income between the two contracting States. Mere exclusion of shipping business profits from Article 7 does not amount to dealing with that item of income.
Ruling of the authority
- The profits arising from the operation of ships in international traffic stands excluded from the Article 7 of the DTAA dealing with business profits.
- Article 8 makes a special provision in respect of the profits derived from the operation of aircraft in international traffic. Such profits shall be taxable only in the State to which the enterprise belongs.
- Article 22 dealing with Other income states that items of income of a resident of a Contracting State not dealt with in the foregoing Articles of the DTAA shall be taxable only in that State.
- Article 22 a residuary article concerning „other incomes? was introduced in 2001. Till then profits derived from the operation of ships in international traffic are left untouched by the DTAA because of the specific exclusion clause in Article 7. The obvious implication of exclusion is that such income can be subjected to domestic law.
- If this legal position was intended to be changed by the amendments made to the DTAA in 2001, a specific reference to this „item? of income and specific language to bring it within the ambit of the DTAA should have been there. Neither a separate article is devoted to it nor is there explicit language in Article 22 to bring it within its arm.
- Profits from the international operation of ships are only a species of business profits just as the profits from international air transport. Although it is an integral part of business profits, it is excluded from the article dealing with business profits. Such income has been left to the care of domestic law, taxable under Section 172 of the Act.
- The AAR held that income received by the applicant on account of carrying the cargo from the Indian ports to the foreign ports by deploying chartered vessels is liable to be taxed in India under the provisions of the Act and such income is not covered by the DTAA between India and Swiss Confederation.
- With respect to the first question the AAR was of the opinion that it need not be answered in the view of the conclusion that shipping profits are not covered by the DTAA and they have to be taxed under the domestic law.
- Under the India – Swiss DTAA Article 7 excludes shipping profits and Article 8 deals with profits from aircraft.
- Since Article 7 excludes shipping profits, this article „deals? with such profits and hence Article 22 cannot be invoked.
- Profits derived from shipping business in India by a non – resident, being a resident of Switzerland will be taxable in India under the domestic tax laws.