Case Law Details
Case Name : Cartier Shipping Co. Ltd., Cyprus Vs. DDIT (ITAT Mumbai)
Appeal Number : ITA No. 3036/Mum/07]
Date of Judgement/Order : 07/06/2010
Related Assessment Year :
- The assessee a Cyprus company, was registered as a foreign company under the laws of Mauritius. The Mauritian tax authorities had issued a tax residency certificate to the assessee.
- The non-resident assessee owned a jack up rig which was used for drilling, prospecting and production of hydrocarbons in the offshore oil fields of India. The rig was given on charter basis to an Indian company which in turn leased it out to another Indian entity.
- The assessee had a PE in India. The rig was part of the said PE. The PE was taxed on net income basis after allowing depreciation on the said rig. Pursuant to the claim of depreciation on the rig the assessee had incurred losses in earlier years.
- The assessee had intimated vide a letter to its jurisdictional assessing officer (“AO”) that pursuant to the termination of the agreement with the Indian entity, it has discontinued its business operations in India and accordingly has moved the said rig from Indian territorial waters to international waters.
- The assessee had entered into an agreement with another foreign company for sale of the rig prior to the date when Indian PE ceased to exist. Pursuant to the agreement the buyer had acquired substantial right with respect to the rig and only the delivery was postponed. An invoice was issued by the assessee evidencing the sale of the rig. The said invoice was notarized outside India wherein the notary public has mentioned that, the invoice is signed and delivered. The buyer had inspected the rig and satisfied himself about the same and accordingly, deposited 25% of sale consideration. All these events took place much before the cessation of PE in India.
- The assessee for the relevant tax year had filed a NIL tax return. In the tax return it did not mention about the sale of rig. An audit was conducted by the AO and returned income was accepted.
- Subsequently, the AO reopened the assessment proceedings of the relevant tax year on the basis that the assessee had earned capital gains on sale of rig which has not been taxed in India since, it was not disclosed by the assessee. The capital gain from the sale of rig was taxed as short term capital gain by AO and upheld by the Commissioner.
Issue Before the Tribunal:- Whether the gain arising on sale of rig is taxable in India since the PE has ceased to exist. Decision of the Tribunal
Observation Under the Indian Income Tax Act 1961
- Relying on the Supreme Court decision in the case of Hyundai Heavy Industries Limited (291 ITR 482) the Tribunal held that the PE is to be treated as a separate profit centre vis-à-vis the nonresident and the profits of such profit center are to be computed on the normal accounting principles and general provisions of the Act.
- It is absurd to suggest that the hypothesis of PE independence and PE being a separate profit center is valid only for amounts taxable as „profits and gains from business or profession? and not for amounts taxable under other heads of income.
- The gains or losses on sale of PE assets are to be treated as “accruing or arising in India”. It is immaterial whether the assets were sold in India or outside India, the sale was still taxable in India. The gain on sale of rig is also deemed to accrue or arise in India because the rig was „an asset in India? as also „a source of income in India?.
- The gain on sale of rig was an income from business connection in India since the asset sold was part of the assets of Indian business operations of the assessee and therefore, has a direct business connection in India.
- The assessee has opted for net basis of taxation instead of opting for gross basis of taxation and claimed the losses attributable mainly to depreciation. Once the assessee opts for net basis of taxation and that claim is accepted, it is not open to assessee to turn around and avoid consequence of that status.
- The provision regarding tax ability of gains on PE or PE assets in the source country will be rendered redundant, if capital gains on alienation of PE or PE`s movable assets can be taxed in the source country only when PE exits. It is because at the point of time when PE is alienated or critical PE assets are alienated, PE cannot continue to exist.
Observation Under the Tax Treaty
- Under the India-Mauritius Tax Treaty, the situs of tax ability of profits on alienation of assets is the same as the situs of taxability of income from such assets. The PE profits were taxable in India and the PE profits were in respect of income generated by chartering of the rig. Therefore, the profits on sale of the rig are also taxable in India.
- Therefore, the gains on sale of rig constituted a PE asset on which depreciation was claimed, hence it is taxable in India under Article 13(2) of the India-Mauritius Tax Treaty.
Observation on Situs of Sale
- The sale has not taken place outside India. The correct sequence of events was that the rig was sold, consequently contract had to be terminated and as part of the contract of sale, the rig was moved to international waters.
- On sale of rig, the invoice was drawn up and the process of moving the rig to international waters had started. The process of moving the rig to the international waters is the result of sale of the rig and sale of rig is not independent of moving it to the international waters, as claimed by the assessee.
- The movement of the rig and its handing over to the buyer is to be seen in conjunction with the fact of having sold the rig by way of invoice. The termination of the contract was a result of the sale of rig and to complete the process of sale of rig.
- The date of delivery and the date of payment are relevant inasmuch as they complete the sale transaction but the date of sale is to be taken as the date on which sale invoice was “signed and delivered as a deed” as certified by London based Notary Public.
- The rig was transferred within the meaning of section 4 of the Sale of Goods Act, 1930, when the rig was well within Indian territorial waters, even if the delivery of the rig was deferred.
- Once the transfer takes place in India, the capital gain on sale of the asset are taxable in India as per the provisions of Income tax Act read with India-Mauritius Tax Treaty, for the reason that the asset was situated in India at the time of its transfer.
- The Tribunal concluded that the sale of rig was precursor to the process of cessation of PE, termination of the contract and movement of equipment in international waters. The rig was situated in India when the process of sale had commenced and substantially completed. The deferral of receipt of part sale consideration and postponement of handing over of the rig was immaterial, so far as tax liability in connection with the sale of PE or its assets are concerned.
Source: Cartier Shipping Co. Ltd., Cyprus Vs. DDIT [ITA No. 3036/Mum/0 7] dated 7 June 2010