ITAT BANGALORE BENCH ‘B’
Marine Links Shipping Agencies
Assistant Director of Income-tax
IT Appeal NO. 184 (BANG.) OF 2011
[Assessment year 2009-10]
JULY 12, 2012
George George K., Judicial Member
This appeal instituted by the assessee is directed against the order of the CIT(A)-IV, Bangalore dated 23.11.2011. The relevant assessment year is 2009-2010. The order of the CIT(A) arise out of the order of the Asst. Director of Income-tax (International Taxation), Mangalore passed under section 172(4) of the Act.
2. The concise grounds raised read as follows :-
(i) The learned Officers below have erred in concluding that the beneficiaries of the freight are the owners and not the charterers of the ships and thus, have erred in assessing the appellant as the agents of the owners of the ship, with whom the appellant had no connection of whatsoever nature.
(ii) The learned officers below have erred in considering the appellant as the agents of Islamic Republic of Iran Shipping Lines, when they only acted as the agents of the charterer of the ship Puyvast Chartering BV, Netherlands who had chartered the ship on a voyage charter basis.
(iii) The learned officers have erred in
(a) Not distinguishing between brokerage commission and address commission.
(b) In concluding that the charterer is entitled only for a commission of 2.5% as against it being entitled to the entire freight.
(c) Holding that the treaty between India and Netherlands is not be applicable to the facts and circumstances of the case.
(d) Ignoring the certificate from the Iranian Company that the beneficiary of the freight was the charterer of the ship.
3. Brief facts of the case are as follows:-
The assessee is an agent of M/s Puyvast Chartering BV (“Puyvast”), a Netherlands based Shipping Company. The ships chartered by Puyvast regularly call Indian Ports for loading export cargo. MV Ocean Candle Voy 1 has been chartered by Puyvast in October, 2008. This ship is owned by M/s Islamic Republic of Iran Shipping Lines, Iran (owner). The ship was engaged to carry granite blocks from Mangalore to Antwerp, Belgium and other places. The ship reached Mangalore port on 7.11.2008. It sailed from the port on 10.11.2008.
3.1 The assessee filed the return of income under section 172(3) on behalf of Puyvast on 26.11.2008, wherein Puyvast was shown as the charterers of the ship and beneficiary of the freight. Copy of tax residency certificate issued by the authorities in Netherlands was also filed along with the return of freight. Notice under section 172(5) dated 23.11.2009 was issued. The said notice was issued to clarify certain aspects. The Income-tax authorities noted that as per charter party document, the Iranian Company is the owner of the ship whereas in the return of freight, Puyvast was shown as the charterer and the beneficiary of freight. The revenue contended that the beneficiary of the freight is Islamic Republic of Iran Shipping Lines, Iran.
3.2 In reply to the above notice, the assessee submitted the email correspondence received from Puyvast and a certificate from the owner of the ship confirming that Puyvast was the beneficiary of the freight. The Assessing Officer passed the order under section 172(4) on 29.12.2009. In the said order, it was concluded that the charterer, M/s Puyvast acts only on behalf of his principal (Islamic Republic) and charges commission. The Income-tax authority concluded that the treaty with Netherlands cannot be applied, since according to him, the owners of the ship were the beneficiary and not the charterers. Accordingly, the revenue proceeded to pass an order under section 172 of the Act and determined a sum of Rs. 3,38,208/- as payable. Since the treaty with Iran did not provide for taxation of income from shipping, the assessment was made as per the Income-tax Act.
4. Aggrieved, the assessee filed appeal before the first appellate authority.
5. The CIT(A) for his reasons mentioned in the impugned order, dismissed the appeal of the assessee. The relevant finding of the CIT(A) at para 5 reads as follows:-
“The only issue to be decided is whether the freight beneficiary is Iranian entity or the Netherland’s entity as the relief under DTAA is available for Netherland’s entity and not for Iran’s entity. The Assessing Officer observed that in the NOC Sl. No.3 of Form No.1, Netherland’s company was shown as charterers and Iranian company was shown as owners. As per copy of the fixture note at Sl. No. 14 it was mentioned that 100% of the freight charges go to the account of ship owners as reduced by 2.5% of address commission to M/s Puyvast and 1.25% to M/s Trade Marine Global, the ship broker. According to the fixture note, the payment shall be made to the owners account within 4 banking days upon completion of last load port. The raising of invoice by the charterer has no relevance since the freight beneficiary is the owner of the ship. Though it is agreeable that M/s Puyvast is not just a commission agent but also has undertaken risks and liabilities in the event of tonnage being less than 19,500 tonnes since the charterer cannot be regarded as the freight beneficiary as freight finally goes to the account of the owner being the Iranian company. In view of this, it is held that the Assessing Officer’s conclusion is correct that relief under the DTAA is not allowable to the Iranian company which is the freight beneficiary and denial of DTAA benefit is upheld”.
6. The assessee being aggrieved is in appeal before us.
7. Elaborate written submission was filed by the learned AR touching upon the OECD commentary on Article 8A by the India-Netherlands tax treaty. It was submitted that the applicability of the treaty can be to the owner of the vessel or the charterer. In this case, the charter M/s Puyast Chartering BV, Netherlands is the beneficiary of freight and hence, it was entitled to the benefit of India-Netherlands double taxation agreement, which clearly stipulate income from operation of ships in international traffic shall be taxable only in the State in which the place of effective management of the enterprise is situated. The tax residency certificate with regard to Puyvast issued by the authorities in Netherlands is never in doubt.
7.1 With reference to clauses 13 and 14 of the charter party executed by the owner of the ship and the charterer of the ship, it was submitted that the Assessing Officer as well as the CIT(A) has only made reference to clause 14 of the charter party and concluded that the owner of the ship are the freight beneficiaries and not the charterer. The revenue authorities had come to this conclusion that the charterer acts as intermediary and got commission for the services rendered by them. It was submitted that the revenue authorities failed to appreciate the fact that the risk and reward of the voyage is borne by the charterer of the ship. The authorities below failed to take note of clause 13 of the charter party wherein it was clearly stipulated that the charterer has to pay a minimum freight for 19500 tonnes regardless of the load and the owner of the Vessel were entitled for higher freight if the load exceeds the minimum tonnage, which is essentially like a dead rent and thus, the entire risk and reward of the ship belongs to the charterer and the owner is entitled for the fixed rent with an incremental rent if the vessel sails with a higher load. It was submitted that clause 13 of the charter party has not been taken note by the revenue authorities and clause 14 only talks about the time of payment wherein, they used the word ‘100% freight’. It was submitted that this is not 100% of the freight earned by the ship, but 100% of the freight agreed to be paid as per clause 13. Therefore, it was submitted, the revenue authorities have misinterpreted clause 14 as the clause based on which the owner is rewarded, while it only deals with the timing of the payment entitled by the owner.
8. The learned DR filed written submission, which is reproduced below:-
“The appeal of the assessee in the case of Marine Links Shipping Agencies, Mangalore rests on the sole question of who is the freight beneficiary in the charter party executed by the owner of the ship and charterer of the ship. As per clause 14 of the said document, the entire freight payment is to be remitted into the bank account of the owner i.e. M/s Islamic Republic of Iran subject to commission payments to M/s Puyvast Chartering BV, Netherlands; whose agent is the present assessee. The Assessing Officer as well as the CIT(A) have limited their reasoning only to this point as is evident from para 4.2 to 4.4 of the order under section 172(4) of the Assessing Officer and para 5 of the CIT(A). To that limited point, the learned counsel for the assessee has not been able to controvert or being any material during hearing on 2/7/2012. His lengthy discussion on OECD charter and DTAA with Netherlands is completely beside the point as the Assessing Officer and the CIT(A) have not even delved into any of it.
As regards email of the owner that the freight beneficiary is the charterer, so long as clause 14 of the charter party (a legal document that has much higher evidentiary value) talks of freight payment to go to the owner, the Bench is requested to take cognizance of only the charter document and not the email. As Iran and India do not have DTAA between them, the Assessing Officer was right in treating the income of the assessee as taxable”.
9. We have heard the rival submissions and perused the materials on record. The solitary issue that arises for our consideration is, who is the freight beneficiary in the charter party executed by the owner of the ship (Iranian entity) and the charterer of the ship (Netherlands entity). If the charterer (Netherlands entity) is the freight beneficiary, the relief under DTAA between India and Netherlands is available, whereas there is no such benefit if the freight beneficiary is the owner of the Vessel, the Iranian party. The dispute is to be resolved by reference to clause 13 and 14 of the charter party executed between the owner of the ship and the charterer. The clause 13 and 14 of the charter party reads as follows :-
“13. Freight rate : (also state whether freight prepaid or payable on delivery)
Euro 46 pmt float l/s/d basis 3/3 or 4/2 with free d/a to owners at all points, freight to be paid basis min 19,500 tons exceeding 19500 mts additional freight to be calculated basis intaken cargo.
14. Freight payment (state currency and method of payment also beneficiary and bank account (Cl.4).
100 per cent freight less 3.75% commissions payable within 4 banking days, upon completion last load port by charterers to owners bank a/c”.
9.1 Clause 14 clearly stipulates 100% freight charges reduced by 3.75% commission is payable within 4 banking days upon completion of last load port by the charterer to the owner’s bank a/c. Out of commission of the 3.75%, 2.5% goes to M/s Puyvast (The charterer) and 1.25% to M/s Trading Marine Global, the ship broker.
9.2 Clause 13 stipulates minimum freight is to be paid to the owner of the ship (the Iranian party) at the rate of 46 Euros of minimum of 19500 tonnes. Clause 13 further stipulates if the tonnage exceeding 19500 m.tonnes, the additional freight is to be calculated depending upon the intake of the cargo. Thus, the owner of the ship (Iran entity) is not only entitled to freight of a minimum M. Tonnes of 19,500 but also an addition freight depending on intake of the cargo. Therefore, the risk and liabilities undertaken by the charterer M/s Puyvast is only in the event of the tonnage being less than 19500 tonnes. Rising of invoice by the charterer and charging 49 Euros per m.tonn is of no relevance, since substantial portion of the freight is paid to the owner of the ship namely, the Iranian entity. As stated earlier, the risk and liabilities undertaken by the charter M/s Puyvast, the Netherlands entity, is limited only to a situation where the tonnage carried by the vessel is less than 19500 tonnes. Therefore, the substantial freight beneficiary is the owner of the ship, the Iranian entity and in view of this, the conclusion of the revenue authorities that relief under DTAA is not allowable is justified and in accordance with law and no interference is called for. It is ordered accordingly.
10. In the result, the appeal filed by the assessee is dismissed.