Case Law Details
Court: Mumbai bench of the Income Tax Appellate Tribunal
Citation: DDIT Vs. Nederlandsche Overzee Baggermaatschappiji B.V.
Brief: Recently, the Mumbai bench of the Income Tax Appellate Tribunal (the Tribunal) in the held that mere provision of a dredger on dry lease for carrying out dredging activity in India does not result in the taxpayer having a Permanent Establishment (PE) as per the India- Netherlands tax treaty (tax treaty).
Further, the Tribunal relied on OECD commentary which states that to form a PE, there should be existence of fixed place of business i.e. it must be establish a distinct place with certain degree of permanence. It usually means that persons who in one way or another are dependent on the enterprise, conduct the business of the enterprise in the state in which the place is situated.
Facts of the Case
• The taxpayer, a company incorporated in Netherlands, entered into a contract with Hollandsche Anneming Maatschappij(HAM) for providing dredger on lease which was to be used in Indian waters. The taxpayer received rentals from HAM on account of lease of dredger for the first time in the Assessment Year (AY) 1998-99 and offered the same for tax as royalty as per the tax treaty.
• For AY 1999- 00, the taxpayer filed a return of income declaring ‘NIL’ income. The taxpayer claimed that the hire rentals were no longer taxable in India in view of the amendment to Article 12 of the tax treaty wherein “payments for the use of equipment” was excluded from the purview of royalty.
• The Assessing Officer (AO) observed that for any increase in the fees of the master, officers and crew deployed, the taxpayer raised the bills on charters which clearly shows that the crew deployed on the vessel were employees of the taxpayer.
• The AO further held that the employees of the taxpayer on board implied that the lease was a wet lease and the vessel constitutes a branch office of the taxpayer. Therefore the taxpayer had a PE in India, within the meaning of Article 5 of the tax treaty.
Tax department’s contention
• The taxpayer had failed to furnish the details of the crew, period of stay of dredger etc. Further, the taxpayer raises bills for increase in the pay and wages of the master and the crew which implies the fact that the dredger in question was manned by the crew of the taxpayer and therefore the lease was a wet lease.
• The income in question was business income and the taxpayer had a PE in India.
Taxpayer’s contention
• The dredger was given on a dry lease basis on charter to HAM.
• For AY 1998- 99, the AO himself acknowledged the taxpayer’s claim that the dredger has been leased out on a dry basis and treated the rent as royalty.
Tribunal’s Ruling
• The Tribunal while observing the following evidences held that the lease was a dry lease:
– The responsibility for the operation and maintenance of the dredger, including the provision of the master, officers and crew for the dredger was on HAM.
– The taxpayer was not be responsible for loss or damage to HAM as a result of strikes, lock out or a restrain of labour on the dredger.
– Invoices were raised by M/s Arya Offshore on HAM evidencing that the expenses in connection with arrival of dredger in Indian water such as port dues, pilot charges etc. were incurred by HAM.
– The service agreement entered into between HAM and the third party OCS Consultancy and Services Pvt. Ltd. for hiring of officers and crews for the vessels show that the dredger was manned by employees of HAM and not the taxpayer.
– The dredger was serviced and maintained by HAM.
– The Tribunal observed that though under the domestic law, the charging section treats receipt as royalty, it cannot be brought to tax in view of the amendment to Article 12 of the tax treaty wherein “payments for the use of equipment” was excluded from the purview of royalty.
• The Tribunal relied on OECD commentary which states that to form a PE, there should be existence of fixed place of business i.e. it must be establish a distinct place with certain degree of permanence. It usually means that persons who in one way or another are dependent on the enterprise, conduct the business of the enterprise in the state in which the place is situated.
• The Tribunal held that the taxpayer had no personnel located in India for the purpose of execution of the contract entered by it. The Tribunal held that the lease of the equipment was a dry lease and mere dry lease of equipment does not result in a PE.
Our Comments
This is a welcome decision from the Mumbai Tribunal which states that mere provision of a dredger on dry lease for carrying out dredging activity in India does not result in the taxpayer having a PE as per the tax treaty. This ruling will provide relief to the taxpayers who have given equipment on dry lease to be used in India.
It is pertinent to note that the Tribunal has relied on OECD model commentary to determine PE although India is not a Member of OECD.
