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Tax Publishers Bengal Tiger Line Pte. Ltd. v. DCIT [IT(TP)A No. 11/CHNY/2020, dt. 6-11-2020] : 2020 TaxPub(DT) 4688 (Chen-Trib.) Denial of benefits of Article 8 exemption to shipping business under Indo Singapore DTAA citing non-taxability in Singapore and invocation of Limitation of benefits (LOB) Article 24 *Facts:* Assessee was a non-resident shipping line operating from Singapore. They were in receipt of freight incomes which arose from operation of ships in international waters and thus they claimed immunity from Income Tax Act citing Article 8 of the Indo-Singapore DTAA which exempts income of a shipping line having international operations from being taxed in the source state (India) as only the state of residence (Singapore here) will have the exclusive right to tax the same. It was the case of the revenue that Article 8 exemption benefit cannot be offered to the assessee as factually they were exempt under Singapore tax laws. Besides the same, since DTAA being an ameliorative provision cannot be read that one cannot get into a zone of double non-taxation by adopting DTAA clauses. Besides this under Limitation of benefits (Article 24) of Indo-Singapore DTAA since Singapore did not tax it the benefit of Article 8 cannot be granted to the assessee. This was upheld by the DRP. On higher appeal -- Held in favour of the assessee that they were entitled to Article 8 shipping line business exemption. LOB clause 24 cannot stand in the way of they claiming Article 8 benefit. As to they not being taxed in Singapore; all that the DTAA says is liable to tax under the state of residence. It does not state liable to tax would mean one need to actually pay taxes as there might be other reasons for exempting the entity factually from tax. The reading that if the residential state chooses not to tax a resident then the source state is conferred the lapsing right to tax it by virtue of LOB clause is an erroneous reading. The AO/DRP's reading of Vienna convention was also incorrect. *Editorial Note:* To appreciate the verdict the below extracts need to be cited. The AO/DRP's reading of the DTAA was as under -- "From the abovementioned 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. 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 :-- -- Existence of an income that has accrued in a foreign country. -- The country of source and country of residence, both contending for the right to tax that income. 11. Only when both these conditions exist, can the provisions of DTAA be applied because it would result in a situation of "double taxation". However, when either one of the conditions does not exist then the application of DTAA becomes pointless. Similarly, the word "only" comes into picture as a tie breaker of sorts only where multiple parties are taxing the same income. However, when only one party remains as a contender then the term "only" loses all significance. 13. The assessee in his submission stated that the provisions of Article 24 of India Singapore tax treaty cannot be invoked on the facts of the elementary reason that the Indian Shipping Income of the Singaporean assessee is "neither exempt from India nor taxed at reduced rate". The assessee itself accepts that the income received by way of freight of shipping business is exempt from tax in Singapore. Thereby it cannot be said to be have been subjected to tax in Singapore. The unambiguous thrust of treaty on income being subject to tax in one contracting state to be able to claim treaty protection in other contracting state, and avoidance of Double non-taxation being a clear objective of the Indo-Singapore tax treaty, such exempt income will not be eligible to get treaty protection in Source state. For reference, the Article 24 of the India-Singapore DTAA is reproduced hereunder :-- "Where this Agreement provides (with or without other conditions) that income from sources in a contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State." 15. It is evident from the Article 24, the scheme of India Singapore treaty which specifically states that only such income can be given treaty benefit in India which has suffered tax in Singapore. Further it evidences that an income which is not taxed in Singapore cannot be granted tax exemption in India." Assessee's counter was -- ".........The shipping income dealt with under Article 8 states that profits derived by an enterprise of a contracting state from the operation of ships in international traffic shall be taxable only in that state, i.e., resident state. The word only debars the other contracting state to tax the shipping income, that is India is precluded from taxing the shipping income even if it is sourced from India An enterprise which is a tax resident of Singapore is liable for taxation oil its shipping income only in Singapore and not in India. When India does not have any taxation right on a shipping income of non-resident entity, exemption or reduced rate of taxation in the source state. It only envisages territorial and jurisdictional rights for taxing the income and India has no jurisdiction for any taxing right which are governed by Article 8. There is no stipulation about exemption under Article 8 of the shipping income which has been specifically provided in some of the Articles like Article 20, 21 & 22. Hence, it cannot be reckoned that shipping income earned from India is to be treated as exempt from tax or taxed at reduced rate, which is a condition precedent for applicability of Article 24, albeit India at the threshold does not have jurisdiction to tax the shipping income of the non-resident entity. Thus, the condition of Article 24 is not satisfied in the present case." "We submit that the inland revenue authority of Singapore (IRAS) vide its Letter, dated 17-9-2018 has already clarified and held that the provisions of article 24 of the India-Singapore would not apply to shipping income as specified in Article 8." The ITAT confirmed that the conditions of Article 24 were non-existent in the case of the assessee. Article 24 LOB warrants -- (a) The exemption should have been inside the DTAA clause to invoke Article 24 which is not the case of the assessee. (b) Then if the amounts received were actually lower then the benefit of DTAA be reduced to the actually received amount only. *Applied:* M.T. Maersk Mikage v. DIT(IT), (2016) 72 taxamann.com 359 (Guj) : 2016 TaxPub(DT) 3859 (Guj-HC) APL Co. Pte. Ltd. v. ADIT, (2017) 78 taxmann.com 240 (Mum) : 2017 TaxPub(DT) 0607 (Mum-Trib) Far Shipping (Singapore) Pte. Ltd. v. ITO, (2017) 84 taxmann.com 297 (Hyderabad-Tribunal) : 2017 TaxPub(DT) 2062 (Hyd-Trib) Bengal Tiger Line Ltd. v. DDIT(International Taxation), (2013) 33 taxmann.com 307 (Chennai-Tribunal) : 2013 TaxPub(DT) 1955 (Chen-Trib) Alabra Shipping Pte. Ltd. v. ITO (2015) 62 taxman.com 185 (Rajkot-Tribunal) : 2015 TaxPub(DT) 4051 (Rkt-Trib) ANOTHER OPINION Case Study on Limitation of Benefits Clause in DTAA Issue A non-resident shipping company of Singapore had an agent in India. The shipping company had availed benefits of article 8 relating to shipping business in India under Indo-Singapore DTAA. However, while scrutinizing the return the, assessing officer found that the freight proceeds were received by the non-resident shipping company not in Singapore but in a bank in the UK. Thus, the officer read article 24 of the Indo-Singapore DTAA (Limitation of benefits) clause and denied the assessee's claim of article 8 and thus taxed the shipping freight realizations on grounds that the income was not received in Singapore. On appeal, Commissioner of Income Tax (Appeals) upheld the same holding that the receipt of money in the respective country is a requirement to avail DTAA benefits. Is the action of the Assessing officer/Commissioner of Income Tax (Appeals) correct? Solution (1) The facts indicated are similar to a near recent decision of Rajkot ITAT in the case of Alabra Shipping Pte. Ltd. Singapore, GAC Shipping India Pvt. Ltd. -- as Agents for v. ITO, International Taxation [ITA No. 392/RJT/2014/AY 2011-12, dated 9-10-2014] : 2015 TaxPub(DT) 4051 (Rkt-Trib). (2) Before delving into the decision lets us understand the meaning of LOB (limitation of benefits clause). In DTAA, at times, the income received by the taxed party under the DTAA could be taxed at a lower rate of tax or exempt or taxed only on the part of the amount remitted, then the tax benefits of the DTAA relief shall also stand reduced to the extent of the amount remitted or the amount taxed. This is due to presence of only passive income like interest, royalty (taxed at a presumptive rate normally) in a tax jurisdiction in which the DTAA is being read. (3) Article 24 of the limitation of benefits clause of Indo-Singapore DTAA reads as under -- Limitation of relief 1. Where this Agreement provides (with or without other conditions) that income from sources in a Contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State, the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State. 2. However, this limitation does not apply to income derived by the Government of a Contracting State or any person approved by the competent authority of that State for the purpose of this paragraph. The term "Government" includes its agencies and statutory bodies. (4) The ITAT held that on the receipt of money in a different location, other than the State of the residency, assessing officer cannot deny the benefits of article 8 as the benefit of shipping income clause is for the residency of the shipping entity. (5) Further, to apply LOB clause following two conditions are sine qua non cumulatively -- (a) The income should be exempt or taxed at a lower rate. (b) The income should be taxed only on part of the income either on the amount remitted or received in that Contracting State. The non-receipt of income in a country does not mean limitation of benefits get triggered. What has to be seen factually if the income in question is taxed in that country in full or not. (6) In the event of meeting the above two clauses, the treaty benefit shall be restricted to the extent of the income taxed or the part taxed. This is in line with source taxation or territorial taxation principle. (7) The assessee was able to prove the following facts -- -- They being a tax resident in Singapore. -- The receipt of money in a neutral bank outside Singapore was offered to tax in Singapore. (8) There is an onus cast on the assessee to prove that the income which was in question is offered to tax in the treaty country which is factually done in this case. Once this is done, LOB clause cannot be invoked. (9) Hence, on facts, there was no way the LOB clause can be pressed into service here in this case. Thus held the ITAT and granted the benefit of article 8 benefit to the shipping entity, thereby quashing the order of the lower authorities.

Tax Publishers

Bengal Tiger Line Pte. Ltd. v. DCIT [IT(TP)A No. 11/CHNY/2020, dt. 6-11-2020] : 2020 TaxPub(DT) 4688 (Chen-Trib.)

Denial of benefits of Article 8 exemption to shipping business under Indo Singapore DTAA citing non-taxability in Singapore and invocation of Limitation of benefits (LOB) Article 24

Facts:

Assessee was a non-resident shipping line operating from Singapore. They were in receipt of freight incomes which arose from operation of ships in international waters and thus they claimed immunity from Income Tax Act citing Article 8 of the Indo-Singapore DTAA which exempts income of a shipping line having international operations from being taxed in the source state (India) as only the state of residence (Singapore here) will have the exclusive right to tax the same. It was the case of the revenue that Article 8 exemption benefit cannot be offered to the assessee as factually they were exempt under Singapore tax laws. Besides the same, since DTAA being an ameliorative provision cannot be read that one cannot get into a zone of double non-taxation by adopting DTAA clauses. Besides this under Limitation of benefits (Article 24) of Indo-Singapore DTAA since Singapore did not tax it the benefit of Article 8 cannot be granted to the assessee. This was upheld by the DRP. On higher appeal --

Held in favour of the assessee that they were entitled to Article 8 shipping line business exemption. LOB clause 24 cannot stand in the way of they claiming Article 8 benefit. As to they not being taxed in Singapore; all that the DTAA says is liable to tax under the state of residence. It does not state liable to tax would mean one need to actually pay taxes as there might be other reasons for exempting the entity factually from tax. The reading that if the residential state chooses not to tax a resident then the source state is conferred the lapsing right to tax it by virtue of LOB clause is an erroneous reading. The AO/DRP's reading of Vienna convention was also incorrect.

Editorial Note: To appreciate the verdict the below extracts need to be cited.

The AO/DRP's reading of the DTAA was as under --

"From the abovementioned 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.

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 :--

-- Existence of an income that has accrued in a foreign country.

-- The country of source and country of residence, both contending for the right to tax that income.

11. Only when both these conditions exist, can the provisions of DTAA be applied because it would result in a situation of "double taxation". However, when either one of the conditions does not exist then the application of DTAA becomes pointless. Similarly, the word "only" comes into picture as a tie breaker of sorts only where multiple parties are taxing the same income. However, when only one party remains as a contender then the term "only" loses all significance.

13. The assessee in his submission stated that the provisions of Article 24 of India Singapore tax treaty cannot be invoked on the facts of the elementary reason that the Indian Shipping Income of the Singaporean assessee is "neither exempt from India nor taxed at reduced rate". The assessee itself accepts that the income received by way of freight of shipping business is exempt from tax in Singapore. Thereby it cannot be said to be have been subjected to tax in Singapore.

The unambiguous thrust of treaty on income being subject to tax in one contracting state to be able to claim treaty protection in other contracting state, and avoidance of Double non-taxation being a clear objective of the Indo-Singapore tax treaty, such exempt income will not be eligible to get treaty protection in Source state. For reference, the Article 24 of the India-Singapore DTAA is reproduced hereunder :--

"Where this Agreement provides (with or without other conditions) that income from sources in a contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State."

15. It is evident from the Article 24, the scheme of India Singapore treaty which specifically states that only such income can be given treaty benefit in India which has suffered tax in Singapore. Further it evidences that an income which is not taxed in Singapore cannot be granted tax exemption in India."

Assessee's counter was --

".........The shipping income dealt with under Article 8 states that profits derived by an enterprise of a contracting state from the operation of ships in international traffic shall be taxable only in that state, i.e., resident state. The word only debars the other contracting state to tax the shipping income, that is India is precluded from taxing the shipping income even if it is sourced from India An enterprise which is a tax resident of Singapore is liable for taxation oil its shipping income only in Singapore and not in India. When India does not have any taxation right on a shipping income of non-resident entity, exemption or reduced rate of taxation in the source state. It only envisages territorial and jurisdictional rights for taxing the income and India has no jurisdiction for any taxing right which are governed by Article 8. There is no stipulation about exemption under Article 8 of the shipping income which has been specifically provided in some of the Articles like Article 20, 21 & 22. Hence, it cannot be reckoned that shipping income earned from India is to be treated as exempt from tax or taxed at reduced rate, which is a condition precedent for applicability of Article 24, albeit India at the threshold does not have jurisdiction to tax the shipping income of the non-resident entity. Thus, the condition of Article 24 is not satisfied in the present case."

"We submit that the inland revenue authority of Singapore (IRAS) vide its Letter, dated 17-9-2018 has already clarified and held that the provisions of article 24 of the India-Singapore would not apply to shipping income as specified in Article 8."

The ITAT confirmed that the conditions of Article 24 were non-existent in the case of the assessee. Article 24 LOB warrants --

(a) The exemption should have been inside the DTAA clause to invoke Article 24 which is not the case of the assessee.

(b) Then if the amounts received were actually lower then the benefit of DTAA be reduced to the actually received amount only.

Applied:

M.T. Maersk Mikage v. DIT(IT), (2016) 72 taxamann.com 359 (Guj) : 2016 TaxPub(DT) 3859 (Guj-HC)

APL Co. Pte. Ltd. v. ADIT, (2017) 78 taxmann.com 240 (Mum) : 2017 TaxPub(DT) 0607 (Mum-Trib)

Far Shipping (Singapore) Pte. Ltd. v. ITO, (2017) 84 taxmann.com 297 (Hyderabad-Tribunal) : 2017 TaxPub(DT) 2062 (Hyd-Trib)

Bengal Tiger Line Ltd. v. DDIT(International Taxation), (2013) 33 taxmann.com 307 (Chennai-Tribunal) : 2013 TaxPub(DT) 1955 (Chen-Trib)

Alabra Shipping Pte. Ltd. v. ITO (2015) 62 taxman.com 185 (Rajkot-Tribunal) : 2015 TaxPub(DT) 4051 (Rkt-Trib)

ANOTHER OPINION

Case Study on Limitation of Benefits Clause in DTAA

Issue

A non-resident shipping company of Singapore had an agent in India. The shipping company had availed benefits of article 8 relating to shipping business in India under Indo-Singapore DTAA. However, while scrutinizing the return the, assessing officer found that the freight proceeds were received by the non-resident shipping company not in Singapore but in a bank in the UK. Thus, the officer read article 24 of the Indo-Singapore DTAA (Limitation of benefits) clause and denied the assessee's claim of article 8 and thus taxed the shipping freight realizations on grounds that the income was not received in Singapore. On appeal, Commissioner of Income Tax (Appeals) upheld the same holding that the receipt of money in the respective country is a requirement to avail DTAA benefits. Is the action of the Assessing officer/Commissioner of Income Tax (Appeals) correct?

Solution

(1) The facts indicated are similar to a near recent decision of Rajkot ITAT in the case of Alabra Shipping Pte. Ltd. Singapore, GAC Shipping India Pvt. Ltd. -- as Agents for v. ITO, International Taxation [ITA No. 392/RJT/2014/AY 2011-12, dated 9-10-2014] : 2015 TaxPub(DT) 4051 (Rkt-Trib).

(2) Before delving into the decision lets us understand the meaning of LOB (limitation of benefits clause). In DTAA, at times, the income received by the taxed party under the DTAA could be taxed at a lower rate of tax or exempt or taxed only on the part of the amount remitted, then the tax benefits of the DTAA relief shall also stand reduced to the extent of the amount remitted or the amount taxed. This is due to presence of only passive income like interest, royalty (taxed at a presumptive rate normally) in a tax jurisdiction in which the DTAA is being read.

(3) Article 24 of the limitation of benefits clause of Indo-Singapore DTAA reads as under --

Limitation of relief

1. Where this Agreement provides (with or without other conditions) that income from sources in a Contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State, the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State.

2. However, this limitation does not apply to income derived by the Government of a Contracting State or any person approved by the competent authority of that State for the purpose of this paragraph. The term "Government" includes its agencies and statutory bodies.

(4) The ITAT held that on the receipt of money in a different location, other than the State of the residency, assessing officer cannot deny the benefits of article 8 as the benefit of shipping income clause is for the residency of the shipping entity.

(5) Further, to apply LOB clause following two conditions are sine qua non cumulatively --

(a) The income should be exempt or taxed at a lower rate.

(b) The income should be taxed only on part of the income either on the amount remitted or received in that Contracting State.

The non-receipt of income in a country does not mean limitation of benefits get triggered. What has to be seen factually if the income in question is taxed in that country in full or not.

(6) In the event of meeting the above two clauses, the treaty benefit shall be restricted to the extent of the income taxed or the part taxed. This is in line with source taxation or territorial taxation principle.

(7) The assessee was able to prove the following facts --

-- They being a tax resident in Singapore.

-- The receipt of money in a neutral bank outside Singapore was offered to tax in Singapore.

(8) There is an onus cast on the assessee to prove that the income which was in question is offered to tax in the treaty country which is factually done in this case. Once this is done, LOB clause cannot be invoked.

(9) Hence, on facts, there was no way the LOB clause can be pressed into service here in this case. Thus held the ITAT and granted the benefit of article 8 benefit to the shipping entity, thereby quashing the order of the lower authorities.