Smit Singapore Pte. Ltd. v. DCIT [ITA No. 7055/Mum/2017, dt. 9-11-2020] : 2020 TaxPub(DT) 4689 (Mum-Trib)

Time charter cross border hiring of vessel -- Whether royalty under Indo-Singapore DTAA

Facts:

Assessee a Singapore resident had time charted a vessel named "Smit Borneo" with crew to Leighton India Contractors Pvt. Ltd. to furtherance on the pipeline project of ONGC. Assessee was in receipt of consideration from Leighton for the said operations. It was the claim of the assessee that the said amounts for the time charter, mobilization of the said vessel and reimbursements costs are to fall in the scope of section 44BB. Further since the assessee's time charter was for less than 183 days in India there was no Permanent Establishment (PE) which arose out of the project thus no amount was taxable in India. It was also confirmed that they were not subject to the exemption for shipping line Article 8 of the Indo-Singapore DTAA nor would their amounts fall under section 44B. The revenue alleged that the time chartering of vessel with its crew was royalty under the Income Tax Act and also under the Indo-Singapore DTAA as it gave a right to use an equipment read with section 9(1)(vi) Explanation 2 to Leighton Contracting India. Assessee countered that they had leased the entire vessel with the crew and the control and the management and operation of the vessel under the time charter still vested with them thus no royalty characterization was possible. Basing this reading of royalty the assessing officer upheld taxability of all the 3 amounts as royalty under the Act as well as under article 12(3)(b) of Indo-Singapore DTAA. The contention of the assessing officer was that Explanation 5 of section 9(1)(vi) does not warrant test of as to who owns or retains control of the right to use. The views of assessing officer was upheld by the DRP. On higher appeal --

Held in favour of the assessee that the said time charter with the crew did not give rise to any royalty reading under the Indo-Singapore DTAA or under the Income Tax Act. The assessee was found to be wrong in claiming the applicability of section 9(1)(vi) Explanation 2(v) in their case as they themselves have claimed that there was no PE existence to be falling in the scope of section 44BB. The time charter was with the crew so it was held to be an entire operations in its intent rather than simple leasing of the vessel. The reading was hence a case of business income. The amounts for the time charter, mobilization and the reimbursements none of these would fall in the scope of royalty under the Indo-Singapore DTAA or under the Income Tax Act. Treaty override confers beneficial provisions of the Income Tax Act or DTAA as the case may be to a non-resident was also upheld.

Applied:

Technip Singapore Pte. Ltd. v. DIT, (2016) 70 taxman.com 233 (Del) : 2016 TaxPub(DT) 2798 (Del-HC)

Sical Logistics Ltd. v. ADIT (I.T) Chennai [ITA No. 1074-1079/Mad/2015, dated 14-12-2016] ITAT Chennai. : 2017 TaxPub(DT) 0276 (Chen-Trib)

DCIT, International Taxation, Baroda v. Bombardier Transportation India Pvt. Ltd. (2017) 162 ITD 586 (Ahd) : 2017 TaxPub(DT) 0134 (Ahd-Trib)

DDIT (IT)-1, Hyderabad v. Dharti Dredging & Infrastructure Ltd. (2012) 146 TTJ 283 (Hyd) : 2012 TaxPub(DT) 1978 (Hyd-Trib)

Dissented:

Poompuhar Shipping Corporation v. ITO (IT)-II, Chennai (2014) 360 ITR 257 (Mad) : 2014 TaxPub(DT) 0181 (Mad-HC)

Editorial Note: The Explanation 2 of section 9(1)(vi) discussed here in the verdict reads as under --

"Explanation 2.--For the purposes of this clause, "royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'Capital gains') for

(i) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trademark or similar property;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

(v) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;

(vi) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or

(vii) the rendering of any services in connection

Indo-Singapore DTAA

12(3). The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use :--

(a) any copyright of a literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information;

(b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraphs 4(b) or 4(c) of Article 8.

As to why the case differs from Poompular shipping is explained in the below tabulation by the ITAT --

Below also make a noteworthy reading --

Asia Satellite Telecommunications Co. Ltd. v. DIT (2011) 332 ITR 340 (Del) : 2011 TaxPub(DT) 0886 (Del-HC), "The effect of an agreement made pursuant to section 90 is that if no tax liability is imposed under this Act, the question of resorting to agreement would not arise. No provision of the agreement can fasten a tax liability when the liability is not imposed by this Act. If a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it. In case of difference between the provisions of the Act and of an agreement under section 90, the provisions of the agreement shall prevail over the provisions of the Act and can be enforced by an appellate authority or the court. However, as provided by sub-section (2), the provisions of this Act will apply to the assessee in the event they are more beneficial to him. Where there is no specific provision in the agreement, it is the basic law, i.e., the Income Tax Act which will govern the taxation of income".