(1.) OUT of these nine appeals, three appeals being ITA Nos. 3672 to 3674/Mum/2008 (assessee's appeals) and three appeals being ITA Nos. 4142 to 4144/Mum/2008 (Revenue's appeals) are cross appeals for assessment years 2004 -05, 2005 -06 and 2006 -07 which arise from three separate orders of ld. CIT(A) -31, Mumbai dated 27 -3 -2008 passed in the first round of litigation while three cross objections being COs. No. 200 to 202/Mum/2009 are filed by the assessee in respect of Revenue's appeal being ITA Nos. 4142 to 4144/Mum/2008. The remaining three appeals being ITA Nos. 4319, 4767 and 4768/Mum/2009 are the appeals filed by the assessee against three separate orders of ld. CIT(A) -31 Mumbai dated 15 -5 -2009 for assessment years 2004 -05, 2005 -06 and 2006 -07 passed in the second round of litigation. Since the issues involved in all these nine appeals and three cross objections are common and interlinked, the same have been heard together and are being disposed of by a single consolidated order for the sake of convenience. The relevant facts of the case giving rise to all these appeals and cross objections are as follows. The assessee M/s. Shipping Corporation of India Limited (SCIL in short) is a Government of India Enterprise which is engaged in the business of shipping. It owns around 90 ships which are plied all over the world. In the course of its business, SCIL is also required to hire ships to meet capacity requirements where exigencies arise. Such ships are taken on charter from the non -resident owners of the ships, registered outside India. The control and operation of all these ships, which are used in international waters, vests with SCIL. SCIL was called upon by the A.O. vide letter dated 9 -11 -2006 to furnish the details of ships/oil tankers/vessels taken on hire/time charter during the previous years relevant to assessment years 2004 -05, 2005 -06 and 2006 -07 along with the names and addresses of the foreign companies to whom the payments were made on account of hire/time charter charges. SCIL was also required by the A.O. to explain as to whether any tax was deducted at source before making such payments to the concerned non - resident entities. M/s. SCIL vide its letter dated 24 -4 -2007 furnished all the details required by the A.O. which revealed that no tax at source was deducted by SCIL from the payments made to the non -resident entities towards hire/time charter charges during the relevant three assessment years. The A.O., therefore, vide letter dated 28 -6 -2007 required SCI to show cause as to why it should not be treated as the assessee in default u/s 201(1) of the Income -tax Act, 1961 for its failure to deduct tax at source and also to show cause as to why interest u/s 201(1A) of the Act should not be charged in its case. In its reply submitted to the A.O. vide letter dated 27 -7 -2007, SCIL explained in detail as to how there was no failure on its part to deduct tax at source from the payments made to the non -resident entities on account of hire/time charter charges and why it should not be treated as an assessee in default u/s 201(1) of the Act. This explanation of the SCI was not found acceptable by the A.O. and he proceeded to hold, for the reasons given in the orders passed u/s 201(1)/201(1A) of the Act, that the hire/time charter charges paid by the assessee to the non -resident entities being in the nature of royalty (equipment royalty taking ship as an equipment), SCIL was required to deduct tax at source from the said payment. Accordingly, he treated SCI as assessee in default for its failure to deduct tax at source @20% on the amount remitted (grossed up) and also levied interest u/s 201(1) of the Act as under: - -
(2.) AGAINST the orders passed by the A.O. u/s 201/201(1)/(1A) of the Act for all the three years under consideration, SCI preferred its appeals before the ld. CIT(A) contending that the payments in question made to the non -resident entities towards hire/time charter charges were not in the nature of royalty within the meaning of section 9(1)(vi) of the Act read with Explanation 2 (iva) thereto. The ld. CIT(A) agreed with this contention raised on behalf of SCIL and held that the payments made by SCIL to the non -resident ship owners for time charter could not be considered as royalty as envisaged in clause (iva) of Explanation 2 to section 9(1)(vi) of the Act. The ld. CIT(A), however, referred to section 44B of the Act and concluded that SCI having entered into time charter arrangements with non -resident ship owners, it was a case of payment made to non -residents for carrying of the goods and amount paid by SCI to the non -resident ship owners was chargeable to tax in India as business profit u/s 44B of the Act. Having held so, the ld. CIT(A) directed the A.O. to consider the relevant Double Tax Avoidance Agreements (DTAAs) between India and foreign countries of which the non -resident ship owners were residents and allow appropriate relief, if any, to SCI as per the said DTAA. Aggrieved by the orders of the ld. CIT(A) taking this view in the first round of proceedings, which is partly in favour of the assessee, both the assessee and Revenue have preferred their respective appeals before the Tribunal and the SCI has also filed its cross objections.
(3.) MEANWHILE , the A.O. proceeded to give effect to the orders of the ld. CIT(A) passed in the first round. He called for the details of payments made by SCI to the ship owners. On perusal of the said details as well as the relevant DTAAs, the A.O. found that the remittances made to France were taxable in India @ 25% of the normal tax chargeable under Article DC of the relevant treaty. He also found that India did not have a DTAA with Liberia and hence remittances made to the said country were chargeable at normal rate applicable to the foreign company. The A.O. also examined the details of remittances made by SCI and held on such examination that the gross amount of charter hire charges including address commission, lashing/communication, visualizing and radiographic expenses and war risk premium were liable to be considered for the purpose of computation of income of the non -resident as per the provisions of section 44 -B of the Act. Accordingly, the A.O. determined 7.5% of the gross amount as income of the ship owners liable to tax in India as per the provisions of section 44B of the Act and treated SCI as the assessee in default u/s 201(1) of the Act to that extent. He also levied interest u/s 201(1A) of the Act on the amount so determined. Against the orders passed by the A.O. u/s 201(1)/201(1A) of the Act while giving effect to the orders of the ld. CIT(A) passed in the first round, SCIL again preferred its appeal before the ld. CIT(A) and after considering the submissions made on behalf of SCIL as well as the material available on record, the ld. CIT(A) dismissed the said appeals of the SCIL vide three separate orders passed on 15 -5 -2009. Against these orders passed by the ld. CIT(A) in the second round, SCIL has again preferred its appeal before the Tribunal being ITA Nos. 4319, 4767 and 4768/Mum/2009.
We have heard the arguments of both the sides and also perused the relevant material available on record. In its appeals being ITA Nos. 3672 to 3674/Mum/2008, SCIL, the assessee has raised a solitary common issue as to whether the ld. CIT(A), on the facts and as per the provisions of the Act, is justified in holding a view that the provisions of section 44B of the Act are directly applicable in its case. The ld. Representatives of both the sides at the time of hearing before us have agreed that this issue is squarely covered in favour of the assessee by the decision of the Tribunal in assessee's own case for A.Y. 2003 -04 rendered vide its order dated 15th December, 2009 passed in ITA No. 9143/Mum/2004. A copy of the said order is placed on record before us and perusal of the same shows that a similar issue has been decided by the Tribunal in favour of the assessee vide paras 7 to 9 of its order which read as under: - -
"7. We have considered the rival submissions. Section 44B read as follows: - -
Special provision for computing profits and gains of shipping business in the case of non -residents - (1) Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non -resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts specified in sub -section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession".
(2) The amounts referred to in sub -section (1) shall be the following, namely: - -
(i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and
(ii) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India."
Chartering is an activity within the shipping industry. In some cases a charterer may own cargo and employ a shipbroker to find a ship to deliver the cargo for a certain price, called freight rate. A charterer may also be a party without a cargo who takes a vessel on charter for a specified period from the owner and then trades the ship to carry cargo at a profit above the hire rate, or even makes a profit in a rising market by re -letting the ship out to other charterers.
A voyage charter is the hiring of vessel and crew for a voyage between a load port and a discharge port. The charterer pays the vessel owner on a per -ton or lump -sum basis. The owner pays the port costs (excluding stevedoring), fuel costs and crew costs.
A bareboat charter is an arrangement for the hiring of a vessel whereby no administration or technical maintenance is included as part of the agreement. The charterer pays for all operating expenses, including fuel, crew, port expenses and hull.
8. In the present appeal, there is no dispute that the chartering by SCI was a voyage charter. There is also no dispute that the chartered ships operated in international waters and payments were made to the ship owners outside India in foreign currencies. Section 44B(1) refers to an Assessee who is a non -resident, who is in receipt of amounts specified in sub -section (2) of section 44B. Sub -section (2) of section 44B refers to two situations: - -
"(1) the first situation talks about shipping of goods from a port in India. The amount paid or payable (whether in or out of India) to the Assessee or to any person, on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India. Admittedly in the case of SCI, even the Assessing Officer has accepted the fact that chartered ships operated in international waters. If that be so then the condition that the payment should be for shipping done at any port in India is not satisfied.
(2) The second situation talks about a case where the goods are not shipped from a port in India but in respect of chartering activity, receipt of amounts is actually in India or by fiction deemed to be received in India. The amount should be received or deemed to be received in India by or on behalf of the SCI on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India. Admittedly in the present the amounts were paid by SCI outside India in foreign currency.
9. Thus, the receipts in the hands of the recipient could not be brought within the fold of section 44B of the Act. The findings of learned CIT(A) without taking into consideration this factual aspect in our view cannot be sustained. We therefore hold that the recipients of the payments from SCI cannot be charged to tax on the receipts from SCI U/S. 44B of the Act. Therefore the payments by the SCI were not chargeable to tax in India and therefore there was no obligation on the part of the SCI to deduct tax at source u/s. 195 of the Act. Consequently the order of learned CIT(A) to this extent is held to be not correct. The other consequential directions of learned CIT(A) are also therefore held to be not correct. The appeal of the SCI to this extent is allowed. The other issues raised by the SCI in its grounds of appeal are not being adjudicated since the preliminary issue is decided in favour of the SCI."