Decided on September 30,1994



A. Kalyanasundharam, Accountant Member - (1.) THE present appeal filed by the department is with reference to the provision of tax that should have been deducted from the payment of hire charges of ship that is contained in Section 195(2) of the Income-tax Act, 1961 ('the Act'). THE objection of the department in the present appeal is on the conclusion by the CIT(A) that the hire charges is not liable to be taxed in India because of the provisions of Double Taxation Agreement between India & UK (DTA).
(2.) The dispute started with the assessee-company applying to the Assistant Commissioner of Income-tax (ACIT) for the issuing of 'No Objection Certificate' that was required by the Reserve Bank of India (RBI) for allowing any remittance out of India. The respondent company vide its letter dated 10-3-1993 applied for the above certificate for the remittance of US Dollars 104642.10 to M/s. Drake Maritime S.A.-London (DM) which covered the hire charges of a ship (H.V. Pelican). The respondent had stated that Oil & Natural Gas Commission (ONGC), a Government of India Undertaking had contracted with Mazagon Down Ltd. (MDL) for various services in connection with its activities of exploration/development of Mineral Oil (MO) in Bombay Offshore area. MDL in turn entered into a contract with the respondent for the provision of ship on hire and accordingly it had entered into Charter Party agreement with DM for hire of a ship that was effective from 7-12-1992. The ACIT held that, the hire of ship to an Indian company by DM in the circumstances of the case, has to be taken to mean that service was rendered by DM in India and hence the hire charges so received by it arose and accrued in India according to the provisions of Section 5(2) of the Income-tax Act, 1961. He also noted that, since DM itself was not engaged in the business of hiring of ships for exploration of oils, the provisions of Section 44BB for determination of income from hiring of machinery for exploration/production of mineral oil does not apply. He also noted that the Government of India had not issued any notification under Section 293A of the Act for levy of tax at a lower rate in regard to such contracts. He directed that the respondent should deduct 65% of the hire charges towards Indian Taxes and remit to UK the balance amount.
(3.) THE respondent in its appeal before CIT(A) had contended that the situs of the contract with UK company [Non-resident company (NR)] was not in India and therefore the income derived by the UK company was not liable to tax in India. THE respondent contended that in terms of Article 9 of DTA, NR is entitled to the relief from taxation in India. It referred to the clauses of DTA, the meaning of the term 'a Contracting State' and 'other Contracting State'. It contended that the income arising to non-residents engaged in the business of shipping, etc., are governed by special Sections 44B, 44BB and 172 of the Act, which all override the provisions of computation of income from business covered by Sections 28 to 43A of the Act. It was contended that in terms of the charter party agreement any dispute that might arise was subject to the jurisdiction of English Courts. It was submitted that the agreement permitted the sub-letting of the ship during the subsistence of the agreement because from the time the agreement was entered into, it had become Disponee Owner of the ship and it continued to enjoy the said status during the period of hire. It was accordingly contended that the payments of time hire being covered by the 'Sale of Disponee Ownership' and the situs of the contract being at UK, no income could arise to NR in India. In support of its contention it had placed reliance on (a) Lima Leitao & Co. Ltd. v. Union of India (1968] 70 ITR 518 (Goa, Daman & Diu); (b) decision of the Supreme Court in Union of India v. Gosalia Shipping (P.) Ltd. [1978] 113 ITR 307; and (c) decision of the Andhra Pradesh High Cour in Addl. CIT v. Skoda Export, Praha [1988] 172 ITR 358.;

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