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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI AMARJIT SINGH & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the assessee challenging the impugned final assessment order dated 18/01/2023, passed under section 143(3) r/w 144C(13) of the Income Tax Act, 1961 ("the Act"), pursuant to the directions dated 27/12/2022, issued by the learned Dispute Resolution Panel- 2, Mumbai [“learned DRP”], under section 144C(5) of the Act, for the assessment year 2020–21.
In this appeal, the assessee has raised the following grounds:–
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023
“On the facts and in the circumstances of the case and in law, the AO, based on directions of DRP has; GENERAL 1. erred in assessing total income at Rs 25,56,83,055 as against returned income of Rs Nil; Taxability of receipts on hire of vessel on time charter basis of Rs 19,79,13,362 2. erred in holding that charges received on account of time charter services rendered by the Appellant for the vessel 'Smit Borneo' to Boskalis Offshore Contracting BV in India were rendered for the 'use' of industrial, commercial or scientific equipment, thereby treating the same as "Royalty" under section 9(1)(vi) of the Income Tax Act, 1961 ('the Act'); 3. erred in holding that the impugned time charter services shall be covered within the definition of the term "Royalty" under Article 12(4) of the India - Singapore Double Tax Avoidance Agreement ('DTAA'); 4. without prejudice to the above, erred in not applying the special deeming provisions of section 44BB of the Act, wherein 10% of the gross receipts shall be deemed to be income of the Appellant; Taxability of reimbursement of expenses of Rs 5,77,69,693 5. erred in holding that reimbursement of expenses on account of on-hire water, fuel, lubricants and repairs cost received by the Appellant amounting to Rs. 5,77,69,693 is intrinsically linked to time charter services and therefore it is for the 'use' of industrial, commercial or scientific equipment, thereby treating the same as "Royalty" under section 9(1)(vi) of the Act; 6. erred in holding that the impugned reimbursement of expenses shall be covered within the definition of the term "Royalty" under Article 12(4) of the India - Singapore DTAA; 7. without prejudice to the above, erred in not applying the special deeming provisions of section 44BB of the Act, wherein 10% of the gross receipts shall be deemed to be income of the Appellant; Levy of interest under section 234A of Rs 2,87,582 erred in levying interest under section 234A of the Act amounting to Rs 2,87,582; 8. Levy of interest under section 2348 of the Act of Rs 48,88,894 9. erred in levying interest under section 234B of the Act amounting to Rs 48,88,894; Initiation of penalty proceedings under section 270A of the Act
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023
10. erred in initiating penalty proceedings under section 270A of the Act.”
Ground no.1 is general in nature and therefore needs no separate adjudication.
The issue arising in grounds no.2 and 3, raised in assessee‟s appeal, is pertaining to the taxability of receipts on hire of vessel on a time charter basis.
The brief facts of the case, pertaining to this issue, are: The assessee is a company incorporated in Singapore. It is operating in the maritime sector and is primarily engaged in the business of salvage, wreck removal, environment protection, and consultancy services. During the year under consideration, the assessee earned revenues in connection with its contract with Boskalis Offshore Contracting BV (“BOC BV”) in respect of the charter of the vessel, Smit Borneo. The assessee chartered the vessel, Smit Borneo along with the crew to BOC BV, which in turn had entered into a contract with BG Exploration and Production India Ltd for carrying certain activities in connection with the exploration/extraction of mineral oils in the Tapti Gas Field. During the year under consideration, the assessee filed its return of income on 15/12/2020 declaring a total income of Rs. Nil and claimed a refund of Rs.1,25,41,070. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act along with a detailed questionnaire were issued and duly served upon the assessee. During the assessment proceedings, the assessee was asked to show cause as to why the receipts amounting to Rs.25,40,08,132 from BOC BV should not be taxable as Royalty. In response thereto, the assessee
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023 submitted that it earned revenue amounting to Rs.19,79,13,362 on account of charter hire charges. It was further submitted that the assessee has chartered the vessel, Smit Borneo, to BOC BV on a time charter basis. Assessee‟s agreement with BOC BV is for the provision of vessel along with the crew. Thus the consideration received by the assessee was not on account of „use’ or „right to use‟ of the aforesaid vessel, i.e. Smit Borneo, which in fact throughout remained with the assessee and was never transferred to BOC BV. It was further submitted that though the vessel, Smit Borneo, was used by the assessee for rendering services to BOC BV, but the same, as per the terms of the agreement was not used by BOC BV on an independent basis. It was also submitted that the control of the vessel throughout remain with the assessee and did not get transferred to BOC BV. Accordingly, since the vessel along with the crew was used by the assessee for rendering services to BOC BV, it cannot be held as being in the nature of contract of hiring equipment by BOC BV from the assessee and should not be taxable as Royalty under the Act. On a without prejudice basis, the assessee submitted that the receipt should be considered as taxable under section 44BB of the Act and hence is excluded from the definition of Royalty.
The Assessing Officer (“AO”), vide draft assessment order, dated 24/03/2022 passed under section 144C of the Act did not agree with the submissions of the assessee and held that the pith and substance of the agreement between the assessee and BOV BV is hiring/leasing/chartering of vessel and not providing services by assessee to BG Exploration and Production India Ltd for exploration of prospecting mineral oils. The AO further
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023 held that the taxability of the receipt under section 44BB of the Act is also not triggered for the year under consideration since the assessee does not have a Permanent Establishment in India. The AO also held that the vessel, Smit Borneo, is a crane barge which is industrial, scientific, and commercial equipment other than the one falling in Article 8(4)(b) & (c) of the India Singapore Double Taxation Avoidance Agreement (“DTAA”). The AO also held that the receipts, in the present case, are in view of the lease of Smit Borneo and are also covered both by clause (iva) of Explanation-2 of section 9(1)(vi) of the Act and Article 12(3)(b) of the India Singapore DTAA. The AO by placing reliance upon the decision of the Hon‟ble Madras High Court in Poompuhar Shipping Corporation Ltd [2013] 30 taxmann.com 150 (Madras) held that the consideration received by the assessee is in the nature of Royalty, since control and “use” or “right to use” has been passed on to the charterers, i.e. BOC BV by the assessee. Accordingly, the AO held that receipts are taxable as royalty liable for taxation @10% as per the Act and the India Singapore DTAA.
The assessee filed detailed objections against the addition made by the AO. Vide directions dated 27/12/2022, issued under section 144C(5) of the Act, the learned DRP, noted that the issue is recurring in nature and has already been adjudicated in the assessment year 2014-15, with material facts remaining the same this year. Accordingly, following the directions rendered in the assessment year 2014-15 in assessee‟s own case, the learned DRP rejected the objections filed by the assessee.
In conformity with the directions issued by the learned DRP, the AO, vide impugned final assessment order dated 18/01/2023, assessed the receipts Page | 5
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023 from chartering as Royalty. Being aggrieved, the assessee is in appeal before us.
During the hearing, the learned Authorised Representative (“learned AR”) submitted that a similar issue has been decided in favour of the assessee by the decisions of the coordinate bench of the Tribunal rendered in assessee‟s own case for the preceding assessment years. The learned AR further submitted that the learned DRP did not grant relief to the assessee merely to keep the issue alive.
On the other hand, the learned Departmental Representative (“learned DR”) by vehemently relying upon the orders passed by the lower authorities submitted that in the present case, the vessel was given on in time charter, while in the preceding year, the same was on voyage charter. By referring to the assessment order, the learned DR submitted that the charterer was given the right to make structural alterations to the vessel for its activity and the same is possible only when it has the right to use the vessel.
We have considered the rival submissions and perused the material available on record. We find that the learned DRP after taking note of the decision of the coordinate bench of the Tribunal on a similar issue in paragraph 6.3.2 of its direction rejected the objections filed by the assessee merely to keep the issue alive judicially. We find that the coordinate bench of the Tribunal in assessee‟s own case in Smit Singapore Pte Ltd. v/s DCIT, in ITA No.7055/Mum./2017, vide order dated 09/11/2020, for the assessment year 2014-15, held that the receipts on hire of vessel, viz Smit Borneo, on time
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023 charter basis to Leighton India Contractors Private Limited is not in the nature of Royalty as per Article 12 of the India Singapore DTAA. The relevant findings of the coordinate bench, in the aforesaid decision, are as under:-
“14. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. As observed by us hereinabove, the assessee had sought our indulgence for adjudication of three issues viz. (1) that, as to whether or not the consideration received by the assessee from time charter of its vessel 'Smit Borneo' had rightly been assessed as 'royalty' by the A.O/DRP under clause (iva) of the 'Explanation 2' to Sec. 9(1)(vi) of the Act, and also Article 12(3)(b) of the India-Singapore tax treaty; (ii) that, as to whether or not the A.O/DRP are right in law and the facts of the case in treating the mobilisation fees received by the assessee as 'royalty', both under the Act, as well as the India-Singapore tax treaty; and (iii) that, as to whether or not the A.O/DRP are justified in treating the consideration received by the assessee towards reimbursement of expenses from Leighton India Contractor Pvt. Ltd., as royalty.
In our considered view, the genesis of the controversy involved in the present appeal primarily hinges around the aspect that as to whether or not the lower authorities were right in concluding that the consideration received by the assessee from the time charter of the vessel viz. 'Smit Borneo' alongwith the crew was to be treated as 'royalty', both as per the clause (iva) of the 'Explanation 2' to Sec. 9(1)(vi) of the Act, AND Article 12(3)(b) of the India- Singapore Tax Treaty. Before proceeding any further, it may be relevant to point out that the fact that the assessee during the year under consideration had not constituted any PE in India is not in dispute before us. For a fair appreciation of the issue under consideration, it would be relevant to cull out the definition of the term 'royalty' as contemplated in 'Explanation 2' to Sec. 9(1)(vi) of the Act, AND Article 12(3)(b) of the India-Singapore tax treaty. The term 'royalty' as defined in the 'Explanation 2' of Sec. 9(1)(vi) of the Act, 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 trade mark 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; Page | 7
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023
(v) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 4488; (vi) the transfer of all or any rights (including the granting of a license) in respect et 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 (vil) the rendering of any services in connection with the activities referred to in sub-clauses (1) to (iv), (iva) and (v)" Further, the term 'royalty' has been defined as per Article 12 of the India- Singapore tax treaty, as under: “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 observed by us hereinabove, the assessee in order to impress upon us that its case does not fall within the meaning of the term 'royalty' as defined in 'Explanation 2' to Sec.9(1)(vi) of the Act, had came forth with two fold contentions viz. (i) that, as the assessee had time chartered its vessel 'Smit Borneo' along with the crew to Leighton India Contractor Pvt. Ltd., and had not given or parted with the 'use' or 'right to use' of the said vessel to the charterer viz. Leighton India Contractor Pvt. Ltd, therefore, the consideration received in lieu thereof could not be held as royalty; and (ii) that, as the services provided by the assessee by time charter of its vessel viz. 'Smit Borneo' were inextricably connected with prospecting, extraction and production of mineral oils, the consideration therein received from the charterer being in the nature of amounts referred to in Sec. 44BB of the Act, would thus fall within the exclusion carved out in the definition of the term 'royalty' as contemplated in clause (iva) of the Explanation 2' to Sec.9(1)(vi) of the Act. We shall first deal with the second limb of the aforesaid contention advanced by the Id. A.R before us. As observed by us hereinabove, it is the claim of the assessee that as the time charter receipts were covered by Sec. 44BB of the Act, the same would thus fall within the exclusion carved out in the definition of the term 'royalty' as contemplated in clause (iva) of the 'Explanation 2' to Sec. 9(1)(vi) of the Act. We are unable to persuade ourselves to accept the aforesaid claim of the assessee. As had been observed by us hereinabove, in the absence of the assessee's PE in India, the aforesaid time charter receipts could not have been brought to tax under Sec 44BB L of the Act. In fact, the assessee had itself not offered the aforesaid amount for tax under Sec.44BB of the Act. Accordingly, in the backdrop of the aforesaid facts, now when the time charter receipts during the year under consideration had not been brought to tax, or in fact, could not have been subjected to tax under Sec. 44BB of the Act, therefore, the claim of Page | 8
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023 the assessee that the same would fall within the scope and gamut of the exclusion carved out in the definition of term 'royalty' as contemplated in clause (iva) of the 'Explanation 2' to Sec. 9(1)(vi) cannot be accepted, and is thus rejected.
16. We shall now advert to the claim of the assessee that as it had time chartered its vessel 'Smit Borneo' along with the crew to Leightor. India Contractor Pvt. Ltd., and had at no stage given or parted with the 'use' or 'right to use' of the said vessel to the charterer, viz. Leighton India Contractor Pvt. Ltd., the same thus could not be treated as royalty in the hands of the assessee. On a perusal of the records, we find substantial force in the claim of the assessee that the nature of 'agreement' entered into by it with Leighton India Contractor Pvt. Ltd., was for providing of time charter services, and not for hiring of any equipment. As such, there is substance in the claim of the Id. A.R that the assessee had only time chartered its vessel viz. 'Smit Borneo' along with the crew to Leighton India Contractor Pvt. Ltd., and had at no stage passed over the 'use' or right to use' of the said vessel to the charterer. But then, we cannot remain oblivious of the fact that the Id. A.R could not dislodge the claim of the revenue that as per 'Explanation 5' to Sec. 9(1)(vi) of the Act, the fact as to whether the possession or control of the right or property was with the payer or the right or property was used directly by the payer, would have any bearing on the characterising of the amounts received for 'use', or the 'right to use' of any industrial, commercial or scientific equipment, as 'royalty', within the meaning of clause (iva) of the 'Explanation 2' to Sec. 9(1)(vi) of the Act. In fact, it was the claim of the Id. A.R, that the consideration received on time charter of the vessel, viz. 'Smit Borneo' did not fall within the realm of the definition of the term 'royalty' within the meaning of Article 12 of the India- Singapore tax treaty, and thus, the same as per Sec. 90(2) could not be brought to tax under the Act. Before proceeding any further, we may herein observe, that as held by the Hon'ble High Court of Delhi in the case of Asia Satellite Telecommunications Co. Ltd. Vs. DIT (2011) 332 ITR 340 (Del), the effect of a tax treaty made pursuant to Sec. 90 is that if no tax liability is imposed under the Act, the question of resorting to the tax treaty would not arise. Further, no provision of the tax treaty can fasten a tax liability when the liability is not imposed by the Act. But then, if a tax liability is imposed by the Act, the agreement may be resorted to for negativing or reducing it. Further, as observed by the Hon'ble High Court, in case of difference between the provisions of the Act and of a tax treaty under Sec. 90, the provisions of the tax treaty shall prevail over the provisions of the Act and can be enforced by an appellate authority or the Court. However, as provided by sub-sec (2) of Sec. 90, the provisions of the Act will apply to an assessee in the event they are more beneficial to him. A similar view has been arrived at by the Hon'ble High Court of Bombay in the case of CIT Vs. Siemens Aktionlesellschaft (2009) 310 ITR 320 (Bom). In the said case, it was inter alia observed by the Hon'ble High Court that though provisions of Sec. 9 of the Act would be applicable, however, considering the provisions of the DTAA if beneficial than the provisions of the IT Act, the provisions of DTAA would prevail.
17. In the backdrop of our aforesaid observations, we shall test the claim of the Id. A.R that the time charter receipts would not fall with the realm of the definition of 'royalty', as provided in Article 12 of the India- Singapore tax treaty. For a fair appreciation of the aforesaid issue we need to look into the relevant clauses of the aforesaid 'agreement', which reads as under: Page | 9
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023
Clause 7 (a)(i) Subject to STCW code, The Master shall carry out his duties promptly and the Vessel shall render all reasonable services within her capabilities by day and by night and at such times and on such schedules as the Charterers may reasonably require without any obligations of the Charterers to pay to the Owners or the Master, Offices or the Crew of the Vessel any excess or overtime payment." Clause 7 (b) The Vessel's crew if required by charterers will connect and disconnect electric cables, fuel, water and pneumatic hoses when placed on board the Vessel for loading and unloading cargoes, and will hook and unhook cargo on board the Vessel when loading or discharging alongside offshore units. Clause 7(d) The entire operation, navigation, and management of the vessel shall be in the exclusive control and command of the Owners, their Masters, Officers and Crew. The Vessel will be operated and the services hereunder will be rendered as requested by the Charterers, subject always to the exclusive Right of the Owners or the Master of the Vessel to determine whether operation of the Vessel may be safely undertaken. In the performance of the Charter Party, the Owners are deemed to be an contractor, the Charterers being concerned only with the results of the services performed. Clause 8 (a) The owners shall provide and pay for all provisions of Vessel crew during mobilization and demobilization voyages, all, wages and all other expenses of the Master, officers and Crew: all maintenance and repair of the Vessel's bull, machinery and equipment as specified in ANNEX "A". Clause 46 (c) of the agreement which provides as under: Owner shall Barge/Marine/ Maintenance crew adequate for 24 (Twenty /four) hours operation. (Emphasis supplied by us) On a perusal of the aforesaid extract of the 'agreement', we find, that the consideration received by the assessee was not on account of 'use' or 'right to use' of the aforesaid vessel viz. 'Smit Borneo', which in fact had throughout remained with the assessee and was never transferred to the charterer viz. Leighton India Contractor Pvt. Ltd. As such, the vessel viz. 'Smit Borneo' was though used by the assessee for rendering services to Leighton India Contractor Pvt. Ltd., but the same, as per the terms of the agreement' was not used by Leighton India Contractor Pvt. Ltd. on an independent basis. In our considered view there is a subtle distinction between the 'use' of an equipment by the assessee 'for the charterer, and the use of the equipment 'by' the charterer. In our considered view, on the basis of the facts discernible from the records, as the vessel viz. 'Smit Borneo' along with crew was used by the assessee for rendering of services to Leighton India Contractor Pvt. Ltd., it could thus by no means be held as being in the nature of a contract of hiring of equipment by Leighton India Contractor Pvt. Ltd. from the assessee. Our aforesaid view that in a case where the control of the equipment throughout had remained with the assessee and did not get transferred to the charterer, Page | 10
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023 the consideration therein received cannot be brought within the realm of the definition of the term 'royalty' is fortified by the judgment of the Hon'ble High Court of Delhi in the case of Technip Singapore Pte. Ltd. Vs. DIT, 70 taxman.com 233 (Del). In the said case, the Hon'ble High Court relying on its earlier judgment in the case of Asia Satellite Telecommunication company Itd. Vs. DIT (2011) 332 ITR 340 (Del), had observed as under: “34. As far as DTAA in the present case is concerned, the income earned by the Assessee would be treated as royalty only where it is received as consideration for the use of the equipment, i.e., industrial, commercial or scientific. It can also be for use of or the right to use any copyright or for information concerning industrial, commercial or scientific experience. It is clear from the contract itself that the control of the equipment throughout remained with the Petitioner and did not get transferred to IOCL. 35.1 In this context, it is necessary to refer to the decision of this Court in Asia Satellite Telecommunications Co. Ltd (supra). The facts were that the Assessee in that case, Asia Satellite Telecommunications Co. Ltd. (ASTC), a company incorporated in Hong Kong, was carrying on the business of private satellite communications and broadcasting facilities and was the lessee of a satellite called AsiaSat 1 which was launched in April 1990 and was the owner of a satellite called AsiaSat 2 which was launched in November 1995. ASTC entered into agreements with television channels, communication companies or other companies who desired to utilize the transponder capacity available on the assessee's satellite to relay their signals. The customers had their own relaying facilities, which were not situated in India. From these facilities, the signals were beamed in space where they were received by a transponder located in the assessee's satellite. 35.2 The process of transmission of TV programmes started with TV channels (customers of ASTC) uplinking the signals containing the television programmes; thereafter the satellite received the signals and after amplifying and changing their frequency relayed it down in India and other countries where the cable operators caught the signals and distributed them to the public. Any person who had a dish antenna could also catch the signals relayed from these satellites. The role of ASTC was that of receiving the signals, amplifying them and after changing the frequency relaying them on the earth. For this service, the TV channels paid ASTC. 35.3 The Court held that ASTC was the operator of the satellites and in control of the satellite. It had not leased out the equipment to the customers. ASTC had merely given access to a broadband width available in a transponder which could be utilized for the purpose of transmitting signals of the customer. It was held that the terms "lease of transponder capacity", "lesson", "lessee" and "rental" used in the agreement would not be the determinative factors. There was no use of "process" by the television channels. Moreover, no such purported use had taken place in India. It was held that the services provided were an "integral part of the satellite" and remained "under the control of the satellite/transponder owner (like the appellant in this case) and it does not vest with the telecast operator/ television channels." The Court rejected the plea that the payment made to ASTC could be 'royalty' within the meaning of Section 9 (1) (vi) of the Act. The Court reiterated that "the fact remains that there is no use of 'process' by the television channels. Moreover, no such purported use has taken place in India." 35.4 The Court has held that the concept of dominion or control is sine qua non use. Further Explanation 5 below Section 9 (vi), to the extent it is not beneficial to the Assessee, will have to in terms of Section 90 (2) of the Act, make way for Page | 11
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023 the provision of the DTAA which is more beneficial to the Assessee. This aspect too has been clarified by the Court in Asia Satellite Telecommunications (supra). It was observed: "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."
For the payment to be characterised as one for the use of the equipment, factually, the equipment must be used by IOCL. In the present case factually, there is no finding that the equipment had actually been used by IOCL. There is a difference between the use of the equipment by the Petitioner 'for' IOCL and the use of the equipment 'by' IOCL Since the equipment was used for rendering services to IOCL, it could not be converted to a contract of hiring of equipment by IOCL."
On a perusal of the orders of the lower authorities, we find, that they in order to support their view that the consideration received by the assessee was liable to be assessed as 'royalty' had relied on the judgment of the Hon'ble High Court of Madras in the case of Poompuhar Shipping Corporation Vs. ITO (I.T)-II Chennai (2014) 360 ITR 257 (Mad). In the said case, the Hon'ble High Court had held that by giving possession to the hirer who has control and custody of the vessel the condition of 'use' or 'right to use' is satisfied. In other words, the Hon'ble High Court was of the view that as long as the hirer is given the right to use (with a right to put the ship for a beneficial use for itself) and use the ship to its advantage, the requirement for 'use' or 'right to use' is met. We have perused the aforesaid judgment of the Hon'ble High Court, and are of the considered view, that the observations of the High Court have to be read in context of the facts as were involved in the case before the court. On a perusal of the facts involved in the case before the Hon'ble High Court, we find, that the assessee had entered into charter agreements with various non-resident companies for chartering of their ships in the course of its business of moving of coal from various ports in India to a particular location in India. As per the agreements entered into between the assessee with the various non-resident companies, we find, that there were certain peculiar clauses viz. (i) the place of redelivery of ships was at the option of the charterer; (ii) the masters/captain and others working on the ships were at the disposal of the charterer; and (iii) the charterer had the right to use the ship, select the time and decide the route as per its requirement. We have given a thoughtful consideration to the facts involved in the aforesaid case before the Hon'ble High Court, and are in agreement with the claim of the Id. A.R that the facts therein involved are distinguishable as in comparison to those in the case before us, which can be briefly culled out as under:
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023
Sr. In case of Madras HC Ruling In case of assessee no. Assessee was engaged in the Assessee was in the business of business of moving coal from providing time charter services in 1. various ports in India to a particular connection with prospecting, extraction location in India or production of mineral oil in India. The place of delivery and redelivery of The place of re-delivery of ships the vessel was at the location of the 2. was at the option of the assessee assessee (i.e the owner or the lessor) in (i.e charterer or the lessee). Singapore (refer Box No. 7 & 8 of the agreement). The masters/captains and others The entire operation, navigation and working in the ships are at the management of the vessel was in the disposal of the assessee (i.e 3. exclusive control and command of the charterer or lessee. assessee (i.e the owners / lessor, their masters, officers and crew. The owners (i.e assessee/lessor) were The assessee (i.e charterer or deemed to be an independent lessee) had the right to use the contractor and the charterers (i.e ship, select the time and decide the 4. Leighton India) were concerned only route requirement. as per its with the results at the time of the services performed. (Refer clause 7(d) of the agreement). Accordingly, we are of the considered view, that unlike the facts involved in the aforesaid case before the Hon'ble High Court, in the case before us the control of the ship had throughout remained with the assessee, and the charterer viz. Leighton India Contractor Pvt. Ltd. was only concerned with the services and had no control over the vessel or its crew members. As such, we find that the reliance placed by the lower authorities on the judgment of the Hon'ble High Court of Madras in the case of Poompuhar Shipping Corporation Vs. ITO (I.T)-II Chennai (2014) 360 ITR 257 (Mad), being distinguishable on facts, would thus not assist the case of the revenue. In fact, our aforesaid view stands fortified by order of a co- ordinate bench of the Tribunal i.e ITAT, Chennai in the case of Sical Logistics Ltd. Vs. ADIT (I.T) Chennai [ITA No. 1074-1079/Mad/2015, dated 14.12.2016]. In the said case, the tribunal had distinguished the facts involved in the case before its jurisdictional High Court in the case of Poompuhar Shipping Corporation (supra). It was observed by the tribunal that in case of time charter of vessel the control of the vessel remains with the foreign shipping companies. In the backdrop of the aforesaid factual matrix the Tribunal relying on the judgment of the Hon'ble High Court of Delhi in the case of Asia Satellite Telecommunication company Itd. Vs. DIT (2011) 332 ITR 340 (Del), had observed, that there is a distinction between letting the asset and use of the asset by the owner for providing services. By drawing support from the aforesaid judgment of the High Court, it was observed by the Tribunal that the payment made for use of the asset by owner cannot tantamount to royalty. The Tribunal while concluding as hereinabove had observed as under: "We are also not in agreement in Department's contention that the payment made in time charter of vessels in this case constitutes royalty". This perception seems to be misconceived. The Hon'ble Delhi High Court in the case of Asia Satellite Telecommunication Co. Ltd. vs. DCIT (supra) has held that two things are necessary to christen a payment as a royalty under Explanation 2 appended to clause (vi), which speaks about possession and control of the vessel in the given case, the assessee neither has control nor possession. over the vessels. Page | 13
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023
The Captain/Master and the crew is instructed, directed and controlled by the ship owner only and not by the assessee. The assessee simply informs the description of the cargo to be carried on and from which port to which port the cargo has to be transported. Thus, it becomes clear that the assessee neither has control/nor the possession over the vessel in question." Apart from that, we find that a similar view had also been arrived at by the ITAT Ahmedabad bench 'I' in the case of DCIT, International Taxation, Baroda Vs. Bombardier Transportation India Pvt. Itd. (2017) 162 ITD 586 (Ahd). In the said case, it was observed by the Tribunal that the rendition of I.T support services to the assessee by a Canadian company, even if certain equipment were to be used, that by itself would not vest any right in the assessee to use the equipment, and thus, payments made by the assessee could not be viewed as payments for 'use' or 'right to use any industrial, commercial, or scientific equipment. Further, we find that a similar view had also been taken by the ITAT Hyderabad Bench 'A' in the case of DDIT (IT)-1, Hyderabad Vs. Dharti Dredging & Infrastructure Ltd. (2012) 146 TTJ 283 (Hyd). In the said case, it was observed by the Tribunal that as the assessee before them had only hired the dredger simpliciter from the foreign company viz. EMPL, and had neither used the same or any part thereof on its own nor was it given any right to use the same by the foreign company, the payment therein made could thus not be treated as royalty. On the basis of our aforesaid observations, we are of the considered view that as can be gathered from a perusal of the relevant extracts of the 'agreement' (as reproduced by the DRP in its order), it can safely be concluded that as the assessee had received charges on account of time charter services rendered by its vessel 'Smit Borneo' along with the crew to Leighton India Contractor Pvt. Ltd., and not for allowing the latter the 'use' or 'right to use' of industrial, commercial, or scientific equipment, the same therein cannot be treated as 'royalty' within the meaning of Article 12(3)(b) of the India- Singapore tax treaty. As such, we herein not being able to subscribe to the view taken by the lower authorities, to the extent they had concluded that the amounts received by the assessee for time charter of its vessel viz. 'Smit Borneo' was to be treated as royalty under Article 12(3)(b) of the India- Singapore tax treaty, therein vacate the same. As we have vacated the view taken by the A.O/DRP that the consideration received by the assessee from time charter of its vessel viz. 'Smit Borneo' was to be treated as 'royalty' as per Article 12 of the India-Singapore Tax Treaty, therefore, we refrain from adverting to the other contentions advanced by the Id. A.R to support its claim, which thus are left open. The Grounds of appeal No. 2 to 4 are allowed in terms of our aforesaid observations.”
We find that in the aforesaid decision same vessel, i.e. Smit Borneo, was given on a time charter basis to Leighton India Contractors Private Limited, for providing services for exploration/extraction of mineral oil to ONGC. Thus, we find no merits in the submissions of the learned DR that the nature of the contract is different in the present case. During the hearing, the learned DR placed reliance on clause 4 of the agreement between the assessee and BOC Page | 14
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023 BV, as quoted on page no.2 of the draft assessment order, to support the submission that the charterer has the option of making structural alterations to the vessel and therefore, the charterer has specific control upon the vessel for its business activities. However, we find that the said clause of the agreement also states that the vessel is to be re-delivered and reinstated at the charterer‟s expense to the original condition and the vessel is to remain on hire during any period of these alterations or reinstatement. In the said clause, it is also stated that such repairs and maintenance may also be undertaken by the assessee at the charterer‟s expense when the same is necessary for the safe and efficient performance of the vessel. Therefore, in view of the above, we are of the considered opinion that the reliance on the aforesaid clause also does not support the case of the Revenue, as nothing has been brought on record to show that during the entire operation, navigation and management of the vessel, it was not in exclusive control and command of the assessee.
We find the coordinate bench of the Tribunal in assessee‟s own case in Smit Singapore Pte Ltd. V/s DCIT, in vide order dated 20/07/2021, for the assessment year 2015-16 rendered similar findings, following the decision of the coordinate bench for the assessment year 2014- 15. The issue arising in the present appeal is recurring in nature and has been decided in favour of the assessee by the decisions of the coordinate bench of the Tribunal for the preceding assessment years. Thus, respectfully following the orders passed by the coordinate bench of the Tribunal in assessee‟s own case cited supra, we uphold the plea of the assessee and delete the addition in Smit Singapore Pte. Ltd. ITA no.816/Mum./2023 respect of receipts on hire of vessel on a time charter basis. Accordingly grounds no.2 and 3 raised in assessee‟s appeal are allowed.
Ground no.4, raised in assessee‟s appeal, is raised on without prejudice basis. Therefore in view of our aforesaid findings, the same needs no separate adjudication.
15. The issue arising in grounds no.5 and 6, raised in assessee‟s appeal, is pertaining to the taxability of reimbursement of expenses.
The brief facts of the case, pertaining to this issue, are: During the year under consideration, the assessee received receipts, apart from chartering, reimbursement of Rs.5,77,69,693 from BOC BV. During the assessment proceedings, the assessee was asked to furnish details of the nature of receipts shown by it as reimbursement and give reasons as to why the same should not be brought to tax. In response thereto, the assessee submitted that these receipts are in the nature of reimbursement of expenses on a pure cost- to-cost basis, i.e. the amounts received by the assessee were purely on account of expenses incurred by the assessee on behalf of BOC BV. It was further submitted that there is no element of income or profits in such receipts on account of reimbursement and accordingly, the same cannot be construed as income of the assessee, to be taxable as Royalty. The AO, vide draft assessment order, did not agree with the submissions of the assessee and held that these receipts are intricately linked to the chartering income and the reimbursement would not have a reason, but for the charter agreement with BOC BV. Accordingly, the AO taxed these receipts as Royalty income of the Smit Singapore Pte. Ltd. ITA no.816/Mum./2023 assessee. The learned DRP, vide its directions, rejected the objections filed by the assessee on this issue by following its directions rendered in assessee‟s own case for the assessment year 2014-15. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order. Being aggrieved, the assessee is in appeal before us.
Having considered the submissions of both sides and perused the material available on record, we are of the considered view that once the main receipt, i.e. pertaining to chartering of vessel has been held to be not a Royalty, the reimbursement of expenses in relation to the same agreement cannot be held to be taxable as Royalty, in the present case, as the AO is also of the view that the receipts are intricately linked to the chartering income. Accordingly, the addition on account of reimbursement of expenses is deleted. As a result, grounds no.5 and 6 raised in assessee‟s appeal are allowed.
18. Ground no.7, raised in assessee‟s appeal, is raised on without prejudice basis. Therefore, in view of aforesaid findings, the same needs no separate adjudication.
Insofar as the levy of interest under section 234A of the Act is concerned, we deem it appropriate to remand this issue to the file of the AO for de novo adjudication after the necessary examination of the fact whether the return of income was filed by the assessee within the prescribed time under the Act. Accordingly, ground no.8, raised in assessee‟s appeal is allowed for statistical purposes.
Smit Singapore Pte. Ltd. ITA no.816/Mum./2023
Insofar as ground no.9, raised in assessee‟s appeal is concerned, the same relates to the charging of interest under section 234B of the Act, which is consequential in nature. Therefore, ground no.9 is allowed for statistical purposes.
Ground no.10 is pertaining to the initiation of penalty proceedings, which is premature in nature and therefore is dismissed.
In the result, the appeal by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 12/06/2023