DCIT (IT) 3(2)(2), MUMBAI vs. MSC MEDITERRANEAN SHIPPING CO. SA ( MSC), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “L” BENCH, MUMBAI

BEFORE SHRI SHAMIM YAHYA, AM AND SHRI RAVISH SOOD, JM I.T.A. Nos. 1391 & 1392/Mum/2016 (Assessment Years: 2010-11 & 2012-13) DCIT(IT)-3(2)(2), M/s. MSC Mediterranean Shipping Room No. 11, Ground Floor, Co. SA (MSC) Scindia House, N. M. Road, Vs. C/o. M/s. MSC Agency India (I) Ltd. Ballard Estate, Mumbai-400 038 MSC House, Andheri Kurla Road, Andheri (E), Mumbai-400 059 PAN/GIR No. AACCM 4945 D (Revenue) : (Assessee) & C.O. Nos.276 & 277/Mum/2017 (Arising out of ITA Nos. 1391 & 1392/Mum/2016) (Assessment Years: 2010-11 & 2012-13) M/s. MSC Mediterranean Shipping Co. DCIT(IT)-3(2)(2), SA (MSC) Room No. 11, Ground Floor, C/o. M/s. MSC Agency India (I) Ltd. Vs. Scindia House, N. M. Road, MSC House, Andheri Kurla Road, Ballard Estate, Mumbai-400 038 Andheri (E), Mumbai-400 059 PAN/GIR No. AACCM 4945 D (Assessee) : (Revenue) Revenue by : Shri Samuel Darse Assessee by : Shri Nishant Thakkar : 24.05.2018 Date of Hearing : 13.08.2018 Date of Pronouncement O R D E R Per Bench:

These are appeals by the Revenue and the cross objection by the assessee

arising out of the respective orders of the Assessing Officer passed u/s. 143(3) r.w.s.

147 r.w.s. 144C(1) of the Income Tax Act, 1961 pursuant to the direction of the

Dispute Resolution Panel for the concerned assessment years.

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of the Double Taxation Avoidance Agreement between India and Switzerland ('Tax Treaty'), the Hon'ble DRP has legally erred in holding that MSC Agency (India) Pvt. Ltd. ('MSC Agency') constitutes a Permanent Establishment ('PE') of the respondent-assessee in India within the meaning of Article 5 of the Tax Treaty. 3. Without prejudice to the above, the Hon'ble DRP has erred in not adjudicating Ground of Objection (No. 6) taken up by the respondent-assessee wherein it was stated that, no income of the respondent assessee could be brought to tax in India as the arm's length commission paid to MSC Agency (which is taxable in India in the hands of MSC Agency), fully extinguishes the tax liability of the respondent assessee in India. 4. The grounds raised by the assessee in CO No. 277/Mum/2017 read as under:

involved in revenue’s appeal is squarely covered in favour of the assessee by a series

of the decision of the ITAT in assessee’s own case.

the exigibility of tax of the profits of the assessee from the operation of ships in

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international traffic. We find that the issue was decided in favour of the assessee

originally by this tribunal vide order dated 06.11.2012 in ITA No. 2311/Mum/2007

for assessment year 2003-04), wherein the ITAT has elaborately discussed the issue

and granted relief to the assessee. This decision has subsequently been followed by

the Tribunal in other years as well. In the above order, the ITAT has adjudicated the

issue as under:

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under Article 8 of OECD model convention according to which profits of an enterprice of a contracting State from the operation of ships or aircraft in international traffic is taxable only in that State. He has contended that India and Switzerland, however, have agreed to modify Article 8 to exclude shipping profit from its scope. He has submitted that the shipping profits are also excluded from Article 7(1) which provides that the business profits of an enterprise of a contracting State shall be taxable only in that State unless the enterprise carries on business in the other contracting State through a PE constituted therein. He has contended that the combined effect of these modifications in Articles 7 and 8 makes it clear that the profits from the operation of ships in international traffic were left to be taxed by each contracting State according to its domestic law. He has contended that this was an undisputed position and understanding of the true import of the Indo-Swiss treaty till the year 2001 and the introduction of Article 22 in the treaty in 2001 did not alter this position. 33. The provisions of Article 22 introduced in the Indo-Swiss treaty in 2001 being relevant in the present context are reproduced hereunder : "1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such the provisions of Article 7 or Article 14, as the case may be, shall apply. 3. Notwithstanding the provisions of paragraph 1, if a resident of a Contracting State derives income from sources within the other Contracting State in the form of lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever, such income may be taxed in that other Contracting State." A reading of Article 22 especially paragraph 1 thereof makes it clear that the items of income of a resident of a contracting State i.e. Switzerland which are not dealt with in the foregoing Articles of the Indo-Swiss treaty shall be taxable only in that State. In the present case, the assessee company being a resident of Switzerland, the income, wherever arising, would fall within the scope of the residuary Article 22 if the same is not dealt with in any other Articles of the treaty. The question, therefore, is whether the shipping profits are dealt with in any other articles of the Indo-Swiss treaty or not. The contention raised by Shri Srivasava on behalf of the

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Revenue is that by agreeing to exclude the shipping profits from Article 8 as well as Article 7 of the Indo-Swiss treaty, India and Switzerland had agreed to leave the shipping profits to be taxed by each State according to its domestic law and this undisputed position prevailing upto 2001 did not change as a result of introduction of Article 22 of the treaty with effect from 01-04-2001. We are unable to agree with this contention of Shri Srivastava. In our opinion, as a result of introduction of Article 22, the items of income not dealt with in the other articles of the Indo- Swiss treaty are covered in the residuary Article 22 and their taxability is governed by the said Article with effect from 01-04-2001. Articles 7 and 8 of the treaty therefore cannot be relied upon to say that by agreeing to exclude the shipping profits from said Articles, the shipping profits are left to be taxed by each contracting State according to its domestic law. It is no doubt true that this was the position prior to introduction of Article 22 in the Indo-Swiss treaty in the year 2001 but the same was altered as a result of introduction of the said article inasmuch as it became necessary to find out as to whether shipping profits have been dealt with in any other article of the treaty. Mere exclusion of shipping profits from the scope of treaty could have resulted in leaving the same to be taxed by the concerned contracting State according to its domestic law prior to introduction of Article 22. However, such exclusion alone will not take it out of the scope of Article 22 unless it is established that the shipping profits have been dealt with in any other article of the treaty. The language of Article 22(1) in this regard is plain and simple and the requirement for application of the said Article is explicitly clear. 34. It is pertinent to note here that the purpose of tax treaties is to allocate taxing jurisdiction as held, inter alia, by the Hon'ble Supreme Court in the case of Union of India vs. Azadi Bachao Aandolan 263 ITR 706 and only when an Article provides for tax treatment i.e. to distribute taxing right of a particular type of income, then it can be said that it deals with such item of income. If there is no article providing for such tax treatment to distribute jurisdiction to tax a particular income like the shipping profits the present case, then it cannot be said that such income is dealt with by the articles of the treaty. When Article 7 provides for taxability of business profits other than international shipping profits, it prescribes distributive rules in respect of business profits other than international shipping profits and it can, therefore, be said that such business profits are dealt with by Article 7. It is, however, not true in respect of international shipping profits as it does not prescribe distributive rules with respect to such profits. By exclusion of such profits from Article 7, it can be said that the same are left to be taxed by the contracting State as per their domestic laws as there was no article upto 01-04- 2001 dealing with such income. However, as a result of introduction of the residuary Article 22 with effect from 01-04-2001, the items of income not dealt with by any other article are specifically covered in that article and since the taxability of such other income is now governed by Article 22, the same has to be

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dealt with reference to the said article. This conclusion gets support from the opinion of Mr. Philip Bekar dated 25th June, 2003 filed by the assessee wherein he has opined that Article 7 cannot be regarded as having dealt with international shipping profit and such profits would be covered within the perview of Article 22 of the Indo-Swiss treaty. 35. In support of his action in bringing to tax the profits from shipping to tax in India as per domestic law, the AO has relied upon the letter dated 14th February, 2005 issued by the Joint Secretary. However, as rightly contended by the learned counsel for the assessee, the said letter has been impliedly superseded by another letter dated 27th May, 2005 issued subsequently wherein reference was made to two letters written earlier dated 29th October, 2003 and 18th December, 2003 accepting that the taxability of shipping profits was governed by Article 22 of the Indo-Swiss treaty. As a matter of fact, this position was accepted by the AO himself in the assessment completed in assessee's own case for assessment year 2002-03 wherein the claim of the assessee that the shipping profit is chargeable to tax only in Switzerland and not in India as per Article 22 of the treaty was allowed by the AO. Even in the voyage assessment order passed on 10th June, 2005 u/s 172(4), the AO accepted that the international shipping profits of the assessee company for assessment year 2005-06 were governed by Article 22(1) of the Indo- Swiss treaty. In order to say that a particular item of income has been dealt with, it is necessary that the relevant article must state whether Switzerland or India or both have a right to tax such item of income. Vesting of such jurisdiction must positively and explicitly stated and it cannot be inferred by implication as sought to be contended by Shri. Srivastava relying on Articles 7 and 8 of the treaty. As rightly contended by the learned counsel for the assessee, the mere exclusion of international shipping profit from Article 7 cannot be regarded as an item of income dealt with by the said article as envisaged in Article 22(1). The expression "dealt with" contemplates a positive action and such positive action in the present context would be when there is an article categorically stating the source of country or the country of residence or both have a right to tax that item of income. The fact that the expression used in Article 22(1) of the Indo-Swiss treaty is "dealt with" viz- a- viz the expression "mentioned" used in some other treaties clearly demonstrates that the expression "dealt with" is some thing more than a mere mention of such income in the article and as rightly contended by the learned counsel for the assessee, the international shipping profits can at the most be said to have mentioned in Article 7 but the same cannot be said to have been dealt with in the said article. 36. In the case of Mahindra & Mahindra 313 ITR (AT) 263, the issue before the Special Bench of the Tribunal was relating to taxability of fees paid by Mahindra

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& Mahindra Ltd. to merchant bankers on account of services rendered by the merchant bankers in relation to a GDR issue floated by Mahindra & Mahindra Ltd. in U.K. In this regard, the Special Bench took a view that since the services rendered by the merchant bankers did not "make available" any technical knowledge etc. to Mahindra & Mahindra Ltd., such technical services would travel from Article 7 to Article 13. The Special Bench, however, took note of Article 7(9) of the DTAA between India and United Kingdom which provided that "where profits include items of income which are dealt with separately in other articles of this convention, then the provisions of those articles shall not be affected by the provisions of this article" and held in view of the said article that technical services would have to go back to article 7 for determination of whether India can tax fees from such technical services. The stand of the Revenue that exclusion of an item of income from an article means that such item has been "dealt with" thus was not accepted by the Special Bench of ITAT by implication in the case of Mahindra & Mahindra. 37. As already observed, the expression "dealt with" used in Article 22 have to be read in the context of purpose of double tax avoidance agreement which is allocation of taxing jurisdiction. From this angle, an item of income can be regarded as "dealt with" by an article of DTAA only when such article provides for and positively vests the powers to tax such income in one or both States. The mere exclusion of international shipping profits from Article 7, therefore, cannot be regarded as vesting India with a right to tax international shipping profits and such profit, in our opinion, cannot be regarded as "dealt with" by the said article as envisaged in Article 22. 38. The stand of the Revenue is that by excluding the profits from the operation of ships in international traffic from Article 7(1), the same has to be regarded as dealt with by Article 7(1) and it, therefore, cannot fall under Article 22. It is contended that such profit, therefore, will be taxable in India as per the domestic law by applying the provisions of section 44B of the Income-tax Act, 1961. If this contention of the Revenue is accepted, the same, in our opinion, will lead to absurdity as rightly contended by the learned counsel for the assessee inasmuch as the profits from the operation of ships in domestic traffic, for example, freight earned for carriage from Goa to Mumbai will be eligible for treaty benefit and will not be taxable in India whereas profits from the operation of ships in international traffic will be taxable in India u/s 44B of the Act. In our opinion, this cannot be the intention of the legislature or even of the parties to the Indo-Swiss treaty i.e. India and Switzerland and the contention of the Revenue resulting in such absurdity cannot be accepted. 39. One of the contentions raised by Shri Srivastava is that the reason for exclusion of international shipping profits from the Indo-Swiss treaty is that the

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Switzerland is a Land locked country and if the Indo-Swiss treaty were to provide taxability of such profit, it would result into treaty shopping. However, as pointed out by the learned counsel for the assessee, India has entered into tax treaties with several other Land locked countries such as Uganda, Kazakhstan Turkmenistan etc. which have not excluded shipping income. Moreover, even the Indo-Swiss treaty has now been amended in the year 2012 whereby the shipping income has been included in Article 8. We, therefore, find it difficult to accept the contention of Shri Srivastava that the international shipping profit were excluded from Indo- Swiss treaty for the reason that Switzerland is a land locked country. We are also unable to agree with the contention of Shri Srivastava that if the stand of the assessee for international shipping profits are not taxable in India but are taxable in Switzerland after the introduction of Article 22 in the Indo-Swiss treaty with effect from 01-04-2001 is to be accepted, the amendment with effect from 1st April, 2012 whereby such income is included in Article 8 thereby giving the State of residence the sole right to tax the same would render a futile exercise, because as a result of the said amendment made in the year 2012, the international shipping profits shall be taxable in the State of residence irrespective of whether the resident has a PE in the other State or not and whether the rights or property are effectively connected with such PE or not which was not the position earlier prior to 2012 even after insertion of Article 22. 40. Shri Srivastava has relied on the commentary of Professor Klaus Vogal wherein while explaining the scope of Article 22, the learned Commentator has stated that the said article does not apply to the items of income classifiable as business profits within the meaning of Article 7. It is, however, to be noted that the international shipping profits have been excluded from business profits within the meaning of Article 7. He has also relied on the comments of Professor Klaus Vogal that the expression "not dealt with" used in the said article must not be taken to mean "not unmistakably dealt with" as the said article is neither designed to remove difficulties of interpretation nor even lays to settle them in favour of the State of residence. In this regard, we have already referred to the correspondence exchanged with the competent authorities of India and Switzerland whereby it was mutually agreed to assign a certain specific interpretation to Article 22 in the context of international shipping profits and keeping in view this agreement arrived at between the two competent authorities, we are of the view that the Revenue authorities are not free to take any contrary view relying on the commentary of Professor Klaus Vogal. As regards the contention of Shri Srivastava that there is nothing in Article 22to suggest that the position that existed till assessment year 2001-02 got altered or modified by the introduction of Article 22 in the Indo-Swiss treaty, we are of the view that the mutual agreement arrived at by the competent authorities of two countries, is good enough to suggest that the position as regards the taxability of international shipping profits got changed by the introduction of Article 22.

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Switzerland. It was submitted that even Article 7 of the treaty which excluded international shipping profits from its ambit did not deal with such profit up to 31/03/2001 and in the absence of any other article in the treaty dealing with such profit, the same was chargeable to tax as income under the Indian Income-tax Act. It was submitted that this position, however, got changed as a result of introduction of Article 22 in the treaty with effect from 01-04-2001 which governs the taxability of all other income which have not been dealt with in other articles of the treaty and since as per the said Article 22, all other income not specifically dealt with in the other articles of the treaty is taxable only in the State of residence i.e. Switzerland, the shipping income from international traffic was not taxable in India and was taxable only in Switzerland. In support of this claim, a letter dated 30th January, 2004 issued by Swiss Tax Authorities to the foreign consultant of the assessee was filed which clearly stated that the profits from operation of ships in international traffic was not covered specifically by any of the articles and, therefore, Article 22 would govern the taxability of such profits. The stand of the assessee was accepted by the AO and in the assessment completed u/s 143(3) vide an order dated 09-03-2004 for assessment year 2002-03 , he held that with the introduction of new Article 22 in the treaty, the income of the assessee from profits from shipping operation in international traffic were taxable only in the State of residence i.e. Switzerland and not in India. 43. There is no dispute that the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to assessment year 2002- 03 wherein the claim of the assessee was accepted by the AO. In the year under consideration, he, however, has taken a different view relying on the letter dated 14th February, 2005 issued by the Joint Secretary. As pointed out by the learned counsel for the assessee, the said letter has been superseded by another letter issued on 27th May, 2005 wherein the Joint Secretary has made a reference to the letters exchanged between the competent authority of India and that of Switzerland dated 29th October, 2003 and 18th December, 2003. Copies of the said letters are placed on record. The first letter dated 29th October, 2003 was sent by Professor Dr. R. Waldburger, Vice Director, Division for International Fiscal Law and Double Taxation Matters, Swiss Federation Tax Administration to the Joint Secretary (FT & TR), Ministry of Finance, Government of India, the contents of which are reproduced below : "We write this letter to you in order to agree on the taxation of profits arising from operation of ships in international traffic in our respective countries in accordance with the provisions of our double taxation agreement. During our negotiation both contracting States decided to tax enterprises that operate in the shipping business according to the internal law of each Contracting State. The term "international traffic" in paragraph 1 subparagraph i) of Article 3 therefore was limited to transport by an aircraft operated by an enterprises of a Contracting State.

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Consequently we have excluded shipping profits in Article 8 DTA-IND (which normally deals with profits arising from shipping and operation of aircrafts). According to paragraph 1 of Article 7 DTA-IND profits from the operation of ships in international traffic are not treated under the general concept of business profit attribution between the company and its permanent establishment. As the double taxation agreement concluded in 1994 did not contain a general provision attributing the taxing right for other income to the states of residence, shipping profits could be taxed by each Contracting State according to its internal law. During the renegotiation we inserted Article 22 into our agreement that deals with all items of income not dealt with specifically under the other Articles of our agreement. As paragraph 1 subparagraph i) of Article 3, Article 7 and Article 8 DTA-IND did not undergo any changes, business profit arising from shipping activities consequently falls under Article 22. Paragraph 1 and 2 of Article 22 DTA-IND, which is relevant for this purpose, reads as follows: "Article 22 Other income 1.Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State. 2.The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in the other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." Accordingly, any income derived by a resident of one of the Contracting States not specifically dealt with in any of the other Articles of our agreement falls under Article 22. According to paragraph 1 of Article 22 such income is taxable only in the country of residence, unless the beneficial owner carries on business in the other Contracting State through a permanent establishment and the right or property in respect of such income is effectively connected with such permanent establishment (paragraph 2 of Article 22). Considering these provisions, we are of the opinion, that income derived by a resident of Switzerland from India out of operation of ships in international traffic, shall fall under Article 22. Further, it is our understanding that such income would

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be liable to tax only in Switzerland unless the beneficial owner carries on business in India through a permanent establishment situated therein and the right or property in respect of such income is effectively connected with such permanent establishment. We hope that you interpret these provisions of our double taxation agreement in the same way and therefore will be able to confirm your agreement to us by returning a countersigned copy of this letter. (emphasis supplied in bold letters). We thank you for your cooperation in this matter and look forward to receiving your soon answer." 44. The immediate reply to the above letter was sent by Joint Secretary (FT & TR) by a letter dated 10th December, 2003 communicating that India was not in agreement that income from shipping business in international traffic would be covered under Article 22 and reasons for the same were also given. However, immediately thereafter, a letter dated 18th December, 2003 was sent by the Joint Secretary (FT & TR) to Shri Wardbarger clarifying the matter as under : " As regards the query raised in your letter dated 29.10.2003, I have already handed over a written reply to Ms. Silvia Frohofer. However, to clarify the matter further, I may submit that profit from operation of ships in international traffic is not covered specifically by any of the Articles of the amended DTAA (Article 8 only refers to air transport). Accordingly, Article 22 of the DTAA dealing with other income would fall to be applicable in respect of income from operation of ships in international traffic. As per paragraph 1 of the said Article, such income is taxable only in the state of residence of the taxpayer. However, paragraph 2 of the Article provides that if the enterprise engaged in operation of ships in international traffic has a Permanent Establishment in another country, then the provisions of Article 7 of the DTAA would apply and not Article 22. But paragraph 1 of Article 7 of the Treaty categorically says that the said Article is not applicable to profits from operation of ships in international traffic. Accordingly, if a Swiss shipping enterprise engaged in operation of ships in international traffic has a Permanent Establishment in India or if an Indian shipping enterprise engaged in operation of ships in international traffic has a Permanent Establishment in Switzerland then the income attributable to the activities carried out in the other country will be taxable in accordance with domestic tax laws of the said country." (emphasis supplied in bold letters). As is clearly evident, it was agreed by the Indian Competent Authority that profit from operation of ships in International traffic is not governed specifically by any of the articles of the treaty and that Article 22 of the DTAA dealing with other income would fall to be applicable in respect of such income. The AO, however, relied on the letter dated 14th February, 2005 written by Joint Secretary (FT &

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TR) to DGIT, International Taxation clarifying that India has not accepted that income from operations of ships in international traffic accruing to a resident of Switzerland will not be taxable in India in view of applicability of Article 22 of Indo-Swiss treaty and such income will be taxable only in accordance with the domestic law of the State. As pointed out by the learned counsel for the assessee, another letter dated 27th May, 2005 thereafter was written by Joint Secretary (FT & TR) to the DGIT, International Taxation enclosing the letters dated 10th December, 2003 and 18th December, 2003 issued in the matter for necessary action. As already noted by us, letter dated 18th December,2003 was written by the Joint Secretary (FT & TR) after 10th December, 2003 clarifying the matter further to the Competent Authority of Switzerland whereby it was agreed that profits from operation of ships in international traffic is not covered specifically by any of the articles of the treaty and that Article 22 of the treaty dealing with other income would fall to be applicable in respect of such income. The letter dated 14th February, 2005 of Joint Secretary (FT & TR) relied upon by the AO to deny the treaty benefit to the assessee company thus was superseded by the letter dated 27th May, 2005 and the reliance of the AO on the letter dated 14th February, 2005 to deny the treaty benefit to the assessee company was clearly misplaced. 45. In Article 3 of Indo-Swiss treaty giving general definitions, the term "competent authority" is defined to mean in the case of India, the Central Government in the Department of Revenue or their authorized representative and in the case of Switzerland, Director of Federal Tax Administration or his authorized representative. Article 25 of the said treaty prescribes the mutual agreement procedure whereby if a resident of a contracting State considers that the action of one or both of the contracting States result or will result for him in taxation not in accordance with this agreement, he may notwithstanding the remedies provided by the national laws of those States, present his case to the competent authority of the contracting States of which he is a resident. As per paragraph 2 of Article 25, the competent authority then shall endeavor, if the objection appears to it to be justified and if it is not itself able to arrive at an appropriate solution, to resolve the case by mutual agreement with the competent authority of the other contracting State, with a view to avoidance of taxation which is not in accordance with the agreement. As per paragraph 3 of Article 25, the competent authorities of the contracting States shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the agreement. In the present case, such endeavor was made by the competent authorities of Switzerland and India and the doubt arising as to the interpretation of Article 22 was resolved by mutual agreement whereby both the competent authorities agreed that international shipping profits of the assessee company are covered by Article 22.

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jurisdiction as held by Hon'ble Supreme Court in the case of Azadi Bachao Andolan. It has also not appreciated the different expressions i.e. "dealt with" and "mentioned in" used in different treaties and the effect thereof, although the said difference was specifically brought to its notice. 48. In the case of ADIT (International Taxation) vs. Green Emirate Shipping & Travels 100 ITD 203 (Mum.), reliance was placed on behalf of the Revenue on the ruling given by the Authority for Advance Ruling in the case of Abdul Razak A. Meman 276 ITR 306 which was directly applicable to the issue under consideration. The Tribunal, however, declined to treat it as a covered matter relying on the decision of Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) wherein it was held that the ruling given by the Authority for Advance Ruling is not even binding on the Commissioner of Income Tax and authorities sub-ordinate thereto in any case except in the case of the very assessee in which such a ruling was given and that too in respect of transaction in respect of which such ruling was given. It was held by the Tribunal that whatever be the respect and deference judicial authorities indeed have for the rulings given by the authority, the Authority for Advance Ruling not being a part of judicial hierarchy cannot lay down a binding precedence. It was held that the ruling given by the Hon'ble Authority for Advance Ruling, therefore, has no precedence value in general. We are, therefore, unable to accept the plea of Shri Srivastava that the issue under consideration be decided in favour of the Revenue following the decision of the Authority for Advance Ruling in the case of Gearbulk AG (supra) . In our opinion, the item of income in question i.e. international shipping profit cannot be said to be dealt with in any other articles of the Indo-Swiss treaty and the taxability of the said income thus is governed by residuary Article 22 introduced in the treaty with effect from 01-04- 2002. 49. Having held that the taxability of international shipping profits is covered by Article 22, it is necessary to ascertain whether the assessee company which received such income being a resident of Switzerland carried on the shipping business in India through a permanent establishment situated therein and whether the property in respect of which such income was paid i.e. ships is effectively connected with such permanent establishment. If both these conditions are satisfied, the international shipping profits will be taken out of Article 22 and will fall in Article 7 as per paragraph 2 of Article 22. 50. As regards the issue as to whether M/s MSC Agency India Pvt. Ltd. constituted permanent establishment of the assessee company in India, it is observed that certain specific information was received by the AO from ACIT, Central Circle-40, Mumbai vide letter dated 31-03-2005 showing that M/s Samasara Shipping P. Ltd. was working as dependant agent of the assessee company in India upto assessment year 2002-03 and the business of the said

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concern was taken over and continued by M/s MSC Agency India from assessment year 2003-04. The said information, gist of which is already given in the foregoing portion of this order, was confronted by the AO to the assessee who took a stand that both M/s Samsara Shipping P. Ltd. and M/s MSC Agency India Pvt. Ltd. were independent agents and did not constitute its PE in India. There was, however, nothing brought on record on behalf of the assessee to support and substantiate its stand. The AO, therefore, did not accept the stand of the assessee and treated M/s MSC Agency India Pvt. Ltd. as dependant agent of the assessee in India on the basis of the following clauses of the agreement dated 01-04-2002 between the assessee company and M/s MSC Agency India Pvt. Ltd. : "2.00 General Conditions:- 2.01 The agreement covers all ports in the Region and /or inland agency work within the Region nominated in clause 11 and covers the following duties:- * Sales and Marketing * Bookings * Documentation * Equipment Control * Equipment Control * Inland Transportation * Operations cost control * Vessel Operations / Husbandry * Disbursements * Systems/IT

2.02 The Agents undertake not to accept the representation in the Region of any other Principals for the service in direct competition or with direct conflict of interest with the Principal's activities in section, without written consent, which shall not be unreasonably withheld by the Principals. 3.10 Marketing Sales and Documentation:- 3.11 To provide marketing and sales activities for the services of the Principals in the Region, to canvass for and book cargo, to publicise the services and to maintain contact with Shippers, Consignees, Forwarding Agents, Port and other Authorities and trade organizations. 3.12 To provide statistics and information, and to report on cargo bookings and use of space allocations. To announce sailing and / or arrivals and to quote freight rates and announce freight traffic and amendments, subject to the freight policies and instructions of the Principals. To provide regular reports and information concerning latest market trends and competition advice developments. 3.13 To arrange for public relations work (including advertising, press................agreed by the principles. 3.14 To issue, sign and stamp on behalf of the Principals ................................. to perform these duties.

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5.00 Principals' Duties: 5.02 The Principals will provide the Agents with any necessary funds to cover creditors and any advance disbursements in respect of the Principal's business within the region, which may be specifically agreed as items not subtracted from the freight account. 5.03 To pay all statutory charges and taxes (as required by Law) levied by countries in the Region, payable by ship owners / operators / charterers whose ships call at ports in the Region. 6.00 Remuneration: 6.01 The Principals agree to pay the Agents, for the above services rendered by them, the commission set forth in Schedule A to this agreement. 7. Duration: The Agent confirms that if their current Agency name includes any of the names listed below, or any variation of these names, then, on termination of this agreement, the existing name of their agency shall also cease, and they will no longer have any entitlement to use the following names, or variations thereof:- MSC M.S.C. Mediterranean Shipping Company (or Mediterranean Shipping Co.) Medite Medship." 51. After having perused the relevant clauses of the agreement between assessee company and M/s MSC Agency India Pvt. Ltd. as given above, we find ourselves in agreement with the view of the AO and the learned CIT(Appeals) that M/s MSC Agency India Pvt. Ltd. was legally and economically dependent agent of the assessee company and since the assessee company was managing and controlling some of its business operations in India through the said dependant agent, it constituted the permanent establishment of the assessee company in India in terms of the Indo-Swiss treaty. We are unable to accept the contention raised by Shri Dastur in this regard that M/s MSC Agency India Pvt. Ltd. had limited right to perform its activities and it, therefore, cannot be regarded as habitually exercising an authority to negotiate and enter into contracts for and on behalf of the assessee company which, in our opinion, is contrary to the relevant clauses of the agreement between the assessee company and M/s MSC Agency India Pvt. Ltd. defining the scope and authority of M/s MSC Agency India Pvt. Ltd. and its commitment to work exclusively for the assessee company and not to accept the representation of any other principle for the same services in the same region without the written consent of the assessee company. 52. The next issue that arises for our consideration in this context is whether the property in respect of which international shipping income was received by the assessee company through shipping business carried on in India through the P.E. situated therein i.e. ships was effectively connected with such permanent establishment. The expression "effectively connected" used in this context in

19 M/s. MSC Mediterranean Shipping Co. SA (MSC)

the Article 22(2) of the Indo-Swiss treaty is not defined either in the said treaty or even in the domestic law i.e. Income-tax Act. The said term, therefore, has to be understood using the general principles of common law keeping in mind the common uses associated with the phrase. The assessee has filed opinion of Shri Mukul Rohotogi, Additional Solicitor General, Supreme Court of India wherein after referring to the meaning given in the "Webstors Revised Unabridged dictionary" and in the words and phrases, permanent edition, Shri Mukul Rohotogi has opined that the expression "effectively connected" must be understood to mean that there is a powerful, complete or thorough control of the ship by the agency. In his view, the shipping company, however, has no such control whatsoever over the ship and since it is only working as an agent who makes bookings and perform other ancillary services, it cannot be said that the ship has any effective connection with the agency. He has stated that to say that the ships are effectively connected with the agency would lead to absurd results inasmuch as the agency will be liable to pay tax whenever the ships are plied on international waters even if they do not come to or depart from Indian shores which would result in extending the territorial jurisdiction of Indian Tax Laws. According to him, Article 22(2) brings profits of the PE within the scope of Article 7 only if the relevant income of the PE arises from a right or property effectively connected with such PE which necessarily refers to the ship itself as the property which generates the income is the ship. In the circumstances, when the ships clearly do not form part the assets of the PE in India but are the assets of the non-resident shipping company abroad, the same cannot be said to be effectively connected to such PE. Where the ships are owned or chartered by the non-resident shipping company abroad and the agency PE merely clears inbound cargo and books outbound cargo and carries out similar functions, the ships are clearly not the assets of the PE nor are they any other way effectively connected with the PE. He has thus concluded that the provisions of Article 22(1) of the treaty would be applicable and the profits of shipping operations in international traffic in the case of non- resident shipping company would be taxable in the country of residence i.e. Switzerland and not in India. 53. The assessee has also filed the opinion of Mr. Philip Baker where he has expressed a similar view saying that the property in respect of which the shipping income is paid is the ships which do not form part of the assets of the permanent establishment in India nor can they be said to be otherwise effectively connected with the permanent establishment in India. They are the assets of the shipping company and have no connection with any agency PE in India save that the PE may clear inbound cargo and book outbound cargo which is carried on those ships. Where the ships are owned or chartered by a non-resident shipping company and the agency PE merely clears inbound cargo and books outbound cargo and carries out similar ancillary functions, the ships are clearly not the assets of the PE nor are they in some other way effectively connected with a permanent establishment. According to him, the concept of "effectively connected" can be applied in

20 M/s. MSC Mediterranean Shipping Co. SA (MSC)

practical terms where branch accounts are drawn up for the PE based upon the correct accounting principles where the ships are shown as assets of the branch. 54. In the case of Sumitomo Mitsui Banking Corporation (supra), the Special Bench of this Tribunal had an occasion to consider and interpret the meaning of the term "effectively connected" used in paragraph No. 6 of Article 11 of the Indo- Japanese treaty which reads as under : "The provisions of para 1, 2 and 3 shall not apply if the beneficial owner of the interest, being a resident of the contracting State carries on business in the other contracting State in which the interest arises, through a PE situated therein or performs in that other contracting State independent personal services from a fixed base situated therein and the debt claimed in respect of which the interest is paid is effectively connected with such PE or fixed base. In such a case, the provision of Article 7 or Article 4 as the case may be shall apply." 55. The Special Bench in this context noted that the provisions of Article 11(6) of the Indo-Japanese convention were pari-materia to that of Article 11(4) of the OECD Model Convention and after taking into consideration the purpose and scope of Article 11(4) of the OECD Model Convention as explained in paragraph No. 24 and 25.1 of the OECD commentary on Model Tax Convention on Income Tax and on Capital (condensed version) issue in July, 2010, the Special Bench held that the economic ownership of the debt claim not being allocated to the PE, it cannot be said that such debt claim is effectively connected with that PE. The Special Bench thus has taken the economic ownership as the basis or criteria to apply the concept of "effectively connected with". Since the economic ownership of the ships in the present case cannot be said to be allocated to the PE but the same has always remained with the assessee company, we are of the view that it cannot be said that the property in the said ships is effectively connected with the PE in India on the basis of criteria adopted by the Special Bench of this Tribunal in the case of Sumitomo Mitsui Banking Corporation (supra). Shri Srivastava has contended that the expression "effectively connected" is much wider than the expression "owned". He has contended that effective connection could be by way of ownership or by the operation or maintenance of the property. We are unable to agree with this contention of Shri Srivastava in view of the decision of Special Bench of this Tribunal in the case of Sumitomo Mitsui Banking Corporation (supra) wherein the similar expression has been interpreted as to mean economic ownership. In any case, it cannot be said that the ships owned by the assessee company were exclusively operated or maintained by the PE in India and going by the scope of work to be done by the said PE which was limited. 56. In the OECD commentary on Model Tax Convention on Income and on Capital (condensed version) published in July, 2010, the term used in paragraph

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21(1) of the Model Convention, (similar to Article 22(1) of the Indo-Swiss Treaty) viz. a right or property in respect of which income paid will be effectively connected with a permanent establishment has been explained. It is stated that for the purposes of paragraph 21(1), a right or property in respect of which income paid will be effectively connected with a PE if the economic ownership of that right or property is allocated to that PE. It is stated that the economic ownership of a right or property in this context means the equivalent of ownership for income- tax purposes by a separate enterprise with the attended benefits and burdens (e.g. the right to the income attributable to the ownership of the right or property, the right to any available depreciation and judicial exposer to gains or losses from the appreciation or depreciation of that right or property). 57. Keeping in view the relevant portion of the OECD commentary on Model Tax Convention on Income and on Capital (condensed version) published in July, 2010 and the ratio of the decision of Special Bench of this Tribunal in the case of Sumitomo Mitsui Banking Corporation (supra) as also the opinion of Philip Baker and Mr. Mukul Rohotogi which conforms to the said ratio, we are of the view that the right or property in respect of which the shipping income is earned by the assessee i.e. ships cannot be said to be effectively connected with the permanent establishment in India . Such income, therefore, will not fall under Article 22(2) but will fall under Article 22(1) and accordingly shall be taxable only in the State of residence of the assessee company i.e. Switzerland and not in India. In that view of the matter, we uphold the impugned order of the learned CIT(Appeals) holding that the international shipping profits of the assessee company are covered by Article 22 of the Indo-Swiss treaty and although the assessee company had a PE in India in the year under consideration, the ships i.e. the property in respect of which shipping income was paid to the assessee company being not effectively connected with that PE, the case of the assessee will be out of paragraph No. 2 of Article 22 and will fall in paragraph 1 of the said article. Consequently, the same will be taxable in the country of residence of the assessee company i.e. Switzerland and not in India. 58. As regards the alternative contention of Shri Dastur that no portion of the international shipping profits earned by the assessee in any case can be taxed in India as the commission paid to M/s MSC Agency India Pvt. Ltd. which constituted its PE is admittedly at an arm's length, it is observed that this alternative claim of the assessee has now become academic in view of our decision accepting the main contention of the assessee that the international shipping profits are chargeable to tax only in Switzerland as per Article 22(1) and not in India. We, therefore, do not deem it necessary or expedient to dwell upon this alternative claim of the assessee.

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precedent as above. We have been informed that the above order of the Tribunal is

already before the Hon’ble High Court and the Hon’ble High Court has not yet reversed

the order.

dismissed. In view of our dismissal of Revenue’s appeal, the alternate grounds of the

assessee in the cross objections are now of academic interest and we are not dwelling into

the same.

Sd/- Sd/- (Ravish Sood) (Shamim Yahya) Judicial Member Accountant Member Mumbai; Dated : 13.08.2018 Roshani, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,

(Dy./Asstt. Registrar) ITAT, Mumbai