DEPUTY COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE 1(1), CHENNAI vs. DOOSAN POWER SYSTEMS INDIA PRIVATE LIMITED, CHENNAI

The brief facts of the case are that Doosan Power Systems India Private Limited (‘the Company’) is engaged in the business of designing, building, installation and maintaining engineering plants with specialization in thermal and coal power

Aggrieved by the order, the assessee filed an appeal before the Learned Commissioner of Income-tax (Appeals) [‘CIT(A)’] on 29.04.2022, wherein the Learned CIT(A) allowed the appeal by referring to the ITAT decision in the company’s own case for A.Y. 2013-14.Against the order of CIT(A), the Department is on appeal before this Tribunal.

The Ld.DR argued that the Ld.CIT(A) erred in deleting the disallowances made u/s.40(a)(i) of the IT Act without appreciating the fact that the Ocean Freight Charges received by the Hyupjin Shipping Co. Ltd, Korea was deemed to accrue or arise in India and the assessee is liable for deduction of tax on the said payments u/s.195 of the Act. The Ld.DR also drew our attention to order of Ld.CIT(A)–NFAC and stated that disallowance made u/s.40(a)(i) of the Act was wrongly deleted by relying on the order passed by Hon’ble Tribunal in assessee’s case for the A.Y. 2013-14 and 2014-15 wherein this Tribunal itself had relied on revised DTAA between India and Korea which was neither applicable for A.Y. 2013-14 and 2014-15 nor for the year 2015-16 as the revised DTAA between India & Korea came into effect from 01.04.2017, and prayed for setting aside the order of the Ld.CIT(A) and confirm the order of the AO.

Per contra, the Ld.AR of the assessee submitted that the consideration paid is only for logistics services, including the :-6-: ITA. No: 1149/Chny/2023 movement of goods from one port to the other port outside India as evident from the agreement. The Respondent submits that it does not have control over the vessel nor is it authorized to operate the said vessel.(The copy of the agreement forms part of page 173 to 191 of the paper book filed on 04 July 2024) & (Sample copy of the invoices raised by HSC forms part of page 160 to 172 of the paper book filed on 04 July 2024).

IMPUGNED PAYMENTS ARE NOT IN NATURE OF ‘ROYALTY’ UNDER SECTION 9(1)(vi) OF THE ACT AS THE PAYMENTS WERE MERE SIMPLICITOR FREIGHT CHARGES; 8.1 The Ld.AR stated that in the Assessment order passed, the Ld. FAO referring to the explanation 2 of section 9(1)(vi) of the Act had concluded that the said consideration paid by the assessee to HSC relates to right to use of industrial, commercial or scientific equipment i.e., vessel and hence is in the nature of Royalty.The Ld.AR submitted that as per agreement entered into with HSC, the services do not confer any right to use of the equipment i.e. ship. The services relate only to logistic services, i.e., for movement of goods across various ports outside India and hence the contention of the Ld. FAO factually incorrect and wholly contrary to law.

APPLICABILITY OF ARTICLE 9 OF THE INDIA- KOREA TAX TREATY ON PROFITS DERIVED FROM LOGISTICS SERVICES PROVIDED BY HSC 10.1 The Ld.AR further submitted that HSC provides logistics services for which freight income is earned by HSC which is governed by Article 7and not Article 9 of the India-Korea tax- treaty. The assessee submitted that Article 9 of the treaty covers only income which are earned from usage of ship / letting out of ships / charter of ships etc. and not for providing logistics services in any manner whatsoever. The HSC does not have any place of business/office in India, the profits arising from logistics services would be taxable only in the resident state i.e., Korea.Thereby, the Ld.AR submitted that no taxes were required to be withheld by the Company while making the remittance and consequently, no disallowance under section 40(a)(i) of the Act ought to be made in its hands.

We have heard the rival contentions, perused the orders, paper books and gone through the orders of lower authorities. The assessee is a resident Indian Company, is engaged in the business of manufacture / job work of boiler pressure parts, panels, header and coils and designing, building, installation and maintaining engineering plants relating to thermal and coal power plants. During the assessment year the assessee had incurred expenses towards freight charges paid to a non- resident logistic company - Hyupjin Shipping Co. Ltd., Korea (‘HSC’). The Assessee had engaged HSC, a Korean logistics company for availing logistics services along with coordinating with port authorities for vessel berthing, loading, unloading,

During the reassessment proceedings the AO held that the payment of freight charges to HSC as above qualifies as Royalty for the use of equipment (ship) under the provisions of section 9(1)(vi) of the Act/Article 12 of the India-Korea tax- treaty. Thus, the freight charges of Rs.61,49,08,760/- was disallowed under section 40(a)(i) of the Act on the grounds of non-withholding of taxes under section 195 of the Act. However, the CIT(A) on 29.04.2022, allowed the appeal of the assessee by deleting the disallowances under section 40(a)(i) of the Act under section 40(a)(i) of the Act by referring to this Tribunal’s decision in the assessee’s own case for A.Y. 2013-14. We note that the order of the Tribunal for the A.Y.2013-14, relied by the Ld.CIT(A) was passed by relying on the revised DTAA between India & Korea, which came into effect from 01.04.2017. Hence, the order of the Ld.CIT(A) is erroneous.

Firstly, the impugned payment made by the assessee is not in the nature of Royalty under section 9(1)(vi) of the act as the payments were mere simplicitor freight charges. We note that the AO’s conclusion in the Assessment order passed, referring to the explanation 2 of section 9(1)(vi) of the Act for treating the said consideration paid by the Respondent to HSC as ‘Royalty’towards to right to use of industrial, commercial or scientific equipment i.e., vessel, devoid of merits. It is observed from the documents produced by the assessee and as per agreement entered into with HSC, the services does not confer any right to use of the equipment i.e. ship. The services relate

Further, the reliance of assessee on the following judicial pronouncements have supported the claim of the assessee that the payment of ocean freight to a non-resident company does not tantamount to royalty. DIT vs. A.P. Moller Maersk AS, Civil Appeal No.8040 of 2015, wherein the Hon’ble Supreme Court observed that: “12. Pertinently, the Revenue itself has given the benefit of Indo- Danish DTAA to the assessee by accepting that under Article 9 thereof, freight income generated by the assessee in these Assessment Years is not chargeable to tax as it arises from the operation of ships in international waters. Once that is accepted and it is also found that the Maersk Net System is an integral part of the shipping business and the business cannot be conducted without the same, which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, it is only a facility that was allowed to be shared by the agents.” - Sical Logistics Ltd.V. ADIT (2017) (78 taxmann.com 158) (Chennai Tribunal). - Nan Lian Ship Management LLC v. ACIT (Int. Tax) (2023) 147 taxmann.com 524 (Mumbai Tribunal). - Smit Singapore Pte Ltd. v. Dy. CIT [2021] 125 taxmann.com 349 (Mumbai Tribunal).

Now, we will analyse the DTAA between India & Korea existing during the A.Y. 2015-16. We note that the HSC does not have any place of business/office in India and further no :-14-: ITA. No: 1149/Chny/2023 activities are being carried out by HSC in India, there exists no business connection for HSC in India. Therefore, no income arises through business connection in India U/s.9(1)(i).Further, as per the India-Korea tax-treaty, the business profits of a foreign company would not be taxable in India, if such company does not have a permanent establishment in India through which the business is carried on. The Article 7(1) of the India- Korea tax-treaty, (as it stood during the relevant AY 2015- 16)(Paper Book Page No.192 to 202) which deals with taxability of business profits reads as under: “7(1). The 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 permanent establishment situated therein. If the enterprise carries on business as aforesaid the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.”

Therefore, we are of the considered view that the HSC (non-resident logistics company) does not have any place of business/office in India through which business activities of the Company are carried on and thereby, the profits arising from logistics services would be taxable only in the resident state i.e., Korea.

Further, we note that HSC is a logistics company, the :-15-: ITA. No: 1149/Chny/2023 freight income earned by HSC would be governed by Article 7 and not Article 9 of the India-Korea tax-treaty. The Article 9 of the treaty covers only income which are earned from usage of ship / letting out of ships / charter of ships etc and not for providing logistics services in any manner whatsoever. Even on perusal of provisions of Section 195 of the IT Act, itattracts tax only on chargeable income, if any, paid to a non-resident. Where there is no liability, the question of tax deduction does not arise. Where no part of the income is chargeable in India, even clearance under Section 195(2) or 195(3) of the IT Act is not necessary. The decision of the Karnataka High Court in Commissioner of Income Tax (International Taxation) v. Samsung Electronics Co. Ltd., reported in (2010) 320 ITR 209 (Kar), has been overruled by the Supreme Court in GE India Technology Centre P. Ltd. V. CIT, reported in (2010) 327 ITR 456 (SC). The Supreme Court held as under: “This reasoning flows from the words ‘sum chargeable under the provisions of the Act’ in Section 195(1). The fact that the Revenue had not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression sum chargeable under the provisions of the Act from Section 195(1).”