TATA NYK SHIPPING PTE LTD,SINGAPORE vs. DCIT, INT.TAX. CIRCLE-3(1)(1), DELHI

The assessee has raised the following grounds of appeal:

Coming straight to the issue involved, we find that the revenue taxed the amount received by the assessee as income from royalty holding that there was no commercial rationale for incorporation of the appellant company in Singapore, the appellant company was used as a conduit with the intent of availing treaty benefits under DTAA and income of the appellant from shipping activity being exempt from tax in Singapore as per Singapore domestic tax laws, the appellant was not liable to tax in Singapore and hence could not be regarded as tax resident of Singapore entitled to benefit of DTAA.

Both the parties made extensive arguments referring to Place of Effective Management (PoEM).

We find that the similar allegations have been made by the revenue and also during the proceedings concluded u/s 263 by the ld. CIT(Intl. Taxation)-3, New Delhi. During the hearing of that case, arguments have been put forward by Sh. Ajay Vohra, Sr. Adv. and by Sh. Gangadhar Panda, CIT DR. The Tribunal passed an order dated 09.03.2023 in ITA No. 1067/Del/2022 wherein the merits of the issue which is akin to the issue before us has been examined and adjudicated. For the sake of ready reference, the operative part of the order is as under:

In any case of the matter, the Revenue certainly cannot control the mode and manner in which the assessee wants to carry on its business activity. If the assessee is constituted within a legal framework and its activities are legal, Revenue certainly cannot step into the shoes of the assessee to question the business prudence. It is also relevant to observe, though, learned CIT has made serious allegations regarding scheme of tax avoidance, the arrangement lacking commercial rationale and substance, conduit company, avoiding payment of tax in Singapore and Netherlands etc., however, these are found to be unilateral allegations without any corroborative

One more allegation made by the CIT to hold that the assessee cannot be considered to be a tax resident of Singapore is because its key person is also a key person in Tata NYK India. However, from the materials placed before us, we find the aforesaid allegation of learned CIT to be baseless. From the list of key managerial personnel furnished in the paper-book it is observed that all key managerial personnel are based in Singapore and were holding National Registration Identity Card issued by the Government of Singapore. It is also relevant to observe, whether the assessee is a tax resident of Singapore or not is a highly debatable issue and has to be decided based upon evidence gathered through proper investigation. Conclusion on these issues cannot be reached on conjectures, surmises, doubts and suspicion. Therefore, not only they are outside the scope of limited scrutiny, but, based on such debatable issues proceedings under section 263 of the Act cannot be invoked. Further, learned CIT has observed that the assessee cannot be treated as tax resident of Singapore as it is not liable to tax in Singapore. Reason being, shipping income is exempt from taxation in Singapore. In this context he has referred to Article 4(1) of the India-Mauritius DTAA. However, he has completely ignored the fact that unlike India-Mauritius Treaty, there is no such condition that a person liable to tax can only be a resident as per definition of resident under Article 4 of India-Singapore DTAA. In any case, whether a particular person is a resident of a particular country or

As could be seen, holding the assessee not to be a tax resident of Singapore, learned CIT has observed that the assessee is liable to be taxed under the domestic law. Having held so, he has held that the receipts from shipping business in international traffic cannot be treated as business profit to be taxed under section 44B of the Act. He has held, since, the assessee leases vessels and earns lease rentals, such receipts are to be treated as royalty under section 9(1)(vi) read with explanation (2)(iva), as, it amounts to equipment royalty. While coming to such conclusion, learned CIT has observed that the assessee does not own any ships/vessels but has taken them on lease from NYK Japan through its subsidiary based in Netherlands. On perusal of record, including the balance sheet of the assessee, we find the aforesaid observations contrary to facts and materials on record. As per the balance sheet of the assessee, the assessee owns substantial number of vessels and large numbers of vessels are under construction. It is further observed that contrary to the allegation of learned CIT, the assessee has not entered into any back to back arrangement, wherein, receipts derived by it from Indian customers has been passed on to other group entities in the form of lease rent. Further, the assessee has not entered into any transaction of sale and lease back of vessels in the year under consideration. It is also evident that the assessee has not paid any lease rent to NYK Netherlands and even NYK Netherlands has not paid any dividend to NYK Japan. Therefore, the allegations of learned CIT are not borne out from record. As per Article 8 of India– Singapore DTAA receipts from operation of ships and aircrafts in international traffic is taxable in the country of residence of the recipient. Therefore, as per the treaty provisions, amounts received by the assessee from operation of ships in international traffic would

In any case of the matter, whether the assessee is entitled to treaty benefit or not is a highly debatable issue, hence, on such an issue an order cannot be considered to be erroneous and prejudicial to the interest of Revenue.

Lastly, we will deal with the decision of learned CIT in treating the receipts from operation of ships in international traffic to be in the nature of royalty income. As discussed earlier, the assessee owns substantial number of vessels for transportation of goods from the ports outside India to ports in India and vice versa. Invoices raised by the assessee demonstrate that the assessee charged fee for transportation of goods and not towards leasing of the vessels. Therefore, the finding of learned CIT that the receipts from the shipping business is in the nature lease rental, hence royalty, appears to be contrary to facts on record. At this stage, we must observe, the assessee had three types of shipping income in the year under consideration, viz., income from coastal shipping, income from inward freight and income from outward freight. Insofar as, income from coastal shipping is concerned, the assessee has offered it to tax under section 44B of the Act. Whereas, income from inward freight and outward freight was claimed as exempt under Article 8 of the treaty. Interestingly, learned CIT has held the inward freight income as royalty and has directed the Assessing Officer to tax such income amounting to Rs.903,54,20,929/- by applying the rate of 10% on gross basis. However, in respect of income from coastal shipping and outward freight, learned CIT has accepted the claim of the assessee

Thus, we find that the Co-ordinate Bench of Tribunal has already held that the assessee is entitled to treaty benefit after examination of the tax returns of the assessee filed before the tax authority of Singapore and also held that the assessee is to be considered as the tax resident of Singapore. The Tribunal has also held that the assessee has not entered into any back- to-back arrangement. The Tribunal has also held that the receipts cannot be treated as royalty.

Hence, in the absence of any change in the business pattern or the judicial proposition, we hold that the revenue erred in treating the receipts from international traffic pertaining to voyage chartered as ‘Royalty’.

Since, the appeal of the assessee stands decided in favour of the assessee, the Stay Application of the assessee become infructuous and hence dismissed.

In the result, the appeal of the assessee is allowed and the Stay Application of the assessee is dismissed.