M.T. Maersk Mikage vs Director of Income Tax

Mr. Akil Kureshi, J. (Oral) - Petitioner has challenged an order dated 25.03.2014 passed by the Commissioner of Income-tax, Ahmedabad, by which, he dismissed the petitioner''s revision petition under section 264 of the Income Tax Act, 1961 (''the Act'' for short) and thereby confirmed an order dated 26.12.2011 passed by the Income Tax Officer, Ghandhidham.

Brief facts are as under.

One ST Shipping and Transport Private Limited (hereinafter to be referred to as ''ST Shipping'' for short) is a Singapore based company. The petitioner GAC Shipping (India) Pvt. Limited (hereinafter to be referred to as ''GAC Shipping'' for short) is engaged in the business of shipping agency services. The petitioner provides such services to its members including to the said ST Shipping which is engaged in the business of operating ships in the international waters. ST Shipping is a taxed resident of Singapore.

During the period relevant to assessment year 2011-12, ST Shipping had through ships owned or chartered by it, undertaken voyages from various Indian ports and earned income from exporters and out of other such business. ST Shipping through present petitioner, filed a return of income under section 172(3) of the Act, declaring the gross profit calculations, but claiming Nil income by relying on Article 8 of Double Taxation Avoidance Agreement (''DTAA'' for short) between India and Singapore. According to ST Shipping, such income was taxable only in Singapore and therefore, exempt from tax regime under the Indian Income Tax Act.

The Assessing Officer processed the returns for five separate vessels, through which, such freight movement had been undertaken and passed a consolidated order dated 26.12.2011, in which he held that the ST Shipping was not entitled to benefit of Article 8 of DTAA by virtue of the provisions contained in Article 24 therein. He noted that the fright receipts were remitted to London and not to Singapore. In his opinion, as per Article 24 of DTAA, the funds have to be remitted where the residents of the country is claiming benefit of the agreement which conditions in the present case was not satisfied. He held as under:

"6. It is therefore amply clear that the funds were remitted to London and not in Singapore. The Article 24 of the DTA Agreement between India and Singapore very specifically states that the funds have to be remitted to the country where the resident is claiming the benefit of the DTA Agreement. In the instant case, the freight beneficiary was ST Shipping and Transport Pte Limited of Singapore and hence the funds ought to have been remitted to Singapore, the benefit of DTA Agreement and its subsequent exemption cannot be granted. Therefore the claim of the assessee for exemption of freight tax for the above vessels is not allowed and is hereby rejected. The assessee furnished inaccurate particulars in the sense that it had claimed exemption of freight where it was not allowable. Though the DTA Agreement is a public document and the assessee had clear and complete access to the agreement, it ought to have claimed exemption as per the provisions of law. By completely ignoring the provisions of Article 24 of the DTA Agreement, the assessee has committed a breach of trust and has falsely claimed exemption of freight tax. The fact that the exemption was not available to the assessee was unearthed by the efforts of the Department after calling of various relevant records and investigation. As such, penalty proceedings under section 271(1)(c) are initiated separately for furnishing inaccurate particulars of income and concealing the true facts."

Resultantly, he held that seven and a half percentage of the total amount of freight earned in the Indian rupees, which was 14.75 crores (rounded off), would be chargeable to tax; on which he levied tax of Rs.46.72 lacs at the prescribed rate. He also initiated penalty proceedings under section 271(1)(c) of the Act.

At one stage, the petitioner filed appeal against the said order of assessment dated 26.12.2011. However, under the apprehension that at a future date the question of maintainability of such appeal may arise in view of the language used in section 246 and 246A of the Act, such appeal was withdrawn and instead a petition under section 264 of the Act was filed before the Commissioner. In such petition, it was contended that the freight income in question had been taxed under the laws of Singapore and was remitted to the bank account at Londan under the specific instructions of the beneficiary.

Before the Commissioner, during the proceedings under section 264 of the Act, the petitioner also produced a letter dated 09.01.2013 issued by Inland Revenue Authority of Singapore, in which, it was stated that the income in question derived by the ST Shipping would be considered to be income accruing in or derived from a business carried on in Singapore and the income would be therefore assessable to tax in Singapore on accrual basis. This was in response to the petitioner''s letter to the said Revenue authority of Singapore concerning the applicability of Article 24 of the DTAA. The contents of the letter dated 09.01.2013 of the authority may be reproduced.

" We refer to your letter dated 2 January 2013.

You have stated that ST Shipping and Transport Pte Ltd''s principal business activity revolved around the shipping line and it received charter payments for such services. During the calender years 2011 and 2012, the company derived such charter income from the following parties in India:

(1) related companies in the form of inter-company charges; and

(2) third parties where the money was remitted to London or Switzerland bank accounts.

You have raised the concern that the benefits accorded under Article 8 of the Singapore-India DTA to the profits of your company were limited by the provisions of Article 24.1 of the said DTA which state that any reliefs provided by the DTA would only apply to the amount of income remitted into Singapore. As such, the Indian tax authorities were likely to impose a tax on your company''s charter income.

Based on the information provided in your letter, we would consider the charter income derived by your company to be income accruing in or derived from a business carried on in Singapore and the income is therefore assessable to tax in Singapore on an accrual basis. This means the full amount of the charter income is assessable to tax in Singapore, and not by reference to the amount remitted to or received in Singapore. Consequently, we are of the view that Article 24.1 of the Singapore-India DTA is not applicable in this case and the provisions of Article 8 would prevail. This being the case, Article 24.2 would not be applicable in the first instance. For clarity, we should add that Article 24.2 seeks to make clear that Article 24.1 does not apply to Government income. Accordingly, Article 24.2 is not relevant to income derived by a taxpayer where the income is assessable to tax in Singapore by reference to the amount remitted to or received in Singapore.

We hope that this is sufficient to address your query. If you require any further clarifications, please do not hesitate to contact us."

The Commissioner of Income-tax however by the impugned order, rejected the petition on the ground that since the income was not remitted to Singapore, Article 24 of DTAA would apply and therefore, the benefit of double taxation avoidance would not be available. Commissioner also relied on the order passed by the Commissioner of Income Tax (Appeals) in assessee''s own case, in which, against the order of assessment, the assessee had taken the appeal route. Relevant portion of the revision order reads as under:

"4.3 The issue of applicability of Article 24 has also been examined by this office. The fact that the amount has not been remitted to Singapore has not been denied by the petitioner. Article 24 of the DTAA between India and Singapore does not talk about the issue of taxability of the amount not remitted to Singapore. Hence, the attempt of the Petitioner to prove the taxability of the amount in Singapore is of no consequence so far as interpretation of Article 24 of the Treaty is concerned. Once the factum of remittance not having been made to Singapore is established, the application of Article 24 is inescapable and hence, the Petitioner cannot be allowed benefit of the Treaty. No interference is called for in the order of the ITO(IT) on this issue as well. �

It is further noted that the order for AY 2012-13 passed by the ITO(IT), Gandhidham in the assessee''s own case has been made a subject matter of appeal before CIT(A), Gandhinagar. All the above three issued were raised before CIT(A) and the documents furnished before this office have also been furnished before CIT(A), Gandhinagar. The CIT(A) has discussed all the above evidences before arriving at a conclusion that the claim of the assessee on all these three issues is liable to be rejected."

Before recording the rival contentions, we may reproduce relevant provisions of the DTAA.

Article 1-Personal Scope

This Agreement shall apply to persons who are residents of one or both of the Contracting States.

Article 2-Taxes Covered

The taxes to which this Agreement shall apply are:

a. In India:

Income-tax including any surcharge thereon (hereinafter referred to as "Indian tax")

b. In Singapore:

The income-tax (hereinafter referred to as "Singapore tax").

The Agreement shall also apply to any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of, the taxes referred to in paragraph 1. The competent authorities of the Contracting States shall notify each other of any substantial changes which are made in their respective taxation laws.

Article 4-Resident

For the purposes of this Agreement, the term "resident of a Contracting State" means any person who is a resident of a Contracting State in accordance with the taxation laws of that State.

Article 8-Shipping And Air Transport

Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State.

The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency engaged in the operation of ships or aircraft.

Interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 shall not apply in relation to such interest.

For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean profits derived from the transportation by sea or air of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of the ships or aircraft, including profits from:

(a) the sale of tickets for such transportation on behalf of other enterprises;

(b) the incidental lease of ships or aircraft used in such transportation;

(c) the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) in connection with such transportation; and

(d) any other activity directly connected with such transportation.

Article 24-Limitation of Relief

Where this Agreement provides (with or without other conditions) that income from sources in a Contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State.

However, this limitation does not apply to income derived by the Government of a Contracting State or any person approved by the competent authority of that State for the purpose of this paragraph. The term "Government" includes its agencies and statutory bodies.

In the background of such facts and the DTAA, learned counsel Shri Bandish Soparkar for the petitioner raised following contentions:

I. The ST Shipping is a company liable to be taxed in Singapore according to the local laws. The income earned by the company in its shipping operations in India would also be accordingly taxed. In terms of Article 8 of the DTAA therefore, the same could not be taxed in India.

II. The interpretation adopted by the Revenue authorities to Article 24 of DTAA is wholly erroneous. Clause-1 of Article 24 would apply only in a case where such income is to be taxed in Singapore only on remittance basis, a condition not fulfilled in the present case. In this context, counsel placed heavy reliance on the certificate dated 09.01.2013 issued by the Inland Revenue Authority of Singapore. Counsel submitted that with respect to other assessments, the assessee had first filed appeal before the Commissioner and after rejection of such appeal carried the matter before the Tribunal. The Tribunal allowed the appeal on the ground that Article 24 of DTAA was wrongly applied by the Revenue authorities. Department has not filed appeal against such judgment of the Tribunal.

III. Counsel submitted that even if such income is exempt from tax under the income tax law in Singapore, the same cannot be taxed in India. In this context, counsel relied on the decision of Division Bench of Delhi High Court in case of Emirates Shipping Line, FZE v. Assistant Director of Income-Tax reported in (2012) 349 ITR 493 (Delhi) and of the Supreme Court in case of Union of India and Another v. Azadi Bachao Andolan and Another reported in 263 ITR 706.

On the other hand, learned counsel Shri Nitin Mehta for the department opposed the petition contending;

I. The revision petition before the Commissioner was not maintainable. The petitioner having first filed appeal before the appellate Commissioner, could not have thereafter filed the revision petition.

II. The Department''s interpretation of Clause-24 of the DTAA is correct. In the present case, admittedly, the income had not been remitted to Singapore. By virtue of Clause-1 of Article 24 therefore, Article 8 of DTAA became inapplicable.

III. He contended that the certificate dated 09.01.2013 issued by inland Revenue authority of Singapore is contrary to section 10 of the Singapore Income Tax Act, which would make it clear that unless income of any person accrues in or is derived from Singapore, the same would be taxed only on the basis of actual receipt.

IV. Even otherwise, there is no evidence to show that the assessee had offered such income to tax in Singapore and that the assessee was actually taxed on such income. If for any reason, the income was exempt from payment of tax, Indian Revenue authorities would be entitled to charge the tax on such income.

Having thus heard learned counsel for the parties and having perused documents on record, we may first dispose of the Revenue''s objection to the maintainability of the revision petition. Section 264 of the Act pertains to revisional powers of the Commissioner. Under sub-section (1) of section 264 in case of any order other than an order to which section 263 applies, which is passed by an authority subordinate to the Commissioner, he may either on his own motion or on application by assessee, call for the record of any proceedings in which, such an order has been passed and may make inquiry and subject to the provisions of the Act, pass such order thereon not being an order prejudicial to the assessee, as he thinks fit. Thus, under sub-section (1) of section 264, the Commissioner has power either on his own motion or on the petition filed by the assessee to revise an order passed by a subordinate officer subject to the provisions of the Act. Sub-sections (2) and (3) of section 264 lay down the period of limitation within which, such revisional powers could be exercised. Sub-section (4) of section 264 lists the cases where the Commissioner cannot exercise such revisional power and reads as under:

264(4) The [Principal Commissioner or] Commissioner shall not revise any order under this section in the following cases -

(a) where an appeal against the order lies to the [Deputy Commissioner (Appeals)] [or to the Commissioner (Appeals)] or to the Appellate Tribunal but has not been made and the time within which such appeal may be made has not expired, or, in the case of an appeal [to the Commissioner (Appeals) or] to the Appellate Tribunal, the assessee has not waived his right of appeal; or

(b) where the order is pending on an appeal before the [Deputy Commissioner (Appeals)]; or

(c) where the order has been made the subject of an appeal [to the Commissioner (Appeals) or] to the Appellate Tribunal.

It is therefore, clear that the Commissioner would be precluded from exercising revisional powers under sub-section (1) of section 264 in the situations listed under sub-section (4) thereof. It is not even the Revenue''s case that the present case fell in any one of them. Merely because at one stage, the petitioner preferred an appeal against the order of assessment but withdrew the same, on a reasonable bona-fide apprehension about maintainability of such appeal arising at a future date in view of the provisions contained in section 246 and 246A of the Act, would not prevent the assessee from presenting a revision petition within the framework provided under section 264 of the Act. In fact, the Commissioner had not even dismissed the petition as not maintainable.

This brings us to the core issue strenuously debated by both sides viz. that of applicability of Article 8 vis-a-vis Article 24 of DTAA. We may quickly refresh the facts. ST Shipping is a company based in Singapore. Through the shipping business carried out at Indian ports, ST Shipping earned income, on which, it claims immunity from Indian income tax. The Revenue contends that the remittance of such accrued income not having taken place at Singapore, Article 24 will apply and consequently Article 8 providing for avoidance of table taxation would not apply.

The fact, that the income in question which arises out of shipping operations by virtue of Clause- 1 of Article 8 of the DTAA would be taxable only in Singapore, is not in serious dispute. The moot question therefore is whether operation of Article 8 is ousted by virtue of Clause-1 of Article 24. As noted, Article-24 of DTAA pertains to limitation of relief. Under clause-1 thereof where the agreement provides that the income from sources in contracting states (in the present case, India) shall be exempt from tax or tax at a reduced rate and under the laws in force in other contracting states (i.e. Singapore), such income is subject to tax by reference to the amount thereof which is remitted or received in that State and not by reference to the full amount thereof then the exemption or reduction of tax under the agreement would be limited to so much of the income as is remitted to or received in that contracting State. In plain terms therefore, if the income in question was taxable in Singapore on the basis of receipt or remission and not by reference to the full amount of income accruing, clause-1 of Article 24 would apply and dependent on the facts of the case, exemption as per Article 8 either in whole or in part would be excluded.

It is, in this context, that the certificate dated 09.01.2013 issued by the Inland Revenue Authority of Singapore assumes significance. In the said certificate, as noted, it was certified that the income in question derived by ST Shipping would be considered as income accruing in or derived from the business carried on in Singapore and such income therefore, would be assessable in Singapore on accrual basis. It was elaborated that the full amount of income would be assessable to tax in Singapore not by reference to the amount remitted to or received in Singapore. In fact, the certifying authority went on to opine that in view of such facts, Article 24.1 of the DTAA would not be applicable and consequently, Article 8 would apply.

To this later opinion of the Revenue authority of Singapore, we may not be fully guided since it falls within the realm of interpretation of the relevant clauses of DTAA. However, in absence of any rebuttal material produced by the Revenue, we would certainly be guided by the factual declaration made by the said authority in the said certificate and this declaration is that the income would be charged at Singapore considering it as an income accruing or derived from business carried on in Singapore. In other words, the full income would be assessable to tax on the basis of accrual and not on the basis of remittance. This certificate was before the Commissioner while he passed the impugned order. The contents of this certificate were not doubted. If that be so, what emerges from the record is that the income in question would be assessable to tax at Singapore on the basis of accrual and not remittance. This would knock out the very basis of the Assessing Officer and Commissioner for invoking clause-1 of Article 24 of DTAA. Both the authorities considered the question of remittance of income as the sole requirement for invoking Article 24.1 of DTAA an interpretation which according to us does not flow from the language used. As noted the essence of Article 24.1 is that in case certain income is taxed by a contracting State not on the basis of accrual, but on the basis of remittance, applicability of Article 8 would be ousted to the extent such income is not remitted. This clause does not provide that in every case of non-remittance of income to the contracting state, Article 8 would not apply irrespective of tax treatment such income is given. When in the present case, we hold that the income in question was not taxable at Singapore on the basis of remittance but on the basis of accrual, the very basis for applying clause-1 of Article 24 would not survive. The contention of Shri Mehta for revenue that the certificate of the Singapore revenue authorities is opposed to provisions of section 10 of the Singapore Income Tax Act also cannot be accepted. The Revenue does not question genuineness of the certificate. It cannot dispute the contention on the ground that the same are opposed to the statutory provision.

By way of a reference, we may notice that the Tribunal also in case of this very assessee in case of Alabra Shipping Pte Ltd. v. Income-tax Officer - International Taxation, Gandhidham, reported in 62 Taxmann.com 185 has taken a somewhat similar view by observing as under:

"6. As a plain reading of Article 24(1) would show, this LOB clauses comes into play when (i) income sourced in a contracting state is exempt from tax in that source state or is subject to tax at a reduced rate in that source state, (ii) the said income (i.e. income sourced in the contracting state) is subject to tax by reference to the amount remitted to, or received in, the other contracting state, rather than with reference to full amount of such income; and (iii) in such a situation, the treaty protection will be restricted to the amount which is taxed in that other contracting state. In simple words, the benefit of treaty protection is restricted to the amount of income which is eventually subject matter of taxation in the source country. This is all the more relevant for the reason that in a situation in which territorial method of taxation is followed by a tax jurisdiction and the taxability for income from activities carried out outside the home jurisdiction is restricted to the income repatriated to such tax jurisdiction, as in the case of Singapore, the treaty protection must remain confined to the amount which is actually subjected to tax. Any other approach could result in a situation in which an income, which is not subject matter of taxation in the residence jurisdiction, will anyway be available for treaty protection in the source country. It is in this background that the scope of LOB provision in Article 24 needs to be appreciated."

Under the circumstances, in our opinion, Assessing Officer and the Commissioner committed serious error in passing the impugned orders. Before closing, we may briefly touch on one more aspect sought to be raised by the Revenue viz. of the actual tax being paid by the assessee on such income at Singapore. On the ground that such income is exempt from payment of tax, the Revenue desired to impose tax in India. In this context, the petitioner has relied on the decision of Delhi High Court in case of Emirates Shipping Line, FZE (supra), in which it was held that the assessee, a UAE based shipping company, whose income from such business was exempt from tax in such country, would still not be liable to pay tax in India by virtue of Article 8 of the DTAA between the said two countries. It was held that a person does not have to actually pay taxes in other country to be entitled to benefit of DTAA.

We may notice that a somewhat similar issue came up before this Court in case of Director of Income Tax (International Taxation) v. Venkatesh Karrier Ltd. reported in 349 ITR 124, in which the Court observed as under:

"10. After taking into consideration the above circulars issued by the Board and also the provisions contained in Article 8 of the DTAA, we find that both the Tribunal below and the CIT [Appeals] rightly held that in such a situation, the owner of the ship being admittedly a resident of UAE, there was no scope of taxing the income of the ship in any of the ports in India. The agreement between the two countries has ousted the jurisdiction of the taxing officers in India to tax the profits derived by the enterprise once it is found that the ship belongs to a resident of the other contracting country and such position has also been clarified by the Circulars issued by the Board as indicated above."

In the present case, however, we are not inclined to conclude this issue since this was not even a ground on which either the Assessing Officer or the Commissioner has refused to grant the benefit to the petitioner. It is a ground sought to be raised for the first time before us by the Revenue, for which, neither full factual evidence, nor legal foundation is laid. We leave such an issue open to be decided in the appropriate case.

In the result, petition is allowed. Impugned order dated 25.03.2014 passed by the Commissioner is set aside. Resultantly, order of assessment dated 26.12.2011 is also quashed. Petition disposed of accordingly.