T.C.A. No. 1202 of 2007. Case: The Commissioner of Income Tax Vs Van Oord ACZ Equipment BV. Chennai (Madras) High Court

Case Number:T.C.A. No. 1202 of 2007
Party Name:The Commissioner of Income Tax Vs Van Oord ACZ Equipment BV
Counsel:For Appellant: T. Ravikumar, Senior Standing Counsel and For Respondents: Porus Kaka, Senior Counsel for R. Sivaraman, Adv.
Judges:R. Sudhakar and G. M. Akbar Ali, JJ.
Issue:Income Tax Act, 1961 - Sections 195(2), 2(23A), 4, 44BB, 5, 9, 9(1), 9(1)(i), 9(1)(vi), 9(1)(vi)(b), 90
Judgement Date:November 14, 2014
Court:Chennai (Madras) High Court
 
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Judgment:

  1. The appeal has been filed by the Revenue challenging the order of the Income Tax Appellate Tribunal 'A' Bench, Chennai, dated 29.3.2007 made in ITA No. 1894/Mds/2005 for the assessment year 2003-2004.

  2. The brief facts of the case are as under: The assessee is a company incorporated in Netherlands and falls within the definition of a foreign company under Section 2(23A) of the Income Tax Act (for brevity, 'the Act'). The management and control of the assessee company is situated in Netherlands. The assessee during the year 2002-2003 let out dredging equipment to their Indian company, namely, Van Oord ACZ India P. Ltd. The assessee filed return of income along with a brief note elucidating the provisions of the Double Taxation Avoidance Agreement signed by the Government of India with the Government of Netherlands and stating that the income earned by letting out of industrial equipment would not be taxable in India. However, the Assessing Officer held that since the definition of royalty, as enumerated in Section 9 of the Act, means consideration for use or right to use any industrial, commercial or scientific equipment, the consideration received by the assessee company falls within the definition of royalty in Section 9 of the Act and accordingly, the same is liable to tax in India.

  3. Assailing the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) after taking note of:

    (i) the documents produced by the assessee from the Income Tax Department of the Netherlands to the effect that equipment rent is included in the total income of the appellant as per the laws of the Netherlands and tax has also been paid on the same, and

    (ii) the amended provisions of the Double Taxation Avoidance Agreement, held that the contracting country (in the present case India) should not levy income tax on the said income. Accordingly, the Commissioner of Income Tax (Appeals) deleted the tax so imposed by the Assessing Officer.

  4. Aggrieved by the above said order, the Revenue preferred an appeal before the Tribunal. The Tribunal, while confirming the order passed by the Commissioner of Income Tax (Appeals), observed that when the assessee has no permanent establishment in India, there is no charging provision in the Act to bring this income under the provisions of the said Act for the purpose of bringing the same to tax.

  5. Challenging the above said order, the Revenue has filed this appeal on the following substantial question of law:

    Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the amount received by the assessee for hiring out dredgers to an Indian Company of the same name for use in Indian ports is not taxable in India in terms of the Double Taxation Avoidance Agreement with the Netherlands?

  6. The main contention of the learned Senior Standing Counsel appearing for the Revenue is that as per Clause (iva) to Explanation 2 to Section 9(1) of the Act, the consideration received for the use or right to use, any industrial, commercial or scientific equipment, but not including the amounts referred to in section 44BB, is royalty and since Section 44BB is not applicable to the case on hand, the income is chargeable to tax in India.

  7. The next contention of the learned Senior Standing Counsel appearing for the Revenue is that as per Article 12(1) of the Double Taxation Avoidance Agreement, royalty arising in a contracting State may be taxed in the other State and, therefore, there is no restriction on the Revenue to impose tax in India, solely because the assessee has paid tax in the Netherlands.

  8. The learned counsel for the revenue would further submit that the payment made towards chartering of the ship should be considered as business income and such business income would attract the provisions of the Income tax under Article 7 of the DTAA. He also placed reliance on Article 5 which defines permanent establishment chargeable to tax in India. The learned counsel relied on 2014 360 ITR 257 Madras (Poompuhar Shipping Corporation Ltd and another vs. Income Tax Officer, International taxation) and contended that the consideration paid for the use of equipment is liable to be treated as Royalty as defined in Explanation II to Sec. 9(1)(i) of the Income Tax act.

  9. On the other hand, the contention of the learned Senior counsel for the respondent company is as follows:

    The respondent company is incorporated in Netherlands and the entire management and control is situated outside India. Therefore, there is no permanent establishment in India.

    The Foreign company was engaged in the business of hiring out of dredging equipment and had let out such dredging equipment to its sister concern, which is incorporated in India and for such use of equipment, the company has raised invoices and the Indian Company deducted income tax at source (TDS) for which the foreign company is not liable to, and made a claim for refund.

    The amount received by the foreign company is a payment for use of equipment and the foreign company is governed by the provisions of Double Taxation Avoidance Agreement (DTAA) and according to the amended DTAA, the income earned from hiring of dredging equipment was not taxable in India.

    The payment towards the hire of dredging equipment is not a royalty as defined under Explanation II to clause (iva) to sec. 9(1) of the Act.

    The dredging equipment was leased out on bareboat understanding (i.e.) without Master and Crew and therefore it is not a Ship as stated by the Department. Therefore, the decision rendered in Poompuhar Shipping Corporation Ltd vs. Income Tax Officer, International Taxation reported in 2014 360 ITR 257 Madras is not applicable.

    As per the decision rendered in the case of Union of India and another vs. Azadi Bachao Andolan and reported in 2003 263 ITR 706 SC, if a tax liability is imposed by the Income Tax Act, the provisions of the DTAA agreement would prevail over the provisions of the Income...

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