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2016-TII-43-HC-AHM-INTL

MT MAERSK MIKAGE Vs DIT: GUJARAT HIGH COURT (Dated: August 24, 2016)

Income Tax - Sections 172(3), 246A, 264 & 271(1)(c) - India-Singapore DTAA - Articles 8 & 24.

Keywords: shipping agency services - exempt income - freight receipts - penalty - accrual basis - income remitted to Singapore - non resident.

Whether when the income earned by the assessee has already been charged to tax at Singapore, considering the same as an income accruing or derived from business carried on there, the entire income is to be considered as assessable to tax on the basis of accrual and not on the basis of remittance - YES: HC

Whether if the business income of the foreign shipping company is exempt from tax in the contracting country, it can be subjected to tax in India - NO: HC

Whether it is necessary for the assessee to actually pay taxes in Singapore to be entitled to avail benefits of DTAA in India - NO: HC

ST Shipping and Transport Private Limited is a Singapore based company. The assessee, GAC Shipping (India) Pvt. Limited is engaged in the business of shipping agency services. Assessee provides such services to its members including to the said ST Shipping which was engaged in the business of operating ships in the international waters. ST Shipping was a taxed resident of Singapore. During the year AY 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 assessee, filed a return of income u/s 172(3), declaring the gross profit calculations, but claiming Nil income by relying on Article 8 of DTAA 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. AO processed the returns for five separate vessels, through which, such freight movement had been undertaken and passed a consolidated order, 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. AO noted that the freight 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 was claiming benefit of the agreement which conditions in the present case was not satisfied. Resultantly, it had held that seven and a half percentage of 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. AO also initiated penalty proceedings u/s 271(1)(c). A petition u/s 264 was filed before the Commissioner, in which 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 London under the specific instructions of the beneficiary. Assessee also produced a letter 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. CIT 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 DTAA would not be available. CIT also relied on the order passed by the CIT(A) in assessee's own case, in which, against the order of assessment, the assessee had taken the appeal route.

Held that,

++ in the certificate issued by Singapore authority, 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 AO and Commissioner for invoking clause1 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 clause1 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;

++ the AO 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 HC in case of Emirates Shipping Line, FZE, 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. In the case of DIT(IT) v. Venkatesh Karrier Ltd. 2012-TII-11-HC-AHM-INTL, the Court observed that 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 [A] 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 AO 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.

Assessee's appeal allowed

 

2016-TII-453-ITAT-PUNE-TP

DCIT Vs BARCLAYS TECHNOLOGY CENTRE INDIA PVT LTD: PUNE ITAT (Dated: July 22, 2016)

Income Tax - Sections 92C(2), 92CA, 143(3) & 144C(3).

Keywords - Arm's Length Price - ALP - Selection of comparables - Safe harbour rules - software services - Transactional Net Margin Method - TNMM - Working capital adjustment.

Whether when the assessee is a captive software service provider, and adopts TNMM as the MAM for its TP Study, TPO's decision to include large players like infosys and Bodhtree Consulting as comparables to adjust its profit margine is legally sustainable albeit a coordinate Bench of the Tribunal had earlier asked the Revenue to exclude them in assessee's own case - NO: ITAT

The assessee Company, engaged in providing software services to Barclays Group worldwide, was set up as an offshore technology centre in India. The services were to support internal software related requirements for the Barclays Group and not for sale to third party. The assessee filed its return and the same was referred to the TPO. The assessee had adopted Transactional Net Margin Method (TNMM) as the most appropriate method to benchmark international transactions relating to Software Development Services. The TPO accepted the said method. In the TP study, the assessee had selected 21 companies as comparables. However, the TPO rejected majority of them and added three new companies as comparables for determining ALP. The TPO finally made an upward adjustment.

Relying on the TPO order, the AO passed the final assessment order retaining the TP adjustment. On appeal, the CIT(A) directed the TPO to include certain companies, demanded by the assessee and further directed to exclude few companies for the reasons that there was vast difference in size and scale of business and nature of activities. The CIT(A) further directed the AO to rework margins of the comparable companies, if necessary, by following safe harbour rules issued by the CBDT and to grant working capital adjustment. Assessee and Revenue filed cross-appeals before the Tribunal.

After hearing parties, Tribunal held that,

+ although, several grounds have been raised by the Department and the assessee in grounds of appeal and Cross Objection, respectively, however, at the time of making submissions the DR could not controvert the reasons give by the CIT(A) to include/exclude certain companies from the list of comparables. Similarly, the counsel for the assessee confined his submissions against inclusion of Kals Information Technology Systems Limited and Bodhtree Consulting Limited in the list of comparables. The counsel has further supported the action of Commissioner of Income Tax (Appeals) in excluding Infosys Technologies Limited from the list of comparables;

+ DR has not been able to controvert the findings of the Tribunal in excluding the three companies i.e. Infosys Technologies Limited, Kals Information Systems and Bodhtree Consulting Ltd. from the final set of comparables. No material has been brought before us to show that there is any change in the facts and circumstances in the assessment year under appeal. Respectfully following the decision of the Co-ordinate Bench under identical facts and circumstances we direct to exclude Kals Information Systems and Bodhtree Consulting Ltd. from the final list of comparables and uphold the directions of CIT(A) to exclude Infosys Technologies Limited from the list of comparables;

+ the counsel the assessee at the time of making submissions had stated that if the three companies i.e. (i) Infosys Technologies Limited, (ii) Kals Information Systems and (iii) Bodhtree Consulting Ltd. are excluded from the list of comparables, then the ALP margin of comparables and the assessee's operating margin of the international transaction with respect to Software Services to its AEs would fall within ± 5% range and hence no adjustment would be required. Since, the assessee has succeeded in its prayer for excluding the aforesaid three companies, the other grounds in Cross Objections have become academic. Moreover, no arguments were advanced by the counsel to substantiate the other grounds raised in Cross Objections, accordingly, the same are dismissed as such. In the result, the appeal of the Revenue is dismissed and the Cross Objections filed by the assessee are partly allowed.

Revenue's appeal dismissed