Madras
High Court
The
Commissioner Of Income Tax vs Van Oord Acz Equipment Bv on 14 November, 2014
T.C.(A).No.1202 of 2007
J U D G M E N T
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 Tax Act and therefore, there is no tax liability on the foreign company.
In similar cases
involving Netherlands Companies doing business in India, the High Court of Uttarkhand
and the High Court of Calcutta had clearly held under Article 5 of the DTAA
agreement between India and Netherlands, the Netherlands companies are not
permanent establishment in India and therefore, there is no tax liability.
Reliance was also placed in the case of ABN Amro Bank,N.V vs Commissioner of
Income Tax reported in 2012 343 ITR 0081 and also in the case of Commissioner
of Income Tax vs BKI/HAM v.o.f reported in 2012 347 ITR 0570.
10. Heard both sides
and perused the materials available on record.
11. The following facts
are not disputed:
The respondent is a
Company incorporated in Netherlands and had let out dredging equipments to one
of its sister concerns which is a company incorporated in India for the purpose
of dredging as per the contract awarded by Gujarat Adhani Port Limited. The
respondent company raised invoices for the use of the equipment from 1.7.2001
to 31.3.2003 amounting to Rs.18,87,40,695/-. The Indian Company deducted TDS of
Rs.5,49,04,367/- under section 195(2) of the Act. The respondent company filed
its return claiming the entire TDS amount by way of refund stating that they
are not liable for Tax under the provisions of DTAA agreement. However, the
assessing officer found that w.e.f.1.4.2002, any consideration for the use or
right to use any industrial, commercial or scientific equipment are included in
the term Royaltyby the amending clause in Explanation to (iva) to sec.9(i) of
the Act and held that the consideration received by the appellant was taxable
and levied income tax at the rate of 10% on the amount of Royalty.
12. On appeal, the
Commissioner of Income Tax (Appeals) considered the DTAA agreement and also the
modified provisions of Article 12 of the DTAA agreement where the definition to
Royalty was modified and the words payments of any kind received as
consideration for the use of or the right to use industrial, commercial or
scientific equipmentwere deleted from the definition. Therefore, the appellate
authority deleted the levy of tax at 10% on equipment rent earned by the
respondent company.
13. On further appeal
by the Department, the Tribunal has also accepted that the respondent Company
is not liable for Tax as per the provisions of the DTAA Agreement and also held
that there is no permanent establishment in India to bring the income under the
provisions of the Income Tax Act.
14. Before adverting to
the merits of the case it is necessary to deal with the Double Taxation Avoidance
Agreement which is known as DTAA. Under a Notification No.GSR 382(E) DATED 27.3.1989,
the convention, between the Government of Republic of India and the Kingdom of Netherlands
for the Avoidance of Double Taxation and the prevention of fiscal evasion with
respect to taxes on income and on capital, came into force w.e.f. 21.1.1989.
Both Governments have agreed and the DTAA agreement with seven chapters and 30
Articles was signed. A protocol with additional article was also signed. The
definitions under Article 3 (a) defines the State and States, which read as
follows:
(a) the term State
means the Netherlands or India, as the context requires, the term States means
the Netherlands and India;
15. Article 5 deals
with permanent establishment sub clauses 1 and 2 are as follows:
1. For the purposes of this Convention, the
term permanent establishment means a fixed place of business through which the
business of the enterprise is wholly or partly carried on.
2. The term permanent
establishmentincludes especially:
(a) a place of
management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, an oil or
gas well, a quarry or any other place of extraction of natural resources;
(g) a warehouse in
relation to a person providing storage facilities for others;
(h) a premises used as
a sales outlet;
(i) an installation or
structure used for the exploration of natural resources provided that the activities
continue for more than 183 days.
16. Article 7 deals
with business profits. Article 12 deals with Royalties, fees for technical
service and payments for the use of equipment. Originally, sub clause (1) to
(4) of Article 12 stood as follows:
1. Royalties, fees for
technical services and payments for the use of equipment arising in one of the States
and paid to a resident of the other State may be taxed in that other State.
2. However, such
royalties, fees and payments may also be taxed in the state in which they arise
and according to the laws of that State, but if the recipient is the beneficial
owner of these categories of income, the tax so charged shall not exceed 20 per
cent of the gross amount of the royalties, of the fees and payments.
3. The competent
authorities of the States shall by mutual agreement settle the mode of
application of paragraph 2.
4. The term royaltiesas
used in this Article means payments of any kind received as a consideration for
the use of, or the right to use, any copyright of literary, artistic or
scientific work, including motion picture films and works on film or video tape
for use in connection with television, any patent, trade mark, design or model,
plan, secret formula or process, or for information concerning industrial,
commercial or scientific experience.(emphasis supplied)
17. Subsequently, there
was an amendment w.e.f.1.4.1991 and sub clauses (1), (2) and (4) of Article 12
were modified as follows:
1. Royalties and fees
for technical services arising in a Contracting State and paid to a resident of
the other Contracting State may be taxed in that other State.
2. However, such
royalties and fees for technical services may also be taxed in the Contracting
State in which they arise and according to the laws of that State; but if the
beneficial owner of the royalties or fees for technical services is a resident
of the other Contracting State, the tax so charged shall not exceed.
(a) in the case of
royalties referred to in sub-paragraph (1) of paragraph 4 and fees for
technical services as defined in this Article (other than services described in
sub-paragraph(b) of this paragraph);
(A) 15 percent of the
gross amount of the royalties or fees for technical services as defined in this
Article, where the payer of the royalties or fees is the Government of that
Contracting State, a Political sub-division or a public sector company; and (B)
20 per cent of gross amount of the royalties or fees for technical services in
all other cases; and
(ii) during the
subsequent years, 15 percent of the gross amount of royalties or fees for
technical services; and
(b) in the case of
royalties referred to in sub-paragraph(b) of paragraph 4 and fees for technical
services as defined in this Article that are ancillary and subsidiary to the
enjoyment of the property for which payment is received under paragraph 4(b) of
this Article, 10 percent of the gross amount of the royalties or fees for technical
services.
4. The term royaltiesas
used in this Article means:
(a) payments of any
kind received as a consideration for the use of, or the right to use, any
copyright to literary, artistic or scientific work including motion picture
films and works or videotape for use in connection with television, any patent,
trade mark, design or model, plan, secret formula or process, or for
information concerning industrial, commercial or scientific experience; and
(b) payments of any
kind received as consideration for the use of, for the right to use industrial,
commercial or scientific equipment, other than payments derived by an
enterprise described in paragraph 1 of Articles 8 and 8A (Shipping and Air
Transport) from activities described in paragraph 2(a) of Article 8 or
paragraph 4(b) of Article 8A.
18. In a further
modification w.e.f.1.4.1997, sub clause 2 was modified as follows:
However, such royalties
and fees for technical services may also be taxed in the Contracting State in
which they arise and according to the laws of that State, but if the recipient
is the beneficial owner of the royalties, or fees for technical services, the
tax so charged shall not exceed 10 percent of the gross amount of the royalties
or the fees for technical services.
19. W.e.f.1.4.1998, sub
clause 4 of Article 12 was also modified as follows:
4) The term royaltiesas
used in this Article means payment of any kind received as a consideration for
the use of, or the right to use, any copyright to literary, artistic or
scientific work including cinematograpy films, any patent, trade mark, design
or model, plan, secret formula or process, or for information concerning
industrial, commercial or scientific expression.
20. Clause (1) of
Article 12 originally covered 'Royalties', 'fees for technical services' and
'payments for the use of equipments'. A plain reading would show that if any
one of the above category arises in one of the States viz., Netherlands and
India and paid to a resident of the other State i.e., Netherlands or India, the
same may be taxed in that other statei.e., Netherlands or India.
21. Clause (2) however
stated that such royalties, fees, payments may also be taxed in the State in which
they arise and according to the laws of the State. But the tax so charged shall
not exceed 20% of the gross amount.
22. Sub clause (4)
defines royalties which will include any consideration received for the use of
any copy right of literary, artistic or scientific work including motion
picture films and works on film or video tape for use in connection with
television, any patent, trade mark, design or model, plan, secret formula or
process, or for information concerning industrial, commercial or scientific experience.
23. Clause 5 defines
'fees for technical services' and clause (6) defines the term payments for the use
of equipmentand means payment of any kind received as a consideration for the
use of or the right to use industrial, commercial or scientific equipment.
24. However, clause (1)
of Article 12 as modified w.e.f.1.4.1991 would show that the 'Royalties' and 'fees
for technical services' arising in a Contracting State and paid to the resident
of the other Contracting State may be taxed in that other State. In this
modification, the category payments for the use of equipmentdoes not figure.
25. Coming to the
modification to clause 2, the first part of Clause 2 is similar to the earlier
clause 2, however, the method of tax so charged is divided into two categories
with reference to the modified (a) and (b) of clause 4. However, clause(2) was
again modified w.e.f.1.4.1997 to its original position with a slight change of
tax so charged shall not exceed 10%as against the original 20%. Similarly, w.e.f.
1.4.1998, clause 4 was also restored its original position deleting sub clause
(a) and (b).
26. In the modification
w.e.f.1.4.1991, clause 6 the definition for payments for the use of equipments did
not figure. Clause 5 defines fees for technical services and clause 6 defines
the amount which does not include for fees for technical services. The above
said clause 6 was further modified w.e.f. 1.4.1995.
27. Sub clause (b) of
clause 4 as modified w.e.f.1.4.1991 defined payments of any kind received as consideration
for the use of, for the right to use industrial, commercial and scientific equipment,
thereby literally including the category payments for the use of equipmentinto
the category of Royalties. However, clause 4 to Article 12 was restored to
original position w.ef.1.4.1998.
28. The above would
show that for all practical purposes, the 'payments for the use of equipment' originally
found in clause (1) of Article 12 as defined in clause (6) was incorporated in
the definition of the term Royaltiesin clause 4 w.e.f.1.4.1991 and subsequently
deleted w.e.f.1.4.1998 and thereby completely taken out from clause (1) and (2)
of Article 12. This means that the payment for the use of equipment or any
consideration for the use of , for the right to use industrial, commercial or
scientific equipment is deleted and it is not taxable in the contracting State
in which they arise viz., in the given case India.
29. Sec.90 of the
Income Tax Act 1961 enables and empowers the Central Government to issue Notification
for implementation of the terms of Double Taxation Avoidance Agreement. In
Union of India and another vs Azadi Bachao Andolan and reported in 2003 263 ITR
706 SC , the Hon'ble Supreme Court considered Sec.90 of the Act and held as
follows:
No provision of the
Double Taxation Avoidance Agreement can possibly fasten a tax liability where the
liability is not imposed by the Act. If a tax liability is imposed by the Act,
the Agreement may be resorted to for negativing or reducing it; and, in case of
difference between the provisions of the Act and the Agreement, the provisions
of the Agreement would prevail over the provisions of the Act and can be
enforced by the appellate authorities and the court.
Section 90 is
specifically intended to enable and empower the Central Government, to issue notification
for implementation of the terms of a Double Taxation Avoidance Agreement. The provisions
of such an Agreement, with respect to cases to which they apply, would operate
even if inconsistent with the provisions of the Income-Tax Act. If it was not
the intention of the Legislature to make a departure from the general
principles of chargeability to tax under section 4 and the general principle of
ascertainment of taxable income under section 5, then there was no purpose in making
those sections subject to the provisions of the Act.
Section 90 was brought
into the statute book precisely to enable the executive to negotiate a Double Taxation
Avoidance Agreement and quickly implement it. Even accepting that the powers
exercised by the Central Government under section 90 are delegated powers of
legislation, there is no reason why a delegatee of legislative power, in all
cases, has no power to grant exemption. The delegate of a legislative power can
exercise the power of exemption in a fiscal statute.
When the requisite
notification has been issued under section 90, the provisions of sub-section
(2) of section 90 spring into operation and an assessee who is covered by the
provisions of the Double Taxation Avoidance Agreement is entitled to seek the
benefits thereunder, even if the provisions of the Double Taxation Avoidance
Agreement are inconsistent with those of the Act. Therefore, a Notification
No.S4693(E) dated 30.8.1999 was issued under Sec.90 of the Income Tax Act
bringing in the above said modification, as India and Netherlands are members
of the Organisation for Economic Co-operation and Development (OECD) to limit
the taxation in line with the conventions between India and other countries.
Therefore the provisions of the Agreement would prevail over the provisions of
the Act.
30. Clause (iva) of
Sec.9(1) of Income Tax Act defines Royalties. w.e.f.1.4.2002. But, in our considered
view, Clause (iva) of Sec.9(1) is not applicable for the simple reason that the
payments for the use of equipment was no longer taxable in the Contracting
State viz., India after the modification dated 1.4.1998 in the DTAA.
31. The learned
Standing counsel for the department would rely upon the judgment rendered in
the case of Poompuhar Shipping corporation Ltd and another vs Income Tax
Officer (International Taxation) reported in 2014 360 ITR 257 (Mad) . The main
question before the Division Bench in the above decision was whether the
payment made for taking ship on time charted basis would constitute Royalty as
defined under Sec.9(1)(vi)(b) of the Income Tax Act.
32. The DTAA of Australia,
USA, France, Germany, Norway, Singapore and Switzerland were considered and
particularly, Art.12 (3) which defined the term Royaltieswas under
consideration.
The said Art. 12(3) is
pari materia to Art.12(4) as modified w.e.f.1.4.1991 of DTAA with Netherlands.
33. For better
appreciation, paragraphs 88 to 92 in the case of Poompuhar Shipping corporation
case (cited supra) are reproduced hereunder:
88. This takes us to
the consideration on Article 12 under DTAA. Article 12 of the Australian DTAA deals
with the jurisdiction of and the State on the taxability of royalty. It states
that Article 8 Ships and aircraft 1. Profits from the operation of ships or
aircraft, including interest on funds connected with that operation, derived by
a resident of one of the Contracting States shall be taxable only in that
State. The definition of royaltyas given under article 12(3) of the DTAA with
Australia is the same as in the definition in the DTAA with France in Article
13, with Germany in Article 12; with Norway in Article 13; with Singapore in
Article 12; with Switzerland in Article 12 and with U.S.A in Article 12.
89. The U.S.A DTAA
specifically reads that royaltywould mean payments of any kind, as follows:
2. Royalties and fees
for included services:_ (1) Royalties and fees for included services arising in
a Contracting State and paid to a resident of the other Contracting State may
be taxed in that other State....
(3) The term
royaltiesas used in this article means
(a) payments of any kind received as a consideration
for the use of, or the right to use, any copyright of a literary, artistic, or
scientific work, including cinematography films or work on film, tape or other
means of reproduction for use in connection with radio or television
broadcasting, any patent, trade mark, design or model, plan, secret formula or
process, or for information concerning industrial, commercial or scientific
experience, including gains derived from the alienation of any such right or
property which are contingent on the productivity, use, or disposition thereof;
and
(b) payments of any
kind received as consideration for the use of, or the right to use, any
industrial, commercial, or scientific equipment, other than payments derived by
an enterprise described in paragraph (1) of Article 8 (Shipping and Air
Transport) from activities described in paragraph 2(c) or 3 of Article 8.
90. Thus, while some of
the DTAAs include payment for use of or right to use of industrial, commercial
and scientific experience as a heading under royalty, invariably, in all the
DTAAs payment for use of or right to use of industrial, commercial and
scientific equipment, is included in the meaning of royalty. The provision
contained in section 9(1)(vi), Explanation 2 (iva) is modelled after U.N. Model
and is different from what one has in the OECD model at present.
91. Thus, while the
OECD Model got amended to bring payment for use of or right to use of the industrial,
commercial scientific experience as royalty, all the DTAA s under consideration
contain the clauses on consideration for use of or right to use of industrial,
commercial and scientific equipment as well as experience as royalty.
92. Thus, when the use
or right to use the ship for an economic benefit is given to the assessee, the consideration
for the use of the industrial, commercial and scientific equipment is royalty, assessable
under Explanation 2(iva) to section 9(1)(vi) of the Income Tax Act. Thus, for
the purposes of Income Tax Act, under the time charter, the payment made being
for the use of the ship, the same comes within the meaning of the word royalty.
34. While considering
the DTAA that is applicable to the present case and the DTAA that was considered
in Poompuhar Shipping case, referred supra, we find that the amendment to Clause
4 of Article 12 with effect from 1.4.1998 by deleting the term payments for the
use of the equipment from the definition of royalties makes the present case
distinguishable on facts. In Poompuhar Shipping case, referred supra, it was a
case of hiring of ship on time-charter basis, whereas in the present case,
dredging equipment is leased out on bareboat basis, namely, without Master and
Crew.
Therefore, on facts,
the decision in Poompuhar Shipping case, referred supra, is distinguishable.
35. The learned
Standing Counsel for the department referring to paragraph (2) of Article 5
which states that an installation or structure used for the exploration of
natural resources is a permanent establishment, provided that the activities
continue for more than 183 days, pleaded that the stand of the department is
justified.
36. We are not inclined
to accept such a plea, as in the case on hand the dredging equipment was leased
out on bareboat basis viz., without Master and Crew. Therefore, it will not
come under the permanent establishment and the entire control over the
equipment was not with the Foreign company, but with the Indian Company.
Therefore, the above said plea is not accepted.
37. For the foregoing
reasons, the appellate authority below has rightly considered Article 12(4) of the
DTAA agreement between Netherlands and India and is 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 and the
substantial question of law is answered against the Revenue/appellant.
38. In the result, the
appeal is dismissed and order of the Income Tax Appellate Tribunal Chennai 'A'
Bench, dated 29.3.2007 made in ITA No.1894/Mds/2005 for the assessment year
2003-2004 is confirmed. No costs.
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