By Geeta Jani, Dhishat B Mehta, Chartered Accountants
Article 12 of DTAA, Section 9(1)(vi) and 172 of the Act –
Payment made for hiring of vessel on time charter basis does not involve
control and possession of the vessel and does not amount to “equipment
royalty”. Hire charges are covered by section 172 and not subject to withholding
u/s. 195
Facts
The Taxpayer, an Indian company, was engaged in carrying on
the business of transporting coal. Taxpayer had hired the vessels owned by
Foreign Shipping Companies (FCo) for transporting the cargo on a time charter
basis and paid hire charges to FCo without withholding taxes thereon.
The Captain/Master of the vessel, crew and other staff of the
ship were controlled by the ship owner, i.e FCo. The repairs and maintenance as
well as the insurance of the vessel was taken care of by FCo. Taxpayer merely
intimated FCo about the availability of the cargo and from where to where the
cargo had to be moved.
Taxpayer argued that payments made to FCo was for
transportation of goods and hence covered u/s. 172 of the Act, which is a
complete code in itself and hence there is no requirement to withhold taxes
u/s. 195 of the Act.
AO contended that the charges paid by the Taxpayer were on
account of the use and hire of the ship and hence, it amounts to royalty within
the meaning of section 9(1)(vi) of the Act and Article 12 of DTAA and hence
subject to withholding u/s. 195 of the Act. Accordingly, AO disallowed the hire
charges paid to FCo for failure to withhold taxes by holding that section 172
is not applicable in respect of hire charges paid to FCo.
Aggrieved by the order of AO, the Taxpayer appealed before
CIT(A), who upheld the order of AO, Taxpayer thus appealed before the Tribunal
Held
– In the case of Asia Satellite
Telecommunication Co. Ltd. vs. DCIT (332 ITR 340), it was held that for
payment to qualify as equipment royalty’, possession and control are over the
equipment is essential. In the present case, the Taxpayer has neither control
nor possession over the vessel. As noted, the captain/master and the crew were
instructed, directed and were under control of FCo and not the Taxpayer.
– One needs to differentiate between ‘letting
the asset’ and ‘use of asset’ by the owner for providing services. In the
present case, hire charges paid to FCo was for services of moving the goods by
a fully manned ship. It was not for letting the vessel, Taxpayer only had the
right to utilise the space in the vessel and was not authorised to operate or
exercise control over the vessel.
– In the present case, FCo did not enjoy any dedicated
berthing facility. Further, the vessel was in Indian waters only for a short
duration and hence does not result in a PE in India. Reliance of AO on Madras
HC ruling in the case of Poompuhar Shipping Corporation (360 ITR 257) is
wrongly placed as Madras HC was concerned with a case where the Taxpayer had a
facility of berthing at an Indian port guaranteed for foreign ship chartered
leading to creation of Permanent Establishment (PE) for the Taxpayer.
– Thus payment of hire charges does
not amount to royalty under the Act as well as DTAA. The hire charges paid to FCo is covered by section 172 of the Act.
