By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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Section 9(1)(vi) – Profits derived from hiring of vessels for operation in international traffic taxable as royalty u/s. 9(1)(vi); however, as per beneficial provisions of Article 8 of India-UAE DTAA such profits are not taxable in India.
Facts:
Taxpayer, an Indian Company, engaged in the business of import and export of merchandise goods, obtains goods from various persons for transporting the same to Maldives. For this purpose, Taxpayer hired a fully operational vessel with necessary permits and trained crew from a company incorporated in UAE (F Co) on the basis of a time charter agreement.
The Taxpayer made the payments to F Co without deducting taxes on the basis that the same was not taxable in India under India-UAE DTAA .
The Tax Authority disallowed the payments made to F Co considering that the hire charges paid by the taxpayer to F Co amounted to royalty under the Act as well as the India-UAE DTAA .
Held:
The hired vessel is an instrument/equipment; therefore, the payment made by the assessee for use or right to use such instrument/equipment would fall within the provisions of section 9(1)(vi) of the Act.
In view of section 90 of the Act, it is well settled that if the provisions of the DTAA are more beneficial to the Taxpayer, then they would prevail over the Act.
The India-UAE DTAA has a specific provision for taxation of royalty income (Article 12) and income from shipping business (Article 8). Based on the principle that specific provision overrides general provisions, in respect of shipping business, Article 8 will override Article 12 of the DTAA . Hence, only Article 8 of the DTAA would be applicable in respect of shipping business.
As per Article 8 of the India-UAE DTAA, profit derived by an enterprise of a contracting state from operation of ship in international traffic shall be taxed only in that contracting state. Further, Article 8(2) specifically provides that profit from operation of the ship in international traffic will also include the charter or rental of ships incidental to such transportation. Accordingly, hire charges paid by the taxpayer to F Co are taxable in UAE and not in India. Consequently, the taxpayer was not required to withhold tax from the payments..
