(2009 TIOL 24 ARA IT)
AAR No. 803 of 2009
Article 7, 22, India-Switzerland Treaty
Dated : 30-9-2009
Issue :
In view of specific provision in Indo-Swiss treaty, income
from shipping business does not qualify for benefit under DTAA and hence, such
income would be taxable in terms of provisions of Income-tax Act.
Facts :
The applicant is a non-resident shipping Company
incorporated under the laws of Switzerland. The applicant enters into medium
and long term shipping contracts for the transportation of cargo worldwide.
During the financial years 2007-08 and 2008-09, the
applicant entered into a shipping contract with non resident charter for
transportation of cargo from Indian ports to overseas ports. The customers
were procured with the help of assistance of independent agents in UK. In
India, independent agent was appointed for shipping agency, clearing &
forwarding services and for acting as port agent. Admittedly, the applicant
had no physical presence or dependent agent anywhere including in India.
There was no dispute that the applicant trigged tax
liability in India in terms of provisions of S. 172 of the Act but, claimed
exemption by relying on treaty provisions.
Treaty between India and Switzerland as signed in the year
1994 is peculiarly worded. Article 7(1) of the treaty specifically excludes
profits from the operation of ships in international traffic. Article 8 of the
treaty is restricted in its application to the operation of aircraft in
international traffic. The treaty was amended in the year 2001 and ‘other
income’ article was added. In terms of ‘other income’ article, income not
dealt with in the foregoing articles was made taxable only in the Country of
Residence (COR) unless right or property in respect of which income paid is
effectively connected with PE in source country.
The applicant’s contention was that the profits from the
operation of ships in international traffic which stands excluded by Article 7
of the DTAA, is covered by ‘other income’ Article of the treaty; and in
absence of PE in India, the income cannot be taxed in India after amendment of
treaty in the year 2001.
Held :
The AAR held :
The Treaty provisions show that shipping business income
earned by a non-resident is not intended to be covered by Indo–Swiss treaty.
The language and scheme of the provisions of the treaty as also a comparative
study of Treaties of India & Switzerland with others lead to the inevitable
conclusion that shipping income derived from international operations is
sought to be kept outside the purview of the Treaty.
Article 7 of the treaty is explicit and specifically
excludes profits from shipping activity. While specific provision is made for
air transportation business, no such provision was made in the treaty for
shipping business.
The residuary Article 22, concerning ‘other incomes’ was
introduced in 2001. Till then, there was no dispute that the profits derived
from the operation of ships in international traffic was left untouched by the
Treaty because of the specific exclusion in Article 7. The obvious implication
of the exclusion is that such income is subjected to domestic tax law
provisions.
If such legal position was intended to be changed by the
amendments made to the treaty in 2001, specific reference to that effect was
required by amendment to Article 7 and/or in ‘other income’ Article. The AAR
observed :
‘Nor is there explicit language in Article 22 to bring it
within the coverage of the Article. When a particular species of income
excluded from the ambit of the Treaty is sought to be brought within the
scope of the Treaty for the first time, we would expect clear and specific
language to express the intendment rather than leaving it to be taken care
of by Article 22 by implication’.
Shipping profits is specie of business income. As a result
profits of shipping business can be considered to have been dealt with by
Article 7. In any case, when an article concerning business profits
specifically refers to profits from the operation of ships in international
traffic, it can be said that the shipping profits have been dealt with in a
manner as provided by Article 7 of DTAA and the exclusion clause clearly
depicts the intention of the authors of the treaty not to treat the shipping
profits at par with the business profits. As a result, for the purpose of
Article 22, Article 22 cannot apply as the profits arising from the operation
of ships cannot be treated as an item not dealt with in the preceding articles
of the treaty.
The AAR noted the commentary on UNMC and Prof. Klaus Vogel,
which was brought to the notice of the AAR by the applicant, on the rationale
of the provision of reserving the right of taxation to the country of
residence in respect of aircraft and shipping operations. The AAR however
contended that in the absence of clear words in the Indo Swiss Treaty, the
shipping profits could not be placed at par with international air transport.
