H.K. Dave Ltd.,, Bhavnagar vs Assessee

I.T.A. No. 1049/Ahd/2006 Assessment year: 2001-02

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IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH, AHMEDABAD

[Coram: Pramod Kumar AM and S.S. Godara JM]

I.T.A. No. 1049/Ahd/2006 Assessment year: 2001-02

H. K. Dave Limited-

As Agent of Tramp Shipping Limited, UK .....................Appellant Plot No. 51, Param, Behind Satyanarayana Road Bhavnagar [PAN: AAACH5397L]

Vs.

Tax Recovery Officer Range 1, Bhavnagar ..................Respondent

Appearances by:

Tushar P Hemani, for the appellant Dinesh Singh, for the respondent

Dates of the hearing the appeal : April 29 and 30, 2015 Date of pronouncing the order : May 01, 2015

O R D E R

Per Pramod Kumar AM:

1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 20 th February 2006, passed by the CIT(A) in the matter of assessment under section 172(4) of the Income Tax Act, 1961, for the assessment year 2001-02.

2. Grievances raised by the assessee, as set out in the memorandum of appeal, are as follows:

1. The learned CIT(A) has erred in law and on facts in confirming the order dated 29 th March 2005 passed by the Tax Recovery Officer, Range-1, Bhavnagar.

I.T.A. No. 1049/Ahd/2006 Assessment year: 2001-02

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2. On the facts and in the circumstances of the case and in law, the learned CIT(A) ought to have cancelled the order of the Tax Recovery Officer. It is, therefore, prayed that the order of the both the lower authorities may be cancelled.

3. Your appellant craves leave to add, alter or amend any grounds of appeal at the time of hearing.

3. Vide petition dated 24 th February 2014, the assessee has filed additional grounds of appeal by stating as follows:

The appellant, through oversight and inadvertently, could not raise in the original appeal memo, the following additional grounds of appeal, and, therefore, the appellant now craves the leave to raise these additional grounds of appeal before this Hon'ble ITAT. The appellant also draws your honour's attention to the fact that all the information and explanation were available before both the lower authorities and, therefore, these additional grounds can be raised before this Hon'ble ITAT:

1. The learned CIT(A) has erred both in law and on facts in erroneously invoking the provisions of Section 172 r.w.s. 163 of the Act and that too without affording any opportunity of hearing which is illegal and without any jurisdiction.

2. The learned CIT(A) further erred in law and on the facts of the case in not appreciating the fact that the learned Assessing Officer had already passed the order under section 172(6) of the Act on 23/10/2001 granting port clearance certificate, after satisfying due compliance of the provisions under section 172(3) of the Act, and, therefore, the learned AO could not have passed order under section 172(4) of the Act on 29/03/2005. In any case, the order passed by the learned AO under section 172(4) of the Act on 29/03/2005 is barred by limitation.

3. Both the lower authorities have failed to appreciate that the freight beneficiary is Tramp Shipping Limited based in London, and, therefore, as per the DTAA entered into between the India and the Great Britain, the said income is not taxable in the hands of the appellant in India.

4. Having perused the said petition and having heard rival contentions on the same, we admit these additional grounds of appeal.

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5. The relevant material facts, as culled out from the material on record, are as follows. The assessee before us is a company engaged in the business of rendering services, in respect of port and income tax clearances, to the foreign vessels touching various ports of call in Gujarat. As the assessee states, in the statement of facts before the first appellate authority, "On 23.10.2001, your appellant (i.e. the assessee) had requested the Tax Recovery Officer, Bhavnagar Range-1, Bhavnagar, for the issuance of income tax clearance certificate in respect of M.V. Stove Campbell which had arrived at Pipavav Port carrying cement, in bulk, under the agency of M/s Tramp Shipping Ltd, UK, London, and accordingly, the said Tax recovery Officer had granted a certificate treating the income as exempt under DTAA of Government of India with the United Kingdom". Subsequently, however, the Tax Recovery Officer noticed that the tax liability was of the charterer i.e. H C Trading International Inc, Bahamas, and held that since Bahamas did not have any double taxation avoidance agreement, providing for non taxation of shipping income in India, the assessee was not entitled to any relief under section 90 of the Act. It was in this backdrop that the assessee was required to show cause as to why the relief granted under section 90, on the basis of Indo UK Double Taxation Avoidance Agreement, not be withdrawn by the assessee. In reply to this notice, the assessee, inter alia, submitted (i) that "the exemption under the double taxation avoidance agreement is available on the basis of the flag of the country of ship and to the owner of the ship"; (ii) that "in this case, freight is paid to the owner in UK but through the chartered of Bahamas"; (iii) that since the freight was ultimately received by UK based owner and the taxability is of the owner, the freight income is entitled to the treaty benefits under section 90:

(iv) that "the ship is under Norway flag which is also under exemption under double taxation avoidance agreement with Norway, and thus, from the point of view of flag, there is no avoidance to tax".

6. None of these submissions, however, impressed the Assessing Officer. It was noted by the Assessing Officer that, under the charter party agreement, the taxes were payable by the charterer i.e. HC Trading International Inc, Nassau, Bahamas. As for the assessee's submission that by way of a subsequent I.T.A. No. 1049/Ahd/2006 Assessment year: 2001-02

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amendment, the responsibility of paying taxes was assigned to the Tramp Shipping Limited, it was noted that the "since this amendment was dated 20.10.04, it has no relevance as it was not in existence on the date of issue of NOC". The Assessing Officer, accordingly, concluded that, "In view of the above mentioned facts, it is very clear that (tax on) freight was payable by the charterer in Bahamas with which no DTAA is in existence. The relief under section 90 already granted at the time of issuing NOC is withdrawn". With these observations, tax liability was computed under section 172(4). Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in further appeal before us.

7. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

8. In our considered view, it was wholly erroneous on the part of the authorities below to determine the eligibility of treaty benefits on the basis of the domicile of the person liable to pay income tax dues, and, of course, to determine the person liable to pay the income tax on the basis of an agreement between the owner and the charterer. Under article 1 of the India UK Double Taxation Avoidance Agreement [(1994) 206 ITR (Statue) 235; Indo UK tax treaty, in short], "shall apply to persons who are residents of one or both of the Contracting States", and the expression "resident of a contracting state", under article 4(1), means "any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature". Clearly, therefore, it is the fact of taxability under a statue, rather than contractual liability under a business agreement, which determines the eligibility for treaty benefits. In any event, it is only elementary that a statutory liability cannot be shifted or avoided on the ground that the person, who has the statutory obligation to make payment of that liability, has assigned this obligation to someone else. It does not, therefore, really matter as to whether, under the charter party agreement, the owner was liable to pay tax or whether the charterer was liable to pay the tax. What really, therefore, matters is as to who was chargeable to tax in respect I.T.A. No. 1049/Ahd/2006 Assessment year: 2001-02

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of such an income. In this light, let us turn to the facts of this case. The present taxability is under section 172, which, for ready reference and as it exists today, is reproduced below:

Section 172- Shipping business of non-residents.

(1) The provisions of this section shall, notwithstanding anything contained in the other provisions of this Act, apply for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India 1631 [* * *].

(2) Where such a ship carries passengers, livestock, mail or goods shipped at a port in India, 1632 [seven and a half per cent] of the amount paid or payable on account of such carriage to the owner or the charterer or to any person on his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be income accruing in India to the owner or charterer on account of such carriage.

(3) Before the departure from any port in India of any such ship, the master of the ship shall prepare and furnish to the 1632a [Assessing Officer] a return of the full amount paid or payable to the owner or charterer or any person on his behalf, on account of the carriage of all passengers, livestock, mail or goods shipped at that port since the last arrival of the ship thereat :

Provided that where the 1632a [Assessing Officer] is satisfied that it is not possible for the master of the ship to furnish the return required by this sub-section before the departure of the ship from the port and provided the master of the ship has made satisfactory arrangements for the filing of the return and payment of the tax by any other person on his behalf, the 1632a [Assessing Officer] may, if the return is filed within thirty days of the departure of the ship, deem the filing of the return by the person so authorised by the master as sufficient compliance with this sub-section.

(4) On receipt of the return, the 1632a [Assessing Officer] shall assess the income referred to in sub-section (2) and determine the sum payable as tax thereon at the 1633 [rate or rates in force] applicable to the total income of a company which has not made the arrangement referred to in section 194 and such sum shall be payable by the master of the ship.

1633a [(4A) No order assessing the income and determining the sum of tax payable thereon shall be made under sub-section (4) after the I.T.A. No. 1049/Ahd/2006 Assessment year: 2001-02

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expiry of nine months from the end of the financial year in which the return under sub-section (3) is furnished:

Provided that where the return under sub-section (3) has been furnished before the 1st day of April, 2007, such order shall be made on or before the 31st day of December, 2008.]

(5) For the purpose of determining the tax payable under sub-section (4), the 1632a [Assessing Officer] may call for such account or documents as he may require.

(6) A port clearance shall not be granted to the ship until the Collector of Customs 1633b , or other Officer duly authorised to grant the same, is satisfied that the tax assessable under this section has been duly paid or that satisfactory arrangements have been made for the payment thereof.

(7) Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming before the expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian port falls, that an assessment be made of his total income of the previous year and the tax payable on the basis thereof be determined in accordance with the other provisions of this Act, and if he so claims, any payment made under this section in respect of the passengers, livestock, mail or goods shipped at Indian ports during that previous year shall be treated as a payment in advance of the tax leviable for that assessment year, and the difference between the sum so paid and the amount of tax found payable by him on such assessment shall be paid by him or refunded to him, as the case may be 1633c .

1633d[(8) For the purposes of this section, the amount referred to in sub-section (2) shall include the amount paid or payable by way of demurrage charge or handling charge or any other amount of similar nature.]

1631. The words "unless the Income-tax Officer is satisfied that there is an agent of the non-resident from whom the tax will be recoverable under the other provisions of this Act" omitted by Finance Act, 1975, s. 19 (w.e.f. 1-6-1975).

1632. Subs. for "one-sixth" by Finance Act, 1975, s. 19 (w.e.f. 1-6-1975).

1633. Subs. by Finance (No. 2) Act, 1967, s. 29 (w.e.f. 1-4-1967), for "rate or rates for the time being".

1633a. Ins. by Finance Act, 2007, s. 51 (retrospectively w.e.f. 1-4-2007).

1633b. "Collector of Customs" has been designated as "Commissioner of Customs" by Finance Act, 1995, s. 50, but no corresponding amendment has been made in the IT Act.

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1633c. Circular No. 730, dated 14-12-1995 [(1995) 129 CTR (St) 45] clarifies that non- resident assessees engaged in the business of carriage by shipping of passengers and goods, etc., shall neither be liable to pay interest under sections 234B and 234C nor entitled to interest under section 244A, in respect of their income attributable only to the business of such carriage of passengers and goods, etc.

1633d. Ins. by Finance Act, 1997, s. 45 (retrospectively w.e.f. 1-4-1976).

9. As evident from a plain reading of Section 172(1), which highlights the fact that the provisions of Section 172 apply "for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by, a non- resident, which carries passengers, livestock, mail or goods (emphasis by underlining supplied by us) shipped at a port in India", shows that the taxability under section 172 is qua a ship and not qua the enterprise owning or using it under a charter agreement. Section 172(4) then refers to the payment of the tax liability by the master of the ship which again shows that the taxability under section 172 is qua the ship rather than qua owner of charterer of the ship. What is thus clear is that the scheme of taxation 172 lays emphasis the tax object, i.e. the activity which is to be taxed, and not the tax subject, i.e. the person who is to be taxed. Therefore, when a person assumes liability, by filing return under section 172(3) in respect of tax liability under section 172(2), such a liability is qua the taxability of income in respect of the amount paid or payable on account of carriage of passengers, livestock, mail or goods on the ship. The scheme of this Section, in our humble understanding, does not allow such a person to choose being accountable in respect of a particular person, in respect of owner of the ship or in respect of charterer of the ship. If he assumes the liability under section 172(3), it is in respect of the income earned by the activities of the ship. The assessee's claim that he is only responsible for the tax liability of the owner, and not the charterer, is only to be stated and rejected. Having said that, we may also point out that the Assessing Officer himself has assessed the UK based company, i.e. owner of the ship and not the charterer of the ship. By implication, thus, he accepts that the income was earned by the UK based company, and, if that be so, the provisions of Article 9(1) of the Indo UK tax treaty unambiguously provides that "income of an enterprise of a Contracting State (i.e. Tramp Shipping Ltd UK) from the operation of ships in I.T.A. No. 1049/Ahd/2006 Assessment year: 2001-02

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international traffic shall be taxable only in that State (i.e. UK)". In this view of the matter, and in view of the fact that it has not been the case of any of the authorities below that the income belonged to the charterer based in Bahamas and not the owner based in UK, we are unable to see any legally sustainable reasons to decline the benefit of Article 9 to the assesse before us. The grievance of the assessee must, therefore, be upheld.

10. However, before parting with the matter, we may also deal with an interesting legal issue raised by the learned counsel. We have noted that, as pointed out by Shri Hemani, the assessment under section 172(4) was framed on 29 th March 2005, whereas the ship had left Indian port on 29 th October 2001. The assessment was thus framed almost three years after the end of the relevant previous year. Undoubtedly, as at the relevant point of time, there was no time prescribed under the statue for framing the assessment under section 172(4) and the provisions of Section 172(4A), which set this time limit as nine months from the end of the financial year in which return under section 172(3) is filed, came into effect from 1 st April 2007, but that does not mean that in the absence of this time limit under section 172(4A), the assessment under section 172(4) could have been done at any point of time. As held by Hon'ble Bombay High Court, in the case of Director of Income Tax (International Taxation) Vs Mahindra & Mahindra Limited [(2014) 365 ITR 560 (Bom)], even when a legal provision, such as contained in section 201, does not prescribe any limitation period, the revenue authorities will have to exercise the powers in that regard within a reasonable time, and the Tribunal is quite justified, in principle, in deciding what would constitute a reasonable time limit. It is thus clear that even when the statute did not prescribe a time limit for completing assessment under section 172(4), we have to hold that such assessments could be framed only within a reasonable time. We have also noted that, subsequently with effect from 1 st April 2007, the statute itself has considered the period of none months from the end of the financial year, in which return under section 172(3) is filed, as reasonable time limit within which assessment order under section 172(4) is to be framed. When this time limit is statutorily treated as a reasonable time limit for the returns filed after 1 st April, 2007, in our I.T.A. No. 1049/Ahd/2006 Assessment year: 2001-02

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considered view, this time limit can also be treated as a reasonable time limit for the returned filed prior to 1 st April 2007 as well. We do so. Viewed in this perspective, the impugned order under section 172(4) was indeed barred by limitation. For this reason also, the assessee must succeed in this appeal.

11. In the result, the appeal is allowed. Pronounced in the open court today on 1 st May, 2015.

Sd/- Sd/-

S. S. Godara Pramod Kumar (Judicial Member) (Accountant Member)

Ahmedabad, the 1 st day of May, 2015

Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File

By order etc

Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad