MSC MEDITERRANEAN SHIPPING CO. S.A, MUMBAI V. DDIT (IT) RG 4(1), MUMBAI

ITA 2683/MUM/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88359 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 10 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 09-02-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 07-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S PADMAJA
• Assessee Lawyers: S E DASTUR
• Keywords: Double taxation relief; Permanent establishment; Advance ruling; Avoidance of tax; Competent authority; Prejudicial to interest
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH L, MUMBAI BEFORE SHRI N. K. BILLAIYA ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NOS. 2681, 2682 ,2683 & 7714/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 MSC MEDITERRANEAN SHIPPING COMPANY, S.A. C/O MSC AGENCY (INDIA) P. LTD. MSC HOUSE, ANDHERI KURLA ROAD. ANDHERI (E) MUMBAI 400 0059 PAN:-AACCM 4945 P VS. DDIT (IT) RG 4(1) SCINDIA HOUSE, MUMBAI (APPELLANT) (RESPONDENT) ITA NO. 3865/MUM/2010 ASSESSMENT YEAR: 2005-06 DDIT (IT) RG 4(1) SCINDIA HOUSE, MUMBAI VS. MSC MEDITERRANEAN SHIPPING COMPANY, S.A. C/O MSC AGENCY (INDIA) P. LTD. MSC HOUSE, ANDHERI KURLA ROAD. ANDHERI (E) MUMBAI 400 0059 PAN:-AACCM 4945 P (APPELLANT) (RESPON DENT) ASSESSEE BY : SHRI S.E. DASTUR & SHRI NISHANT THAKKAR REVENUE BY : MS. S. PADMAJA DATE OF HEARING : 09 .02.2015 DATE OF ORDER : 20.02.2015 ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 2 O R D E R PER BENCH: THE AFORESAID APPEALS HAVE BEEN FILED BY THE EITH ER PARTIES AGAINST SEPARATE IMPUGNED FINAL ASSESSMENT ORDER PA SSED IN PURSUANCE OF DIRECTION OF THE DRP AND IN SOME OF THE ASSESSME NT YEARS AGAINST ORDER PASSED BY LD.CIT(A). SINCE ISSUES INVOLVED IN ALL THESE APPEALS ARE COMMON, ARISING OUT OF SIMILAR SET OF FACTS THEREFO RE, SAME WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY THIS CONSOLI DATED ORDER. TO UNDERSTAND THE FACTS AND IMPLICATION THEREOF, WE WI LL FIRST TAKE UP CROSS APPEALS FOR THE A.Y. 2005-06. IN ASSESSEES APPEAL FOLLOWING GROUNDS HAVE BEEN RAISED:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) [' CIT(A)'] HAS ERRED IN CONFIRMING THE ACTION OF THE LEARNED DEPUT Y DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) - 4(1) (DDLT') IN DENYING THE BENEFIT OF ARTICLE 22 OF THE DOUBLE TAXATION AVOIDA NCE AGREEMENT BETWEEN INDIA AND SWITZERLAND ('TAX TREATY') AND HO LDING THE APPELLANT LIABLE TO TAX IN INDIA UNDER THE PROVISIO NS OF SECTION 44B OF THE INCOME-TAX ACT, 1961 ('IT ACT') WITH RESPECT TO ITS SHIPPING INCOME. 1A. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTI ON OF THE LEARNED DDLT IN HOLDING THAT THE EXCHANGE OF LETTER S BETWEEN THE CENTRAL BOARD OF DIRECT TAXES ('CBDT') AND THE SWIS S FEDERAL TAX ADMINISTRATION DOES NOT CONSTITUTE A MUTUAL AGREEME NT AS CONTEMPLATED BY ARTICLE 25(3) OF THE TAX TREATY. 1B. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN NOT APPROPRIATELY T AKING INTO CONSIDERATION THE SUBSEQUENT CLARIFICATION DATED MA Y 27, 2005 ISSUED BY THE CBDT REGARDING APPLICABILITY OF ARTIC LE 22 OF THE TAX TREATY TO SHIPPING PROFITS. ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 3 1C. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTI ON OF THE LEARNED DDLT IN NOT GRANTING TO THE APPELLANT THE B ENEFIT OF THE TAX TREATY, BEING A COMPREHENSIVE AGREEMENT/LEGISLA TION, DESPITE THE FACT THAT THE APPELLANT IS UNDISPUTEDLY A TAX R ESIDENT OF SWITZERLAND WITHIN THE MEANING OF ARTICLE 4 OF THE TAX TREATY AND, THEREFORE, IS CLEARLY ENTITLED TO THE BENEFITS OF T HE TAX TREATY. 1D. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTI ON OF THE LEARNED DDLT IN DENYING THE BENEFIT OF ARTICLE 22 O F THE TAX TREATY TO THE APPELLANT BY COMPARING THE PROVISIONS OF THE TAX TREATY WITH THE FRAMEWORK OF OTHER DOUBLE TAX AVOIDANCE AGREEMENTS ENTERED INTO BY IND IA AND SWITZERLAND, RESPECTIVELY, WITH OTHER COUNTRIES. 1E. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTI ON OF THE LEARNED DDLT IN HOLDING THAT SINCE, ARTICLE 7 OF TH E TAX TREATY EXPLICITLY MENTIONS 'PROFITS FROM OPERATION OF SHIP S IN INTERNATIONAL TRAFFIC' AND TAKES IT OUT OF THE PURVIEW OF ARTICLE 7, PROFITS FROM OPERATION OF SHIPS DOES NOT FALL WITHIN THE CRITERI A OF ITEMS OF INCOME NOT DEALT WITH SPECIFICALLY IN OTHER ARTICLE S OF THE TAX TREATY AND, HENCE, SUCH PROFITS CANNOT BE COVERED U NDER ARTICLE 22 OF THE TAX TREATY. 2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTI ON OF THE LEARNED DDLT IN HOLDING THAT MSC AGENCY (INDIA) PVT . LTD. CONSTITUTES A PERMANENT ESTABLISHMENT OF THE APPELL ANT IN INDIA WITHIN THE MEANING OF ARTICLE 5 OF THE TAX TREATY. 3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THE AR MS LENGTH COMMISSION PAID TO THE APPELLANTS INDIAN AGENT, MS C AGENCY (INDIA) PRIVATE LIMITED, DOES NOT EXTINGUISH THE TA X LIABILITY OF THE APPELLANT IN INDIA. FROM THE PLAIN READING OF GROUND NO. 1 AND SUB GROU NDS, THE SOLITARY ISSUE WHICH ARISES, RELATES TO TAXABILITY OF THE PR OFITS FROM THE OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC EARNED BY THE ASS ESSEE IN INDIA. GROUND NO. 2 AND 3 RELATES TO TAXABILITY OF SAME SHIPPING INCOME, ATTRIBUTABLE TO PE. ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 4 2. AT THE OUTSET, LEARNED SENIOR COUNSEL, SHRI S.E. DASTUR SUBMITTED THAT BOTH THE ISSUES INVOLVED ARE SQUARELY COVERED BY THE DECISION OF TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2003-0 4, WHICH HAS BEEN FOLLOWED IN A.Y. 2004-05 ALSO. EXPLAINING THE FACT S, HE SUBMITTED THAT THE ASSESSEE COMPANY IN INCORPORATED IN SWITZERLAND AND IS ENGAGED IN THE BUSINESS OF OPERATION OF SHIP IN INTERNATIONAL SEAS. UP TO THE A.Y. 2001-02, THE ASSESSEE WAS ASSESSED U/S 44B OF THE I NCOME-TAX ACT. AFTER THE AMENDMENT OF INDIA-SWISS DTAA, W.E.F. A.Y . 2002-03, THE ASSESSEE HAD STARTED SHOWING ITS SHIPPING INCOME IN INDIA AT NIL. THIS WAS ON ACCOUNT OF AMENDMENT IN ARTICLE 22 WHICH ALL OCATES THE TAXING RIGHTS TO THE COUNTRY OF RESIDENCE IN RESPECT OF CE RTAIN KINDS OF INCOME WHERE ARE NOT HITHERTO DEALT IN THE TREATY. SINCE I NDIA-SWISS DTAA DOES NOT HAVE A SHIPPING ARTICLE, THEREFORE, ARTICLE 22 WILL APPLY AND NO SHIPPING INCOME CAN BE HELD TO BE TAXABLE IN INDIA. IN THE A.Y. 2002-03, THE ASSESSING OFFICER ACCEPTED THAT SHIPPING INCOME IS COVERED BY ARTICLE 22 AND THEREFORE, IT IS NOT TAXABLE IN INDIA. HOWEV ER, FROM A.Y. 2003-04 ON WORDS, THE ASSESSING OFFICER HELD THAT THE SHIPP ING INCOME WOULD BE TAXABLE IN INDIA U/S 44B. HE ALSO POINTED OUT THAT ARTICLE 7 OF THE TREATY SPECIFICALLY EXCLUDES PROFITS FROM THE OPERATION OF THE SHIPS IN INTERNATIONAL TRAFFIC FROM THE BUSINESS PROFIT OF T HE ENTERPRISE OF CONTRACTING STATE (SWITZERLAND). IN THIS BACKGROUND , MR. DASTUR DREW OUR ATTENTION TO VARIOUS OBSERVATION AND THE FINDING OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2003-04, WHEREIN T HIS ASPECT HAS BEEN DISCUSSED IN DETAIL. ACCORDINGLY, HE SUBMITTED THAT THE ISSUE INVOLVED ARE SQUARELY COVERED IN FAVOUR OF THE ASSESSEE. NOT ONL Y THAT IN A.Y. 2004- 05, THE TRIBUNAL HAS AGAIN REITERATED THE SAME CONC LUSION. THEREFORE, THE SAME JUDICIAL IS PRECEDENCE SHOULD BE FOLLOWED. ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 5 2.1 LD. DR ALSO ACCEPTED THIS FACT THAT SO FAR AS I SSUE OF TAXABILITY OF SHIPPING INCOME IS CONCERNED THE SAME IS COVERED BY THE DECISION OF THE TRIBUNAL. 3. AFTER CONSIDERING THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER AND ALSO THE ORDER OF THE TRIBUNAL, WE FIND THAT TH E ISSUE RAISED IN THE GROUNDS INCLUDING THOSE RAISED IN GROUND NO. 2 & 3 OF APPEAL ARE SQUARELY COVERED IN FAVOUR OF THE ASSESSEE, WHEREIN THE TRIBUNAL HAS DISCUSSED THE ISSUE IN DETAIL ON ALL THE ISSUES WHI CH HAS BEEN RAISED BY THE AO AS WELL AS LD.CIT(A). THE RELEVANT OBSERVATI ON AND THE FINDING OF THE TRIBUNAL IN THIS REGARD ARE AS UNDER:- WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT TH E PROFITS FROM OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC WERE CL AIMED TO BE TAXABLE ONLY IN SWITZERLAND BY THE ASSESSEE I.E. IN THE STATE OF ITS RESIDENCE AND NOT IN INDIA AND ACCORDINGLY NIL INCO ME WAS &C1ARED BY IT IN THE RETURN-OR-'INCOME FILED FOR TH E YEAR UNDER CONSIDERATION. THIS CLAIM OF THE ASSESSEE WAS BASED ON ARTICLE 22 OF THE DTAA BETWEEN INDIA AND SWITZERLAND (INDO-SWI SS TREATY) ESPECIALLY PARAGRAPH 1 OF THAT ARTICLE. ACCORDING T O THE AO, THE SAID ARTICLE 22 DEALING WITH OTHER INCOME NOT SPECI FICALLY DEALT WITH BY ANY ARTICLE OF THE TREATY, HOWEVER, WAS NOT APPLICABLE IN RESPECT OF PROFITS FROM OPERATION OF SHIPS IN INTER NATIONAL TRAFFIC AS THE SAME WAS DEALT WITH IN ARTICLE 7 BY EXCLUSION W HEREBY SUCH PROFITS WERE EXCLUDED FROM THE PURVIEW OF ARTICLE 7 (1). ACCORDING TO HIM, THE SAID PROFITS THUS WERE TAXABLE IN INDIA AS PER THE DOMESTIC LAW I.E. INCOME-TAX ACT, 1961 AND ACCORDIN GLY HE BROUGHT THE SAME TO TAX IN THE HANDS OF THE ASSESSE E IN INDIA BY APPLYING THE PROVISIONS OF SECTION 44B AT THE RATE OF 7.5% OF GROSS RECEIPTS. IN THIS REGARD, HE HELD THAT THE AS SESSEE WAS HAVING A PERMANENT ESTABLISHMENT IN INDIA IN THE FO RM OF M/S MSC AGENCY INDIA P. LTD . THE LEARNED CIT(APPEALS) AGREED WITH THE AO TO THE EFFECT THAT THE ASSESSEE COMPANY WAS HAVING A PE IN INDIA DURING THE YEAR UNDER CONSIDERATION. HE, H OWEVER, HELD THAT THE TAXABILITY OF THE PROFITS OF THE ASSESSEE COMPANY FROM OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC IS GOVE RNED BY ARTICLE 22 ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 6 OF INDO-SWISS TREATY AND ALTHOUGH THE ASSESSEE WAS HAVING A PE IN INDIA, THE RIGHT OR PROPERTY IN RESPECT OF WHICH THE INCOME WAS PAID I.E, SHIPS NOT BEING EFFECTIVELY CONNECTED WIT H SUCH PE, PROFITS FROM OPERATION OF SHIPS IN INTERNATIONAL TR AFFIC IS TAXABLE ONLY IN SWITZERLAND AS PER PARAGRAPH 1 OF ARTICLE 2 2 OF INDO-SWISS TREATY. THE FIRST AND FOREMOST ISSUE THAT IS TO BE CONSIDERED AND DECIDED THUS IS WHETHER THE TAXABILITY OF PROFITS F ROM OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC OF THE ASSESSEE COMP ANY IS GOVERNED BY ARTICLE,22 OF THE INDO-SWISS TREATY OR NOT. 32. THE LEARNED SPECIAL COUNSEL FOR REVENUE SBRI G. C. SRIVASTAVA, HAS CONTENDED THE PROFITS FROM SHIPPING AND AIR TRA NSPORT ARE SPECIFICALLY DEALT WITH UNDER ARTICLE 8 OF MODEL CO NVENTION ACCORDING TO WHICH PROFITS OF AN ENTERPRICE OF A CO NTRACTING STATE FROM THE OPERATION OF SHIPS OR AIRCRAFT IN INTERNAT IONAL TRAFFIC IS TAXABLE ONLY IN THAT STATE. HE HAS CONTENDED THAT I NDIA AND SWITZERLAND, HOWEVER, HAVE AGREED TO-MODIFY ARTICLE 8 TO EXCLUDE SHIPPING PROFIT FROM ITS SCOPE. HE HAS SUBMITTED TH AT THE SHIPPING PROFITS ARE ALSO EXCLUDED FROM ARTICLE 7(1) WHICH P ROVIDES THAT THE BUSINESS PROFITS OF AN ENTERPRISE OF A CONTRACTING STATE SHALL BE TAXABLE ONLY IN THAT STATE UNLESS THE ENTERPRISE CA RRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A P E CONSTITUTED THEREIN. HE HAS CONTENDED THAT THE COMBINED EFFECT OF THESE MODIFICATIONS IN ARTICLES 7 AND 8 MAKES IT CLEAR TH AT THE PROFITS FROM THE OPERATION OF SHIPS IN INTERNATIONAL TRAFFI C WERE LEFT TO BE TAXED BY EACH CONTRACTING STATE ACCORDING TO ITS DO MESTIC LAW. HE HAS CONTENDED THAT THIS WAS AN UNDISPUTED POSITION AND UNDERSTANDING OF THE TRUE IMPORT OF THE INDO-SWISS TREATY TILL THE YEAR 2001 AND THE INTRODUCTION OF ARTICLE 22 IN THE TREATY IN 2001 DID NOT ALTER THIS POSITION. 33. THE PROVISIONS OF ARTICLE 22 INTRODUCED IN THE INDO-SWISS TREATY IN 2001 BEING RELEVANT IN THE PRESENT CONTEX T ARE REPRODUCED HEREUNDER: '1. ITEMS OF INCOME OF A RESIDENT OF A CONTRACTING STATE, WHEREVER ARISING, NOT DEALT WITH IN THE FOREGOING ARTICLES O F THIS AGREEMENT SHALL BE TAXABLE ONLY IN THAT STATE. 2, THE PROVISIONS OF PARAGRAPH 1 SHALL NOT APPLY TO INCOME, OTHER THAN INCOME FROM IMMOVABLE PROPERTY AS DEFINED IN P ARAGRAPH 2 OF ARTICLE 6, IF THE RECIPIENT OF SUCH INCOME, BEIN G A RESIDENT OF A CONTRACTING STATE, CARIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED TH EREIN, OR ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 7 PERFORMS IN THAT OTHER STATE INDEPENDENT PERSONAL S ERVICES FROM A FIXED BASE SITUATED THEREIN, AND THE RIGHT OR PRO PERTY IN RESPECT OF WHICH THE INCOME IS PAID IS EFFECTIVELY CONNECTE D WITH SUCH PERMANENT ESTABLISHMENT OR FIXED BASE. IN SUCH THE PROVISIONS OF ARTICLE 7 OR ARTICLE 14, AS THE CASE MAY BE, SHALL APPLY. 3. NOTWITHSTANDING THE PROVISIONS OF PARAGRAPH 1, I F A RESIDENT OF A CONTRACTING STATE DERIVES INCOME FROM SOURCES WIT HIN THE OTHER. CONTRACTING STATE IN THE FORM OF LOTTERIES, CROSSWO RD PUZZLES, RACES INCLUDING HORSE RACES, CARD GAMES AND OTHER G AMES OF ANY SORT OR GAMBLING OR BETTING OF ANY FORM OR NATURE W HATSOEVER, SUCH INCOME MAY BE TAXED IN THAT OTHER CONTRACTING STATE.' A READING OF ARTICLE 22 ESPECIALLY PARAGRAPH 1 THER EOF MAKES IT CLEAR THAT THE ITEMS OF INCOME OF A RESIDENT OF A C ONTRACTING STATE I.E. SWITZERLAND WHICH ARE NOT DEALT WITH IN THE FO REGOING ARTICLES OF THE INDO-SWISS TREATY SHALL BE TAXABLE ONLY IN T HAT STATE. IN THE PRESENT CASE, THE ASSESSEE COMPANY BEING A RESIDENT OF SWITZERLAND, THE INCOME, WHEREVER ARISING WOULD FAL L WITHIN THE SCOPE OF THE RESIDUARY ARTICLE 22 IF THE SAME IS NO T DEALT WITH IN ANY OTHER ARTICLES OF THE TREATY. THE QUESTION, THE REFORE, IS WHETHER THE SHIPPING PROFITS ARE DEALT WITH IN ANY 'OTHER ARTICLES OF THE INDO-SWISS TREATY OR NOT. THE CONTENTION RAI SED BY SHRI SRIVASTAVA ON BEHALF OF THE REVENUE IS THAT BY AGRE EING TO EXCLUDE THE SHIPPING PROFITS FROM ARTICLE 8 AS WELL AS ARTICLE 7 OF THE INDO-SWISS TREATY, INDIA AND SWITZERLAND HAD AG REED TO LEAVE THE SHIPPING PROFITS TO BE TAXED BY EACH STATE ACCO RDING TO ITS DOMESTIC LAW AND THIS UNDISPUTED POSITION PREVAILIN G UPTO 2001 DID NOT CHANGE AS A RESULT OF INTRODUCTION OF ARTIC LE 22 OF THE TREATY WITH EFFECT FROM 01-04-2001. WE ARE UNABLE T O AGREE WITH THIS CONTENTION OF SHRI SRIVASTAVA. IN OUR OPINION, AS A RESULT OF INTRODUCTION OF ARTICLE 22, THE ITEMS OF INCOME NOT DEALT WITH IN THE OTHER ARTICLES OF THE INDO-SWISS TREATY ARE COV ERED IN THE RESIDUARY ARTICLE 22 AND THEIR TAXABILITY IS GOVERN ED BY THE SAID ARTICLE WITH EFFECT FROM 01-04-2001. ARTICLES 7 AND 8 OF THE TREATY THEREFORE CANNOT BE RELIED UPON TO SAY THAT BY AGRE EING TO EXCLUDE THE SHIPPING PROFITS FROM SAID ARTICLES, TH E SHIPPING PROFITS ARE LEFT TO BE TAXED BY EACH CONTRACTING ST ATE ACCORDING TO ITS DOMESTIC LAW. IT IS NO DOUBT TRUE THAT THIS WAS THE POSITION PRIOR TO INTRODUCTION OF ARTICLE 22 IN THE INDO-SWI SS TREATY IN THE YEAR 2001 BUT THE SAME WAS ALTERED AS A RESULT OF I NTRODUCTION OF THE SAID ARTICLE INASMUCH AS IT BECAME NECESSARY TO FIND OUT AS TO WHETHER SHIPPING PROFITS HAVE BEEN DEALT WITH IN AN Y OTHER ARTICLE OF THE TREATY. MERE EXCLUSION OF SHIPPING PROFITS F ROM THE SCOPE OF ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 8 TREATY COULD HAVE RESULTED IN LEAVING THE SAME TO B E TAXED BY THE CONCERNED CONTRACTING STATE ACCORDING TO ITS DOMEST IC LAW PRIOR TO INTRODUCTION OF ARTICLE 22. HOWEVER, SUCH EXCLUSION ALONE WILL NOT TAKE IT OUT OF THE SCOPE OF ARTICLE 22 UNLESS IT IS ESTABLISHED THAT THE SHIPPING PROFITS HAVE BEEN DEALT WITH IN ANY OT HER ARTICLE OF THE TREATY. THE LANGUAGE OF ARTICLE 22(1) IN THIS R EGARD IS PLAIN AND SIMPLE AND THE REQUIREMENT FOR APPLICATION OF T HE SAID ARTICLE IS EXPLICITLY CLEAR. 34. IT PERTINENT TO NOTE HERE THAT THE PURPOSE OF T AX TREATIES IS TO ALLOCATE TAXING JURISDICTION AS HELD, INTER ALIA, B Y THE HON'BLE SUPREME COURT IN THE CASE OF UNION OF INDIA V. AZAD I BACHAO AANDOLAN 263 ITR 706 AND ONLY WHEN AN ARTICLE PROVI DES FOR TAX TO DISTRIBUTE TAXING RIGHT OF A PARTICULAR TYPE OF INCOME, THEN IT CAN BE SAID DEALS WITH SUCH ITEM OF INCOME. IF THER E IS NO ARTICLE PROVIDING FOR SUCH TAX TREATMENT TO DISTRIBUTE JURI SDICTION TO TAX A PARTICULAR INCOME LIKE THE SHIPPING PROFITS THE PRE SENT CASE, THEN IT CANNOT BE SAID THAT SUCH INCOME IS DEALT WITH BY THE ARTICLES OF THE TREATY. WHEN ARTICLE 7 PROVIDES FOR TAXABILITY OF BUSINESS PROFITS OTHER THAN INTERNATIONAL SHIPPING PROFITS, IT PRESCRIBES DISTRIBUTIVE RULES IN RESPECT OF BUSINESS PROFITS O THER THAN INTERNATIONAL SHIPPING PROFITS AND IT CAN, THEREFOR E, BE SAID THAT SUCH BUSINESS PROFITS ARE DEALT WITH BY ARTICLE 7. IT IS, HOWEVER, NOT TRUE IN RESPECT OF INTERNATIONAL SHIPPING PROFI TS AS IT DOES NOT PRESCRIBE DISTRIBUTIVE RULES WITH RESPECT TO SUCH P ROFITS. BY EXCLUSION OF SUCH PROFITS FROM ARTICLE 7, IT CAN BE SAID THAT THE SAME ARE LEFT TO BE TAXED BY THE CONTRACTING STATE AS PER THEIR DOMESTIC LAWS AS THERE WAS NO ARTICLE UPTO 01-04-20 01 DEALING WITH SUCH INCOME. HOWEVER, AS A RESULT OF INTRODUCT ION OF THE RESIDUARY ARTICLE 22 WITH EFFECT FROM 01-04-2001, T HE ITEMS OF INCOME NOT DEALT WITH BY ANY OTHER ARTICLE ARE SPEC IFICALLY COVERED IN THAT ARTICLE AND SINCE THE TAXABILITY OF SUCH OT HER INCOME IS NOW GOVERNED BY ARTICLE 22, THE SAME HAS TO BE DEALT WI TH REFERENCE TO THE SAID ARTICLE. THIS CONCLUSION GETS SUPPORT F ROM THE OPINION OF MR. PHILIP BEKAR DATED 25 TH JUNE, 2003 FILED BY THE ASSESSEE WHEREIN HE HAS OPINED THAT ARTICLE 7 CANNOT BE REGA RDED AS HAVING DEALT WITH INTERNATIONAL SHIPPING PROFIT AND SUCH PROFITS WOULD BE COVERED WITHIN THE PERVIEW OF ARTICLE 22 O F THE INDO- SWISS TREATY. 35. IN SUPPORT OF HIS ACTION IN BRINGING TO TAX TH E PROFITS FROM SHIPPING TO TAX IN INDIA AS PER DOMESTIC LAW THE AO HAS RELIED UPON THE LETTER DATED 14 TH FEBRUARY, 2005 ISSUED THE JOINT SECRETARY. HOWEVER, AS RIGHTLY CONTENDED BY THE LEA RNED COUNSEL ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 9 FOR THE ASSESSEE, THE SAID LETTER HAS BEEN IMPLIEDL Y SUPERSEDED BY ANOTHER LETTER DATED 27 TH MAY, 2005 ISSUED SUBSEQUENTLY WHEREIN REFERENCE WAS MADE TO TWO LETTERS WRITTEN EARLIER D ATED 29TH OCTOBER, 2003 AND 18TH DECEMBER, 2003 ACCEPTING THA T THE TAXABILITY OF SHIPPING PROFITS WAS GOVERNED BY ARTI CLE 22 OF THE INDO-SWISS TREATY. AS A MATTER OF FACT, THIS POSITI ON WAS ACCEPTED BY THE AO HIMSELF IN THE ASSESSMENT COMPLETED IN AS SESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03 WHEREIN THE CLAIM OF THE ASSESSEE THAT THE SHIPPING PROFIT IS CHARGEABLE TO TAX ONLY IN SWITZERLAND AND NOT IN INDIA AS PER ARTICLE 22 OF T HE TREATY WAS ALLOWED BY THE AO. EVEN IN THE VOYAGE ASSESSMENT OR DER PASSED ON 10 TH JUNE, 2005 U/S 172(4), THE AO ACCEPTED THAT THE INTERNATIONAL SHIPPING PROFITS OF THE ASSESSEE COMP ANY FOR ASSESSMENT YEAR 2005-06 WERE GOVERNED BY ARTICLE 22 (1) OF THE INDO-SWISS TREATY. IN ORDER TO SAY THAT A PARTICULAR ITEM OF INCOME HA S BEEN DEALT WITH, IT IS NECESSARY THAT THE RELEVANT ARTICLE MUS T STATE WHETHER SWITZERLAND OR INDIA OR BOTH HAVE A RIGHT TO TAX SU CH ITEM OF INCOME. VESTING OF SUCH JURISDICTION MUST POSITIVEL Y AND EXPLICITLY STATED AND IT CANNOT BE INFERRED BY IMPLICATION AS SOUGHT TO BE CONTENDED BY SHRI, SRIVASTAVA RELYING ON ARTICLES 7 AND 8 OF THE TREATY. AS RIGHTLY CONTENDED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MERE EXCLUSION OF INTERNATIONAL SHIPP ING PROFIT FROM ARTICLE 7 CANNOT BE REGARDED AS AN ITEM OF INCOME D EALT WITH BY THE SAID ARTICLE AS ENVISAGED IN ARTICLE 22(1) . TH E EXPRESSION 'DEALT WITH' CONTEMPLATES A POSITIVE ACTION AND SUC H POSITIVE ACTION IN THE RESENT CONTEXT WOULD BE WHEN THERE IS AN ARTICLE CATEGORICALLY STATING THE SOURCE OF COUNTRY OR THE COUNTRY OF RESIDENCE OR BOTH HAVE A RIGHT TO TAX THAT ITEM OF INCOME. THE FACT THAT THE EXPRESSION USED IN ARTICLE 22( 1) OF THE INDO-SWISS TREATY IS 'DEALT WITH' VIZ- A-VIZ THE EXPRESSION 'M ENTIONED' USED IN SOME OTHER TREATIES CLEARLY DEMONSTRATES THAT THE E XPRESSION 'DEALT WITH' IS SOME THING MORE THAN A MERE MENTION OF SUCH INCOME IN THE ARTICLE AND AS RIGHTLY CONTENDED BY T HE LEARNED COUNSEL FOR THE ASSESSEE, THE INTERNATIONAL SHIPPIN G PROFITS CAN AT THE MOST BE SAID TO HAVE MENTIONED IN ARTICLE 7 BUT THE SAME CANNOT BE SAID TO HAVE BEEN DEALT WITH IN THE SAID ARTICLE. 36. IN THE CASE OF MAHINDRA & MAHINDRA 313 ITR (AT) 263, THE ISSUE BEFORE THE SPECIAL BENCH OF THE TRIBUNAL WAS RELATING TO TAXABILITY OF FEES PAID BY MAHINDRA & MAHINDRA LTD. TO MERCHANT BANKERS ON ACCOUNT OF SERVICES RENDERED BY THE MERC HANT BANKERS IN RELATION TO A GDR ISSUE FLOATED BY MAHIN DRA & ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 10 MAHINDRA LTD. IN U.K. IN THIS REGARD, THE SPECIAL B ENCH TOOK A VIEW THAT SINCE THE SERVICES RENDERED BY THE MERCHA NT BANKERS DID NOT 'MAKE AVAILABLE' ANY TECHNICAL KNOWLEDGE ET C. TO MAHINDRA & MAHINDRA LTD., SUCH TECHNICAL SERVICES W OULD TRAVEL FROM ARTICLE 7 TO ARTICLE 13. THE SPECIAL BENCH, H OWEVER, TOOK NOTE OF ARTICLE 7(9) OF THE DTAA BETWEEN INDIA AND UNITED KINGDOM WHICH PROVIDED THAT 'WHERE PROFITS INCLUDE ITEMS OF INCOME WHICH ARE DEALT WITH SEPARATELY IN OTHER ART ICLES OF THIS CONVENTION, THEN THE PROVISIONS OF THOSE ARTICLES S HALL NOT BE AFFECTED BY THE PROVISIONS OF THIS ARTICLE' AND HEL D IN VIEW OF THE SAID ARTICLE THAT TECHNICAL SERVICES WOULD HAVE TO GO BACK TO ARTICLE 7 FOR DETERMINATION OF WHETHER INDIA CAN TA X FEES FROM SUCH TECHNICAL SERVICES. THE STAND OF THE REVENUE T HAT EXCLUSION OF AN ITEM OF INCOME FROM AN ARTICLE MEANS THAT SUC H ITEM HAS BEEN 'DEALT WITH' THUS WAS NOT ACCEPTED BY THE SPEC IAL BENCH OF ITAT BY IMPLICATION IN THE CASE OF MAHINDRA & MAHIN DRA. 37. AS ALREADY OBSERVED, THE EXPRESSION 'DEALT WITH ' USED IN ARTICLE 22 HAVE TO BE READ IN THE CONTEXT OF PURPOS E OF DOUBLE TAX AVOIDANCE AGREEMENT WHICH IS ALLOCATION OF TAXING J URISDICTION. FROM THIS ANGLE, AN ITEM OF INCOME CAN BE REGARDED AS 'DEALT WITH' BY AN ARTICLE OF DTAA ONLY WHEN SUCH ARTICLE PROVIDES FOR AND POSITIVELY VESTS THE POWERS TO TAX SUCH INCOME IN ONE OR BOTH STATES. THE MERE EXCLUSION OF INTERNATIONAL SHIPPIN G PROFITS FROM ARTICLE 7, THEREFORE, CANNOT BE REGARDED AS VESTING INDIA WITH A RIGHT TO TAX INTERNATIONAL SHIPPING PROFITS AND SUC H PROFIT, IN OUR OPINION, CANNOT BE REGARDED AS 'DEALT WITH' BY THE SAID ARTICLE AS ENVISAGED IN ARTICLE 22. 38. THE STAND OF THE REVENUE IS THAT BY EXCLUDING T HE PROFITS FROM THE OPERATION OF SHIPS IN INTERNATIONAL TRAFFI C FROM ARTICLE 7(1), THE SAME HAS TO BE REGARDED AS DEALT WITH BY ARTICLE 7(1) AND IT, THEREFORE, CANNOT FALL UNDER ARTICLE 22. IT IS CONTENDED THAT SUCH PROFIT, THEREFORE, WILL BE TAXABLE IN INDIA AS PER THE DOMESTIC LAW BY APPLYING THE PROVISIONS OF SECTION 44B OF TH E INCOME-TAX ACT, 1961. IF THIS CONTENTION OF THE REVENUE IS ACC EPTED, THE SAME, IN OUR OPINION, WILL LEAD TO ABSURDITY AS RIG HTLY CONTENDED BY THE LEARNED COUNSEL FOR THE ASSESSEE INASMUCH AS THE PROFITS FROM THE OPERATION OF SHIPS IN DOMESTIC TRAFFIC, FO R EXAMPLE, FREIGHT EARNED FOR CARRIAGE FROM GOA TO MUMBAI WILL BE ELIGIBLE FOR TREATY BENEFIT AND WILL NOT BE TAXABLE IN INDIA WHE REAS PROFITS FROM THE OPERATION OF SHIPS IN INTERNATIONAL TRAFFI C WILL BE TAXABLE IN INDIA U/S 44B OF THE ACT: IN OUR OPINION, THIS C ANNOT BE THE INTENTION OF THE LEGISLATURE OR EVEN OF THE PARTIES TO THE INDO- ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 11 SWISS TREATY I.E. INDIA AND SWITZERLAND AND THE CON TENTION OF THE REVENUE RESULTING IN SUCH ABSURDITY CANNOT BE ACCEP TED. 39. ONE OF THE OF THE CONTENTIONS RAISED BY SHRI S RIVASTAVA IS THAT THE REASON FOR EXCLUSION OF INTERNATIONAL SHIP PING PROFITS FROM THE INDO-SWISS TREATY IS THAT THE SWITZERLAND IS A LAND LOCKED COUNTRY AND IF THE INDO-SWISS TREATY WERE TO PROVID E TAXABILITY OF SUCH PROFIT, IT WOULD RESULT INTO TREATY SHOPPING. HOWEVER, AS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE , INDIA HAS ENTERED INTO TAX TREATIES WITH SEVERAL OTHER LAND L OCKED COUNTRIES SUCH AS UGANDA, KAZAKHSTAN TURKMENISTAN ETC. WHICH HAVE NOT EXCLUDED SHIPPING INCOME. MOREOVER, EVEN THE INDO-S WISS TREATY HAS NOW BEEN AMENDED IN THE YEAR 2012 WHEREBY THE S HIPPING INCOME HAS BEEN INCLUDED IN ARTICLE 8. WE, THEREFOR E, FIND IT DIFFICULT TO ACCEPT THE CONTENTION OF SHRI SRIVASTA VA THAT THE INTERNATIONAL SHIPPING PROFIT WERE EXCLUDED FROM IN DO-SWISS TREATY FOR THE REASON THAT SWITZERLAND IS A LAND LO CKED COUNTRY. WE ARE ALSO UNABLE TO AGREE WITH THE CONTENTION OF SHRI SRIVASTAVA THAT IF THE STAND OF THE ASSESSEE FOR IN TERNATIONAL SHIPPING PROFITS ARE NOT TAXABLE IN INDIA BUT ARE T AXABLE IN SWITZERLAND AFTER THE INTRODUCTION OF ARTICLE 22 IN THE INDO-SWISS TREATY WITH EFFECT FROM 01-04-2001 IS TO. BE ACCEPT ED, THE AMENDMENT WITH EFFECT FROM 1 ST APRIL, 2012 WHEREBY SUCH INCOME IS INCLUDED IN ARTICLE 8 THEREBY GIVING THE STATE O F RESIDENCE THE SOLE RIGHT TO TAX THE SAME WOULD RENDER A FUTILE EX ERCISE, BECAUSE AS A RESULT OF THE SAID AMENDMENT MADE IN THE YEAR 2012, THE INTERNATIONAL SHIPPING PROFITS SHALL BE TAXABLE IN THE STATE OF RESIDENCE IRRESPECTIVE OF WHETHER THE RESIDENT HAS A PE IN THE ETHER STATE OR NET AND WHETHER THE RIGHTS OR PROPER TY ARE EFFECTIVELY CONNECTED WITH SUCH PE OR NOT WHICH WAS NOT THE POSITION EARLIER PRIOR TO 2012 EVEN AFTER INSERTION OF ARTICLE 22. 40. SHRI SRIVASTAVA HAS RELIED ON THE COMMENTARY OF PROFESSOR KLAUS VOGAL WHEREIN WHILE EXPLAINING THE SCOPE OF A RTICLE 22, THE LEARNED COMMENTATOR HAS STATED THAT THE SAID ARTICL E DOES NET APPLY TO THE ITEMS OF INCOME CLASSIFIABLE AS BUSINE SS PROFITS WITHIN THE MEANING OF ARTICLE 7. IT IS, HOWEVER, TO BE NOT ED THAT THE INTERNATIONAL SHIPPING PROFITS HAVE BEEN EXCLUDED F ROM BUSINESS PROFITS WITHIN THE MANING OF ARTICLE 7. HE HAS ALSO RELIED ON THE COMMENTS OF PROFESSOR KLAUS VOGAL THAT THE EXPRESSI ON NOT DEALT WITH USED IN THE SAID ARTICLE MUST NOT BE TAKEN TO MAN NOT UNMISTAKABLY DEALT WITH AS THE SAID ARTICLE IS NEI THER DESIGNED TO REMOVE DIFFICULTIES OF INTERPRETATION NOR EVEN LAYS TO SETTLE THEM IN FAVOUR OF THE STATE OF RESIDENCE. IN THIS REGARD , WE HAVE ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 12 ALREADY REFERRED TO THE CORRESPONDENCE EXCHANGED WI TH THE COMPETENT AUTHORITIES OF INDIA AND SWITZERLAND WHER EBY IT WAS MUTUALLY AGREED TO. ASSIGN A CERTAIN SPECIFIC INTER PRETATION TO. ARTICLE 22 IN THE CONTEXT OF INTERNATIONAL SHIPPING PRE FITS AND KEEPING IN VIEW THIS AGREEMENT ARRIVED AT BETWEEN T HE TWO COMPETENT AUTHORITIES WE ARE OF THE VIEW THAT THE R EVENUE AUTHORITIES ARE NET FREE TO TAKE ANY CONTRARY VIEW RELYING EN THE COMMENTARY OF PROFESSOR KLAUS VOGAL. AS REGARDS THE CONTENTION OF SHRI SRIVASTAVA THAT THERE IS NOTHING IN ARTICLE 22 TO SUGGEST THAT THE POSITION THAT EXISTED TILL ASSESSMENT YEAR 2001-02 GOT ALTERED OR MODIFIED BY THE INTRODUCTION OF ARTICLE 22 IN THE INDO- SWISS TREATY, WE ARE OF THE VIEW THAT THE MUTUAL AG REEMENT ARRIVED AT BY THE COMPETENT AUTHORITIES OF TWO COUN TRIES, IS GOOD ENOUGH TO SUGGEST THAT THE POSITION AS REGARDS THE TAXABILITY OF INTERNATIONAL SHIPPING PROFITS GOT CHANGED BY THE I NTRODUCTION OF ARTICLE 22. 41. UPTO ASSESSMENT YEAR 2001-02, INTERNATIONAL SHI PPING PROFITS NO DOUBT WERE BEING TAXED UNDER THE DOMESTIC LAWS A S PER THE PROVISIONS OF SECTION 44B. HOWEVER, IT WAS NOT BECA USE OF THE EXCLUSION CONTAINED IN ARTICLE 7 THAT INDIA WAS VES TED WITH THE AUTHORITY TO TAX SUCH INTERNATIONAL SHIPPING PROFIT BUT IT WAS BECAUSE THERE WAS NO OTHER ARTICLE IN THE INDO-SWIS S TREATY DEALING WITH INTERNATIONAL SHIPPING PROFITS WHICH C OULD OVERRIDE THE PROVISIONS OF SECTION 44B OF THE ACT IN TERMS O F SECTION 90(2) OF THE ACT BEING MORE BENEFICIAL TO THE ASSESSEE. T HIS POSITION, HOWEVER, HAS CHANGED AS A RESULT OF INTRODUCTION O F ARTICLE 22 IN THE INDO-SWISS TREATY WHICH NOW GOVERNS THE INTERNA TIONAL SHIPPING PROFITS NOT BEING DEALT WITH SPECIFICALLY BY ANY OTHER ARTICLE OF THE TREATY AND IF THE PROVISIONS OF ARTI CLE 22 ATE BENEFICIAL TO THE ASSESSEE, THE SAME ARE BOUND TO P REVAIL OVER THE PROVISIONS OF SECTION 44B OF THE ACT, IN THIS REGAR D, A REFERENCE CAN USEFULLY BE MADE TO THE DTAA BETWEEN INDIA ANTI LIBYA WHICH HAS NO CLAUSE PRESCRIBING THE TAX TREATMENT FOR CAP ITAL GAINS NOR ANY RESIDUARY CLAUSE SUCH AS OTHER INCOME CLAUSE. T HE CAPITAL GAINS EARNED BY A RESIDENT OF LIBYA IN INDIA THUS I S TAXABLE IN INDIA IF EXIGIBLE AS PER THE DOMESTIC LAWS IN VIEW OF THE ABSENCE OF A MORE BENEFICIAL CLAUSE IN THE RELEVANT TREATY. THIS POSITION CAN BE FURTHER UNDERSTOOD BY REFERENCE TO DTAA BETW EEN INDIA AND MALAYSIA WHICH HAS NO CLAUSE PRESCRIBING A TAX TREATMENT FOR CAPITAL GAINS BUT HAS A RESIDUARY CLAUSE I.E. OTHER INCOME CLAUSE IN ARTICLE 22 WHICH PRESCRIBES DISTRIBUTIVE RULES W ITH RESPECT TO ITEMS OF INCOME FOR WHICH NO RULES HAVE BEEN PRESC RIBED IN THE EARLIER ARTICLES OF THE AGREEMENT. THE TAXABILITY O F CAPITAL GAINS ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 13 EARNED BY A RESIDENT-OF MALAYSIA IN INDIA THUS WILL 'BE 'GOVERNED BY THE DISTRIBUTIVE RULES CONTAINED IN ARTICLE 22 I F THEY ARE MORE BENEFICIAL TO THE ASSESSEE THAN THE RELEVANT PROVIS IONS CONTAINED IN THE INDIAN INCOME-TAX ACT. THESE EXAMPLES WILL F URTHER SUPPORT AND SUBSTANTIATE THE VIEW THAT INTERNATIONAL SHIPPI NG PROFITS WERE BEING TAXED IN INDIA UNDER THE DOMESTIC LAW UP TO A SSESSMENT YEAR 2001-02 NOT BECAUSE OF THE EXCLUSION CONTAINED IN ARTICLE 7 BUT BECAUSE OF ABSENCE OF ANY ARTICLE PRESCRIBING S PECIFICALLY A TAX TREATMENT I.E. DISTRIBUTIVE RULES IN THE INDO-SWISS TREATY. THIS POSITION, HOWEVER, HAS CHANGED AS A RESULT OF INTRO DUCTION OF RESIDUARY ARTICLE 22 PRESCRIBING TAX TREATMENT OR D ISTRIBUTIVE RULES FOR OTHER INCOME WHICH HAS NOT BEEN DEALT WITH BY A NY EARLIER ARTICLES OF THE TREATY LIKE THE INTERNATIONAL SHIPP ING PROFITS. 42. IN ASSESSEE'S OWN CASE, A SIMILAR ISSUE CAME UP FOR CONSIDERATION FOR THE FIRST TIME IN ASSESSMENT YEAR 2002-03 WHEN ARTICLE 22 INTRODUCED IN THE INDO-SWISS TREATY FROM 01- 04-2001 BECAME OPERATIVE AND APPLICABLE. FOR THAT YEAR, THE RETURN WAS FILED BY THE ASSESSEE DECLARING NIL INCOME MAKING A SIMILAR CLAIM THAT UNDER THE BENEFICIAL PROVISIONS OF ARTICLE 22 OF INDO-SWISS TREATY, IT WAS NOT LIABLE TO TAX IN INDIA ON ITS I NTERNATIONAL SHIPPING PROFITS. THE STAND OF THE ASSESSEE WAS THA T IN THE ABSENCE OF ANY SPECIFIC ARTICLE IN THE DTAA DEALING WITH TAXABILITY OF PROFITS DERIVED FROM THE OPERATION OF SHIPS IN I NTERNATIONAL TRAFFIC, PARAGRAPH 1 OF ARTICLE 22 OF THE DT AA WAS APPLICABLE AND ITS SHIPPING PROFITS WERE TAXABLE ONLY IN SWITZERLA ND. IT WAS SUBMITTED THAT EVEN ARTICLE 7 OF THE TREATY WHICH E XCLUDED INTERNATIONAL SHIPPING PROFITS FROM ITS AMBIT DID N OT DEAL WITH SUCH PROFIT UP TO 31.03.2001 AND IN THE ABSENCE OF ANY O THER ARTICLE IN THE TREATY DEALING WITH SUCH PROFIT, THE SAME WAS C HARGEABLE TO TAX AS INCOME UNDER THE INDIA INCOME-TAX ACT. IT WA S SUBMITTED THAT THE POSITION, HOWEVER, GOT CHANGED AS A RESULT OF INTRODUCTION OF ARTICLE 22 IN THE TREATY EFFECT FRO M 01.04.2001 WHICH GOVERNS THE TAXABILITY OF ALL OTHER INCOME WH ICH HAVE NOT BEEN DEALT WITH IN OTHER ARTICLES OF THE TREATY AND SINCE AS PER THE SAID ARTICLE 22, ALL OTHER INCOME NOT SPECIFICALLY DEALT WITH. IN THE OTHER ARTICLES OF THE TREATY IS TAXABLE ONLY IN THE STATE OF RESIDENCE I.E. SWITZERLAND, THE SHIPPING INCOME FRO M INTERNATIONAL TRAFFIC WAS NOT TAXABLE IN INDIA AND WAS TAXABLE ON LY IN SWITZERLAND. IN SUPPORT OF THIS CLAIM, A LETTER DAT ED 30TH JANUARY, 2004 ISSUED BY SWISS TAX AUTHORITIES TO THE FOREIGN CONSULTANT OF THE ASSESSEE WAS FILED WHICH CLEARLY STATED THAT TH E PROFITS FROM OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC WAS NOT COVERED SPECIFICALLY BY ANY OF THE ARTICLES AND, THEREFORE, ARTICLE 22 WOULD ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 14 GOVERN THE TAXABILITY OF SUCH PROFITS. THE STAND OF THE ASSESSEE WAS ACCEPTED BY THE AO AND IN THE ASSESSMENT COMPLE TED U/S 143(3) VIDE AN ORDER DATED 09-03-2004 FOR ASSESSMEN T YEAR 2002-03 , HE HELD THAT WITH THE INTRODUCTION OF NEW ARTICLE 22 IN THE TREATY, THE INCOME OF THE ASSESSEE FROM PROFITS FROM SHIPPING OPERATION IN INTERNATIONAL TRAFFIC WERE TAXABLE ONL Y IN THE STATE OF RESIDENCE I.E. SWITZERLAND AND NOT IN INDIA. 43. THERE IS NO DISPUTE THAT THE ISSUE INVOLVED IN THE YEAR UNDER CONSIDERATION AS WELL AS ALL THE MATERIAL FACTS REL EVANT THERETO ARE SIMILAR TO ASSESSMENT YEAR 2002-03 WHEREIN THE CLAI M OF THE ASSESSEE WAS ACCEPTED BY THE AO. IN THE YEAR UNDER CONSIDERATION, HE, HOWEVER, HAS TAKEN A DIFFERENT V IEW RELYING ON THE LETTER DATED 14TH FEBRUARY, 2005 ISSUED BY THE JOINT SECRETARY. AS POINTED OUT BY THE LEARNED COUNSEL FO R THE ASSESSEE, THE SAID LETTER HAS BEEN SUPERSEDED BY AN OTHER LETTER ISSUED ON 2IH MAY, 2005 WHEREIN THE JOINT SECRETARY HAS MADE A REFERENCE TO THE LETTERS EXCHANGE~ THE COMPETENT AU THORITY OF INDIA AND THAT OF SWITZERLAND DATED 29TH OCTOBER, 2 003 AND 18TH DECEMBER, 2003. COPIES OF THE SAID LETTERS ARE PLAC ED ON RECORD. THE FIRST LETTER DATED 29TH OCTOBER, 2003 WAS SENT BY PROFESSOR DR. R. WALDBURGER, VICE DIRECTOR, DIVISION FOR INTE RNATIONAL FISCAL LAW AND DOUBLE TAXATION MATTERS, SWISS FEDERATION T AX ADMINISTRATION TO THE JOINT SECRETARY (FT & TR), MI NISTRY OF FINANCE, GOVERNMENT OF INDIA, THE CONTENTS OF WHICH ARE REPRODUCED BELOW: WE WRITE THIS LETTER TO YOU IN ORDER TO AGREE ON TH E TAXATION OF PROFITS ARISING FROM OPERATION OF SHIPS IN INTERNAT IONAL TRAFFIC IN OUR RESPECTIVE COUNTRIES IN ACCORDANCE WITH THE PRO VISIONS OF OUR DOUBLE TAXATION AGREEMENT. DURING OUR NEGOTIATION BOTH CONTRACTING STATES DECI DED TO TAX ENTERPRISES THAT OPERATE IN THE SHIPPING BUSINESS A CCORDING TO THE INTERNAL LAW OF EACH CONTRACTING STATE. THE TERM 'I NTERNATIONAL TRAFFIC' IN PARAGRAPH 1 SUBPARAGRAPH I) OF ARTICLE 3 THEREFORE WAS LIMITED TO TRANSPORT BY AN AIRCRAFT OPERATED BY AN ENTERPRISES OF A CONTRACTING STATE. CONSEQUENTLY WE HAVE EXCLUDED SH IPPING PROFITS IN ARTICLE 8 DTA-IND (WHICH NORMALLY DEALS WITH PROFITS ARISING FROM SHIPPING AND OPERATION OF AIRCRAFTS). ACCORDING TO PARAGRAPH 1 OF ARTICLE 7 DTA-IND PROFITS FROM THE O PERATION OF SHIPS IN INTERNATIONAL TRAFFIC ARE NOT TREATED UNDE R THE GENERAL CONCEPT OF BUSINESS PROFIT ATTRIBUTION BETWEEN THE COMPANY AND ITS PERMANENT ESTABLISHMENT. AS THE DOUBLE TAXATION AGREEMENT CONCLUDED IN 1994 DID NOT CONTAIN A GENERAL PROVISI ON ATTRIBUTING ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 15 THE TAXING RIGHT FOR OTHER INCOME TO THE STATES OF RESIDENCE, SHIPPING PROFITS COULD BE TAXED BY EACH CONTRACTING STATE ACCORDING TO ITS INTERNAL LAW. DURING THE RENEGOTIATION WE INSERTED ARTICLE 22 INT O OUR AGREEMENT THAT DEALS WITH ALL ITEMS OF INCOME NOT D EALT WITH SPECIFICALLY UNDER THE OTHER ARTICLES OF OUR AGREEM ENT. AS PARAGRAPH 1 SUBPARAGRAPH I) OF ARTICLE 3, ARTICLE 7 AND ARTICLE 8 DTA-IND DID NOT UNDERGO ANY CHANGES, BUSINESS PROFI T ARISING FROM SHIPPING ACTIVITIES CONSEQUENTLY FALLS UNDER A RTICLE 22. PARAGRAPH I AND 2 OF ARTICLE 22 DTA-IND, WHICH IS R ELEVANT FOR THIS PURPOSE, READS AS FOLLOWS: 'ARTICLE 22 OTHER INCOME 1. ITEMS OF INCOME OF A RESIDENT OF A CONTRACTING S TATE, WHEREVER ARISING, NOT DEALT WITH IN THE FOREGOING ARTICLES O F THIS AGREEMENT SHALL BE TAXABLE ONLY IN THAT STATE. 2.THE PROVISIONS OF PARAGRAPH 1 SHALL NOT APPLY TO INCOME, OTHER THAN INCOME FROM IMMOVABLE PROPERTY AS DEFINED IN P ARAGRAPH 2 OF ARTICLE 6, IF THE RECIPIENT OF SUCH INCOME, BEIN G A RESIDENT OF A CONTRACTING STATE, CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED TH EREIN, OR PERFORMS IN THE OTHER STATE INDEPENDENT PERSONAL SE RVICES FROM A FIXED BASE SITUATED THEREIN, AND THE RIGHT OR PROPE RTY IN RESPECT OF WHICH THE INCOME IS PAID IS EFFECTIVELY CONNECTED W ITH SUCH PERMANENT ESTABLISHMENT OR FIXED BASE. IN SUCH CASE THE PROVISIONS OF ARTICLE 7 OR ARTICLE 14, AS THE CASE MAY BE, SHALL APPLY. ACCORDINGLY, ANY INCOME DERIVED BY A RESIDENT OF ON E OF THE CONTRACTING STATES NOT SPECIFICALLY DEALT WITH IN A NY OF THE OTHER ARTICLES OF OUR AGREEMENT FALLS UNDER ARTICLE 22. A CCORDING TO PARAGRAPH 1 OF ARTICLE 22 SUCH INCOME IS TAXABLE ON LY' IN THE COUNTRY OF RESIDENCE, UNLESS THE BENEFICIAL OWNER C ARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A P ERMANENT ESTABLISHMENT AND THE RIGHT OR PROPERTY IN RESPECT OF SUCH INCOME IS EFFECTIVELY CONNECTED WITH SUCH PERMANENT ESTABL ISHMENT (PARAGRAPH 2 OF ARTICLE 22). CONSIDERING THESE PROVISIONS, WE ARE OF THE OPINION , THAT INCOME DERIVED BY A RESIDENT OF SWITZERLAND FROM INDIA OUT OF OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC, SHALL FALL UNDER ARTICLE 22. FURTHER, IT IS OUR UNDERSTANDING THAT SUCH INCOME WOULD BE L IABLE TO TAX ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 16 ONLY IN SWITZERLAND UNLESS THE BENEFICIAL OWNER CAR RIES ON BUSINESS IN INDIA THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN AND THE RIGHT OR PROPERTY IN RESPECT OF SUC H INCOME IS EFFECTIVELY CONNECTED WITH SUCH PERMANENT ESTABLISH MENT. WE HOPE THAT YOU INTERPRET THESE PROVISIONS OF OUR DOUBLE TAXATION AGREEMENT IN THEREFORE WILL BE ABLE TO CON FIRM YOUR AGREEMENT TO US BY RETURNING A COUNTERSIGNED COPY O F THIS LETTER, (EMPHASIS SUPPLIED IN BOLD LETTERS) WE THANK YOU FOR YOUR COOPERATION IN THIS MATTER AN D LOOK FORWARD TO RECEIVING YOUR SOON ANSWER.' 44. THE IMMEDIATE REPLY TO THE ABOVE LETTER WAS SEN T BY JOINT SECRETARY CFT & TR) BY A LETTER DATED 10 TH DECEMBER, 2003 COMMUNICATING THAT INDIA WAS NOT IN AGREEMENT THAT INCOME FROM SHIPPING BUSINESS IN INTERNATIONAL TRAFFIC WOULD BE COVERED UNDER ARTICLE 22 AND REASONS FOR THE SAME WERE ALSO GIVEN . HOWEVER, IMMEDIATELY THEREAFTER, A LETTER DATED 18TH DECEMBE R, 2003 WAS SENT BY THE JOINT SECRETARY (FT & TR) TO SHRI WARDB ARGER CLARIFYING THE MATTER AS UNDER:- ' AS REGARDS THE QUERY RAISED IN YOUR LETTER DATED 29.1 0.2003, I HAVE ALREADY HANDED OVER A WRITTEN REPLY TO MS. SIL VIA FROHOFER. HOWEVER, TO CLARIFY THE MATTER FURTHER, I MAY SUBMI T THAT PROFIT FROM OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC IS NOT COVERED SPECIFICALLY BY ANY OF THE ARTICLES OF THE AMENDED DTAA (ARTICLE 8 ONLY REFERS TO AIR TRANSPORT). ACCORDINGLY, ARTICLE 22 OF THE DTAA DEALING WITH OTHER INCOME WOULD FALL TO BE APPLICAB LE IN RESPECT OF INCOME FROM OPERATION OF SHIPS IN INTERNATIONAL T R AFFIC. AS PER PARAGRAPH 1 OF THE SAID ARTICLE, SUCH INCOME IS TAX ABLE ONLY IN THE STATE OF RESIDENCE OF THE TAXPAYER. HOWEVER, PARAGR APH 2 OF THE ARTICLE PROVIDES THAT IF THE ENTERPRISE ENGAGED IN OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC HAS A PERMANENT ESTA BLISHMENT IN ANOTHER COUNTRY, THEN THE PROVISIONS OF ARTICLE 7 O F THE DTAA WOULD APPLY AND NOT ARTICLE 22. BUT PARAGRAPH 1 OF ARTICLE 7 OF THE TREATY CATEGORICALLY SAYS THAT THE SAID ARTICLE IS NOT APPLICABLE TO PROFITS OPERATION OF SHIPS IN INTERNATIONAL TRAF FIC. ACCORDINGLY, IF A SWISS SHIPPING ENTERPRISE ENGAGED IN OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC HAS A PERMANENT ESTABLISHMENT IN INDIA OR IF AN INDIAN SHIPPING ENTERPRISE ENGAGED IN OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC HAS A PERMANENT ESTABLISHMENT IN SWITZERLAND THEN THE INCOME ATTRIBUTABLE TO THE ACTIVITIES CARR IED OUT IN THE OTHER COUNTRY WILL BE TAXABLE IN ACCORDANCE WITH DO MESTIC TAX LAWS OF THE SAID COUNTRY.' (EMPHASIS SUPPLIED IN BO LD LETTERS). ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 17 AS IS CLEARLY EVIDENT, IT WAS AGREED BY THE INDIAN COMPETENT AUTHORITY THAT PROFIT FROM OPERATION OF SHIPS IN IN TERNATIONAL TRAFFIC IS NOT. GOVERNED SPECIFICALLY BY ANY OF THE ARTICLES OF THE TREATY AND THAT ARTICLE 22 OF THE DTAA DEALING WITH OTHER INCOME WOULD FALL TO BE APPLICABLE IN RESPECT OF SUCH INCO ME. THE AO, HOWEVER, RELIED ON THE LETTER DATED 14TH FEBRUARY, 2005 WRITTEN BY JOINT SECRETARY (FT & TR) TO DGIT, INTERNATIONAL TAXATION CLARIFYING THAT INDIA HAS NOT ACCEPTED THAT INCOME FROM OPERATIONS OF SHIPS IN INTERNATIONAL TRAFFIC ACCRUI NG TO A RESIDENT OF SWITZERLAND WILL NOT BE TAXABLE IN INDIA IN VIEW OF APPLICABILITY OF ARTICLE 22 OF INDO-SWISS TREATY AND SUCH INCOME WIL L BE TAXABLE ONLY IN ACCORDANCE WITH THE DOMESTIC LAW OF THE STA TE. AS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, ANOTHE R LETTER DATED 27TH MAY, 2005 THEREAFTER WAS WRITTEN BY JOINT SECR ETARY (FT & TR) TO THE DGIT, INTERNATIONAL TAXATION ENCLOSING T HE LETTERS DATED 10 TH DECEMBER, 2003 AND 18TH DECEMBER, 2003 ISSUED IN THE MATTER FOR NECESSARY ACTION. AS ALREADY NOTED B Y US, LETTER DATED 18TH DECEMBER, 2003 WAS WRITTEN BY THE JOINT SECRETARY (FT & TR) AFTER 10 TH DECEMBER, 2003 CLARIFYING THE MATTER FURTHER TO THE COMPETENT AUTHORITY OF SWITZERLAND WHEREBY I T WAS AGREED THAT PROFITS FROM OPERATION OF SHIPS IN INTERNATION AL TRAFFIC IS NOT COVERED SPECIFICALLY BY ANY OF THE ARTICLES OF THE TREATY AND THAT ARTICLE 22 OF THE TREATY DEALING WITH OTHER INCOME WOULD FALL TO BE APPLICABLE IN RESPECT OF SUCH INCOME. THE LETTER DA TED 14TH FEBRUARY 2005 OF JOINT SECRETARY (FT & TR) RELIED U PON BY THE AO TO DENY THE TREATY BENEFIT TO THE ASSESSEE COMPANY THUS WAS SUCCEEDED BY THE LETTER DATED 27 TH MAY, 2005 AND THE RELIANCE OF THE AO ON THE LETTER DATED 14 TH FEBRUARY, 2005 TO DENY THE TREATY BENEFIT TO THE ASSESSEE COMPANY WAS CLEARLY MISPLAC ED. 45. IN ARTICLE 3 OF INDO-SWISS TREATY GIVING GENERA L DEFINITION, THE TERMS COMPETENT AUTHORITY IS DEFINED TO MEAN IN T HE CASE OF INDIA, THE CENTRAL GOVERNMENT IN THE DEPARTMENT OF REVENUE OR THEIR AUTHORIZED REPRESENTATIVE AND IN THE CASE OF SWITZERLAND, DIRECTOR OF FEDERAL TAX ADMINISTRATION OR HIS AUTHO RIZED REPRESENTATIVE. ARTICLE 25 OF THE SAID TREATY PRESC RIBES THE MUTUAL AGREEMENT PROCEDURE WHEREBY IF A RESIDENT OF A CONT RACTING STATE CONSIDERS THAT THE ACTION OF ONE OR BOTH OF THE CON TRACTING STATES RESULT OR WILL RESULT FOR HIM IN TAXATION NOT IN AC CORDANCE WITH THIS AGREEMENT, HE MAY NOTWITHSTANDING THE REMEDIES PROV IDED BY THE NATIONAL LAWS OF THOSE STATES, PRESENT HIS CASE TO THE COMPETENT AUTHORITY OF THE CONTRACTING STATES OF WH ICH HE IS A RESIDENT. AS PER PARAGRAPH 2 OF ARTICLE 25, THE COM PETENT AUTHORITY THEN SHALL ENDEAVOR, IF THE OBJECTION APP EARS TO IT TO BE ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 18 JUSTIFIED AND IF IT IS NOT ITSELF ABLE TO ARRIVE AT AN APPROPRIATE SOLUTION, TO RESOLVE THE CASE BY MUTUAL AGREEMENT W ITH THE COMPETENT AUTHORITY OF THE OTHER CONTRACTING STATE, WITH A VIEW TO AVOIDANCE OF TAXATION WHICH IS NOT IN ACCORDANCE WI TH THE AGREEMENT. AS PER PARAGRAPH 3 OF ARTICLE 25, THE CO MPETENT AUTHORITIES OF THE CONTRACTING STATES SHALL ENDEAVO R TO RESOLVE BY MUTUAL AGREEMENT ANY DIFFICULTIES OR DOUBTS ARISING AS TO THE INTERPRETATION OR APPLICATION OF THE AGREEMENT. IN THE PRESENT CASE, SUCH ENDEAVOR WAS MADE BY THE COMPETENT AUTHO RITIES OF SWITZERLAND AND INDIA AND THE DOUBT ARISING AS TO T HE INTERPRETATION OF ARTICLE 22 WAS RESOLVED BY MUTUAL AGREEMENT WHEREBY BOTH THE COMPETENT AUTHORITIES AGREED THAT INTERNATIONAL SHIPPING PROFITS OF THE ASSESSEE COMPANY ARE COVERE D BY ARTICLE 22. 46. IN THE CASE OF CIT VS. ARUN DUA 186 ITR 494, IT WAS HELD BY THE HON'BLE CALCUTTA HIGH COURT AT PAGE 496 OF THE REPORT THAT IF AN AGREEMENT BETWEEN TWO PARTIES HAS BEEN UNDERSTOO D IN A CERTAIN WAY AND HAS BEEN ACTED UPON BY THEM, IT WOU LD NOT BE OPEN TO THE TAX OFFICER TO GIVE ANOTHER INTERPRETAT ION TO THE AGREEMENT. IN THE PRESENT CONTEXT, THE INDO-SWISS T REATY ESPECIALLY THE SCOPE OF ARTICLE 22 THEREOF WAS UNDE RSTOOD IN A CERTAIN WAS AS EXPRESSED AND CLARIFIED IN THE LETT ER DATED 29 TH OCTOBER, 2003 ISSUED BY THE COMPETENT AUTHORITY BY LETTER DATED 18 TH DECEMBER, 2003 AGREEING THAT THERE BEING NO OTHER ARTICLE OF THE TREATY DEALING WITH PROFITS DERIVED FROM SHI PPING OPERATIONS IN INTERNATIONAL TRAFFIC, THE TAXABILITY THEREOF WA S GOVERNED BY ARTICLE 22. WE ARE OF THE VIEW THAT THE REVENUE AUT HORITIES IN INDIA THEREFORE ARE NOT JUSTIFIED TO TAKE A DIFFERE NT VIEW BY ASSIGNING DIFFERENT INTERPRETATION TO THE RELEVANT CLAUSES OF THE TREATY THAN THE ONE UNDERSTOOD BY BOTH THE PARTIES TO THE SAID AGREEMENT. 47. IN SUPPORT OF THE REVENUE'S CASE ON THE ISSUE U NDER CONSIDERATION, SHRI SRIVASTAVA HAS HEAVILY RELIED O N THE DECISION OF AUTHORITY FOR ADVANCE RULING IN THE CASE OF GEARBUL K AG (SUPRA) WHEREIN A SIMILAR ISSUE HAS BEEN STATED TO BE DECID ED IN FAVOUR OF THE REVENUE HOLDING THAT INCOME DERIVED FROM OPERAT IONS OF SHIPS IN INTERNATIONAL TRAFFIC IS LIABLE TO TAX IN INDIA AS PER DOMESTIC LAW REJECTING THE CONTENTION OF THE ASSESS EE THAT ARTICLE 22 OF THE INDO-SWISS TREATY APPLIES TO SUCH INCOME AND ALLOCATES TAXING RIGHTS TO THE COUNTRY OF RESIDENCE I.E. SWIT ZERLAND. HE HAS CONTENDED THAT ALTHOUGH THE SAID DECISION OF AUTHOR ITY FOR ADVANCE RULING IS NOT STRICTLY BINDING ON THE TRIBU NAL, IT HAS A ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 19 GRATE PERSUASIVE VALUE AND THEIR BEING NO DECISION OF THE TRIBUNAL, HIGH COURT OR THE SUPREME COURT DIRECTLY ON THE ISSUE, THE DECISION OF AUTHORITY FOR ADVANCE RULING DESERV ES TO BE FOLLOWED BY THE TRIBUNAL. WE ARE UNABLE TO ACCEPT T HIS CONTENTION OF SHRI SRIVASTAVA. A PERUSAL OF THE JUDGMENT OF TH E AUTHORITY FOR ADVANCE RULING PASSED IN THE CASE OF GEARBULK AG (S UPRA) SHOWS THAT THE LETTERS EXCHANGED BETWEEN THE COMPETENT AU THORITY OF INDIA AND SWITZERLAND EXPLAINING THEIR UNDERSTANDIN G AS REGARDS THE APPLICABILITY OF ARTICLE 22 TO THE INTERNATIONA L SHIPPING PROFITS WERE NOT BROUGHT TO THE NOTICE OF THE AUTHORITY. MO REOVER, HAVING HELD AT ONE PLACE THAT PRIOR TO 01.04.2001, SUCH PR OFITS WERE UNTOUCHED UNDER THE INDO-SWISS TREATY, THE AUTHORIT Y STILL PROCEEDED TO ARRIVE AT A CONCLUSION THAT ARTICLE 22 DID NOT APPLY TO SUCH PROFITS WHICH, IN OUR OPINION, WITH DUE RES PECT, IS SELF CONTRADICTORY. IT IS ALSO OBSERVED THAT THE AUTHORI TY WHILE HOLDING THAT THERE WAS NO POINT IN EXCLUDING SHIPPING PROFI TS FROM ARTICLE 7 AND INCLUDING IT IN ARTICLE 22 WHEN BOTH ARTICLE S 7 AND 22 PRESCRIBED PE BASED TAXATION, HAS OVERLOOKED THE FA CT THAT THE SCOPE OF ARTICLE 22 IS NARROWER THAN THE SCOPE OF A RTICLE 7 INASMUCH AS ARTICLE 22 COVERS THE INCOME WHICH IS I N RESPECT OF A RIGHT OR PROPERTY EFFECTIVELY CONNECTED TO THE PE W HEREAS ARTICLE 7 COVERS THE PROFITS ATTRIBUTABLE TO THE PE: THE AUTH ORITY HAS ALSO NOT CONSIDERED THE MEANING OF EXPRESSION 'DEALT WIT H' USED IN ARTICLE 22 OF THE TREATY IN THE CONTEXT OF THE PURP OSE OF TAX TREATIES WHICH IS TO ALLOCATE JURISDICTION AS HELD BY HON'BLE SUPREME COURT IN THE CASE OF AZADI BACHAO ANDOLAN. IT HAS ALSO NOT APPRECIATED THE DIFFERENT EXPRESSIONS I.E, 'DEA LT WITH' AND 'MENTIONED IN' USED IN DIFFERENT TREATIES AND THE E FFECT THEREOF, ALTHOUGH THE SAID DIFFERENCE WAS SPECIFICALLY BROUG HT TO ITS NOTICE. 48. IN THE CASE OF ADIT (INTERNATIONAL TAXATION) VS . GREEN EMIRATE SHIPPING & TRAVELS 100 ITD 203 (MUM.), RELI ANCE WAS PLACED ON BEHALF OF THE REVENUE ON THE RULING GIVEN BY THE AUTHORITY FOR ADVANCE RULING IN THE CASE OF ABDUL R AZAK A. MEMAN 276 ITR 306 WHICH WAS DIRECTLY APPLICABLE TO THE ISSUE UNDER CONSIDERATION. 'THE TRIBUNAL, HOWEVER, DECLIN ED TO TREAT IT AS A COVERED MATTER RELYING ON THE DECISION OF HON' BLE SUPREME COURT IN THE CASE OF AZADI BACHAO ANDOLAN (SUPRA) W HEREIN IT WAS HELD THAT THE RULING GIVEN BY THE AUTHORITY FOR ADV ANCE RULING IS NOT EVEN BINDING ON THE COMMISSIONER OF INCOME TAX AND AUTHORITIES SUB-ORDINATE THERETO IN ANY CASE EXCEPT IN THE CASE OF THE VERY ASSESSEE IN WHICH SUCH A RULING WAS GIVEN AND THAT TOO ILL RESPECT OF TRANSACTION IN RESPECT OF WHICH SUCH RULING WAS ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 20 GIVEN. IT WAS HELD BY THE TRIBUNAL THAT WHATEVER BE THE RESPECT AND DEFERENCE JUDICIAL AUTHORITIES INDEED HAVE FOR THE RULINGS GIVEN BY THE AUTHORITY THE AUTHORITY FOR ADVANCE RU LING NOT BEING A PART OF JUDICIAL HIERARCHY CANNOT LAY DOWN A BIND ING PRECEDENCE. IT WAS HELD THAT THE RULING GIVEN BY THE HONBLE AU THORITY FOR ADVANCE RULING, THEREFORE, HAS NO PRECEDENCE VALUE IN GENERAL. WE ARE, THEREFORE UNABLE TO ACCEPT THE PLEA OF SHRI SRIVASTAVA THAT THE ISSUE UNDER CONSIDERATION BE DECIDED IN FA VOUR OF THE REVENUE FOLLOWING THE DECISION OF THE AUTHORITY FOR ADVANCE RULING IN THE CASE OF GEARBULK AG (SUPRA). IN OUR O PINION, THE ITEM OF INCOME IN QUESTION I.E. INTERNATIONAL SHIPP ING PROFIT CANNOT BE SAID TO BE DEALT WITH IN ANY OTHER ARTICLES OF T HE INDO-SWISS TREATY AND THE TAXABILITY OF THE SAID INCOME THUS I S GOVERNED BY RESIDUARY ARTICLE 22 INTRODUCED IN THE TREATY WITH EFFECT FROM 01- 04- 2002. 49. HAVING HELD THAT THE TAXABILITY OF INTERNATIONA L SHIPPING PROFITS IS COVERED BY ARTICLE 22, IT IS NECESSARY TO ASCERT AIN WHETHER THE ASSESSEE COMPANY WHICH RECEIVED SUCH INCOME BEING A RESIDENT OF SWITZERLAND CARRIED ON THE SHIPPING BUSINESS IN INDIA THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN AND WHETHE R THE PROPERTY IN RESPECT OF WHICH SUCH INCOME WAS PAID I .E. SHIPS IS EFFECTIVELY CONNECTED WITH SUCH PERMANENT ESTABLISH MENT. IF BOTH THESE CONDITIONS ARE SATISFIED, THE INTERNATIONAL S HIPPING PROFITS WILL BE TAKEN OUT OF ARTICLE 22 AND WILL FALL IN AR TICLE 7 AS PER PARAGRAPH 2 OF ARTICLE 22. 50. AS REGARDS THE ISSUE AS TO WHETHER M/S MSC AGEN CY INDIA PVT. LTD. CONSTITUTED PERMANENT ESTABLISHMENT OF TH E ASSESSEE COMPANY IN INDIA, IT IS OBSERVED THAT CERTAIN SPECI FIC INFORMATION WAS RECEIVED BY THE AO FROM ACIT, CENTRAL CIRCLE-40 , MUMBAI VIDE LETTER DATED 31-03-2005 SHOWING THAT M/S SAMAS ARA SHIPPING P. LTD. WAS WORKING AS DEPENDANT AGENT OF THE ASSESSEE COMPANY IN INDIA UPTO ASSESSMENT YEAR 2002-03 AND T HE BUSINESS OF THE SAID CONCERN WAS TAKEN OVER AND CON TINUED BY MIS MSC AGENCY INDIA PVT. LTD. FROM ASSESSMENT YEAR 2003-04. THE SAID INFORMATION, GIST OF WHICH IS ALREADY GIVE N IN THE FOREGOING PORTION OF THIS ORDER, WAS CONFRONTED BY THE AO TO THE ASSESSEE WHO TOOK A STAND THAT BOTH M/S SAMSARA SHI PPING P. LTD. AND M/S. MSC AGENCY INDIA PVT. LTD. WERE INDEP ENDENT AGENTS AND DID NOT CONSTITUTE ITS PE IN INDIA. THER E WAS, HOWEVER, NOTHING BROUGHT ON RECORD ON BEHALF OF THE ASSESSEE TO SUPPORT AND SUBSTANTIATE ITS STAND. THE AO, THEREFORE, DID NOT ACCEPT THE STAND OF THE ASSESSEE AND TREATED M/S MSC AGENCY IN DIA PVT. LTD. AS DEPENDANT AGENT OF THE ASSESSEE IN INDIA ON THE BASIS OF THE ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 21 FOLLOWING CLAUSES OF THE AGREEMENT DATED 01.04.2002 BETWEEN THE ASSESSEE COMPANY AND M/S. MSC AGENCY INDIA PVT. LTD.: 2.00 GENERAL CONDITIONS:- 2.01 THE AGREEMENT COVERS ALL PORTS IN THE REGION AND/OR INLAND AGENCY WORK WITHIN THE REGION NOMINATED IN CLAUSE 1 1 AND COVERS THE FOLLOWING DUTIES:- SALES AND MARKETING BOOKINGS DOCUMENTATION EQUIPMENT CONTROL EQUIPMENT CONTROL INLAND TRANSPORTATION OPERATIONS COST CONTROL VESSEL OPERATIONS/HUSBANDRY DISBURSEMENTS SYSTEMS/IT 2.02 THE AGENTS UNDERTAKE NOT TO ACCEPT THE REPRESE NTATION IN THE REGION OF ANY OTHER PRINCIPALS FOR THE SERVICE IN DIRECT COMPETITION OR WITH DIRECT CONFLICT OF INTEREST WIT H THE PRINCIPAL'S ACTIVITIES IN SECTION, WITHOUT WRITTEN CONSENT, WHI CH SHALL NOT BE UNREASONABLY WITHHELD BY THE PRINCIPALS. 3.10 MARKETING SALES AND DOCUMENTATION:- 3.11 TO PROVIDE MARKETING AND SALES ACTIVITIES FOR THE SERVICES OF THE PRINCIPALS IN THE REGION, TO CANVASS FOR AND BO OK CARGO, TO PUBLICISE THE SERVICES AND TO MAINTAIN CONTACT WITH SHIPPERS, CONSIGNEES, FORWARDING AGENTS, PORT AND OTHER AUTHO RITIES AND TRADE ORGANIZATIONS. 3.12 TO PROVIDE STATISTICS AND INFORMATION, AND TO REPORT ON CARGO BOOKINGS AND USE OF SPACE ALLOCATIONS. TO ANNOUNCE SAILING AND J OR ARRIVALS AND TO QUOTE FREIGHT RATES AND ANNOUNCE FREIGHT TRAFFIC AND AMENDMENTS, SUBJECT T THE FREIGHT POLICIES AND INSTRUCTIONS OF THE PRINCIPALS. TO PROVIDE REGULAR REPORTS AND INFO RMATION CONCERNING LATEST MARKET TRENDS AND COMPETITION ADV ICE DEVELOPMENTS. 3.13 TO ARRANGE FOR PUBLIC RELATIONS WORK (INCLUDIN G ADVERTISING, PRESSAGREED BY THE PRINCIPLES. 3.14 TO ISSUE, SIGN AND STAMP ON BEHALF OF THE PRIN CIPALS TO PERFORM THESE DUTIES. ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 22 5.00 PRINCIPALS DUTIES:- 5.02 THE PRINCIPALS WILL PROVIDE THE AGENTS WITH ANY NECESSARY FUNDS TO COVER CREDITORS AND ANY ADVANCE DISBURSEME NTS IN RESPECT OF THE PRINCIPALS BUSINESS WITHIN THE REGI ON, WHICH MAY BE SPECIFICALLY AGREED AS ITEMS NOT SUBTRACTED FROM THE FREIGHT ACCOUNT. 5.03 TO PAY ALL STATUTORY CHARGES AND TAXES (AS R EQUIRED BY LAW) LEVIED BY COUNTRIES IN THE REGION, PAYABLE BY SHIP OWNERS/OPERATORS/CHARTERERS WHOSE SHIPS CALL AT POR TS IN THE REGION. 6.00 REMUNERATION: 6.01 THE PRINCIPALS AGREE TO PAY THE AGENTS, FOR THE ABOVE SERVICES RENDERED BY THEM, THE COMMISSION SET FORTH IN SCHEDULE A TO THIS AGREEMENT. 7. DURATION:- THE AGENT CONFIRMS THAT IF THEIR CURRENT AGENCY NA ME IS INCLUDES ANY OF HE NAMES LISTED BELOW, OR ANY VARIATION OF T HESE NAMES, THEN, ON TERMINATION OF THIS AGREEMENT, THE EXISTIN G NAME OF THEIR AGENCY SHALL ALSO CEASE, AND THEY WILL NO LONGER HA VE ANY ENTITLEMENT TO USE THE FOLLOWING NAMES, OR VARIATIO NS THEREOF:- MSC M.S.C. MEDITERRANEAN SHIPPING COMPANY (OR MEDITERRANEAN SH IPPING CO.) MEDITE MEDSHIP. 51. AFTER HAVING PERUSED THE RELEVANT CLAUSES OF TH E AGREEMENT BETWEEN ASSESSEE COMPANY AND M/S. MSC AGENCY INDIA PVT. LTD. AS GIVEN ABOVE, WE FIND OURSELVES IN AGREEMENT WITH THE VIEW OF THE AO AND THE LEARNED CIT(APPEALS ) THAT M/S MSC A GENCY INDIA PVT. LTD. WAS LEGALLY AND ECONOMICALLY DEPENDENT AG ENT OF THE ASSESSEE COMPANY AND SINCE THE ASSESSEE COMPANY WAS MANAGING AND CONTROLLING SOME OF ITS BUSINESS OPERA TIONS IN INDIA THROUGH THE SAID DEPENDANT AGENT, IT CONSTITUTED TH E PERMANENT ESTABLISHMENT OF THE ASSESSEE COMPANY IN INDIA IN T ERMS OF THE INDO-SWISS TREATY. WE ARE UNABLE TO ACCEPT THE CONT ENTION RAISED BY SHRI DASTUR IN THIS REGARD THAT M/S MSC AGENCY I NDIA PVT. LTD. HAD LIMITED RIGHT TO PERFORM ITS ACTIVITIES AND IT, THEREFORE, CANNOT ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 23 BE REGARDED AS HABITUALLY EXERCISING AN AUTHORITY T O NEGOTIATE AND ENTER INTO CONTRACTS FOR AND ON BEHALF OF THE ASSES SEE COMPANY WHICH, IN OUR OPINION, IS CONTRARY TO THE RELEVANT CLAUSES OF THE AGREEMENT BETWEEN THE ASSESSEE COMPANY AND M/S. MSC AGENCY INDIA PVT. LTD. DEFINING THE SCOPE AND AUTHORITY OF MIS MSC AGENCY INDIA PVT. LTD. AND ITS COMMITMENT TO WORK E XCLUSIVELY FOR THE ASSESSEE COMPANY AND NOT TO ACCEPT THE REPRESEN TATION OF ANY OTHER PRINCIPLE FOR THE-SAME SERVICES IN THE SA ME REGION WITHOUT THE WRITTEN CONSENT OF THE ASSESSEE COMPANY . 52. THE NEXT ISSUE THAT ARISES FOR OUR CONSIDERATI ON IN THIS CONTEXT IS WHETHER THE PROPERTY IN RESPECT OF WHICH INTERNATIONAL SHIPPING INCOME WAS RECEIVED BY THE ASSESSEE COMPAN Y THROUGH SHIPPING BUSINESS CARRIED ON IN INDIA THROUGH THE P .E. SITUATED THEREIN I.E. SHIPS WAS EFFECTIVELY CONNECTED WITH S UCH PERMANENT ESTABLISHMENT. THE EXPRESSION 'EFFECTIVELY CONNECTE D' USED IN THIS CONTEXT IN THE ARTICLE 22(2) OF THE INDO-SWISS TREA TY IS NOT DEFINED EITHER IN THE SAID TREATY OR EVEN IN THE DOMESTIC L AW I.E. INCOME- TAX ACT. THE SAID TERM, THEREFORE, HAS TO BE UNDERS TOOD USING THE GENERAL PRINCIPLES OF COMMON LAW KEEPING IN MIND TH E COMMON USES ASSOCIATED WITH THE PHRASE. THE ASSESSEE HAS F ILED OPINION OF SHRI MUKUL ROHOTOGI, ADDITIONAL SOLICITOR GENERA L, SUPREME COURT OF INDIA WHEREIN AFTER REFERRING TO THE MEANI NG GIVEN IN THE 'WEBSTORS REVISED UNABRIDGED DICTIONARY' AND IN THE WORDS AND PHRASES, PERMANENT EDITION, SHRI MUKUL ROHOTOGI HAS OPINED THAT THE EXPRESSION 'EFFECTIVELY CONNECTED' MUST BE UNDE RSTOOD TO MEAN THAT THERE IS A POWERFUL, COMPLETE OR THOROUGH CONTROL OF THE SHIP BY THE AGENCY. IN HIS VIEW, THE SHIPPING C OMPANY, HOWEVER, HAS NO SUCH CONTROL WHATSOEVER OVER THE SH IP AND SINCE IT IS ONLY WORKING AS AN AGENT WHO MAKES BOOKINGS A ND PERFORM OTHER ANCILLARY SERVICES, IT CANNOT BE SAID THAT TH E SHIP HAS ANY EFFECTIVE CONNECTION WITH THE AGENCY. HE HAS STATED THAT TO SAY THAT THE SHIPS ARE EFFECTIVELY CONNECTED WITH THE A GENCY WOULD LEAD TO ABSURD RESULTS INASMUCH AS THE AGENCY WILL BE LIABLE TO PAY TAX WHENEVER THE SHIPS ARE PLIED ON INTERNATION AL WATERS EVEN IF THEY DO NOT COME TO OR DEPART FROM INDIAN SHORES WHICH WOULD RESULT IN EXTENDING THE TERRITORIAL JURISDICTION OF INDIAN TAX LAWS. ACCORDING TO HIM, ARTICLE 22(2) BRINGS PROFITS OF T HE PE WITHIN THE SCOPE OF ARTICLE 7 ONLY IF THE RELEVANT INCOME OF T HE PE ARISES FROM A RIGHT OR PROPERTY EFFECTIVELY CONNECTED WITH SUCH RELEVANT INCOME OF THE PE ARISES FROM A RIGHT OR PROPERTY EF FECTIVELY CONNECTED WITH SUCH PE WHICH NECESSARILY REFERS TO THE SHIP ITSELF AS THE PROPERTY WHICH GENERATES THE INCOME IS THE S HIP. IN THE ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 24 CIRCUMSTANCES WHEN THE SHIPS CLEARLY DO NOT FORM PA RT THE ASSETS OF THE PE IN INDIA BUT ARE THE ASSETS OF THE NON-RE SIDENT SHIPPING COMPANY ABROAD, THE SAME CANNOT BE SAID TO BE EFFEC TIVELY CONNECTED TO SUCH PE. WHERE THE SHIPS ARE OWNED OR CHARTERED BY THE NON-RESIDENT SHIPPING COMPANY ABROAD AND THE AGENCY PE MERELY CLEARS INBOUND CARGO AND BOOKS OUTBOUND CARG O AND CARRIES OUT SIMILAR FUNCTIONS, THE SHIPS ARE CLEARL Y NOT THE ASSETS OF THE PE NOR ARE THEY ANY OTHER WAY EFFECTIVELY CO NNECTED WITH THE PE. HE HAS THUS CONCLUDED THAT THE PROVISIONS O F ARTICLE 22(1) OF THE TREATY WOULD BE APPLICABLE AND THE PROFITS O F SHIPPING OPERATIONS IN INTERNATIONAL TRAFFIC IN THE CASE OF NON- RESIDENT SHIPPING COMPANY WOULD BE TAXABLE IN THE COUNTRY OF RESIDENCE I.E. SWITZERLAND AND NOT IN INDIA. 53. THE ASSESSEE HAS ALSO FILED THE OPINION OF MR. PHILIP BAKER WHERE HE HAS EXPRESSED A SIMILAR VIEW SAYING THAT T HE PROPERTY IN RESPECT OF WHICH THE SHIPPING INCOME IS PAID IS THE SHIPS WHICH DO NOT FORM PART OF THE ASSETS OF THE PERMANENT ESTABL ISHMENT IN INDIA NOR CAN THEY BE SAID TO BE OTHERWISE EFFECTIV ELY CONNECTED WITH THE PERMANENT ESTABLISHMENT IN INDIA. THEY ARE THE ASSETS OF THE SHIPPING COMPANY AND HAVE NO CONNECTION WITH ANY AGENCY PE IN INDIA SAVE THAT THE PE MAY CLEAR INBOU ND CARGO AND BOOK OUTBOUND CARGO WHICH IS CARRIED ON THOSE SHIPS . WHERE THE SHIPS ARE OWNED OR CHARTERED BY A NON-RESIDENT SHIP PING COMPANY AND THE AGENCY PE MERELY CLEARS INBOUND CAR GO AND BOOKS OUTBOUND CARGO AND CARRIES OUT SIMILAR ANCILL ARY FUNCTIONS, THE SHIPS ARE CLEARLY NOT THE ASSETS OF THE PE NOR ARE THEY IS SOME OTHER WAY EFFECTIVELY CONNECTED WITH A PERMANENT ES TABLISHMENT. ACCORDING TO HIM THE CONCEPT OF EFFECTIVELY CONNEC TED CAN BE APPLIED IN PRACTICAL TERMS WHERE BRANCH ACCOUNTS AR E DRAWN UP FOR THE PE BASED UPON THE CORRECT ACCOUNTING PRINCI PLES WHERE THE SHIPS ARE SHOWN AS ASSETS OF THE BRANCH. THE AFORESAID DECISION AND THE CONCLUSION OF THE TR IBUNAL WILL APPLY MUTATIS MUTANDIS IN THIS YEAR ALSO AND THEREFORE, R ESPECTFULLY FOLLOWING THE SAME, WE HOLD THAT THE ISSUES AS RAISED BY THE ASSESSEE IN THE GROUNDS OF APPEAL ARE ALLOWED. ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 25 4. NOW WE WILL TAKE UP DEPARTMENTS APPEAL, VIDE WH ICH FOLLOWING GROUNDS HAVE BEEN RAISED:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DIRECTING TO TAX THE INTEREST IN COME RECEIVED FROM THE INCOME TAX DEPARTMENT ON REFUND AS PER THE ARTICLE 11 OF THE INDO-SWISS TREATY @ 10% IGNORING THE FACT TH AT THE PAYMENT OF INTEREST IS EFFECTIVELY CONNECTED WITH I TS PE IN INDIA AND THEREFORE IT WILL BE ASSESSED AS PER ARTICLE 7 OF THE DTAA. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD.CIT(A) ERRED IN DIRECTING TO DELETE THE INTEREST U/S 234B OF THE I.T. ACT, 1961 ON THE GROUND THAT WHEN DUTY IS CAST ON THE PAYER TO PAY TAX AT SOURCE, NO INTEREST U/S 234B CAN BE I MPOSED ON THE PAYEE ASSESSEE WITHOUT APPRECIATING THE FACT THAT A SSESSEES SHIPPING RECEIPT WAS TAXABLE IN INDIA AND IT IS THE LIABILITY OF THE PAYEE TO PAY ADVANCE TAX EVEN ON THE AMOUNT WHICH H AD NOT BEEN DEDUCTED AT SOURCE U/S 195 OF THE INCOME TAX A CT, 1961. 5. AT THE OUTSET, IT HAS BEEN ADMITTED BY BOTH THE PARTIES THAT THE ISSUE RAISED IN GROUND NO. 1 IS COVERED BY THE DECI SION OF SPECIAL BENCH IN THE CASE OF ACTI VS. CLOUGH ENGINEERING LTD. REP ORTED IN 130 ITD 137 (SB). THUS, RESPECTFULLY FOLLOWING THE RATIO LAID D OWN BY THE SPECIAL BENCH THAT REFUND OF INCOME-TAX IS TAXABLE UNDER AR TICLE 11 I.E. @10%, GROUND NO. 1 RAISED BY THE DEPARTMENT IS DISMISSED. 6. GROUND NO. 2 RELATES TO CHARGING OF INTEREST U/S 234B. THIS GROUND IS ALSO COVERED BY THE DECISION OF HONBLE BOMBAY H IGH COURT IN THE CASE OF NGC NETWORK LLC 313 ITR 187 (BOM). IT HAS ALSO B EEN BROUGHT TO OUR NOTICE THAT IN ASSESSEES OWN CASE, THE TRIBUNA L IN A.Y. 2007-08 AS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE WHICH HAS BEEN CONFIRMED BY THE HONBLE HIGH COURT ALSO. ACCORDINGLY, GROUND NO. 2 IS ALSO TREATED AS DISMISSED. ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 26 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED WHEREAS THE DEPARTMENTS APPEAL IS DISMISSED. 8. IN THE APPEALS FOR THE A.YS. 2006-07, 2007-08 AN D 2008-09, SO FAR AS THE ISSUE RELATING TO TAXABILITY OF SHIPPING INC OME, THE SAME ARE ARISING OUT OF IDENTICAL SET OF FACTS AND SIMILAR F INDING HAS BEEN GIVEN BY THE AUTHORITIES BELOW, THEREFORE, THE SAME IS SQUAR ELY COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.YS. 2003-04 AND 2004-05 AS HELD ABOVE WHILE DECIDING THE APPEAL FOR THE A.Y. 2005- 06. SO FAR AS THE ISSUE OF INTEREST AS RAISED IN A. Y. 2006-07, THE SAME IS COVERED BY THE DECISION OF THE SPECIAL BENCH IN THE CASE OF CLOUGH ENGINEERING LTD. (SUPRA). 9. IN A.Y. 2006-07, THE ASSESSEE HAS ALSO CHALLENGE D THE ISSUE OF REOPENING U/S 148, WHICH HAS BEEN RAISED VIDE GROUN D NO. 1. SINCE WE HAVE ALREADY DECIDED THE ISSUE ON MERITS IN FAVOUR OF THE ASSESSEE, THEREFORE, THIS GROUND HAS BECOME PURELY ACADEMIC A ND HENCE WE ARE NOT ADJUDICATING THE SAME. 10. IN A.Y. 2008-09 AND 2009-10, THE ASSESSEE HAS R AISED GROUND NO. 5, WHICH DEALS WITH SERVICE TAX, WHICH HAS BEEN TRE ATED BY THE AO TO FORM PART OF THE GROSS FREIGHT COLLECTION TAXABLE U /S 44B. THIS GROUND WILL ALSO BECOME ACADEMIC IN VIEW OF THE DECISION ON MER ITS, BEING DECIDED IN FAVOUR OF THE ASSESSEE THAT SHIPPING INCOME IS N OT TAXABLE IN INDIA. THE GROUND RELATING TO LEVY U/S 234B IS ALSO COVERE D IN FAVOUR OF THE ASSESSEE AS HELD ABOVE. ACCORDINGLY, ALL THE GROUND IN ALL THE AFORESAID YEARS IN THE CASE OF THE ASSESSEES APPEAL ARE TREA TED AS ALLOWED. 11. SO FAR AS APPEAL IN ITA NO. 2683/MUM/2010 FOR T HE A.Y. 2007-08, THE SAME HAS BEEN FILED BY THE ASSESSEE AGAINST ORD ER PASSED BY THE AO ITA NOS. 2681, 2682 ,2683 & 7714, 3865/MUM/2010 8690/MUM/2011 & 6986/MUM/2012 ASSESSMENT YEARS: 2005-06, 2006-07, 2007-08, 2008-09 & 2009-10 27 IN RELATION TO DOUBLE INCOME TAX RELIEF CERTIFICATE . SINCE GROUNDS RAISED IN THIS APPEAL ARE SIMILAR TO QUANTUM APPEAL PASSED U/S 143(3) FOR THE SAME ASSESSMENT YEAR I.E. A.Y. 2007-08 IN ITA NO. 2 682/MUM/2010, THEREFORE THIS APPEAL WILL BECOME PURELY ACADEMIC A S IN THE QUANTUM APPEAL, IT HAS ALREADY BEEN HELD THAT ASSESSEES SH IPPING INCOME IS NOT TAXABLE IN INDIA. 12. IN THE RESULT, THE APPEAL OF THE A SSESSEE IS ALLOWED, WHEREAS REVENUES APPEAL FOR THE A.Y. 2005-06 IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF FEBRUARY, 2015. SD/- SD/- (N.K. BILLAIYA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 20.02.2015 *SRIVASTAVA COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR L BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.