Marine Links Shipping Agencies V. Commissioner of Income Tax Bangalore and Assistant Director of Income Tax International Taxation, Mangalore

ITA/424/2012

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The case involves Marine Links Shipping Agencies, acting as an agent for M/s.Puyvast Chartering BV, which chartered a ship from M/s.Islamic Republic of Iran Shipping Lines to transport granite blocks. The core issue was whether the charterer or the ship owner was the beneficiary of the freight for tax purposes under the Income Tax Act, 1961, specifically concerning the applicability of the India-Netherlands double taxation agreement. The Income Tax Authorities, supported by the tribunal and the High Court, concluded that the ship owner was the beneficiary, thus denying the treaty benefits to the charterer.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 807637 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 17-09-2013
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: GAYATHRI SRIDHARAN
• Keywords: Charter Party; Double Taxation Agreement; Income Tax; International Taxation; Beneficiary of Freight; Agent of Non-Resident
• Section: 163(2); 172(3); 172(4); 260-A; 172(5)

Judgement Text

" - 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 17TH DAY OF SEPTEMBER 2013 PRESENT THE HON’BLE MR.JUSTICE DILIP B.BHOSALE AND THE HON’BLE MR.JUSTICE B.MANOHAR I.T.A.NO.424/2012 BETWEEN: Marine Links Shipping Agencies, I floor, ABCO Trade Centre, Kottara Chowki, Mangalore-575006. Represented by its Managing Partner Sri.Jeethan Sequeira. …APPELLANT (By Smt.Gayathri Sridharan, Adv. for Lakshmi Kumaran and Sridharan, Advs.) AND: 1. Commissioner of Income Tax Bangalore. 2. Assistant Director of Income Tax International Taxation, Mangalore. ...RESPONDENTS (By Sri.K.V.Aravind, Adv.) This ITA is filed under Section 260-A of I.T.Act, 1961, arising out of Order dated 12.07.2012 passed in - 2 - ITA No.184/Bang/2011, for the Assessment Year 2009- 2010 and etc., This ITA coming on for admission this day, DILIP B.BHOSALE J, delivered the following:- PC: This appeal is directed against the order dated 12.07.2012 passed by the Income Tax Appellate Tribunal, Bangalore Bench-‘B’ (for short ‘the tribunal’) in ITA No.184/Bang/2011, whereby the appeal has been dismissed. Appeal before the tribunal was directed against the order of the CIT(A)-IV, Bangalore dated 23.11.2011, whereby, order of the Assistant Director of Income Tax (International Taxation), Mangalore, dated 29.12.2009 passed under Section 172(4) of the Income Tax Act (for short ‘the Act’) was confirmed. The relevant assessment year is 2009-2010. 2. The Assessee claims to be an agent of M/s.Puyvast Chartering BV (for short ‘the charterer’). The charterer is a Netherland based shipping company. MV Ocean Candle Vay 1 (for short ‘the ship’) had been - 3 - chartered by the charterer in October, 2008. The owner of the ship is one M/s.Islamic Republic of Iran Shipping Lines, Iran (for short ‘owner of the ship’). The ship was engaged to carry granite blocks from Mangalore to Antwerp, Belgium and other places. The ship, accordingly, reached Mangalore port on 07.11.2008. It sailed from the port on 10.11.2008. The Assessee filed returns of income under Section 172(3) of the Act on behalf of the charterer on 26.11.2008. In other words, the Assessee, claiming to be an agent of the charterer, had shown the charterer as beneficiary of the freight. Copy of the tax residency certificate issued by the authorities in Netherland was also filed along with the return. 3. It is in this backdrop, a notice under Section 172(5) dated 23.11.2009 was issued seeking certain clarifications. The Income Tax Authorities noted that as per the “charter party” document, the Iranian company is owner of the ship, whereas, in the return of freight, charterer was shown as the beneficiary of the freight. The notice was replied by the Assessee and it was - 4 - reaffirmed that the charterer was the beneficiary of the freight. The Income Tax Authorities did not accept the reply and held that the treaty with the Netherland cannot be applied, unless the owner of ship, was beneficiary and not the charterer. It is in this backdrop, the question that falls for consideration was, whether the charterer is the beneficiary of the freight or the owner of the ship and that on whose behalf the Assessee was acting as an agent? 4. Having considered the entire materials placed on record, in particular, the agreement called “charter party”, all the three Authorities held that the owner of ship was the beneficiary of freight. 5. In the present appeal, the grounds of challenge raised by learned counsel for the appellant, and the grounds as raised before the tribunal are similar. The tribunal in paragraphs 7 and 7.1 has quoted the arguments advanced on behalf of the Assessee, which read thus:- - 5 - “7. xxxxxxxxxx It was submitted that the applicability of the treaty can be to the owner of the vessel or the charterer. In this case, the charter M/s.Puyvast Chartering BV, Netherlands is the beneficiary of freight and hence, it was entitled to the benefit of India-Netherlands double taxation agreement, which clearly stipulate income from operation of ships in international traffic shall be taxable only in the State in which the place of effective management of the enterprise is situated. The tax residency certificate with regard to Puyvast issued by the authorities in Netherlands is never in doubt. 7.1 With reference to clauses 13 and 14 of the charter party executed by the owner of the ship and the charterer of the ship, it was submitted that the Assessing Officer as well as the CIT(A) has only made reference to clause 14 of the charter party and concluded that the owner of the ship are the freight beneficiaries and not the charterer. The revenue authorities had come to this conclusion that the charterer acts as intermediary and got commission for the services rendered by them. It was submitted that the revenue authorities failed to appreciate the fact that the risk and reward of the voyage is borne by the charterer of the ship. The authorities below failed to take note of clause 13 of the charter party wherein it was clearly stipulated that the charterer has to pay a minimum freight for 19500 tonnes regardless of the load and the owner of the Vessel were entitled for higher freight if the load exceeds the minimum tonnage, which is essentially like a dead rent and thus, the entire risk and reward of the ship belongs to the charterer and the owner - 6 - is entitled for the fixed rent with an incremental rent if the vessel sails with a higher load. It was submitted that clause 13 of the charter party has not been taken note by the revenue authorities and clause 14 only talks about the time of payment wherein, they used the word ‘100% freight’. It was submitted that this is to be paid as per clause 13. Therefore, it was submitted, the revenue authorities have misinterpreted clause 14 as the clause based on which the owner is rewarded, while it only deals with the timing of the payment entitled by the owner”. 6. Apart from the submissions, as were advanced before the Tribunal, learned counsel for the appellant invited our attention to Section 163(2) of the Act, to contend that the Authorities below did not follow the procedure to determine, ‘whether the Assessee was acting as an agent of the owner of the ship or of the charterer’, and in view thereof, the findings that he was acting as an agent of the owner is wrong. Our attention was also invited to Clauses 13 & 14 of the “charter party”. 7. From bare perusal of Clause-14, it is clear that 100% freight charges minus 3.75% commission was payable within four banking days upon completion of - 7 - last load port by the charterer to the owner’s bank account. Clause-24 of the Agreement, further shows that out of the commission of 3.75%, 2.5% would go to the charterer and 1.25% to M/s.Trading Marine Global, the ship broker. 8. It is in this backdrop, it was vehemently contended by learned counsel for the appellant that Clause-13 stipulates the rate of minimum tonnes, which clearly shows that the Assessee was not acting as an agent of the owner but of the charterer. The tribunal has considered the similar submission, in proper perspective and we are in agreement with the findings recorded in respect thereof, which finds place in paragraph 9.2 of the order. Paragraph 9.2 of the order reads thus:- “Clause 13 stipulates minimum freight is to be paid to the owner of the ship (the Iranian party) at the rate of 46 Euros of minimum of 19500 tonnes. Clause 13 further stipulates if the tonnage exceeding 19500 m.tonnes, the additional freight is to be calculated depending upon the intake of the cargo. Thus, the owner of the ship (Iran entity) is not only entitled to freight of a minimum M.tonnes of 19,500 but also an addition freight depending an intake of the - 8 - cargo. Therefore, the risk and liabilities undertaken by the charterer M/s.Puyvast is only in the event of the tonnage being less than 19500 tonnes. Rising of the invoice by the charterer and charging 49 Euros per m.tonn is of no relevance, since substantial portion of the freight is paid to the owner of the ship namely, the Iranian entity. As stated earlier, the risk and liabilities undertaken by the charter M/s.Puyvast, the Netherlands entity, is limited only to a situation where the tonnage carried by the vessel is less than 19500 tonnes. Therefore, the substantial freight beneficiary is the owner of the ship, the Iranian entity and in view of this, the conclusion of the revenue authorities that relief under DTAA is not allowable is justified and in accordance with law and no interference is called for. It is ordered accordingly”. 9. We have perused Section 163 of the Act to appreciate the contention urged on behalf of the appellant. It would be advantageous to reproduce the same. Section 163 of the Act, reads thus:- “Who may be regarded as agent. 163. (1) For the purposes of this Act, “agent”, in relation to a non-resident, includes any person in India - (a) who is employed by or on behalf of the non-resident; or (b) who has any business connection with the non-resident; or - 9 - (c) from or through whom the non- resident is in receipt of any income, whether directly or indirectly; or (d) who is the trustee of the non- resident; and includes also any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset in India: Provided that a broker in India, who in respect of any transactions, does not deal directly with or on behalf of a non-resident principal bur deals with or through a non- resident broker shall not be deemed to be an agent under this section in respect of such transactions, if the following conditions are fulfilled, namely:- (i) the transactions are carried on in the ordinary course of business through the first mentioned broker; and (ii) the non-resident broker is carrying on such transactions in the ordinary course of his business and not as a principal. (2) No person shall be treated as the agent of a non-resident unless he has had an opportunity of being heard by the [Assessing] Officer as to his liability to be treated as such”. 10. This Section, in our opinion, is of no avail to the appellant to contend that the appellant was acting as an agent of the charterer and not of the owner. Admittedly, the appellant was acting as an agent. His - 10 - status as an agent is not in dispute. The question, ‘whether the appellant was acting as an agent of the charterer or of the owner of the ship’, can be determined only on the basis of the materials placed on record and not by raising the dispute about his status. To decide such question is not within the scope of Section 163 of the Act. Therefore, in our opinion, reliance placed on Section 163 of the Act is misplaced. 11. In the present case, as observed earlier, based on the materials on record, in particular, the agreement-“charter party” clearly show that 100% freight less 3.75% commission was payable by charterer to the owner. From the language of this clause read with other relevant clauses, to us, it is clear that the appellant was acting as an agent of the owner and not of the charterer. As a matter of fact, having regard to the clauses in the agreement, in our opinion, even the charterer was acting as an agent of the owner and not as an independent charterer within the meaning of Section 172 of the Act. This is evident from the “charter - 11 - party” agreement, which clearly show that even the so called charterer was also entitled for only commission. 12. In the circumstances, we find no merit in the appeal. Hence, the same is dismissed summarily. Sd/- JUDGE Sd/- JUDGE Srl. "