Bengal Tiger Line Pte. Ltd. v. DCIT [IT(TP)A No.
11/CHNY/2020, dt. 6-11-2020] : 2020 TaxPub(DT) 4688 (Chen-Trib.)
Denial of benefits of Article 8 exemption to shipping
business under Indo Singapore DTAA citing non-taxability in Singapore and
invocation of Limitation of benefits (LOB) Article 24
Facts:
Assessee was a non-resident shipping line operating from
Singapore. They were in receipt of freight incomes which arose from operation
of ships in international waters and thus they claimed immunity from Income Tax
Act citing Article 8 of the Indo-Singapore DTAA which exempts income of a
shipping line having international operations from being taxed in the source
state (India) as only the state of residence (Singapore here) will have the
exclusive right to tax the same. It was the case of the revenue that Article 8
exemption benefit cannot be offered to the assessee as factually they were
exempt under Singapore tax laws. Besides the same, since DTAA being an
ameliorative provision cannot be read that one cannot get into a zone of double
non-taxation by adopting DTAA clauses. Besides this under Limitation of
benefits (Article 24) of Indo-Singapore DTAA since Singapore did not tax it the
benefit of Article 8 cannot be granted to the assessee. This was upheld by the
DRP. On higher appeal --
Held in favour of the assessee that they were entitled to
Article 8 shipping line business exemption. LOB clause 24 cannot stand in the
way of they claiming Article 8 benefit. As to they not being taxed in
Singapore; all that the DTAA says is liable to tax under the state of
residence. It does not state liable to tax would mean one need to actually pay
taxes as there might be other reasons for exempting the entity factually from
tax. The reading that if the residential state chooses not to tax a resident
then the source state is conferred the lapsing right to tax it by virtue of LOB
clause is an erroneous reading. The AO/DRP's reading of Vienna convention was
also incorrect.
Editorial Note: To
appreciate the verdict the below extracts need to be cited.
The AO/DRP's reading of the DTAA was as under --
"From the abovementioned
introductory sentence of the India-Singapore DTAA it is clear that the
'purpose' of entering into this agreement is the "avoidance of double
taxation" and "prevention of fiscal evasion".
7. In simple terms, the
meaning of "double taxation" is the taxation of the same income
twice. In the parlance of International Taxation, this usually implies taxation
of the same income by two different countries - the Resident State and the
Source State. So the purpose of this DTAA is to prevent an income from being
taxed twice. However, in a case where a certain category of income is not
taxable at all in one state, then the question of double taxation would not
arise at all.
10. The assessee in his
submission has stressed on the wording "Profits derived by an enterprise
of a Contracting State from the operation of ships or aircraft in international
traffic shall be taxable only in that State". The main thrust of the
assessee's argument is that only the country of residence of a shipping company
has exclusive rights to tax the income from operation of ships in international
waters. This however, is a skewed interpretation. The DTAA seeks to prevent a
situation where both the signatory countries lay claim to taxation rights on
the same income. In such a scenario, the DTAA comes into picture only to
clarify as to which country will have the first right of taxation. In other
words, in a situation where both India and Singapore are laying claim to
taxation rights on the shipping income of the assessee company, then in that
case the country of residence, will have the exclusive right of taxation.
However, in a situation where the country of residence itself is not taxing the
income in question, then the question of double taxation does not arise in the
first place and the other country, i.e., the source country (India) very much
gets the right of taxation. All DTAAs have been entered into for the purpose of
avoiding double taxation. The intention has never been to allow or enable
'Double Non-Taxation'. What can be gauged from the above discussion is that
there are certain pre-requisites that need to be satisfied to invoke the
provisions of the DTAA :--
-- Existence of an income
that has accrued in a foreign country.
-- The country of source and
country of residence, both contending for the right to tax that income.
11. Only when both these
conditions exist, can the provisions of DTAA be applied because it would result
in a situation of "double taxation". However, when either one of the
conditions does not exist then the application of DTAA becomes pointless.
Similarly, the word "only" comes into picture as a tie breaker of
sorts only where multiple parties are taxing the same income. However, when
only one party remains as a contender then the term "only" loses all
significance.
13. The assessee in his
submission stated that the provisions of Article 24 of India Singapore tax
treaty cannot be invoked on the facts of the elementary reason that the Indian
Shipping Income of the Singaporean assessee is "neither exempt from India
nor taxed at reduced rate". The assessee itself accepts that the income
received by way of freight of shipping business is exempt from tax in
Singapore. Thereby it cannot be said to be have been subjected to tax in
Singapore.
The unambiguous thrust of
treaty on income being subject to tax in one contracting state to be able to
claim treaty protection in other contracting state, and avoidance of Double
non-taxation being a clear objective of the Indo-Singapore tax treaty, such
exempt income will not be eligible to get treaty protection in Source state.
For reference, the Article 24 of the India-Singapore DTAA is reproduced
hereunder :--
"Where this Agreement
provides (with or without other conditions) that income from sources in a
contracting State shall be exempt from tax, or taxed at a reduced rate in that
Contracting State and under the laws in force in the other Contracting State
the said income is subject to tax by reference to the amount thereof which is
remitted to or received in that other Contracting State and not by reference to
the full amount thereof then the exemption or reduction of tax to be allowed
under this Agreement in the first-mentioned Contracting State shall apply to so
much of the income as is remitted to or received in that other Contracting
State."
15. It is evident from the
Article 24, the scheme of India Singapore treaty which specifically states that
only such income can be given treaty benefit in India which has suffered tax in
Singapore. Further it evidences that an income which is not taxed in Singapore
cannot be granted tax exemption in India."
Assessee's counter was --
".........The shipping
income dealt with under Article 8 states that profits derived by an enterprise
of a contracting state from the operation of ships in international traffic
shall be taxable only in that state, i.e., resident state. The word only debars
the other contracting state to tax the shipping income, that is India is precluded
from taxing the shipping income even if it is sourced from India An enterprise
which is a tax resident of Singapore is liable for taxation oil its shipping
income only in Singapore and not in India. When India does not have any
taxation right on a shipping income of non-resident entity, exemption or
reduced rate of taxation in the source state. It only envisages territorial and
jurisdictional rights for taxing the income and India has no jurisdiction for
any taxing right which are governed by Article 8. There is no stipulation about
exemption under Article 8 of the shipping income which has been specifically
provided in some of the Articles like Article 20, 21 & 22. Hence, it cannot
be reckoned that shipping income earned from India is to be treated as exempt
from tax or taxed at reduced rate, which is a condition precedent for
applicability of Article 24, albeit India at the threshold does not have
jurisdiction to tax the shipping income of the non-resident entity. Thus, the
condition of Article 24 is not satisfied in the present case."
"We submit that the
inland revenue authority of Singapore (IRAS) vide its Letter, dated 17-9-2018
has already clarified and held that the provisions of article 24 of the
India-Singapore would not apply to shipping income as specified in Article
8."
The ITAT confirmed that the conditions of Article 24 were
non-existent in the case of the assessee. Article 24 LOB warrants --
(a) The exemption should have
been inside the DTAA clause to invoke Article 24 which is not the case of the
assessee.
(b) Then if the amounts received
were actually lower then the benefit of DTAA be reduced to the actually
received amount only.
Applied:
M.T. Maersk Mikage v. DIT(IT), (2016) 72 taxamann.com 359 (Guj) : 2016 TaxPub(DT) 3859 (Guj-HC)
APL Co. Pte. Ltd. v. ADIT, (2017) 78 taxmann.com 240
(Mum) : 2017 TaxPub(DT) 0607 (Mum-Trib)
Far Shipping (Singapore) Pte. Ltd. v. ITO, (2017) 84
taxmann.com 297 (Hyderabad-Tribunal) : 2017 TaxPub(DT) 2062 (Hyd-Trib)
Bengal Tiger Line Ltd. v. DDIT(International Taxation),
(2013) 33 taxmann.com 307 (Chennai-Tribunal) : 2013 TaxPub(DT) 1955
(Chen-Trib)
Alabra Shipping Pte. Ltd. v. ITO (2015) 62 taxman.com
185 (Rajkot-Tribunal) : 2015 TaxPub(DT) 4051 (Rkt-Trib)
ANOTHER OPINION
Case Study on Limitation of Benefits Clause in
DTAA
Issue
A non-resident shipping company of
Singapore had an agent in India. The shipping company had availed benefits of
article 8 relating to shipping business in India under Indo-Singapore DTAA.
However, while scrutinizing the return the, assessing officer found that the
freight proceeds were received by the non-resident shipping company not in
Singapore but in a bank in the UK. Thus, the officer read article 24 of the
Indo-Singapore DTAA (Limitation of benefits) clause and denied the assessee's
claim of article 8 and thus taxed the shipping freight realizations on grounds
that the income was not received in Singapore. On appeal, Commissioner of
Income Tax (Appeals) upheld the same holding that the receipt of money in the
respective country is a requirement to avail DTAA benefits. Is the action of
the Assessing officer/Commissioner of Income Tax (Appeals) correct?
Solution
(1) The facts indicated are similar to a near recent
decision of Rajkot ITAT in the case of Alabra Shipping Pte. Ltd. Singapore,
GAC Shipping India Pvt. Ltd. -- as Agents for v. ITO, International Taxation
[ITA No. 392/RJT/2014/AY 2011-12, dated 9-10-2014] : 2015 TaxPub(DT) 4051
(Rkt-Trib).
(2) Before delving into the decision lets us understand the
meaning of LOB (limitation of benefits clause). In DTAA, at times, the income
received by the taxed party under the DTAA could be taxed at a lower rate of
tax or exempt or taxed only on the part of the amount remitted, then the tax
benefits of the DTAA relief shall also stand reduced to the extent of the
amount remitted or the amount taxed. This is due to presence of only passive
income like interest, royalty (taxed at a presumptive rate normally) in a tax
jurisdiction in which the DTAA is being read.
(3) Article 24 of the limitation of benefits clause of
Indo-Singapore DTAA reads as under --
Limitation of relief
1. Where this Agreement provides
(with or without other conditions) that income from sources in a Contracting
State shall be exempt from tax, or taxed at a reduced rate in that Contracting
State and under the laws in force in the other Contracting State, the said
income is subject to tax by reference to the amount thereof which is remitted
to or received in that other Contracting State and not by reference to the full
amount thereof, then the exemption or reduction of tax to be allowed under this
Agreement in the first-mentioned Contracting State shall apply to so much of
the income as is remitted to or received in that other Contracting State.
2. However, this limitation does
not apply to income derived by the Government of a Contracting State or any
person approved by the competent authority of that State for the purpose of
this paragraph. The term "Government" includes its agencies and
statutory bodies.
(4) The ITAT held that on the receipt of money in a
different location, other than the State of the residency, assessing officer
cannot deny the benefits of article 8 as the benefit of shipping income clause
is for the residency of the shipping entity.
(5) Further, to apply LOB clause following two conditions
are sine qua non cumulatively --
(a) The income should be exempt
or taxed at a lower rate.
(b) The income should be taxed
only on part of the income either on the amount remitted or received in that
Contracting State.
The non-receipt of income in a country does not mean
limitation of benefits get triggered. What has to be seen factually if the
income in question is taxed in that country in full or not.
(6) In the event of meeting the above two clauses, the
treaty benefit shall be restricted to the extent of the income taxed or the
part taxed. This is in line with source taxation or territorial taxation
principle.
(7) The assessee was able to prove the following facts --
-- They being a tax resident in
Singapore.
-- The receipt of money in a
neutral bank outside Singapore was offered to tax in Singapore.
(8) There is an onus cast on the assessee to prove that the
income which was in question is offered to tax in the treaty country which is
factually done in this case. Once this is done, LOB clause cannot be invoked.
(9) Hence, on facts, there was no way the LOB clause can be
pressed into service here in this case. Thus held the ITAT and granted the
benefit of article 8 benefit to the shipping entity, thereby quashing the order
of the lower authorities.