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Background
In a recent ruling, the Mumbai Income-tax Appellate Tribunal (“the Tribunal”), in the case of Nederlandsche Overzee Baggermaatschappiji BV1 (“the assessee”), has analysed whether the lease of a dredger would be considered a bare boat charter or a wet lease. After analysis of the facts of the case, it held that the lease was a bare boat lease, and that a dry lease of equipment does not result in a permanent establishment (“PE”).
Facts
• The assessee, a company incorporated in Netherlands, was a tax resident of Netherlands for the purposes of a Double Taxation Avoidance Agreement (“tax treaty”) between India and the Netherlands. The business of the company was to provide dredgers on charter hire to other parties.
1 DDIT v. Nederlandsche Overzee Baggermaatschappiji BV.
[2010-TII-78-ITAT-MUM-INTL]
• It entered into a contract with Hollandsche Anneming Maatschappij BV (“HAM”) for lease of the dredger. It received charter hire rentals from HAM on account of the lease of the dredger.
• For assessment year 1999-2000, the assessee filed a return of income declaring Nil income claiming the hire rentals to be not taxable, in view of the amendment to Article 12 of the India-Netherlands tax treaty vide notification dated 30 August, 1999, in terms of which the “payment for the use of equipment” was excluded from the purview of
‘royalty’ with effect from 1 April, 1998.
• The assessing officer (“AO”), after examining the agreement with HAM, concluded that the agreement did not mention anything whatsoever about the basic aspects like which officials would handle the vessels, who would be the employer of personnel working on the vessel, etc.
Mere leasing of dredger (equipment) does not give rise to a permanent establishment Tax & Regulatory Services
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• Based on the fact that the assessee had raised a bill on the charterers as a part of the hire for increase in pay of the masters, officers and crew, concluded that the masters, officers and crew were the employees of the assessee. The AO treated the charter of the dredger as a wet lease.
• As the charter of the dredger was treated as a wet lease, the AO held that there was a PE in India, and accordingly worked out the income of the PE and taxed it at the rate of 48%. Aggrieved, the assessee carried the matter to appeal.
• On appeal, the Commissioner of Income-tax (Appeal) (“CIT(A)”), held that:
- Merely because the assessee was a wholly owned subsidiary of HAM, it could not be concluded that it had retained operation, management and control of the dredger with itself, thereby constituting a wet lease.
- All the documentary evidence like invoices raised by the third party in the name of HAM clearly showed that the management and control of the dredgers were with HAM and not with the assessee.
- Article 5(7) of the India-Netherlands tax treaty provides that a company in India controlled by a company in the Netherlands shall not result in the company in India being considered a PE of the company in the Netherlands.
- Since it did not have responsibility beyond the provisions of the dredger on charter hire, the lease of the dredger was merely a dry lease and it did not constitute a PE in India.
The revenue appealed against the order of the CIT(A).
Issue
Would the lease of a dredger be considered a bare boat charter or a wet lease resulting in a PE being constituted in India?
Revenue’s contentions
The revenue contended that the assessee had a PE in India, and its business income had been rightly taxed.
Assessee’s contentions
The assessee contended that:
• The dredger was given on lease to HAM on a bare boat lease basis.
• The assessee had submitted evidence to show that the management and control was in the hands of HAM and not the assessee and hence the lease was a dry lease.
• Charter rent is covered under section 9(1)(vi) of the Income-tax Act, 1961 (“the Act”), which is a specific clause, and hence it cannot be brought to tax under section 9(1)(i) of the Act, which is a general clause. In this regard, reliance was placed on the decision of the Gujarat High Court in the case of Meteror Satellite Ltd.2
• The PE would exist only if income was treated as business income and included under Article 7 of the tax treaty. The assessee does not have a fixed place in India through which it was carrying on its business. It merely leased a dredger to HAM on a bare boat charter basis; the dredger was under the control and management of the HAM and not the assessee.
• The assessee had no employees in India, nor did it render any dredger services in India. In addition, the mere lease of a dredger did not amount to establishing a PE.
Tribunal’s ruling The Tribunal held that:
• The contentions by the assessee and the revenue required the Tribunal to decide multiple issues before deciding whether the contract between the assessee and the HAM was a bare boat lease or a wet lease.
2 Meteror Satellite Ltd. v. ITO [1980] 121 ITR 311 (Guj).
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• The employees were hired by HAM. The assessee was not responsible for loss or damage to HAM in case of labour problems.
• Expenses on the arrival of the dredger in Indian waters such as port dues, pilot charges, etc. were incurred by HAM. Just because the assessee was a wholly owned subsidiary of HAM, it could not be concluded that it had itself retained operation, management and control of the dredger, thereby constituting a wet lease.
• Thus, the lease was a bare boat lease and the income from it was royalty, being payment for the use of the equipment.
Whether the amount received as royalty could be brought to tax
• The amendment to the tax treaty excluded payment for use of equipment from the definition and scope of royalty, since April 1998.
• Though receipt of bare boat rentals, or payment for use of equipment, is treated as royalty under the domestic law, it cannot be brought to tax as royalty, consequent to the amendment in the tax treaty.
Whether the charter rentals could be classified as regular business income under the domestic law in terms of section 9(1)(i) of the Act
• The issue is covered by the decision of the Gujarat High Court in the case of Meteror Satellite Ltd. (supra) where it was held that in matters of royalty, only clause (vi) would be relevant and not the general provisions of clause (i) of section 9(1) of the Act.
Whether the assessee has a PE in India or not:
• The assessee had no personnel located in India for the purpose of execution of the contract entered by it with HAM. Further, the assessee did not have any responsibility beyond providing a dredger on charter hire. The dredger was operated by the personnel appointed by HAM and was used by HAM for the purpose of business.
Mere dry lease of equipment did not result in a PE.
Conclusion
The Tribunal has brought out the distinction between a dry lease and a wet lease. The Tribunal has also held that under the domestic law, if income is regarded as royalty, it cannot be treated as business income under the tax treaty.
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