Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Time charter payments not
“royalty” under section 9(1)(vi)
January 17, 2017
In brief
In a recent decision1, the Chennai Income-tax Appellate Tribunal (Tribunal) held that in the absence of control and possession of the taxpayer over the vessel, payments made by the taxpayer to foreign shipping companies for hiring a vessel on time charter basis did not constitute royalty under the provisions of the Income-tax Act, 1961 (the Act) and the Double Taxation Avoidance Agreement (tax treaty).
In detail
Facts
The taxpayer1 was an Indian company engaged in the business of transporting coal within Indian ports by time chartering of vessels from foreign shipping companies (FSC).
The taxpayer availed the services of FSC owning vessels for transportation of coal within Indian ports.
The FSC included two companies from Liberia and one company from France.
The Captain/ Master, crew and other staff of the vessel were controlled by the FSC, and the taxpayer only intimated the FSC
regarding the availability/
destination of cargo. The repair and maintenance of the vessel were done and borne by the FSC. The FSC did not file any return of income in India; however,
1 TS-701-ITAT-2016 (Chennai Tribunal)
the taxpayer deposited presumptive tax on time charter payment under section 172 of the Act, on behalf of the FSC.
The tax officer (TO) considered the payments made by the taxpayer to FSC as payments for “use”
and “hire of the ship” and chargeable to tax as
“royalty” under section 9(1)(vi) of the Act and Article 12 of respective tax treaty.
As the taxpayer had not withheld tax on payments made to FSCs, the TO disallowed the same under section 40(a)(i) of the Act.
On appeal, the
Commissioner of Income- tax (Appeals) confirmed the addition made by the TO.
Issue before the Tribunal Would the non-withholding of tax on time charter payments made by the taxpayer to FSC
2 Poompuhar Shipping Corporation Limited v. ITO [2013] 360 ITR 257 (Madras High Court)
attract disallowance under section 40(a)(i) of the Act?
Revenue’s contention
The Revenue relied on the jurisdictional High Court (HC) decision in the case of Poompuhar Shipping Corporation Limited,2 wherein it was held that the time charter payments made to non-resident shipping company would qualify as royalty, considering the vessel as
‘equipment’.
The Revenue also
contended that the moving vessel had a place of business where the vessel was docked, and
accordingly FSC had a permanent establishment (PE) in India. Further, since the payments were not effectively connected or attributed to such PE, the same were to be taxed as per Article 12 and not under Article 7 of the tax treaty.
Tax Insights
PwC Page 2
As there was an element of continuity of activity of FSC in India, there was a business connection between the FSC and the taxpayer. Therefore, the amount paid by the taxpayer to FSC was chargeable to tax under section 9(1)(vi) and subject to tax withholding under section 195 of the Act.
The provisions of section 172 of the Act applied only to non- residents engaged in
occasional shipping business.
As the FSC was not engaged in occasional shipping, but in the regular shipping business, the provisions of section 172 were not applicable, and the
disallowance should have been made under section 40(a)(i) of the Act in the hands of the taxpayer.
Taxpayer’s contention
The taxpayer relied on the Madras HC decision of Essar Shipping Corporation3, wherein the HC pointed out that a time charter contract was a contract for hire of services, and there was no transfer of effective control of the vessel in such an
arrangement.
The taxpayer further argued that the payment made to FSC was covered under section 172 of the Act, and hence, the provisions of section 195 were not applicable.
The taxpayer placed reliance on the decision of the Tribunal in its own case for earlier years, wherein it had been held that time charter payments to FSC were not royalty, and where the provisions of section 172 applied to the FSC, there was
3 47 VST 209 (Madras High Court) – The ruling of Madras High Court is in context of section 3A of the Tamil Nadu General Sales Tax Act – Levy of tax on right to use any goods.
no requirement to withhold tax under section 195 of the Act.
Tribunal’s ruling
The Tribunal placed reliance on the Delhi HC ruling in the case of Asia Satellite
Telecommunication Co.
Limited4 and held that the taxpayer did not have possession and control of the vessel as
- the Captain/ Master and the crew were instructed, directed and controlled by the FSC, and not by the taxpayer;
- the repair and maintenance of the vessel were all done and borne by the FSC;
- the vessel was insured by the FSC;
- the time charter agreement executed by the taxpayer and FSC clearly mentioned that the taxpayer could utilise the space in the vessel, and not that the taxpayer was authorised to operate or exercise control over the vessel;
- the taxpayer only intimated the whereabouts/
destination of cargo to FSC.
Therefore, the payment made by the taxpayer to FSC could not be considered as “royalty”.
There was a difference
between “letting the asset” and
“use of asset” and the payment made for use of asset could not tantamount to royalty. In the present case, the consideration was not only for use of the vessel, but also for the services of moving the goods by a fully manned vessel.
4 Asia Satellite Telecommunication Co.
Limited v. DCIT [2011] 332 ITR 340 (Delhi High Court)
5 [2012] 16 ITR (Tribunal) 1 (Visakhapatnam) [SB]
Further, the Tribunal distinguished the facts of the case of Poompuhar Shipping Corporation,2 and held that since there was no dedicated berthing facility guaranteed for foreign vessels, as in case of Poompuhar Shipping Corporation2, and the vessel ran in Indian waters only for a short duration, the FSC did not constitute a PE in India.
The Tribunal held that the taxpayer had only booked the freight space in the ship (time charter) and had not taken the vessel on hire, as it was done under what was called as “bare boat charter”. Therefore, the payment made in this case would not constitute “royalty”
paid for the use of industrial, or commercial, or scientific equipment.
The Tribunal thus followed its own ruling in the taxpayer’s case in earlier years, wherein it was held that the provisions of section 172 applied to the FSC.
Therefore, no tax was required to be withheld under section 195 of the Act, as the amount paid did not amount to royalty.
As the tax has been recovered from the FSC once under section 172 of the Act, there could not be any further recovery of the same tax from the taxpayer, and disallowance under section 40(a)(i) was unwarranted.
Without prejudice to this, the Tribunal further relied on the Special Bench decision in Merilyn Shipping’s5 case to hold that since the hire charges were not outstanding at the end of the financial year as it was already paid by the
Tax Insights
PwC Page 3
taxpayer, there could not be any disallowance of the same.
The takeaways
This is a welcome judgment in light of the controversy on taxability of time charter
payments, especially considering the adverse decision of the Madras HC in the case of
Poompuhar Shipping
Corporation2. The Tribunal in the present case has emphasised on the control and possession over the vessel being a determinative factor while examining whether the time charter payments would qualify as “royalty” or not. While the Special Leave Petition in case of Poompuhar Shipping
Corporation2 is pending adjudication before the Apex Court, the Tribunal ruling may be relied upon by taxpayers facing similar disputes.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor.
Tax Insights
For private circulation only
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents.
© 2017 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.
About PwC
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 223,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.
In India, PwC has offices in these cities: Ahmedabad, Bengaluru, Chennai, Delhi NCR (Gurgaon), Hyderabad, Kolkata, Mumbai and Pune. For more information about PwC India's service offerings, visit www.pwc.com/in
PwC refers to the PwC International network and/or one or more of its member firms, each of which is a separate, independent and distinct legal entity. Please see www.pwc.com/structure for further details.
©2017 PwC. All rights reserved
Follow us on:
Our Offices
Ahmedabad Bengaluru Chennai
1701, 17th Floor, Shapath V, Opp. Karnavati Club, S G Highway,
Ahmedabad – 380051 Gujarat
+91-79 3091 7000
6th Floor
Millenia Tower ‘D’
1 & 2, Murphy Road, Ulsoor, Bengaluru – 560 008 Karnataka
+91-80 4079 7000
8th Floor
Prestige Palladium Bayan 129-140 Greams Road Chennai – 600 006 Tamil Nadu
+91 44 4228 5000
Hyderabad Kolkata Mumbai
Plot no. 77/A, 8-2-624/A/1, 4th Floor, Road No. 10, Banjara Hills, Hyderabad – 500034,
Telangana
+91-40 44246000
56 & 57, Block DN.
Ground Floor, A- Wing Sector - V, Salt Lake Kolkata – 700 091, West Bengal
+91-033 2357 9101/
4400 1111
PwC House Plot No. 18A,
Guru Nanak Road(Station Road), Bandra (West), Mumbai – 400 050 Maharashtra
+91-22 6689 1000
Gurgaon Pune For more information
Building No. 10, Tower - C 17th & 18th Floor,
DLF Cyber City, Gurgaon – 122002 Haryana
+91-124 330 6000
7th Floor, Tower A - Wing 1, Business Bay, Airport Road, Yerwada, Pune – 411 006 Maharashtra
+91-20 4100 4444
Contact us at
