ORDER
O.K. Narayanan, A.M.
1. This is an appeal filed by the assessee. The appeal relates to the asst. yr. 2000-01. The assessee had chartered a foreign oil tanker in the previous year relevant to the assessment year under appeal for transporting petroleum products from port of Chennai in the east coast of India to port Hazira in the west coast of India. The assessee-company had remitted freight to the foreign oil tanker without withholding tax under Section 195 of the IT Act, 1961. The AO treated the assessee-company as an assessee-in-default and demanded a tax amount of Rs. 4,54,850 to cover the non-deduction. He also levied interest of Rs. 27,290 towards the delay period. The demand for tax deductible at source and interest due thereon has been made through the order passed under Sections 201(1) and 201(1A) of the IT Act, 1961. The order has been passed on 31st May, 2000, which has been upheld by the CIT(A)-XXXI at Mumbai through his order passed on 3rd April, 2002. The assessee is aggrieved and, therefore, the second appeal before us.
2. The only dispute raised in this appeal is whether the assessee-company was bound to withhold tax on the freight amount paid to foreign oil tanker or not ? The question is whether the assessee-company has violated the provisions of Section 195 or not ?
3. The question whether the assessee-company has violated the provisions of Section 195 or not, could be decided only on the basis of a finding as to whether the freight amount paid by the assessee-company to the foreign oil tanker was in the nature of “any other sum chargeable under the provisions of this Act (not being income chargeable under the head ‘Salaries’)” as provided in Section 195 of the IT Act, 1961. For that matter, any enquiry as into the application of Section 195 is in fact an enquiry as into whether payment of any interest or any other sum made to a non-resident or to a foreign company is chargeable under the provisions of the IT Act or not.
4. It is necessary, therefore, to briefly state the facts of the present case:
(i) The assessee-company had taken a tanker on voyage charter basis from Heidenreich Marine (Far East) (P) Ltd., Singapore (M/s HMPL, for short) for transportation of petroleum products from the port of Chennai to the port of Hazira, both in India. The voyage was chartered for a lump sum freight of USD 280,000 and if applicable demurrage @ USD 13,500 per day. The tanker ship anchored at Chennai port on 4th Jan., 2000 on its way from Singapore to Arabian Gulf. After discharge of the chartered voyage, the tanker ship left Hazira port at Surat, Gujarat on its way to Arabian Gulf on 13th Jan., 2000.
(ii) The assessee-company had sought the permission of the AO to remit the USD 280,000 to M/s HMPL, without deducting tax. Permission was sought on the ground that the payment due to M/s HMPL was not taxable in India in the light of the agreement entered into between India and Singapore for Avoidance of Double Taxation and Prevention of Fiscal Evasion (Singapore DTAA) for short).
(iii) The assessing authority on receipt of the application, sent a letter to the assessing authority on 4th Feb., 2000 intimating that the payment proposed by the assessee-company would not be covered by the Singapore DTAA and the assessee-company was liable to deduct the prescribed tax. As no reply was forthcoming from the assessee-company, the AO repeated in letter on 17th April, 2000, wherein he had proposed to pass the order under Section 195(2) in the light of the details available on record.
(iv) The assessee-company replied to the above letter reiterating its earlier stand that the payment would not be taxable in India in view of Articles 7 and 8 of the Singapore DTAA and, therefore, there was no liability to deduct the tax. There were further correspondence between the assessee-company and the assessing authority explaining further the respective stand adopted by them on the issue of deducting tax under Section 195. Meanwhile, the assessee-company informed the AO that as the payment was to be made without any delay as the tank ship was on move, the payment of freight of USD 280,000 had already been paid without any deduction of tax.
(v) It is in this ground, that the AO has passed the order under Sections 201(1) and 201(1A).
5. It is useful to reproduce the relevant articles of Singapore DTAA and the relevant provisions of the IT Act, 1961 relied on by the assessee-company and the assessing authority to strengthen their respective contentions and finding.
6. Following are the relevant articles extracted from Singapore DTAA:
Articles 1 to 2….
Article 3 : General definitions–I. In this agreement, unless the context otherwise requires:
(a) the term ‘India’ means the territory of India and includes the territorial sea and airspace above it, as well as any other maritime zone in which India has sovereign rights, other rights and jurisdictions, according to the Indian law and in accordance with international law ;
(b)to(g)….
(h) the term ‘international traffic’ means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State;
Article 5 : Permanent establishment–1. For the purposes of this agreement, the term ‘permanent establishment’ means a fixed place of business through which the business of the enterprise is wholly or partly carried on.
2. The term ‘permanent establishment’ includes especially:
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;
(g) a warehouse in relation to a person providing storage facilities for others;
(h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on;
(i) premises used as a sales outlet or for soliciting and receiving order;
(j) an installation or structure used for the exploration or exploitation of natural resources but only if so used for a period of more than 120 days in any fiscal year.
3. A building site or construction, installation or assembly project constitutes a PE only if it continues for a period of more than 183 days in any fiscal year.
4. An enterprise shall be deemed to have a PE in a Contracting State and to carry on business through that PE if it carries on supervisory activities in that Contracting State for a period of more than 183 days in any fiscal year in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State.
5. Notwithstanding the provisions of paras 3 and 4, an enterprise shall be deemed to have a PE in a Contracting State and to carry on business through that PE if it provides services or facilities in that Contracting State for a period of more than 18 days in any fiscal year in connection with the exploration, exploitation or extraction of mineral oils in that Contracting State.
6. An enterprise shall be deemed to have a PE in a Contracting State if it furnishes services, other than services referred to in paras 4 and 5 of this article and technical services as defined in Article 12, within a Contracting State through employees or other personnel, but only if:
(a) the use of facilities solely for the purpose of storage, display or occasional delivery of goods or merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;
(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise.
However, the provisions of sub-paras (a) to (e) shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State through which the business of the enterprise is wholly or partly carried on.
8. Notwithstanding the provisions of paras 1 and 2, where a person–other than an agent of an independent status to whom para 9 applies–is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have a PE in the first-mentioned State, if–
(a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise;
(b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or
(c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise.
9. An enterprise of a Contracting State shall not be deemed to have a PE in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise itself or on behalf of that enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph.
10. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a PE or otherwise) shall not of itself constitute either company a PE of the other.
Article 7 : Business profits–1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a PE situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that PE.
2. Subject to the provisions of para 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a PE situated therein, there shall in each Contracting State be attributed to that PE the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. In any case where the correct amount of profits attributable to a PE is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the PE may be estimated on a reasonable basis.
3. In the determination of the profits of a PE, there shall be allowed as deduction, expenses which are incurred for the purposes of the business of the PE including executive and general administrative expenses so incurred, whether in the State in which the PE is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State.
4. Insofar as it has been customary in the Contracting State to determine the profits to be attributed to a PE on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in para 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this article.
5. No profits shall be attributed to a PE by reason of the mere purchase by that PE of goods or merchandise for the enterprise.
6. For the purposes of the preceding paragraphs, the profits to be attributed to the PE shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
7. Where profits include items of income which are dealt with separately in other articles of this agreement, then the provisions of those articles shall not be affected by the provisions of this article.
8. For the purpose of para 1, the term ‘directly or indirectly attributable to the PE’ includes profits arising from transactions in which the PE has been involved and such profits shall be regarded as attributable to the PE to the extent appropriate to the part played by the PE in those transactions, even if those transactions are made or placed directly with the overseas head office of the enterprise rather than with the PE.
Article 8 : Shipping and ail transport–1. 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.
2. The provisions of para 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency engaged in the operation of ships or aircraft.
3. Interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 shall not apply in relation to such interest.
4. For the purposes of this article, profits from the operation of ships or aircraft in international traffic shall mean profits derived from the transportation by sea or air of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of the ships or aircraft, including profits from:
(a) the sale of tickets for such transportation on behalf of other enterprises;
(b) the incidental lease of ships or aircraft used in such transportation;
(c) the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) in connection with such transportation; and
(d) any other activity directly connected with such transportation.
Articles 9 to 22….
Article 23 : Income not expressly mentioned.–Items of income which are not expressly mentioned in the foregoing articles of this agreement may be taxed in accordance with the taxation laws of the respective Contracting States.
7. The relevant provisions of the IT Act, 1961 are as follows:
9. Income deemed to accrue or arise in India.–{1) The following incomes shall be deemed to accrue or arise in India–
(1) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.
44B. Special provision for computing profits and gains of shipping business in the case of non-residents.–(1) Notwithstanding anything to the contrary contained in Sections 28 to 43A, in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts specified in Sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head ‘Profits and gains of business or profession’.
(2) The amounts referred to in Sub-section (1) shall be the following, namely:
(i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and
(ii) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India.
Explanation.–For the purposes of this Sub-section, the amount referred to in Clause (i) or Clause (ii) shall include the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature.
195. Other sums.–(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not, being income chargeable under the head ‘Salaries’) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:
201 Consequences of failure to deduct or pay.–(1) If any such person (referred to in Section 200) and in the cases referred to in Section 194, the principal officer and the company of which he is the principal officer does not deduct (the whole or any part of the tax) or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax:
Provided that no penalty shall be charged under Section 221 from such person, principal officer or company unless the AO is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax.
(1A) Without prejudice to the provisions of Sub-section (1), if any such person, principal officer or company as is referred to in that Sub-section does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid.
8. As we have surveyed the preliminaries of the case, we may now proceed to examine the contentions raised by the assessee-company before the assessing authority to claim exemption from Section 195. They are as follows:
(i) That M/s HMPL is a Singapore resident company and, therefore, a nonresident in India.
(ii) That the taxability of any income in the hands of M/s HMPL not to be ascertained in the light of the Singapore DTAA.
(iii) That Article 8 of Singapore DTAA provides that the profits derived by a Singapore enterprise from the operations of ships in ‘international traffic’ shall be taxable only in Singapore. The tanker ship was chartered for the voyage between Chennai and Hazira in India on its ‘international traffic’ from Singapore to Arabian Gulf.
(iv) That the income attributable in the hands of M/s HMPL is in the nature of business income and, therefore, is to be normally governed by Article 7 of Singapore DTAA. That Article 8 of the Singapore DTAA has specifically provided an independent treatment for shipping business and that is why it is necessary to decide the issue under Article 8, rather than under article.
(v) That alternatively, the payment of freight is governed by Article 7 of the Singapore DTAA. As per the said article, the profits shall be taxable in India only if M/s HMPL had a ‘permanent establishment’ (PE) situate in India. That the tanker ship was in Indian waters for a period of 10 days only and, therefore, no ‘permanent establishment’ could be inferred, as the period of stay was less than 180 days. Therefore, the payment is not chargeable to tax in India under Article 7.
(vi) That, therefore, either under general law provided under Article 7 or under the special law provided under Article 8, the freight of USD 280,000 remitted by the assessee-company to M/s HMPL would not be taxable in India and so the assessee-company had no obligation to withhold tax under Section 195 of IT Act, 1961.
9. On the other hand, the grounds on which the assessing authority has arrived at the findings are the following:
(i) That the tanker ship transported petroleum products from the port of Chennai to port of
(ii) That, therefore, the protection available under Article 8 of the Singapore DTAA could not be extended to M/s HMPL.
(iii) That the Sub-section of PE as provided in Article 5 of the Singapore DTAA and of ‘business income’ provided under Article 7 do not govern the taxation of profits derived from shipping business.
(iv) That the governing rule is an operative rule which gives exclusive rights to the resident country under the OECD model of treaties. That the profits derived from ‘international traffic’ are subject to Singapore DTAA and not the profits derived from coastal traffic. That the income derived from coastal traffic is taxable in the country of operation.
(v) That the concept of PE applies only to building site, construction, installation, assembly, project and the like as provided under Article 5 and does not apply to ship.
(vi) That Articles 5 and 7 are not applicable to ‘Income from shipping business’.
(vii) That without offending the above, the ship itself could be considered as a PE.
(viii) That the income from coastal traffic is not governed either by Article 7 or Article 8 of Singapore DTAA and, therefore, the residual Article 23 applies whereby income is to be taxed in accordance with the taxation laws of the operating country.
(ix) That, therefore, Section 44B of the IT Act, 1961 applies to the income earned by M/s HMPL. That Section 44B provides for computing profits and gains of shipping business in the case of non-residents.
(x) That in view of the above, the income of M/s HMPL was taxable in India and that the assessee-company has failed to deduct the tax as required by Section 195 and, therefore, has to be treated as an assessee-in-default and the tax amount has to be recovered from the assessee-company under Section 201(1) along with interest due thereon under Section 20K1A) of the IT Act, 1961.
10. In first appeal, the CIT(A) also held that the voyage of the ship from the port of Chennai to the port of Hazira was not in ‘international traffic’ and Article 8 of the Singapore DTAA would not apply in assessee’s case. Regarding Article 7, the CIT(A) held that Clause 7 of article provides that the items dealt in by other articles would not be affected by Article 7 and, therefore, when Article 8 was applicable for shipping business, Article 7 would not apply. He held, therefore, that Article 23 applies in assessee’s case and that the AO has rightly invoked the provisions of Section 44B in assessee’s case.
11. The grounds raised by the assessee-company in the second appeal read as follows:
1. The CIT(A) has erred on facts and in law in holding that the payment made by the company, Essar Oil Ltd. to M/s HMPL, Singapore is liable to be charged to tax in India.
2. The CIT(A) has erred on facts and in law in holding that the amount paid to M/s HMPL, Singapore by Essar Oil Ltd. was assessable to tax in terms of Article 23, being the income not expressly mentioned in earlier article.
3. The CIT(A) has erred on facts and in law in holding that the receipt by M/s HMPL, is neither in the nature of business receipt to which Article 7 of India-Singapore DTAA applied nor in the nature of shipping income to which Article 8 of said treaty applied.
4. The CIT(A) has erred on facts and in law in holding that provision of Section 44B applies even after holding that income is not in the nature of business income. Otherwise also Section 44B is applicable to payments received by non-residents for carriage of freight, whereas appellant had paid the money as charter hire charges, to which provision of Section 44B is not applicable.
5. The CIT(A) has erred in not deciding the primary issue that order under Section 201 cannot be passed by AO when an application is pending with AO under Section 195 for adjudication.
12. Shri Vijay Mehta, the learned chartered accountant appearing for the assessee-company, argued at length on the following lines:
(i) ‘International traffic’ is defined in Article 3(h) of the Singapore DTAA. It means any transport by a ship operated by a non-resident enterprise. The only exception provided is in a case where the ship is operated on ‘solely’ between places in India.
(ii) M/s HMPL is a resident Singapore enterprise. The ship was sailing to Arabian Gulf. It was on its way to Arabian Gulf that the charter of the assessee-company was signed to transport petroleum products from Chennai to Hazira. The ship was not operated solely between places in India. The ship was operated in ‘international traffic’ between Singapore and Arabian Gulf. The ship entered into Indian waters just for 10 days in the course of ‘international traffic. Therefore, the exception provided in Article 3(h) to the ‘international traffic’, does not apply to assessee’s case. The ship was operating very much in ‘international traffic’.
(iii) As the ship was operating in ‘international traffic’, Article 8 of Singapore DTAA governed the income earned by M/s HMPL.
(iv) Without prejudice to the applicability of Article 8, the provisions of Article 7 are equally and still applicable in assessee’s case. Even after the transport was not expected to be in the ‘international traffic’ as held by the assessing authority, the transport was in coastal traffic. The Singapore enterprise is engaged in the business of shipping. The income attributable to the Singapore enterprise out of the impugned transport of petroleum products from Chennai to Hazira was nothing but business profits out of shipping operations. The tax treatment of business profits is governed by Article 7 of Singapore DTAA.
(v) Therefore, the shipping profit earned out of coastal traffic could be taxable or would be taxable only if M/s HMPL had a PE in India. Article 5 of DTAA covers concerns with PE. It means fixed place of business which it did not have in India. M/s HMPL did not have any PE in India either in the specific manner illustrated in Clause 2 or in the manners illustrated in Clauses 3 to 10 of Article 5.
(vi) The Tribunal, Mumbai Bench ‘E’ in the case of Dy. CIT v. Subsea Offshore Ltd. (1998) 61 TTJ (Mumbai) 339 : (1998) 66 ITD 296 (Mumbai) has held that a foreign vessel which was in Indian waters only for 2-1/2 months could not be said to be a PE. The facts considered by the Tribunal in the above case are similar to the facts of the present case. Therefore, in the light of the above-mentioned Tribunal decision, the assessing authority is not justified in passing an observation that the ship itself was a PE.
(vii) The finding of the assessing authority that Clause 7 of Article 7 precludes the case of the assessee from the scope of Article 7 for the reason that shipping profit has been specifically dealt in by Article 8 is not a proper finding in law. Article 7 deals with ‘business income’ derived from any business. Article 8 is in the nature of a proviso to Article 7 whereby a special exception is carved out for the profit derived from shipping in ‘international traffic’. Article 8 applies only to ‘international traffic’. It does not apply to the shipping profit out of transportation in coastal traffic. The scope of Article 8 is confined to the limited area of international traffic. The said article does not affect the generality of Article 7 in respect of business profit.
(viii) Therefore, the AO is not justified in holding that Article 8 is not applicable in this case and, therefore, the assessee’s case straight away fell under Article 23, by virtue of operation of Clause 7 of Article 7. Article 23 is meant for income ‘not expressly mentioned’. The income of M/s HMPL was out of shipping transport in coastal traffic. It was a business income. Therefore, it comes under Article 7. It will not come under the residuary Article 23. Business income is covered by Article 7 and, therefore, Article 23 had no relevance in the present case.
13. Shri Mehta further contended that the relevant income disputed in this appeal is the amount received as a lump sum by the non-resident shipping company for operation of its ship between two places, both in India. But, it does not cease to be a ship in ‘international traffic’ because of the crucial word ‘solely’ used in the definition of the term ‘international traffic’. Only where the ship is operated ‘solely’ between places in the other Contracting State it looses the character of ship in ‘international traffic’. This is patent from the language of the definition of ‘international traffic’.
14. Shri Mehta relied on the Commentary brought out by Philip Baker in “Double Taxation Convention and International Tax Law” in para 8.03 as under:
International traffic–International traffic is defined in Article 3(1)(d) to cover all transport except where the ship or aircraft is operated solely between places in the other Contracting State.
The Commentary to Article 3 ends with this definition is broader than the term normally signifies and only permits States other than the State where effective management is situated to tax the profits if the operations are confined solely to places in that State. ‘Solely’ implies that the entire voyage must begin, end and take place within the State before that State may impose any tax.
15. The learned chartered accountant further stated that where the operations of the ship are confined to voyages within the State, the ship cannot be one in ‘international traffic’. He relied on similar understanding found in the work of Klaus Voguel on ‘Double Taxation Conventions’ at para 34 which is as under:
The term ‘international traffic’ is defined in Article 3(1)(d) of the MCs as follows:
Unless the context otherwise requires, the term ‘international traffic’ means any transport by a ship or aircraft operated by an enterprise which has its place of effective management in a Contracting State, except when the ship or aircraft is operated ‘solely’ between places in the other Contracting State. It is sufficient for the operation of ships or aircrafts to be of a cross-border nature while transportation as such may even be restricted to the movement of goods or passengers between points within the State of the place of management or within a third State. If, for instance, auxilliary activities such as the sale of passage tickets, are performed by an agency within the other Contracting State and if such tickets are valid only for travelling between points within the State of effective management or within a third State, this would nevertheless involve ‘international traffic’, and taxation of the profits made on the sale of the tickets would be governed by Article 8.
It has further proceeded to observe as under:
In particular, it is not necessary for a border to be crossed after every take off or sailing. Even if placed within one stoppage of point one after the other, such transportation continues to fall within the scope of operating ships or aircraft in ‘international traffic’ unless the ship or aircraft had to remain in that State for good’.
16. Shri Mehta further argued that even assuming that the ship was not in international traffic and that Article 8 would have no application, the provisions of Article 7 should apply to the assessee’s case. Again relying on the Commentary by Klaus Voguel as extracted below, the learned chartered accountant submitted that Article 8 nowhere interrupts the applicability of Article 7 to the profit earned out of shipping business:
Being a special provision, article takes precedence over Article 7 which applies to all other business income. However, Article 8’s priority exists only where profits from the operation of ships or aircraft in ‘international traffic’ or from the operation of boats engaged in inland waterways transport are transported. Income derived from the operation of ships or aircraft other than any international traffic comes under Article 7 if it constitutes business profits. Article 8 furthermore applies only when the enterprise’s place of effective management is situated in a Contracting State. Whenever, it is stated in a third State, the relationship between the two Contracting States is covered by the PE principle laid down in Article 7.
17. Shri Mehta also relied on the text of Mr. D.P. Mittal on Double Taxation Agreements (4th Edn.) to bring here the point that even if not covered under Article 8, the income would be treated as business profits under Article 7 and would be taxable if attributable to PE. Shri Mittal has further stated in his text that profits obtained by leasing a ship or aircraft on charter basis is a business profit under Article 7.
18. Shri Mehta further stated that the residual Article 23 is not meant for any sort of business income. As stated at p. 1072 of the Commentary of Klaus Voguel, the residuary provision remains very narrow and applies the following topics of income:
(i) Social insurance;
(ii) Annuity arising out of previous contributions;
(iii) Maintenance payment to relatives;
(iv) Accident benefit payments;
(v) Income from so-called derivatives;
(vi) Lottery winnings; and
(vii) Income from gambling.
Klaus Voguel has specifically stated on p. 1073 that Article 23 does not apply to income from business.
19. The learned chartered accountant, therefore, submitted that the profit attributable to the transportation carried out by M/s HMPL is not chargeable to tax in India as the same is governed by Article 8 of Singapore DTAA and at the same time also enjoys the benefit of the provisions of Article 7 in the nature of business profit for the reason that it had no PE in India. Therefore, the lower authorities have grossly erred in relying on Article 23 which is totally irrelevant to the assessee’s case and in roping the assessee by the provisions of Section 44B of the IT Act, 1961.
20. Without prejudice to the above arguments, the learned chartered accountant further argued on the quantum of liabilities determined by the assessing authority by grossing up of the income under Section 195A. He submitted that in view of the decision in the case of CIT v. ONGC , AO is not justified in grossing up.
21. He further submitted that the application put in by the assessee-company seeking permission of remittance of money to M/s HMPL was never disposed of by the AO and, therefore, in such circumstances passing of orders under Sections 201(1) and 201(1A) is not proper as held by Tribunal, Hyderabad Bench ‘B’ in the case of Niraj Petrochemicals Ltd. v. ITO (2000) 68 TTJ (Hyd)(TM) 152 : (2000) 73 ITD 1 (Hyd)(TM).
22. He, therefore, submitted that the freight charges paid to M/s HMPL may be held as not liable for tax in India and, accordingly, the impugned orders of the lower authorities may be set aside.
23. Shri Manoj Kumar, the learned Departmental Representative appearing for the Revenue, has relied on the detailed orders passed by the lower authorities. The learned Departmental Representative submitted that the taxability of a sum paid by an assessee to a non-resident would be ultimately examined only at the time of regular assessment and, therefore, it was the bounded duty of the assessee-company to deduct tax at source while making the payment to M/s HMPL. He relied on the decision of Tribunal, Mumbai Bench ‘D’ in Dy. CIT v. Arthur Anderson & Co. [ITA No. 9125/Mum/1995, dt. 29th July, 2003] wherein the Tribunal has held that Section 195 of the Act speaks about tentative deduction of income-tax subjected to regular assessment and just because the tax is deducted at source, the rights of the parties are in no manner affected and, therefore, the assessee-company should have deducted tax at the time of payment of the same. Shri Manoj Kumar further invited our attention to the provisions contained in Section 9 of the IT Act wherein income is considered as agreed or received or deemed to accrue or receive in India. He submitted that the freight was earned by M/s HMPL for rendering services in the Indian waters and the goods was transported between Indian ports. Therefore, it is obvious that the income earned by M/s HMPL was earned out of business connection with India. M/s HMPL is a non-resident and engaged in shipping business. Therefore, in such circumstances, Section 44B of the IT Act directly applies to M/s HMPL and the income has to be held as taxable in India. Therefore, the assessee-company was bound to deduct tax before remitting the amount.
24. Shri Manoj Kumar further contended that the articles relied on by the assessee-company in the Singapore DTAA are not applicable to the present case. As the transportation of goods was undertaken between two Indian ports, the case does not fall under Article 8. Once the assessee’s case is out of Article 8, the assessee is straight away covered by the specific provision provided in Section 44B of the IT Act. Where Section 44B is specifically available to a non-resident shipping business, there is no justification in relying on a general Clause 7 in Singapore DTAA. He, therefore, submitted that the AO as well as the CIT(A) have rightly held that the income earned by M/s HMPL was assessable in India and, therefore, the assessee-company was liable to deduct the tax at the time of remittance of the freight amount.
25. We heard both sides in detail and considered the matter involved in this appeal. It is to be stated that there are no disputes regarding the facts of the case relating to the issue involved herein. The foreign ship was on its way from Singapore to Arabian Gulf. The said voyage was through international waters. It was in the course of that international traffic that the ship had come to the port of Chennai and loaded the petroleum products and sailed to the port of Hazira and unloaded the goods there. Thereafter again the ship continued its sailing to Arabian Gulf. The foreign ship has made a deviation from its international voyage to touch the two Indian ports to discharge the charter obligation entered into with the assessee-company and for that matter, the foreign ship was in Indian waters for 10 days.
26. The provisions contained in Section 9 of the IT Act, 1961 deal with the issue of ‘arising or accruing or receiving of income in India’ resulting in the taxation of such income in India. The non-resident ship coming under the purview of Section 9, whereby it earns income taxable in India, is further endorsed by the provisions of Section 44B, a special provision which provides for a presumptive taxation of income. In the case of a non-resident ship, income under Section 44B is worked out on the basis of a fixed percentage of the freight collected from Indian ports. This is the general law.
27. But when a country enters into a DTAA with India, such agreement stands on a special footing by virtue of which the provisions of such DTAA are prevailed over the general provisions contained in the IT Act, 1961 and wherever applicable and wherever necessary, the provisions of the DTAA shall be first applied. The provisions of any DTAA will have precedence over the provisions of law contained in the IT Act, 1961. There is no dispute on this legal position also.
28. As far as the present case is concerned, Singapore and India have entered into a DTAA. Therefore, while dealing with the taxability of income in India, in the hands of non-residents, who are Singapore residents will have to be first examined in the light of the Singapore DTAA. If the case of the non-resident falls under the purview of Singapore DTAA, then the clauses contained in the said DTAA need to be followed in all respects in its true law and spirit. Therefore, in the present case, the first endeavour must be to see whether the transactions and taxability thereon are covered by Singapore DTAA or not.
29. As the taxability of income arising generally from business and more particularly from special cases in business like shipping, airlines, etc., and also other residual income is covered by the Singapore DTAA and, therefore, obviously the Singapore DTAA will be governing the issue of taxability in the hands of HMPL, a non-resident shipping company, who received the freight amount of USD 280,000 from the assessee-company.
30. The first question to be considered is whether Article 8 of the Singapore DTAA would apply in this case or not. Article 8 provides that 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. In the present case, the Contracting State is Singapore and, therefore,, if the ship in the present case is to be treated as sailed through international traffic, the income arising therefrom shall be taxable only in Singapore. The term ‘international traffic’ means any transport by a ship or aircraft operated by an enterprise of Contracting State except when the ship or aircraft is operated solely between places in the other Contracting State. It means any transport by a ship which is operated by a non-resident ship is to be treated as any international traffic except in one situation. The exceptional situation is that the status of ‘international traffic’ will loose if the ship was operated solely between places in the other Contracting State. Here, in the present case, the other Contracting State is India. The Contracting State is Singapore. The ship is operated by Singapore company, which is nonresident. Therefore, by all means, the ship must be held as sailed through international traffic unless it is established that the ship solely operated between places in India, The ship had operated between Chennai and Hazira only once. It was a solitary voyage. Otherwise, the ship was sailing from Singapore to Arabian Gulf. While operating in that international traffic, the ship made a small deviation and transported the petroleum products from Madras port to Hazira port for and on behalf of the assessee-company on the basis of a charter party. The whole case of destination revolves on the expression ‘solely’ if any ship is operated by non-resident, it shall be considered operated in international traffic even after it is operated between two places in India by chance or along with other voyages. The opposite situation arises only when the ship operated exclusively between Indian ports. The crucial expression ‘solely’ is so important that it desires whether a voyage was in international traffic or in coastal traffic. A voyage becomes coastal traffic only if the foreign ship operated solely and exclusively between domestic ports in India. Therefore, in the present case, it is an undisputed fact that the ship never operated between Chennai and Hazira solely and exclusively. It operated only once and that too, by taking a short deviation from international waters on its way from Singapore to Arabian Gulf. Therefore, if the facts of the case are examined in the plain language of Article 8 of Singapore DTAA, it is obvious that the ship of M/s HMPL had operated in international traffic even while the ship was carrying petroleum products from the port of Chennai to the port of Hazira.
31. This position has been exemplified by Philip Baker in. ‘Double Taxation Convention and International Tax Law’ in the following words:
International traffic is to cover all transport except where the ship is operated solely between places in the other Contracting State …. ‘Sole’ implies that the entire voyage must begin, end and take place within the State before that State may impose any tax.
32. Again Klaus Voguel, an authority on the subject has explained in ‘Double Taxation Conventions’ in the following manner:
Unless the context otherwise requires, the term ‘international traffic’ means any transport by a ship or aircraft operated by an enterprise which has its place of effective management in a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State. Auxiliary services such as the sale of passenger tickets are performed by an agency within the other Contracting State and if such tickets are valid only for travelling between points within the State of effective management or within a third State, this would nevertheless involve international traffic and taxation of the profits made on the sale of tickets would be governed by Article 8.
Klaus Voguel has further held that “in particular, it is unnecessary for a border to be crossed after every take off or sailing. Even if placed within one stoppage of point one after the other, such transportation continues to fall within the scope of operating ships or aircraft in international traffic unless the ship or aircraft had to remain in that State for good.
33. Therefore, it is clear from the above that even if a ship in the course of its voyage in international traffic ports between two ports in another country, such operation does not cease the voyage to be in international traffic and does not convert into coastal traffic. It still remained in international traffic. For the purpose of qualifying a voyage as coastal traffic, the voyage must begin and must end within the coastal waters of a particular State. In the present case, the facts are that the ship was proceeding from Singapore to Arabian Gulf and on its way through the international waters, had operated certain tasks to Indian ports and the voyage commenced in Singapore and India in Arabian Gulf and the stay of the ship in Indian waters was for a period of 10 days only and, therefore, in the light of all these facts, it is necessary to hold that the ship was operating in international traffic and, therefore, income, if any, arising out of the present case would be taxable only in Singapore and not in India.
34. There is another aspect on this issue in the light of Article 8 of Singapore DTAA. If the protection of Article 8 of Singapore DTAA is available only to a ship which is operated in international traffic and would not be available if it had even for once or occasionally crossed to coastal waters, then what is the justification of bringing out Article 8 in the Singapore DTAA. As far as a ship, inch by inch, sailing through international traffic and never crossed over to coastal traffic, the question of application of Indian IT Law does not arise at all. Any income earned by a ship sailing exclusively through such international waters never comes under the jurisdiction of Indian law and income earned by the ship in such traffic would never be answerable to Indian taxation. When there is no such connection, why India should enter into an agreement for brining out an article in the matter of taxing an altogether foreign entity earning income from foreign domicile. Is it necessary for India to enter into an agreement with Singapore that India will not tax any income arising to a Singapore ship arising from the operations carried out in Atlantic Ocean ? So, if we rule out the occasional visit of foreign ship into our coastal water, there is no relevance for Article 8 at all. It is a basic principle of statutory construction that no provision is made in an Act or agreement without any purpose. Every clause, every expression and everything therein are relevant and operative. Therefore, Article 8 of Singapore DTAA becomes operative only when there are circumstances where ship sailing through international waters may occasionally crossover to Indian waters for carrying out random business operations. Such crossover to Indian waters does not change the character of international voyage of the ship only for the reason that the ship has operated in random business for an Indian client.
35. The clauses in DTAAs are drafted on the basis of real time business experienced and close study of the attended circumstances and not on the basis of any academic propositions and logical presumptions. In the area of international maritime business, it is necessary for ocean going ships to crossover to the domestic waters of other countries even in the course of their international traffic. It has to provide for such practical necessities that practical articles like 7 and 8 are provided in such DTAAs.
36. Therefore, in the facts and circumstances for the detailed discussions, we had in the above paragraphs, we hold that the case in appeal is covered by Article 8 of Singapore DTAA and profit if any, arising to M/s HMPL on its transaction with assessee-company would not be taxable in India and would be taxable in Singapore. Therefore, the assessee-company was not under an obligation to deduct tax under Section 195 of the IT Act, 1961.
37. Alternatively, if we examine the application of Article 7 of Singapore DTAA, we are unable to agree with the contentions of the Revenue. It is the argument of the Revenue that as income has arisen to M/s HMPL out of business connection in India, the income was arising in India, and, therefore, provisions of Section 44B would apply, is not correct. Sections 9 and 44B apply in the present case, if there was no Singapore DTAA. As a DTAA is already in force, the same should be considered first in preference to IT Act and, therefore, Sections 9 and 44B of the IT Act, 1961 cannot take precedence over the relevant articles of Singapore DTAA.
38. We do not also agree with the argument of the Revenue that income of HMPL is straight away covered by Article 23 of Singapore DTAA. Article 23 of Singapore DTAA deals with income not expressly mentioned elsewhere in the DTAA. It deals with items of income which are not expressly mentioned in the foregoing articles of the said agreement that may be taxed in accordance with the taxation laws of the Contracting States.
39. Klaus Voguel, the authority on the subject, has again held that the application of the residuary provision m Article 23 is very narrow and it is generally applied to such residual receipts or income such as social insurance, annuity arising out of previous contributions, maintenance payments to relatives, accident benefit payments, income from so-called derivatives, lottery winnings and income from gambling, etc., etc. Article 23 does not cover income arising out of business. In the present case, the income earned by M/s HMPL is income earned out of business. Income earned by an assessee out of shipping operations is invariably business income which is recognized by the provisions of Indian IT Act itself. Even according to the assessing authority, if the assessee falls under Article 23 of the Singapore DTAA, the assessee is governed by provisions of Section 44B of the IT Act, 1961. The heading given to Section 44B is–“Special provision for computing profits and gains of shipping business in the case of non-residents”. The Act itself provides that income earned out of shipping business by a non-resident is to be considered as profits and gains and it is for that reason the taxability of such profit has been brought under Section 44B which is brought under Part D of Chapter IV of the IT Act, 1961. Part D deals with computation of income under the head ‘Profits and gains of business or profession’ in Sections 28 to 44DA. The income attributable to operations carried out by M/s HMPL is nothing but germane to the regular business of shipping carried on by it. Therefore, by the basic concept of Indian income taxation itself is that such income is ‘income from business’.
40. Article 7 of Singapore DTAA deals with business profits. It reads that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a PE situated therein. If we again rely on the authorities on the subject, Klaus Voguel has explained that income derived from the operation of ships or aircraft other than in international traffic applies the case under Article 7 if it constitutes business profit. Profits obtained by leasing a ship or aircraft on charter fully equipped, manned and supplied is a business profit under Article 7. It is further held that income from use, maintenance, rental of containers used for transport of goods or…is income from operation of ships and, therefore, business profit.
41. Even if for the sake of argument one holds that the case is not covered by Article 8 of Singapore DTAA, still it does not preclude the assessee to claim the immunity under Article 7. The income attributable to the Singapore shipping company is business profit and de hors Article 8, the case is still coming under Article 7 of the DTAA which deals with the taxability of business profit. Article 8 is a specific provision over and above the general provision of business profits provided in Article 7. If the case of the assessee does not fall under the specific provision of Article 8, still, the assessee could not be deprived of the benefit already available to it under the general provisions of Article 7. Only for the reason that the assessee does not come under Article 8, the assessee could not be placed under a lesser advantage than Article 7. If we take an example what all Indians will get rupees one hundred each and all Maharashtrians will get rupees two hundred each in Bombay, a non-Maharashtrian living in Mumbai, even though could be denied rupees two hundred for the reason of not being a Maharashtrian, would not be denied the basic amount of rupees one hundred otherwise available to an Indian. Non-entitlement for rupees two hundred available to a Maharashtrian does not make every person not entitling even for the basic amount of one hundred rupees as they would otherwise get as Indian. This logic applies to the present case also. Article 8 provides for a specific benefit carved out of the general benefit given in Article 7. Therefore, if the special benefit of Article 8 is not available, let the matter be closed there. One cannot go further and cannot say that the assessee is not even entitled for the benefit of Article 7.
42. Therefore, we hold that the profit attributable to M/s HMPL was in the nature of business income and business income is covered by Article 7 of DTAA even if the assessee is driven out of Article 8.
43. When we found that the assessee is covered by the provisions of Article 7, the next question is whether M/s HMPL, the non-resident company, had any PE in India. Article 5 of Singapore DTAA deals with PE. Clause 1 of Article 5 provides that PE means a fixed place of business. This is straight away ruled out. M/s HMPL had no fixed place of business in India. Clause 2 of Article 5 illustrates certain items as in the nature of PE. The first among them is place of management and that is not applicable to M/s HMPL; the place of management is in Singapore. The second item is a ‘branch’; it had no branch in India. The third is ‘an office; the assessee did not have that also. The fourth one is ‘a factory’; that too was not there. The next one is ‘a workshop’; no doubt it was not there. The next item is ‘a mine, an oil or gas well, etc.’; Revenue has no such case. M/s HMPL had no warehouse or farm or premises used as sales outlet or for soliciting and receiving orders or an installation or structure used for the exploration or exploitation of natural resources. None of the items specified in Article 5 is applicable to the assessee. It was a sailing ship, just crossed over to Indian waters for a period of 10 days. Therefore, according to the stipulations provided in Singapore DTAA, M/s HMPL had no PE in India during the relevant previous year.
44. A similar issue was considered by Tribunal, Mumbai Bench ‘E’ in the case of Dy. CIT v. Subsea Offshore Ltd. (supra). In that case, a non-resident company in UK entered into an agreement with Indian companies to undertake the work of inspection and repairs of submarine pipeline networks, used in connection with oil and gas exploration, extraction and production with the help of a vessel, special Remotely Operated Vehicles (ROV). The assessee received Rs. 266.88 lakhs for its work from Indian companies, 10 per cent of which was received as profit and brought to tax by the AO. On appeal, the CIT(A) agreed with the assessee’s contention that in terms of Article 5 of DTAA with UK dt. 16th April, 1981, it did not have any PE in India and held that the profit in question was not liable to tax in India. On further appeal by the Revenue before the Tribunal, the issue was further examined and the Tribunal held that a ‘PE’ denotes some place of fixed nature with permanency and it does not include in its ambit a moving vessel, which operates near a fixed place and which does not belong to the assessee. In coming to the above finding, the Tribunal had relied on the decision of the Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust where it was held that ‘PE’ connotes a projection of the enterprise itself into the territory of the taxing State in a substantial and enduring form. It was further held in Consolidated Iron Ores Ltd. 28 Tax Cases 127 that there must be continuous or regular business activity. The Delhi Bench of the Tribunal in Boudier Christian v. ITO (1993) 46 ITD 114 (Del) had held that where the parent company had provided only technical service, but did not carry on drilling, it was not a case of PE.
45. Therefore, in the light of the above discussion and judicial pronouncements, it is very clear that a PE means some permanent seat in India to carry on the business activities of a foreign enterprise, with some amount of consistency and endurance. In the present case, M/s HMPL was operating a sailing ship just for 10 days in Indian waters. It is not possible to conceive that the said ship was a PE of M/s HMPL.
46. Therefore, the assessee is not hit by exception provided in Article 7 of Singapore DTAA and, accordingly, any profit attributable to M/s HMPL shall be taxable only in Singapore and not in India. The assessee-company had, therefore, no obligation to deduct any amount of tax under Section 195 out of the sum of USD 280,000 paid to M/s HMPL.
47. In the facts and circumstances of the case, we hold that the case of the assessee is covered by Article 8 as well as Article 7 of Singapore DTAA and it does not come under Article 23 of the said agreement as apprehended by the lower authorities. Therefore, the amount of USD 280,000 paid by the assessee-company to M/s HMPL was not in the nature of a sum chargeable under the provisions of Indian IT Act and, therefore, the assessee-company was not liable to deduct tax as provided under Section 195. Therefore, the order passed by the assessing authority under the provisions of Sections 201(1) and 201(1A) is cancelled.
48. In result, this appeal filed by the assessee is allowed.