The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted the disallowance of ocean freight charges paid to Korean-associated enterprises (AE)since the amount can be taxable only in contracting states.
Doosan Power Systems India, the assessee is arising out of the assessment order framed by the DCIT, Corporate Circle 1(1), Chennai u/s.143(3) r.w.s. 144C of the Income Tax Act, 1961 (‘Act’), vide order dated 30.05.2017 and rectification order .154 of the Act dated 17.01.2020 passed by the JCIT, Corporate Circle 1(1), Chennai as per the direction of the Dispute Resolution Panel, Bengaluru dated 04.04.2017 for the assessment year 2013-14.
The assessee company is engaged in the business of designing, building, installing and maintaining engineering plants with a specialization in thermal and coal power plants. The assessee company renders engineering services to its associated enterprises Doosan Heavy Industries & Construction Co. Ltd.
During the year the assessee has availed ocean freight services from its AE Doosan Corporation, Korea for which Rs. 5,13,63,114/- has been paid without deduction of tax. The assessee filed detailed submission arguing that the payment is not liable for TDS in India.
The basic premise of the submission is that ‘Ocean freight charges would not fall within the scope of fees for technical services under section 9(1)(vi) of the Act and under article 13 of the India-Korea DTAA. Since the same would be like the business of profits under Article 7 ‘of the DTAA. Since Doosan Corporation does not have business activity in India, the same would not be taxable in India.’
As per the mandate of the section, tax is to be deducted at the source concerning the income element embedded in the payments. However, a non-resident company including a foreign company may obtain from the assessing officer a certificate authorizing him to receive payment without deduction of tax at source The expression ‘any other sum’ occurring in section 195(1) does not necessarily refer to sums which represent wholly income or profit.
The assessee argued that ocean freight charges would not fall within the scope of fee for technical services or royalty u/s.9(1)(vii) of the Act or under Article 13 of the India Korea DTAA. The DRP finally considered the payment of ocean freight charges as royalty as defined in Explanation 2 to section 9(1)(vi) of the Act.
The DRP also considered the amendment carried out by the Finance Act, 2001 w.e.f. 01.04.2002 by inserting clause 4(a) to section 9(1)(vi) of the Act i.e., royalty means consideration for the use of or right to use any industrial, commercial or scientific equipment, but not including the amount referred to in section 44BB of the Act.
The bench of Mahavir Singh (Vice President) and Manoj Kumar Aggarwal (Accountant Member) has observed that “the assessee’s case is covered by Article 8 of DTAA of India-Korea and therefore the rentals of the ship are like profit from the operation of ship or aircraft in international traffic carried on by an enterprise of a contracting state. The amount can be taxable only in the contracting state and not taxable in India. Hence, the assessee is not liable to deduct TDS and therefore, no disallowance by invoking the provisions of section 40(a)(i) of the Act.”
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