Receipts from International Traffic pertaining to Voyage shall not be Chartered as ‘Royalty’: ITAT [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) held that the receipts from international traffic pertaining to voyages should not be chartered as royalty .

The assessee, Tata NYK Shipping Pte Ltd, is a shipping company filed the appeal against the order passed by the Assessing Officer under section 143(3)read with section 144C(13) of the Income Tax Act, 1961.

The assessee challenged that Commissioner of  Income Tax (Appeals) [CIT(A)] has erred in bringing  receipts from operation of ships in international traffic to be in the nature of royalty income.

The revenue taxed the amount received by the assessee as the income from royalty holding that there was no commercial rationale for incorporation of the appellant company in Singapore.

When the issue came before the Commissioner of Income Tax (Appeals) observed that the assessee company was incorporated in Singapore in the year 2007 and continued its business since then. The assessee holds substantial fixed assets in Singapore amounting to Rs.1728 crores, out of which an amount of Rs.1324 crores pertained to vessels.

Additionally, it was noted that the available facts and evidence indicated that the assessee consistently submitted tax returns to the tax authorities in Singapore. The assessee also provided reports to the corporate affairs authorities. Importantly, there were no accusations or allegations made by any authorities in Singapore or the Netherlands against the assessee.

The CIT(A) found that the assessee owns a substantial number of vessels for the transportation of goods from the ports outside India to ports in India and vice versa. The invoices raised by the assessee demonstrated that the assessee charged fee for transportation of goods and not towards leasing of the vessels.

Hence, the CIT(A) concluded that these receipts from the shipping business are in the nature lease rental hence, royalty appeared to be contrary to facts on record.

The tribunal reviewing the facts and decision of the CIT(A) observed that the assessee had three types of shipping income, income from coastal shipping, income from inward freight and income from outward freight.

Insofar as, income from coastal shipping is concerned, the assessee has offered it to tax under section 44B of the Income Tax Act. Whereas, income from inward freight and outward freight was claimed as exempt under Article 8 of the treaty.

The CIT(A) has held the inward freight income as royalty and has directed the Assessing Officer to tax such income amounting to Rs .903 ,54,20,929/- by applying the rate of 10% on gross basis.

It was also observed by conjoint reading of the show cause notice as well as order passed under section 263 of the Income Tax Act coupled with the fact that ultimately CIT(A)  has restricted his directions only to inward freight income.

Thereby , accepting assessee’s claim under section 44B Income Tax Act in respect of income from coastal  shipping and claim of exemption under Article 8 of the treaty in  respect of income from outward freight amounting toRs.56 ,13 ,86 ,432/- , revealed the mechanical approach of CIT in invoking jurisdiction under section 263 of the Income Tax Act.

It was assumed that CIT(A) himself was not sure about the nature and character of shipping income earned by the assessee.

After considering the facts, the two-member bench comprising Dr. B. R. R. Kumar (Accountant Member) Yogesh Kumar Us (Judicial Member) held that revenue erred in treating the receipts from international traffic pertaining to voyage chartered as ‘Royalty’ .

Ajay Vohra appeared for the assessee and Anshuman Pattnaik for the revenue.

To Read the full text of the Order CLICK HERE

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