Charter Hire Charges Disputed as Royalty Instead of Presumptive Income: ITAT Restores Matter to DRP for Fresh Directions [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) restored the matter to the Dispute Resolution Panel (DRP) for fresh directions in a case where charter hire charges were treated as royalty instead of presumptive income under section 44BB of Income Tax Act,1961.

Celestial Vision Limited,appellant-assessee, was a non-resident company incorporated and tax resident in the British Virgin Islands (BVI) for the relevant year. It filed its income tax return on 31.12.2022, declaring income of Rs. 89,64,307/- under section 44BB.

During scrutiny, the Assessing Officer(AO), in the draft assessment order, proposed to treat receipts of Rs. 8,96,43,062/- from granting the right to use commercial equipment to Afcons as royalty income. The AO held that these receipts fell under clause (iv a) of Explanation 2 to section 9(1)(vi) read with sub-clause (vi) and were taxable under section 115A read with section 91, as there was no Double Taxation Avoidance Agreement ( DTAA ) between India and BVI.

The assessee raised objections before the DRP, arguing that the Charter Hire Charges were wrongly classified as "Royalty Income" instead of being taxed on a presumptive basis under section 44BB. It contended that the AO had ignored the special deeming provisions of section 44BB, misinterpreted the Charter Party Agreement, overlooked Circular No. 7/2003, and did not follow binding judicial precedents.

The DRP upheld the AO’s view, observing that the income was taxable in India under section 9(1) and the DTAA as royalties/FTS. It noted that the AO had established a nexus with Indian operations, performed a proper functional analysis, and followed principles of natural justice by providing sufficient opportunity to the assessee.

The DRP also found the reassessment valid under sections 147, 148, and 148A, as the AO had tangible material and obtained the required approvals.

Consequently, the AO completed the assessment under sections 143(3) read with 144C(13) on 09.01.2025, determining total income of Rs. 8,96,43,062/- as royalty, taxable at 10%, against which the assessee filed an appeal before the tribunal.

The assessee counsel argued that the AO and DRP had addressed issues not raised by the assessee and showed a clear non-application of mind. He submitted that the AO and DRP did not consider the legal grounds raised by the assessee and failed to adjudicate the specific points made.

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The two member bench comprising Benna Pillai (Judicial Member) and Renu Jauhri (Accountant Member) noted that the DRP’s order was unclear and had confused the facts of the case. While the AO had observed that there was no DTAA with BVI, the DRP discussed DTAA applicability and also referred to reassessment under section 147, even though the case was a normal assessment under section 143(3).

The tribunal found that the core issues raised by the assessee were not properly examined, and the directions on merits were unclear.

In the interest of justice, the tribunal restored the matter to the DRP, directing it to examine all issues raised by the assessee and issue fresh directions to the AO through a speaking order, after giving the assessee an opportunity to be heard.

Accordingly, the appeal was allowed for statistical purposes.

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