Income of Non Residents from Shipping and Aircraft Operation · Income of Non Residents from...

Income of Non Residents from Shipping and Aircraft Operation

- Chamber of Tax Consultants

Workshop on Taxation of Foreign Remittances

January 2017

Contents

Recognised as Tier I firm by

Abbreviations

Taxability under ITA

Taxability under Tax Treaties

International Traffic

Pool Arrangement

Abbreviations


Word Full Form

FAC Foreign Airline Companies

FSC Foreign Shipping Companies

ITA / Act Income Tax Act, 1961

OECD Organisation for Economic Cooperation and Development

POEM Place of Effective Management

UN United Nations

Taxability under ITA

4

Overview

Taxability of

FAC/FSC

under ITA

Income from

shipping

operations

Income from

aircraft

operations

Section 44B Section 172 Section 44BBA

Above sections deal with presumptive taxation

Purpose - provide simple manner of calculation of income

Section 44B and 44BBA are similarly worded

Recognised as Tier I firm by 5

Taxability of Foreign Shipping Companies

Section 44B verses section 172

Section 44B and Section 172 of the ITA deal with shipping income of a non-

resident


Section 44B Section 172

Applies to regular shipping business Applies to occasional shipping activities

Overrides only Section 28 to 43A of the ITA Overrides all other provisions of the ITA

Income deemed at 7.5% of

• Export freight (wherever received)

• Import freight which is received in India

• Freight to include demurrage, handling

charges or any other similar charges

Income deemed at 7.5% of

• Export freight (wherever received)

• Freight to include demurrage, handling

charges or any other similar charges

Return to be filed as per due date specified

under Section 139 of the ITA

Return can be be filed within 30 days of

departure of the ship

Normal procedure and time limit for

assessment and collection of tax applicable

Assessment to be completed within 9 months

from the end of the financial year in which return

is furnished

Effective Rate of Tax – 3 % (surcharge & cess) of the freight collected

6

Taxability of Foreign Airline Companies

Text of Section 44BBA

Section 44BBA is similar to Section 44B

Exception – Section 44BBA provides a lower percentage of deemed income, i.e. 5% vis-a-vis 7.5% provided under Section 44B


Effective Rate of Tax – 2% (surcharge & cess) on carriage collected

7

Section 44B, 172 and 44BBA – Topical Issues

1. Whether the above presumptive provisions would be applicable even in case of losses?

[Royal Jordanian Airlines vs. DDIT (126 ITD 289) (Del) (2008)]

2. Are provisions of section 44BBA applicable to Domestic Air traffic?

[Lloyd Helicopters International Pty limited vs. CIT (249 ITR 162)(AAR) (2001)]

3. Whether income accruing outside India is also taxable under section 44B?

[CIT v. Nippon Yusen Kaisha Ltd (233 ITR 158)(Cal) (1998)]

4. Whether assessment of non resident ship owner under section 172 can be said to be assessment of its total income?

[CIT v. Taiyo Gyogyo Kabushiki Kaisha (244 ITR 177)(Ker) (2000)]

5. Whether disallowance under section 14A/40(a)(i) or (ia) be made over and above 7.5%

[Shreyas Shipping Logistics [TS-427-ITAT-2016(Mum)]]

8Recognised as Tier I firm by


6. Whether dead freight can be treated as payment on account of carriage of goods under section 172?

[CIT v. Pestonji Bhicajee (107 ITR 837)(Guj) (1977)]

7. Does section 172 override section 44B?

[(ITO v CMA CGM Agencies (India) Pvt. Ltd.) (26 taxmann.com 121) (Rajkot ITAT) (2012)]

8. Whether section 90(2) overrides section 172?

[Arabian Express Line Ltd. of United Kingdom v. Union of India (212 ITR 31)(Guj) (1995)]

9. Would income from wet leasing of an aircraft be considered as business of operation of aircrafts?

[Caribjet Inc. vs. DCIT (4 SOT 18) (Mum ITAT) (2005)]



10. Service tax to be considered in gross receipts for computing presumptive income under section 44B of the Act?

[China Shipping Container liners (Hong Kong) Co. Ltd vs. ADIT (38 taxmann.com) (Mum ITAT) (2013)]

[Orient Overseas Container Line Ltd vs. ADIT (35 taxmann.com 342) (Mum ITAT) (2013) ]

11. Multiple assessments- Assessment under section 143 or 172 of the Act

[ITO vs. CMA CGM Agencies (India) (P.) Ltd (2012) (26 taxmann.com 121) (Rajkot ITAT)]

12. Possible to access India-UAE tax treaty, where shareholders of the company are from Switzerland, which grants right to tax shipping income to Switzerland?

[ITO vs. MUR Shipping DMC Co(2015)] (62 taxmann.com) (Rajkot ITAT)]

13. Potential risk of freight forwarders being considered as “Agent” of non-residents as per section 163 of the Act


Taxability under Tax Treaties

11

Overview

Objective of inserting specific article (Article 8 in most of the treaties) on Shipping & Aircraft

Restrict taxing rights to One Contracting State only

o Exception- taxability in both States (albeit with some concessions)

Simplify taxability

Due to source rule of taxation, taxpayer can be liable to tax in various countries – fragmented taxation can be burdensome and hence needs to be mitigated

Mitigate burden of profit attribution for PE constituted in various countries

Overrides Article 7 (Business Profits) – limited override though

No need for detailed rules since taxing rights restricted to one State

Plethora of interpretation issues


Article 8 – Operation in International Traffic


1. Article 8 applies to an enterprise engaged in operation of ships

2. Profits from operation of ships in international traffic taxable in contracting

state in which POEM is situated (or state of residence in certain tax treaties)

Operation of ships

3. Ship could be owned or leased –

4. Critical aspect – Ship should be at the disposal of the enterprise and controlling

and managing the ship is important

5. Operation of Ships not defined in some Tax Treaties – France, Germany, Japan,

Korea

6. Expressions not defined in some Tax Treaty - meaning to be ascertained as per

domestic laws [Article 3(2)]

DDIT vs. Balaji Shipping (UK) Ltd. (25 SOT 325) (Mum ITAT) (2008)

JDIT vs. CMA CGM SA France (27 SOT 367) (Mum) (2008)

Operation of ships

1. Under the ITA - Sec115VB - Operation of ships shall mean operating any ship (owned or chartered) and includes arrangement such as slot charter (subject to certain exceptions)

However, the definition is for only the specified Chapter and thus cannot be considered overall - Bombay HC in case of DDITvs. Balaji Shipping (UK) Ltd (315 ITR 62) (Bom) (2012)

2. Operation of ships to include:

Actual operation

Activities directly connected with operations

Activities incidental or ancillary to operations


Operation of ships – OECD Commentary

1. What is covered by “operation of ships”

Transportation of passengers or cargo by ships or aircraft operated in international traffic

2. Activities directly connected with Operation

Transportation of passengers or cargo on ships operated by other enterprises under code-sharing, slot-chartering arrangements or to take advantage of earlier sailing

Inland haulage charges

Lease of containers (in certain cases) connected to shipping business

3. Activities ancillary or incidental

Make minor contribution relative to operation of ships and which cannot be regarded as separate business or source of income


Operation of aircrafts/ships

Food for thought

1. Tramp Shipping – ‘more than casual’ or ‘occasional shipping business’?

India- Netherlands Tax treaty provides taxation right to India where the shipping activities in India is more than casual.[James Mackintosh & Co (P) Ltd vs. ACIT ( 92 TTJ 388) (Mum ITAT) (2005)]

2. Income from software developed & maintained solely for the purpose of shipping operations - taxable as Royalty or Fees for Technical Services or Shipping profits?

[DDIT v. A. P. Moller (33 taxmann.com 44) (Mum ITAT) (2013)]

3. Income from security and scanning services provided to other airlines – can this be considered as derived from operation of aircrafts?

[ADIT vs. Delta Airlines Inc. (124 ITD 114) (MUM ITAT) (2010)]


Ancillary/Incidental activities


Food for thought

Operation of shuttle service from airport to city

Transportation of goods by truck connecting a depot with the port / airport

Is the depot exclusively for goods in transit?

In transit hotel

Interest income for accounts which briefly hold freight collections

OECD view

Protocol to India-Spain tax treaty, Belgium, China

Treasury function covered?

Interest receivable on refund of income – tax

[Hapag-Lloyd Container Line GMBH vs. ADIT (ITA No. 6214/M/07)(Mum)]

Restaurants, snack shops, etc operated on ships

Operated by shipping enterprise v/s outsourced to third parties

Aircraft – maintenance services on reciprocation basis

[Lufthansa German vs. DCIT (83 TTJ 113) (Del ITAT) (2004)]

Ancillary/Incidental activities


Background

A Pte. Ltd. is a company incorporated in Singapore and in the business of

operation of ship

A Pte. Ltd. has a 100% subsidiary in India to undertake following activities:

Charter party evaluation;

Providing market information;

Back-office operations – accounting, HR, treasury etc.

The subsidiary is remunerated at cost plus 10% basis – At ALP

Question

Whether the activities performed by the subsidiary are in the nature of

ancillary/incidental activities?

In case A Pte. Ltd. were to perform these activities through branch office India -

whether cost to cost reimbursement would suffice or mark-up needs to be paid?

Whether income of branch office in India would be also be exempt under Article 8?

Bareboat Charter

Bare ship means a one which is given on hire (i.e. without crew, equipment, etc.)

Taxability - Under ITA

Madras HC in case of Poompuhar Shipping Corporation [(TS-528-HC-2013) (Mad) (2003)]

Not considered as “operation of ship” by lessor since crew of lessee operating the ship

Considered as “Royalty” for use of equipment

Payment is for “use and hire of vessel”, not for services

Under Tax Treaties

Whether taxable as Royalty (Equipment Royalty) under Article 12/13?

Whether covered under Article 8?

Is it incidental to the operation of ships?

Is it rental income from hire/ lease of ships? (Treaties with US, Canada and Singapore)

Whether covered under Article 7 ?


Slot Charter

Charterer allowed to place certain number of container slots as per its disposal in the vessel

Taxability

2 different scenarios contemplated by Bombay HC in Balaji Shipping (315 ITR 62) (Mum) (2012)


Scenarios Ruling

Slot hire facilities availed for carriage of goods

from India to final destination

Article 8 benefit granted by relying on Model

Commentary since it is ancillary to operation

of ships

Slot hire facilities obtained on feeder vessels for

delivery to international hub port from where it

was further shipped on vessels chartered by

taxpayer

Article 8 benefit granted. Bombay HC stated

that the slot hire agreements are inextricably

interlinked with the operation of ships by the

taxpayer

Feeder vessel– Concept & Controversy

A short-sea vessel which transfers cargo between central hub ports & smaller spoke ports

Controversy

Whether such an activity be said to be in course of operation of ships in international traffic eligible for relief under the Treaty?

Rulings

Benefit of Treaty available if-

Feeder Vessel is owned by the assessee or by members of consortium / pool

Such transportation is ancillary to main activity

Assessee to establish the link between transportation of cargo by feeder vessel with the transportation by mother vessels

[DDIT vs. Delmas France (27 SOT 441)]

[Hapag-Lloyd Container Line GMBH vs. ADIT (146 TTJ 279)]

[DDIT v. Cia de Navegacao Norsul (121 ITD 113 (Mum.)]


International Traffic

22

Meaning of “international traffic”


Generally defined under Article 3 of Tax Treaty

Transport by ship or aircraft operated by enterprise which has its POEM /

residence in a contracting state, except

Operation solely between places in other contracting state (i.e. Coastal traffic)

Query: Whether International Traffic?

Singapore ChennaiSurat

(India)UAE

Singapore ChennaiSurat

(India)

ChennaiSurat

(India)

Case 1

Case 2

Case 3

Pool Arrangement

24

Profits from Pool Arrangement

Provisions of Article 8(1) also apply to profits from participation in pool, joint business or international operating agency

Meaning

Terms “pool”, “joint business” or “international operating agency” not defined

Typically, a pooling arrangement involves

Pooling of resources by various shipping/ airline companies

Provision of services to each other

And dividing resultant profits amongst each other

For Airlines - As per Delhi Tribunal in Lufthansa German Airlines [90 ITD 310], pool concept should flow from International Airlines Technical Pool (‘IATP’), which would require: Reciprocity of rendering and receiving services / facilities recognised by IATP Use of standard agreement forms and levy of charges as per IATP manual Non existence of commercial activities in providing services to other airlines


Profits from Pool Arrangement

Food for thought

Reciprocal arrangement entitled to benefit of Article 8(4)

Lufthansa German (83 TTJ 113)(ITAT, Del)

Only rendering of services and not availing services would not be participation in pool and accordingly, not covered under Article 8(4)

British Airways Plc (80 ITD 90) (ITAT, Del)


Other Important Aspects

Income from Alienation of Ships/ Aircrafts

Generally taxable under Article 13 on Capital gains

e.g. – Tax Treaties with Canada, Denmark, France, Singapore

Covered under Article 8 in certain tax treaties

e.g. – Tax Treaties with UK, USA

Constitution of PE by FSC in India

A ship, though movable, may be considered as a ‘fixed place of business’ if it is not actually moved. Accordingly, a ship anchored in Indian waters, for a period exceeding that mentioned in the relevant tax treaty, may be considered to be a PE of the foreign enterprise

[Fugro Engineers BV vs. ACIT (26 SOT 78) – Delhi ITAT]


Other Important Aspects

Article 8 excludes shipping income (e.g. previous DTAA with Switzerland)

Article 7 also excludes shipping income

Recourse to Article 22 – Other income possible ?

Gearbulk AG (184 Taxman 383) (AAR) (2009)

What if Article 8 fails – is it detrimental or is it taxpayer neutral?


Practical Aspects

Obtain provisional certificate

In order to avail exemption under Article 8, Foreign Shipping Companies to obtain provisional / DIT certificate from the jurisdictional tax officer

Documentary Requirements to procure provisional certificate

Valid Tax Residency Certificate

Certificate of POEM

Form 10F

Charter party agreements

Ship registry

Any other documents the jurisdictional tax officer may require

Documentation – extremely critical. Inconsistency in documents required at different ports in India

Prosecution notices are issued if documentation is not proper

Complete break down of income asked at the time of assessment by the tax authorities


Section 44B

Section 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


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Section 172

172 - Shipping business of non-residents.

1) The provisions of this section shall, notwithstanding anything contained in the other provisions of this Act, apply for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India

2) Where such a ship carries passengers, livestock, mail or goods shipped at a port in India, seven and a half per cent of the amount paid or payable on account of such carriage to the owner or the charterer or to any person on his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be income accruing in India to the owner or charterer on account of such carriage

3) Before the departure from any port in India of any such ship, the master of the ship shall prepare and furnish to the Assessing Officer a return of the full amount paid or payable to the owner or charterer or any person on his behalf, on account of the carriage of all passengers, livestock, mail or goods shipped at that port since the last arrival of the ship thereat:

Provided that where the Assessing Officer is satisfied that it is not possible for the master of the ship to furnish the return required by this sub-section before the departure of the ship from the port and provided the master of the ship has made satisfactory arrangements for the filing of the return and payment of the tax by any other person on his behalf, the Assessing Officer may, if the return is filed within thirty days of the departure of the ship, deem the filing of the return by the person so authorised by the master as sufficient compliance with this sub-section.


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Section 172

172 - Shipping business of non-residents.

4) On receipt of the return, the Assessing Officer shall assess the income referred to in sub-section (2) and determine the sum payable as tax thereon at the rate or rates in force applicable to the total income of a company which has not made the arrangements referred to in section 194 and such sum shall be payable by the master of the ship.

4A) No order assessing the income and determining the sum of tax payable thereon shall be made under sub-section (4) after the expiry of nine months from the end of the financial year in which the return under sub-section (3) is furnished:

Provided that where the return under sub-section (3) has been furnished before the 1st day of April, 2007, such order shall be made on or before the 31st day of December, 2008.

7) Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming before the expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian port falls, that an assessment be made of his total income of the previous year and the tax payable on the basis thereof be determined in accordance with the other provisions of this Act, and if he so claims, any payment made under this section in respect of the passengers, livestock, mail or goods shipped at Indian ports during that previous year shall be treated as a payment in advance of the tax leviable for that assessment year, and the difference between the sum so paid and the amount of tax found payable by him on such assessment shall be paid by him or refunded to him, as the case may be.


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Section 44BBA

Section 44BBA - Special provision for computing profits and gains of the business of operation of aircraft in the case of non-residents.

(1) Notwithstanding anything to the contrary contained in section 28 to 43A, in the case of an assessee, being a non-resident, engaged in the business of operation of aircraft, a sum equal to five 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 :—

(a) 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 from any place in India; and

(b) 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 from any place outside India.]


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Article 8 – India Israel Tax Treaty

1) Profits from the operation of ships and aircraft in international traffic shall be taxable only in the Contracting State of which the enterprise is a resident.

2) The term "profits" shall include derived by the enterprise from the rental of ships and aircraft operated in international traffic. Such term shall also include income derived by the enterprise from the use, maintenance or rental of containers operated in international traffic (including trailers, barges and related equipment for the transport of such containers) if such income is incidental to the profits of the enterprise from the operation of ships and aircraft in international traffic.

3) The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency.

4) For the purposes of this Article, interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as income or profits derived from the operation of such ships or aircraft and the provisions of Article 11 shall not apply in relation to such interest.

5) The term "operation of ships and aircraft" shall mean business of transportation by ships or air of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships and aircraft, including the sale of tickets for such transportation on behalf of other enterprises, the incidental lease of ships and aircraft and any other activity directly connected with such transportation.


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Thank You

Sudhir Nayak, Partner

Email: [email protected]

35

Disclaimer: This is a general presentation for information and educational purpose only and should not be construed as a professional advice

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