1. The present set of appeals i.e. ITA Nos. 145 to 148/Mds/2012 relevant to the assessment years 2002-03, 2003-04, 2004-05 & 2006-07 respectively are filed by the assessee against the order of CIT(A)-IV, Chennai dated 01.11.2011.
2. The assessee is a State Government Undertaking established exclusively to transport coal from various Ports in India required for various thermal stations of TNEB (now known as Tamil Nadu Generation & Distribution Company Ltd.). The assessee is having its own vessels for transportation of coal. Apart from its own vessels, the assessee is also hiring vessels from Indian and foreign shipping companies.
3. For the assessment year 2002-03 to 2004-05 the Assessing Officer reopened the assessment under section 147 and issued notice under section 148 dated 16.03.2005. The assessee vide letter dated 25.04.2005 sought reasons for reopening the assessment. The Assessing Officer vide letter dated 1.12.2010 gave following reasons for the reopening of the assessment:-
"The reason for reopening the assessment for the assessment year 2003-04 is given as under: TDS was not made under the head Dry docking Expenses to the tune of Rs. 796.77 and needs to be disallowed u/s.40(a)(ia) of the IT Act.
Also the assessee did not deduct tax on Charter hire payments to Foreign Shipping Company to the tune of Rs. 4962.72 lakhs. The same was not disallowed u/s. 40(a)(ia) of IT Act, 1961."
The Assessing Officer vide assessment order dated 27.12.2007 for the assessment year 2002-03 raised demand of Rs. 14,24,22,361/- including interest under section 234B. Similarly, for the assessment year 2003-04 and 2004-05, demand to the tune of Rs. 6,81,31,783/- and Rs. 4,56,65,387/- respectively were raised by the Assessing Officer on identical grounds. The assessee made payments towards hire charges for foreign shipping companies belong to various non-resident. Allegedly tax was not deducted at source on payment of the hire charges made to non-resident foreign shipping companies. Since the foreign shipping companies had not filed their returns of income and had not paid tax on the income received by them viz. hire charges, the assessee was treated as agent of the said foreign shipping companies under the provisions of section 163(2) of the Act. The Assessing Officer treated the assessee as 'representative assessee' under section 160(1)(i) of the Act.
The assessee in response to notice under section 148 filed separate returns for each of the shipping companies under protest declaring NIL income.
4. The assessee contended before the Assessing Officer that :-
(i) Assessee had no business connection with the foreign shipping company;
(ii) Time charter payments paid by the assessee to foreign shipping companies is not taxable in India; &
(iii) Time charter payments do not partake the character of royalty.
The Assessing Officer, disregarding the submissions made by the assessee, held that since the transportation activity was performed by foreign shipping companies in Indian Coastal Waters, therefore income arises in India or deemed to arise/accrue in India as per the provisions of section 9 of the Act. The Assessing Officer further held that the income of the foreign companies would be chargeable in India for the reason that foreign vessels were being put to use by the assessee for transportation of coal between Indian ports for which payment was made by the assessee and finally, the Assessing Officer while making additions held that since the assessee had not deducted withholding tax on hire charges paid to foreign shipping companies, the assessee has been treated as 'representative assessee' under section 163 of the Act.
5. Aggrieved against the order of the Assessing Officer, the assessee preferred appeal before the CIT(A). The CIT(A) upheld the order of the Assessing Officer and dismissed the appeals of the assessee for all the relevant assessment years. Now, the assessee is in second appeal before the Tribunal impugning the order of the CIT(A) for the assessment years 2002-03, 2003-04, 2004-05 & 2006-07. Since similar issues were involved in these appeals, they are taken up together and decided by this common order.
6. The common grounds of appeals before the Tribunal in all the appeals are as follows:-
"1. The order of the CIT(A) is contrary to law, facts and circumstances of the case.
2. In terms of section 163(2) read with section 149(3) the notice u/s.148 ought to have been given before expiry of two years from the end of assessment year whereas in the instant case, the notice reached the appellant only on 4.4.2005 and hence issuance of notice u/s. 148 is barred by time.
3. The CIT(A) erred in holding that the reopening of assessment u/s.147 to treat the assessee company as representative assessee of FSC is valid.
4. The CIT(A) erred in holding that the charter hire charges paid to FSC would constitute royalty under Explanation 2 to section 9(1)(iv)(a) and hence taxable in India.'
5. The CIT(A) erred in holding that assessee company was rightly treated as representative assessee u/s. 163 of the Act since it did not deduct or withheld tax on hire charges paid to foreign shipping companies.
6. The CIT(A) failed to appreciate that in the present case the charter hire payments were added u/s. 201(1) for failure to deduct tax u/s. 195 and hence there is no income which escaped tax.
7. The CIT(A) failed to appreciate that the transaction/relationship of the assessee company with FSC does not fulfill any of the conditions stipulated in sec. 163(1) of the Act and hence the assessee cannot by any stretch of imagination be treated as an agent of non-resident.
8. The CIT(A) ought to have appreciated that the transactions between the assessee company and the ship owner were on the basis of Principal and not on principal to agent basis.
9. The CIT(A) ought to have appreciated that assessee had availed the services of foreign shipping companies only when it did not get the Indian ship to transport its goods. Hence there is no continuity between the business of the non-resident and the business in India so as to constitute business connection.
10. The CIT(A) ought to have appreciated that the charter hire charges paid to non-residents are not liable to tax in India and hence not liable to tax deduction at source.
11. The CIT(A) ought to have appreciated that provisions of section 163 does not envisage that non-compliance of withholding tax obligations does give rise to relationship envisaged u/s. 163.
12. The CIT(A) ought to have appreciated that the Assessing Officer has treated the assessee company as an assessee in default u/s. 201(1) for non-deduction of tax u/s. 195 and hence treating the assessee as an agent u/s. 163 of the Act would amount to double taxation."
7. Mr. R. Vijayaraghavan, counsel appearing on behalf of the assessee submitted that assessee hire ships from foreign shipping companies for transportation of coal. An agreement between the assessee and the ship owner is that of time charter agreement, according to which ship is leased with crew. The assessee is only getting ship for transportation and it has no control over the crew of the ship. He submitted that where the character of the agreement is time charter, then the said agreement is outside the purview of section 9(1)(iv)(a). The consideration paid by the assessee is not for the use of the ship but for the services hired by the assessee for transportation of coal. He contended that the authorities below have erred in coming to the conclusion that agreement is "bare charter" agreement. In order to support his contention, the counsel for the assessee pointed out that main features of time charter agreement are -
(i) The possession of the ship is always under the control of its owner;
(ii) Ship is being used by owner to transport the goods of the assessee;
He further submitted that OECD model does not apply to time 'charter agreement'. It only applies to "bare boat". An amendment to section 9(1)(vi) Explanation 2(iv)(a) was brought out only to bring it in line with OECD model. The counsel for the assessee submitted that time charter does not involve payment of "royalty". The payment is only for the services provided by the shipping company. To distinguish between the expression "used" and/or 'right to use', he relied on the judgement of the Hon'ble Madras High Court in the case of State of Tamil Nadu v. Essar Shipping Ltd. [2009] 47 VST 8.
8. With regard to grounds of appeal no. 5, 7, 8, 9 and 11, the counsel for the assessee submitted that the department cannot take inconsistent pleas and once it has invoked the provisions of section 201, the department cannot invoke provisions of section 163 of the Act as well. If the department has considered the assessee as 'representative assessee', then the assessee is not liable to deduct tax at source.
9. With regard to submissions on ground no. 2, the counsel submitted that notice issued for reopening of assessment is barred by limitation. He submitted that the department may have sent notice within time but it had reached the assessee after expiry of the limitation as provided under the provisions of the Act. To support his contention, he relied on the judgement of the Hon'ble Supreme Court of India in the case of CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/ 187 Taxman 312.
10. On the other hand, the D.R. appearing on behalf of the Revenue submitted that the issue with regard to nature of payment and deductibility of tax at source has already been settled in assessee's own case by the Tribunal relevant to the assessment year 2002-03 to 2004-05 reported as Poompuhar Shipping Corpn. Ltd. v. ITO [2007] 109 ITD 226 (Chennai). He submitted that as per the charter agreement, the assessee had control over the ship as well as crew. He referred to page 8 - para 7 (h) of the order passed by the CIT(A) The relevant extract of para 7(h) is reproduced herein below:-
"h. Since the assessee has not deducted or withheld tax on hire charges paid to foreign shipping companies, the assessee was rightly treated as representative assessee under section 163 of the I.T. Act. These time charter agreements entered into by the assessee company with various foreign companies are of in a standard time charter Government Form which is approved by the New York Products Exchange. On perusal of these agreements, it can be seen that the nature of payments of foreign companies is only for hiring of ships and it is similar to hiring of a car along with a chauffeur. The clauses in the time charter agreements can be gone through as mentioned by the Assessing Officer. Clause 77 of the time charter agreement says that the captain of the ship who is appointed by the owner of the ship shall be under the orders and of the characters as regards employment and agency. Clause 145 says that the vessel has to work night and day, if required by the characters and all the cranes should be at the disposal of characters during loading and discharging the steamer. Clause 18 says that the vessel should be placed at the disposal of charter till disposal of goods. All these clauses show that the assessee company has got control over the ship owner/capital as far as transportation and delivery of its goods. Hence, there is Principal to Agent relationship between the assessee company and the ship owner but not Principal to Principal relationship as claimed by the learned Authorized Representative of the assessee."
The DR submitted that the authorities below had passed a well reasoned and detailed order treating the assessee as 'representative assessee' under the provisions of section 163 of the Act. The DR further submitted that the CIT(A) has rightly held that the hire charges paid by the assessee partake the character of royalty and is thus liable to the taxed in view of the amendment to Explanation 2(4) of section 9(1)(vi) of the Act. The DR relied on the order of the Chennai Bench of the Tribunal in the case of West Asia Maritime Ltd. v. ITO [2008] 111 ITD 155 wherein "ship" is held to be an equipment and hire charges paid for its use are treated as "royalty" under the provisions of section 9(i)(vi) of the Act.
11. We have heard the rival submissions made by the parties and have also gone through the judgements relied on by the respective parties. The first submission of the assessee is that hire charges paid to foreign shipping companies do not partake character of royalty and thus are not covered by the provisions of section 9(1)(vi) of the Act. A perusal of the record shows that agreement entered into between the assessee and foreign shipping companies is in the nature of time charter agreement. The Hon'ble Madras High Court in the case of Essar Shipping Ltd. (supra) has referred to "Law of Carriage by Sea" by B.C. Mitra, according to which "a time charter is one in which the ownership and also possession of the ship remain in the original owner, whose remuneration or hire is generally calculated at a monthly rate on the tonnage of ship while a voyage charter is a contract to carry specified goods on a defined voyage on a remuneration or freight usually calculated according to the quantity of cargo carried." The consistent view of the Courts in India is that under the time charter the owners provide services for the charterer with their ship, their officers and a crew for an agreed period of time. As per the reference contained in Venkataramaiya's "Law Lexicon with Legal Maxims" various terms are defined. According to which "the modern form of time charterparty party is, in essence, one under which the shipowner agrees with the time-charterer that, during a certain named period, the shipowner will render service as a carrier by his servants and crew to carry the goods which are put on board his ship by the time-charterer. Certain phrases surviving in the printed form now used are only pertinent to the older form of demise charter-party. Those phrases are, as in the present case, the owners agree to let the steamer, and the charterers agreed to hire the steamer. There is no 'letting' or 'hiring' of the steamer, or anything of the sort, here. Then, at the end of the period, it was solemnly provided that the vessel should be redelivered by the time charterers to the shipowners. 'Redelivery' is only a pertinent expression if there has been a delivery or handing over by the shipowners, to the charterers. There never has been anything of that sort here. The ship has at all times been in the possession of the shipowners and they simply undertook to do services with their crew in carrying the goods of the characters."
12. Thus, it can be said that in case of time charter agreement which is not chartered by device neither legal ownership nor beneficial ownership or equitable ownership is given in the hands of the charterer. The charterer has only contractual right to his services of ship. A charterparty creates no right of property in a ship nor had any interest in the ship except that it is a vehicle with which the ship owner is to do the agreed work.
13. From the perusal of documents on record, we have observed that notice under section 148 of the Act was issued to the assessee being the 'representative assessee' of the foreign shipping companies. The assessee/'representative assessee' had filed the returns of income on behalf of the foreign shipping companies under protest declaring Nil income. The special provisions with regard to taxation of shipping companies is under section 172 of the Act. According to which the following conditions have to be satisfied:-
(i) The assessee is a non-resident;
(ii) The assessee owns a ship or ship chartered by a non-resident;
(iii) Ship carries passengers , livestock, mail or goods shipped at a port in India; &
(iv) Non-resident may (or may not) have an agent/representative in India.
If all the above conditions are satisfied 7.5% of the amount paid or payable on account of such carriage to the non-resident shall be deemed to be the income of the non-resident. The said income shall be taxable in the same year in which such payment is made. In the present case, the assessee has paid hire charges for the services rendered by the foreign shipping companies. The said hire charges paid by the assessee to foreign shipping companies is income in the hands of foreign shipping companies for the services rendered in India. The assessee has not placed on record any document to show that foreign shipping companies were exempted by DTAA from payment of tax. As per the provisions of section 195 of the Income Tax Act, it was the duty of the assessee to deduct tax at source before making payment to the foreign shipping companies/(non-resident). Non-compliance of the provisions of section 195 of the Act results in the initiation of proceedings under section 201 of the Act. Thus, the assessee was liable to deduct tax at source.
14. We find that in the instant case, the assessee was using the services of foreign shipping companies for transportation of coal from one port to another on hire basis. The assessee was paying hire charges for providing such services by the foreign shipping companies. In our considered opinion, the payment made by the assessee to the foreign shipping company do not partake the character of "royalty". The payment was made for the 'use' of ship by its 'owner' in rendering 'service' to the assessee. Therefore, the payment made in the present case would not constitute 'royalty' for the use of industrial or commercial or scientific equipments. Thus, the provisions of section 9(1)(vi) of the Act are not attracted.
15. Although the assessee cannot be treated as 'representative assessee', under the provisions of section 193 of the Act, however, the assessee is liable to deduct tax on the payments made to foreign shipping companies under the provisions of section 195 of the Act. In the instant case, the assessee is liable to deduct tax on the hire charges paid to foreign shipping companies. The counsel for the assessee submitted that proceedings has been initiated against the assessee under the provisions of section 201 of the Act for non-deduction of tax at source. Against which the assessee has approached the Hon'ble Madras High Court. The Hon'ble Madras High Court has granted stay in the matter relevant to the assessment year 2002-03 to 2004-05.
The assessee is assailing the order of the CIT(A) on the ground that the assessee cannot be considered as "assessee representative" under the provisions of section 163. At the same time, the assessee is also not complying with the provisions of section 195 against which the department has already initiated proceedings under the provisions of section 201 of the Act. The assessee cannot be allowed to take benefit of both the provisions of the Act to get away from the tax liability. The assessee cannot escape from liability of taxation by challenging the provisions of Act in different forums. We remit the matter back to the Assessing Officer to initiate proceedings against the assessee under one of the provisions of the Act in the light of the judgement of the Hon'ble Bombay High Court in the case of CIT v. Premier Tyres Ltd. [1982] 134 ITR 17 /[1981] 7 Taxman 364 after disposal of the matter subjudice before the Hon'ble Madras High Court.
16. As regards submissions of the counsel for the assessee with respect to notice under section 148 being barred by limitation is concerned, notice was despatched to the assessee on 16.03.2005 which was alleged to have been received by the assessee after the expiry of the period of limitation of the two years. The D.R. has placed reliance on the judgements of R.K. Upadhyaya v. Shanabhai P. Patel [1987] 166 ITR 163/ 33 Taxman 229 (SC) and CIT v. Sheo Kumari Devi [1986] 157 ITR 13 / 24 Taxman 77 (Pat.) and Jai Hanuman Trading Co. (P.) Ltd. v. CIT [1977] 110 ITR 36 (Punj. & Har.) (FB) wherein it has been held that notice issued within the time limit but served after expiry of the time limitation cannot be held to be invalid. In view of the aforesaid judgements, this ground of the assessee is dismissed.
17. The assessee has also assailed the order of the CIT(A) on the ground of reopening of assessment under section 147 of the Act. The Assessing Officer had given reasons for reopening the assessment which are reproduced in para 3 above. It is a well settled law that for reopening, the Assessing Officer must have reasons to believe that the income chargeable to tax has escaped assessment for any assessment year. In our considered opinion, in the instant case, the Assessing Officer had valid reasons for reopening the assessment, as the income chargeable to tax had escaped assessment. Prima-facie it is not the change of opinion which has resulted in the reopening of assessment but the belief that the income has escaped assessment warranting initiation of proceedings under section 147 of the Act. We uphold the finding of CIT(A) on this ground as well.
18. In the result, the appeals of the assessee are partly allowed for statistical purposes.