The order of the Bench was delivered by
Out of these three appeals, two appeals being ITA No. 1632/Mum/12 (assessee’s appeal) and ITA No. 1808/Mum/2012 (Revenue’s appeal) are cross appeals for A.Y. 2003-04 while the remaining appeal is the appeal filed by the assessee for A.Y. 2008-09 which is directed against the order of ld. CIT(A) 10, Mumbai dated 29-09-2011.
2. First, we shall take up the cross appeals filed for A.Y. 2003-04 which are directed against the order of ld. CIT(A) - 10, Mumbai dated 29-09-2011.
5. The relevant facts of the case giving rise to this appeal are as follows. The assessee in the present case is a partnership firm registered in Denmark. During the previous year relevant to A.Y. 2003-04, it was acting as managing owner of Akitieselskab Dampskibsselskabet Svendborg (hereinafter referred to as ‘Svendborg’) and M/s Dampskibsselskabet af 1912 Aktieselskab (hereinafter referred to as ‘1912’) both of which are shipping companies engaged in the business of operation of ships in international traffic. The return of income for the year under consideration was filed by it on 28-11- 2003 declaring total income at ‘nil’. In the assessment completed u/s 143(3) of the Income Tax Act, 1961 vide an order dated 24-3-2006, the total income of the assessee was computed by the A.O. at ? 102.96 crores. Thereafter it was noticed by the A.O. that while computing the income of the assessee from shipping business u/s 44B of the Act, freight income amounting to ? 14,36,87,471/- was wrongly reduced from the amount of gross freight. He was of the opinion that the income of the assessee thus had escaped assessment to the extent of ? 1,07,76,560/- i.e. 7.5% of ? 14,36,87,471/-. He therefore reopened the assessment for A.Y. 2003-04 after recording the reasons and issued notice u/s 148 of the Act on 31-3-2010 declaring ‘nil’ income. In the reassessment completed u/s 143(3) r.w.s. 147 of the Act vide an order dated 16-12-2010, the amount of ? 1,07,76,560/- was brought to tax by the A.O. in the hands of the assessee on account of income from feeder freight. He also added a further sum of ? 52,02,535/- in the hands of the assessee on account of fees for managerial services treating the same as fees for technical services as done in the assessment originally completed u/s 143(3) of the Act.
3. Against the order passed by the A.O. u/s 143(3) r.w.s. 147 of the Act, an appeal was preferred by the assessee before the ld. CIT(A) challenging the validity of the said assessment as well as disputing both the additions of ? 1,07,76,560/- and ? 52,02,535/- made therein by the A.O. After considering the submissions made on behalf of the assessee as well as the material available on record, the ld. CIT(A) held that the assessee having disclosed all the material facts in the return of income and there being no tangible fresh material having been brought on record, the reopening of the assessment originally made u/s 143(3) of the Act for A.Y. 2003-04 by the A.O. after the expiry of a period of four years from the end of the A.Y. was bad in law. He also observed that the entire freight income from shipping business was liable to be assessed in the hands of two companies viz. ‘1912’ and Svendborg and not in the hands of the assessee as held by his predecessor in assessee’s own case for the immediately preceding two years i.e 2001-02 and 2002-03 as well as in the first round of litigation for A.Y. 2003-04 emanating from the order of the A.O. passed u/s 143(3) of the Act. He also noted that the A.O. has already considered the freight income from shipping business in the hands of the said two companies and the same is held to be not chargeable to tax in India as per the benefit available under the relevant DTAA.
4. As regards the other addition made by the A.O. on account of fee for managerial services treating the same as fees for technical services, the ld. CIT(A) observed that similar addition was made by the A.O. even in the assessment originally completed u/s 143(3) of the Act for A.Y. 2003-04 and the same was confirmed by his predecessor. He held that fresh adjudication of this issue therefore was not required and dismissed the ground raised by the assessee on this issue. Aggrieved by the order of the ld. CIT(A), both the assessee and Revenue have preferred their appeals before the Tribunal on the following grounds:-
Assessee’s grounds:
“1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) - 10, Mumbai [‘CIT(A)’] erred in not adjudicating the following grounds of appeal relating to taxability of management fees of ? 5,202,535 received by the appellant outside India:.
“Ground 4a: The learned DDI T erred in holding that management fees received by the appellant outside India, proportionate to the business carried on by the payers, Dampskibsselskabet af 1912 Aktieselskab (‘1912’) and Aktieselskabet Dampskibsselskabet Svendborg (‘Svendborg’) with India, amounting to ? 5,202,535 is chargeable to tax in India in the hands of the Appellant as fees for technical service. Ground 4b: The learned SSIT erred in holding that the management fees received by the appellant is chargeable to tax in India without appreciating that such management fees do not accrue or arise to the appellant in India.”
1a. The learned CIT(A) erred in observing that the issue has been decided against the appellant in the original proceedings without appreciating that as per the beneficial provisions of India-Denmark Tax Treaty, management fees received by the appellant outside India is not chargeable to tax in India.
Revenue’s grounds:
“1. On the facts and in the circumstances of the case and in law, the Id. CIT(A) has erred in holding that the reassessment proceedings are not valid when there was a failure on the part of assessee to make full and true disclosure of all material facts necessary for his assessment.
2. The Appellant prays that the order of the Ld. CIT (A) on the above ground(s) be set aside and that of the Assessing Officer be restored.”
5. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that in the assessment completed u/s 143(3) r.w.s. 147 of the Act, two additions of ? 1,07,76,560/- and ? 52,02,535/- were made by the A.O. on account of income from shipping business as computed u/s 44B of the Act in respect of feeder freight and fees for managerial services received by the assessee treating the same as fees for technical services. As agreed by the ld. Representatives of both the sides, both these issues are squarely covered in favour of the assessee by the decision of the Tribunal rendered vide its common order dated 8th Nov. 2013 in assessee’s own case for the earlier years i.e assessment years 1997-98 to 2002-03 as well as assessment year 2003-04 (emanating from the assessment originally made u/s 143(3) of the Act). A copy of the said order is placed on record before us and perusal of the same shows that the issue relating to taxability of shipping income was decided by the Tribunal in favour of the assessee holding that the entire income from shipping business was chargeable to tax in the hands of two companies viz. ‘1912’ and Svendborg and not in the hands of the assessee. The reasons given by the Tribunal to arrive at this conclusion in para 29 & 30 of its order are extracted hereunder:-
“29. It is seen from the material available on record that the assessee firm on behalf of these companies have been making applications from time to time at the beginning of every financial year for obtaining annual double income tax relief / port clearance certificate. Along with the said application, detail information and documents have been filed which goes to show that firstly, the bills of lading have been issued in the name of the listed companies i.e., Svendborg and 1912 as owners of the vessels, secondly, agency agreement between the assessee firm on behalf of these two limited companies and agents in India i.e., MIPL, which evidences that booking and receiving of freight receipt are done by MIPL on behalf of these two companies; thirdly, copies of the Articles of Association of the limited companies clearly indicate that the firm A.P. Mollar has been appointed as managing owner and vested with the authorities which may bind the companies; fourthly, certificate of tax residency issued by the tax Danish authorities for the two limited companies to the managing owner A.P. Moller that they are tax resident of Denmark; and lastly, incorporation certificates of these two companies issued by the competent Danish authorities. From these documents, it can be deduced that shipping income is that of two companies and the assessee firm is only a representative of these two companies. Based on these documents, the assessee has been given DIT relief certificate from the Department and on that basis, it has been claiming its income from shipping operation as non—taxable by virtue of Article—9(1) of the DTAA. In the return of income filed, the assessee firm had declared the gross receipts from shipping business of these two companies from India and the same have been claimed as not liable for tax in India and accordingly, “Nil” income is offered from shipping business. It has also been brought on record before us that in the subsequent years fle., from the assessment year 2004—05 to the assessment year 2010—11, the income from shipping business has been held to be non—taxable in India and the benefit of the treaty has been given. In the year under appeal before us, the Assessing Officer held that this shipping income belongs to the assessee firm, as the assessee firm has been filing the return of income in its own name and under the Permanent Account Number allotted to A.P. Moller (i.e., the assessee firm) and all the shipping income in the return of income has been shown under the name of the assessee only, therefore, the assessee is a beneficial owner of the freight income in India. He further held that since the assessee is transparent entity under the Danish laws i.e., the partnership firm is treated as non—taxable entity, therefore, benefit of DTAA cannot be given to the assessee. Accordingly, he has taxed the shipping income in the hands of the assessee firm. The learned Commissioner (Appeals), partly accepted by the assessee’s contention insofar as that the shipping income does not belong to the assessee firm, because it is only a managing owner and the said income belongs to these two companies and accordingly, directed the Assessing Officer to examine the taxability of the freight receipts in the hands of these two companies. However, he held that the management fees paid by these two companies to the assessee firm are liable for taxation as fees for technical services / royalty under section 9(1)(vii) in India. Regarding denial of benefit of DTAA to the assessee firm, he upheld the contention of the Assessing Officer.
30. Now, whether the assessee firm A.P. Moller and the two companies Svendborg and 1912 can be said to be one entity inasmuch as all the shipping income can be said to belong to the assessee firm. From the Article of Association and other material placed on record, it is evident that the assessee firm is the managing owner and in that capacity only, it manages the affairs of these two companies for which it is remunerated as per the relevant terms agreed between the parties. In such a situation, it cannot be held that whatever income accrues during the carrying on such business belongs to the assessee firm. Once the entire infrastructure including the vessels which are deployed in the international traffic belongs to the two companies, then it cannot be said that the income accruing from exploiting I deployment of such assets / vessels belong to the assessee firm. The assessee can be compared to a CEO of a company who is managing the affairs of the company and this does not lead to any inference that the income of the company belongs to the CEO. As per the Article of Association, the assessee acts as a representative of the two companies and in that paiity, it acts and does obligations on behalf of the two companies. All THE DOCUMENTS referred to before us also goes to show that the assessee is only representative and the actual shipping business and freight receipts belong to these two companies. Thus, we hold that the assessee firm is separate and distinct from two companies and any income accruing on account of shipping operations does not belong to the assessee, but to these two companies only. Insofar as the allegation of the Department that the return of income was filed by the assessee firm wherein the shipping income has been disclosed, we are of the opinion that such an income has been disclosed as a representative of the companies and income per-se cannot be taxed in the hands of the assessee as a partnership firm but as a representative of these two companies. That is the reason why all throughout such a shipping income has been held to be non-taxable by the Department in the subsequent years and benefit of the treaty has been given. Even in the earlier years also, when such a shipping income was offered for tax, the same was in the capacity of the representative of these two companies only. The status in the return of income as well as in the assessment orders has always been held to be that of non-resident corporate company and not as a partnership firm. From the assessment year 2004—05, two sets of returns of income are being filed, one by the assessee firm on managing commission / fees which is being claimed as non—taxable and second return of income in the name of these two companies which has now been merged referred to as A.P. Moller Maersk A/S showing shipping income.(This status of assessment is being continued till present. Once the Department itself has accepted the assessee firm as a representative of these two companies and has been giving treaty benefit and treating the shipping income belonging to these two companies year-after-year, then in this year, exception cannot be carved out so as to hold that the shipping income belongs to the assessee firm. Thus, we fully agree with all the contention raised by the learned Sr. Counsel before us and, accordingly, hold that the shipping income belongs to these companies only and not in the hands of the assessee firm which is only a representative of these companies and is carrying out its obligation for filing of the return of income as well as managing the entire affairs. Thus, this issue stands decided in favour of the assessee.”
6. As regards the second addition made by the A.O. on account of managerial services treating the same as fees for technical services, it is observed that a similar issue was also involved in assessee’s own case for the earlier years and the same was decided by the Tribunal vide its order dated 8th Nov. 2013 (supra) in favour of the assessee vide para 33 & 34 which read as under:
“The learned Commissioner (Appeals), after directing the Assessing Officer to consider the shipping income in the hands of the Svendborg and 1912 separately, however, held that insofar as the management fees paid by these two companies by the assessee in relation to the Indian receipts are concerned, the same are liable for taxation under the provisions of section 9(1)(i) and 9(1)(vii)(c). He has also denied the treaty benefit given by the Assessing Officer. However, the manner and the method in which such a calculation has to be done has been left to the Assessing Officer to be determined. It is undisputed fact that the assessee firm is entitled to receive management fee from Svendborg and 1912 for managing their business and such a fee is determined on the basis of GRT i.e., the carrying capacity of the ships per annum. The main contention before us is that firstly such an income cannot be taxed in India by virtue of Article 13(6) and, secondly, the scope of section 9(1)(i) also does not cover such kind of a payment. Article-13 of the Indo Denmark DTAA provides for the scope of taxability/nontaxability of the royalty and fees for technical services. Article—13(6) carves out an exception that the royalty and fees for technical services shall be deemed to arise in a contracting State when such non— resident has a P.E. or fixed base in the other contracting State and the liability to pay royalty or fees for technical services has been incurred in connection with such P.E. and such royalty or fees for technical services are borne by such P.E. The relevant portion of Para—6 of Article—13 is reproduced hereunder for the sake of ready reference:-
“13(6) Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying their royalties or fees for the technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed is situated.”
34. Thus, for taxing the royalty and fees for technical services in case of a non-resident under the Indo Denmark DTAA, the basic condition is that there has to be a P.E. or fixed base in connection with which such a liability has been incurred. Not only this, such royalty or fees for technical services are borne by such P.E. or fixed base. If that is not so, the same cannot be taxed in the hands of the non-resident. In this case, admittedly, this payment has not been made by any P.E. to the assessee firm albeit the payment has been made by non-resident company i.e., two Danish companies to another non-resident i.e., a partnership firm established under the laws of Denmark. Once the payment has been made from one nonresident to another non-resident in connection with the entire global business in Denmark only, then it cannot be held that such a payment can be taxed in India either as fees for technical services or as royalty. Thus, we are of the opinion that such a payment cannot taxed as FTS in case of the assessee. Otherwise also, by virtue of Article—13(6), such a payment cannot be taxed in India, because it has nothing to do with the MIPL as the main criteria that such a payment has to be deductible in the hands of the P.E. is not at all applicable in the present case. Neither there is any economic link of the assessee with the P.E. nor any payment has been deducted by the RE. Thus, in our conclusion, the payment of management fee cannot be subjected to tax in India by virtue of Article-13(6). Insofar as the issue of denial of treaty benefit, we have already discussed this issue in the forgoing paragraphs wherein we have held that the assessee firm is entitled for treaty benefit. As we have already held that the payment of management fee is not taxable in India and by virtue of Article-13(6) and that the treaty benefit is available to the assessee, we are not dealing with the arguments raised by the either party on sections 9(1)(i) or 9(1)(vii). Thus, the third issue is also decided in favour of the assessee that the management fee cannot be taxed in India in the hands of the assessee.”
7. Both the issues involved in this case in respect of which additions were made by the A.O. in the reassessment completed u/s 143(3) r.w.s. 147 for A.Y. 2003-04 thus are squarely covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for the earlier years and respectfully following the same, we hold that both the additions made by the A.O. in the reassessment made for A.Y. 2003-04 are not sustainable.
8. Keeping in view the decision rendered above deleting both the additions made by the A.O. in the reassessment completed u/s 143(3) r.w.s. 147 of the Act, the issue raised by the Revenue in its appeal relating to validity of the said assessment made by the A.O. has become infructuous/academic. We therefore do not consider it necessary or expedient to adjudicate upon the same. The appeal of the assessee for A.Y. 2003-04 is accordingly allowed whereas the appeal of the Revenue for A.Y. 2003-04 is dismissed.
9. As regards the appeal of the assessee for A.Y. 2008-09, it is observed that the solitary issue involved therein relating to the addition of ? 1.22 crores made by the A.O. and confirmed by the ld. CIT(A) on account of management fees received by the assessee treating the same as fees for technical services is similar to the one involved in the appeal of the assessee for A.Y. 2003-04 which has already been decided by us in favour of the assessee while disposing of the appeal of the assessee for A.Y. 2003-04. Following our conclusion drawn in A.Y. 2003-04, we delete the addition made by the A.O. and confirmed by the ld. CIT(A) on account of management fees and allow the appeal of the assessee for A.Y. 2008-09.
10. In the result, appeals of the assessee for A.Y. 2003-04 & 2008-09 are allowed whereas appeal of the Revenue for A.Y. 2003-04 is dismissed.
The order pronounced in the open court on 18th June, 2014.