The ITAT explains the taxability of the amount received for the ship’s time charter
Fact and issue of the case
The facts in brief are that, assessee is a company incorporated in and tax resident of UAE and is engaged in the business of shipping operation. It has entered into Time Charter contract with M/s Poompuhar Shipping Corp. Ltd. (PSCL) dated 18.04.2018 for transporting coal from Paradeep port to Tutucorine in Tamil Nadu, through its ship ‘MV Eastern View’. The said contract was a period of 13 months. The assessee in turn has chartered the vessel ‘MV Eastern View’ from M/s Power Overseas Investment LLC, again on Time Charter Basis. The assessee has disclosed the receipts of transporting coal from port to port from (PSCL) as shipping business and offered to tax u/s 44B of the Act, i.e. @ 7.5% of the gross receipt attributable to shipping operations carried out in India.
Ld. AO after analyzing the contract between the assessee and M/s PSCL, deduced that assessee is simply letting out the vessel and PSCL has hired the vessels for the period of 13 months for carrying out coal from Paradip port to Tuticorin, Tamil Nadu. He held that PSCL is paying the assessee for the use/right to use by way of leasing or letting out the vessel and therefore, the same is to be taxed under ‘royalty’ u/s 9(1)(vi). AO observed that assessee is being paid fixed amount irrespective of fact, whether the vessel is being used by the charter or not. He held that assessee is not being paid for transporting coal form one port to another within India territory albeit for leasing the vessel. Therefore, it cannot be taxed u/s 44B of the Act. Thus, on these facts he strongly relied upon the judgment of Hon’ble Madras High Court in the case of M/s Poompuhar Shipping Corp. Ltd. vs. ITO (360 ITR 257) and held that the amount received by the assessee is liable to tax under the head ‘Royalty’.
On the other hand, Ld. DR strongly relied on the orders passed by AO and Ld. DRP and submitted , in the case of Poompuhar Shipping Corporation Ltd, the Hon’ble Madras High Court has clearly held that the payment made to a non-resident company who has given the ship on time charter basis to Poompuhar Shipping Corp. Ltd. is a ‘Royalty’ within the meaning of section 9(1)(vi). Thus, this issue stands squarely covered against the assessee by the Hon’ble Madras High Court in the case of the payer itself therefore, no different view can be taken.
We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material placed on record. The main issue involved here is, whether the income earned by the assessee is to be taxed u/s 44B of the Act on the presumption basis as claimed by the assessee in the return of income; or whether the receipt should be taxed as ‘royalty’ for use of an equipment in terms of clause (iva) to Explanation 2 to section 9(1)(vi).
The case of the assessee is that, since it is a non resident company engaged in the business of operation of ships, i.e., the ship of the assessee is used for transporting of coal and has operated a ship on time charter basis by PSCL, therefore it has be subjected to tax under the special provision of section 44B of the Act. Whereas, the case of the revenue is that the ship is equipment which has been let out by the assessee and hired by the charter. The receipts are in the nature of hire charges, therefore, it is the use of the equipment and accordingly, the judgment of Hon’ble Madras High Court is squarely applicable.
First of all, we have to see whether the income earned by the assessee was in the nature of ‘royalty’ within the meaning of section 9(1)(vi) r.w. Explanation (iva). Clause (iva) to Explanation 2 of section 9(1)(vi) reads as under:- (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44B.
Observation of the court
Now we have to see, whether these parameters is applicable in the present case and whether, it can be held that the consideration paid under time charter fits in the definition of the royalty under clause (a) of section 9(1)(iv). In our opinion and analysis of the agreement before us, the aforesaid principle and ratio laid down by the Hon’ble High Court is not applicable in the present case for the reasons enumerated hereunder:
i. The assessee is a UAE based company which has hired ship on Time Charter from M/s Power Overseas Investment LLC owner, a different entity. Thereafter it has entered into time charter agreement with M/s Poompuhar Shipping Corp. Ltd. Though for all purposes the assessee can be said to be owner of the ship till it is in its possession and control for the time period it has taken on time charter. As per the terms of the agreement which we have discussed hereinabove, firstly it can be seen that the payment which assessee was receiving was not purely on account of giving use or right to use the ship to M/s Poompuhar Shipping Corp. Ltd., that is, the charterer and the payment was calculated on the basis of daily freight and load capacity.
ii. The assessee though the owner of the ship but was never separated from the use of the ship nor granted the ship to the charterer, which is generally is in the case of typical time charter.
iii. If the agreement provides that the charterer will pay for the use and hire of the said vessel per running day of 24 hours per calendar month, it means that the payment was to be calculated on per day basis which is a kind of voyage freight. This is also further evident from the method and manner of freight calculation and dead freight calculation. If freight is calculated on pro-rata basis, then under no circumstances, it can be inferred that use or right to use of the ship is given to the charterer.
iv. It was never the condition that the ship itself, and the control over the working and navigation was transferred for the time period to the charterer who used the vessel and there was never a transfer of ship and the control over navigation to charterer, which was one of the condition laid down in the aforesaid judgement. Even though, pressing of compensation or functional control and custody of vessel with the assessee is not relevant factor for deciding the equipment royalty, but then there has to be leasing and letting of the equipment with complete use or right to use of vessel giving to the hirer or charterer. There has to be some kind of economic benefit while giving use or right to use the ship to the charterer which here in this case is not fully satisfied. Had it been so, then the assessee would have only received fixed amount for the time period of the time charter agreement and nothing would have depending on loading capacity and freight calculation based on loading of carriage. The freight is not calculated when there is no carriage of goods due to certain circumstances and the charterer was not required to make any payment.
v. Another important observation made by the Hon’ble High Court while deciding this issue and on the reading of various charter agreements involved in those cases that hire was payable for the use of the ship for specific period of time irrespective of whether the charterer choose to use it for carrying carriage or lays it out of the use and the owner and possession of the vessel which even though remain with the owner who was separated for the use of ship which was granted to the charterer. Here this condition is absent in the present time charter agreement, because the payment is decided purely on the basis of the loading of the good and the determination of the freight is based on the loading capacity and not to the some kind of fixed amount. This material difference itself distinguishes the facts involved in the case before the Hon’ble High Court.
Thus, we hold that the aforesaid judgment of Hon’ble High Court is not applicable on the facts of the present case. Accordingly, we hold that;
> Firstly, the payment received by the assessee from M/s Poompuhar Shipping Corp. Ltd. is not in the nature of ‘royalty’ and hence, the same is not taxable under section 9(1)(vi) of the Income Tax Act.
> Secondly, the agreement and the payment received by the assessee is for carriage of goods and for operating the ships, therefore the income of the assessee has rightly been offered to tax u/s 44B of the Act.
In the result, the appeal filed by the assessee stands allowed. Orders pronounced in the open court on 30th December, 2022.
Read the full order from hereNan-Lian-1
The tribunal has ruled in favour of the assessee and dismiss the appeal.