Chartering foreign ship? Get ready to pay tax here
September, 08th 2006
In an order that will have a bearing on all corporates who charter ships for a certain period, a Chennai bench of the income-tax tribunal has held that a ship is an equipment and hence payment for chartering a foreign ship could be construed as royalty and, therefore, taxable in India.
The order by the division bench of Income-tax Appellate Tribunal (ITAT), Chennai, comprising MK Chaturvedi and KD Ranjan, was in the case of Poompuhar Shipping Corporation, a Tamil Nadu government undertaking. It charters vessels from India and abroad to transport coal for the state electricity board.
The shipping company did not deduct tax while remitting the payments for the charter of foreign ships. The I-T department took a stand that the shipping company should have deducted tax while making remittance. In a rather controversial order the ITAT upheld the I-T departments stand on the issue.
According to TP Ostwal, a senior chartered accountant, This order will generate a debate on the interpretation of the concept of royalty.
The crux of the argument between the department and the shipping company was that the payment for chartering ships amounted to royalty, which under the provisions of the Income Tax Act, is liable to be taxed.
In order to treat such remittance as royalty payment, the ship should be construed as equipment because royalty has been defined as the consideration for the use of or right to use any industrial or commercial or scientific equipment.
Therefore, the shipping company argued that time charter of ships is not a contract for hiring an equipment effecting such liability under Section 9 (I) (vi) of the I-T Act. Since a ship cannot be construed as an equipment, liability to deduct tax at source does not arise, said the shipping company.
The ITAT, after examining several definitions for the term equipment, observed that the term has various shades of meaning. It said, Lifeboat is equipment qua the ship. Ship is equipment qua the business. Equipment denotes things that are needed for a particular purpose or activity.
In the present case we find that the asssessee is in the shipping business and in the context of the business of the assessee, ship can be construed to be an equipment in business.
Besides, the ITAT also observed that the two berths, exclusively kept under lease for ships chartered by the shipping company, could be treated as permanent establishment.
A PE is always a base for levying tax on an entity, and hence the transaction under question is taxable in India.