Contents. Abbreviations Taxability under ITA Taxability under Tax Treaties International Traffic POEM Pool Arrangement. Recognised as Tier I firm by

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1 CA Sudhir Nayak Income of Non Residents from Shipping and Aircraft Operation - Chamber of Tax Consultants Workshop on Taxation of Foreign Remittances January 2016

2 Contents Abbreviations Taxability under ITA Taxability under Tax Treaties International Traffic POEM Pool Arrangement

3 Abbreviations FAC FSC Word Foreign Airline Companies Foreign Shipping Companies Full Form ITA / Act Income Tax Act, 1961 OECD POEM UN Organisation for Economic Cooperation and Development Place of Effective Management United Nations

4 Taxability under ITA 4

5 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 5

6 Taxability of Foreign Shipping Companies Section 44B verses section 172 Section 44B and Section 172 of the ITA deal with shipping income of a nonresident Section 44B Section 1 Applies to regular shipping business Applies to occasional shipping activities Overrides only Section 28 to 43A 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 Return to be filed as per due date specified under Section 139 of the ITA Normal procedure and time limit for assessment and collection of tax applicable Overrides all other provisions of the ITA Income deemed at 7.5% of Export freight (wherever received) Freight to include demurrage, handling charges or any other similar charges Return can be be filed within 30 days of departure of the ship 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

7 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

8 Section 44B, 172 and 44BBA Topical Issues Whether the above presumptive provisions would be applicable even in case of losses? [Royal Jordanian Airlines vs. DDIT (126 ITD 289) (Del) (2010)] Are provisions of section 44BBA applicable to Domestic Air traffic? [Lloyd Helicopters International Pty limited vs. CIT (249 ITR 162)(AAR) (2001)] Whether income accruing outside India is also taxable under section 44B? [CIT v. Nippon Yusen Kaisha Ltd (233 ITR 158)(Cal) (1998)] 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)] 8

9 Section 44B, 172 and 44BBA Topical Issues 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)] Does section 172 override section 44B? [(ITO v CMA CGM Agencies (India) Pvt. Ltd.) (26 taxmann.com 121) (Rajkot ITAT) (2012)] Whether section 90(2) overrides section 172? [Arabian Express Line Ltd. of United Kingdom v. Union of India (212 ITR 31)(Guj) (1995)] 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)] 9

10 Section 44B, 172 and 44BBA Topical Issues 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 2) (Mum ITAT) (2013) ] 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)] 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)] Potential risk of freight forwarders being considered as Agent of non-residents as per section 163 of the Act 10

11 Taxability under Tax Treaties 11

12 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 12

13 Article 8 Operation in International Traffic Article 8 applies to an enterprise engaged in operation of ships 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 Ship could be owned or leased Critical aspect Ship should be at the disposal of the enterprise and controlling and managing the ship is important Operation of Ships not defined in some Tax Treaties France, Germany, Japan, Korea 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) 13

14 Operation of ships 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) Thus reliance to be placed on OECD and UN Commentary Operation of ships to include: Actual operation Activities directly connected with operations Activities incidental or ancillary to operations 14

15 Operation of ships OECD Commentary What is covered by operation of ships Transportation of passengers or cargo by ships or aircraft operated in international traffic 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 Activities ancillary or incidental Make minor contribution relative to operation of ships and which cannot be regarded as separate business or source of income 15

16 Operation of aircrafts/ships Food for thought 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)] 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)] 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)] 16

17 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)] 17

18 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? OECD Commentary 18

19 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 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 by relying on Model Commentary since it is ancillary to operation of ships Article 8 benefit granted. Bombay HC stated that the slot hire agreements are inextricably interlinked with the operation of ships by the taxpayer 19

20 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.)] 20

21 International Traffic 21

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? Case 1 Singapore Chennai Surat (India) UAE Case 2 Singapore Chennai Surat (India) Case 3 Chennai Surat (India) 22

23 POEM 23

24 Meaning of POEM POEM not defined in Tax Treaties / Article 8 OECD commentary on Article 4(3) Tie breaker rule for residence Place where key management and commercial decisions are taken Place of top level management Under the ITA, POEM is defined to mean the place where key management and commercial decisions necessary for the conduct of the business of an entity as a whole are in substance made definition highly subjective no meaning is assigned to the term of what constitutes key managerial and commercial decisions, business of an entity as a whole, in substance made It is proposed in the draft guidelines released by Central Board of Direct Taxes that process of determination of POEM will primarily be based on whether the company is engaged in active business outside India Companies engaged in active business outside India, POEM is to be presumed to be outside India if the majority of Board of Directors meetings are held outside India Passive Income defined to mean aggregate of a) income from the purchase and sale of goods from/to its associated enterprise and b) income by way of royalty, dividend, capital gains, interest or rental income 24

25 Meaning of POEM For companies that are not engaged in active business outside India, determination will be a two stage process : Stage 1 - identification of the persons who actually make the key management and commercial decisions for the conduct of the company s business as a whole Stage 2 - determination of the place where the decisions are in fact being made 25

26 Meaning of POEM Definition under IT Act [section 115VC (Tonnage Tax)] Place where board of directors or executive directors make decisions Cannot be considered as per Bombay HC in case of Balaji Shipping As per Indian Judicial Precedents, POEM refers to A place where factually and effectively the day-to-day affairs of the company are managed and controlled [Integrated Container Feeder Services v. JCIT 278 ITR 182 (Mum) (2005)] Not necessarily the place in which the ultimate control of the company (i.e. shareholders) reside - [220 ITR 377 (AAR)] To be determined vis-à-vis only the contracting states entering into Tax Treaty? Yes - (220 ITR 377)(AAR) and DLJMB Mauritius Investment Co. vs. CIT (228 ITR 268) (AAR) 26

27 POEM Food For thought POEM for fiscally transparent partnerships? POEM in case of a PE? If the business operations are carried out by the PE, which is not the POEM of the enterprise as a whole, for the purpose of Article 8, the POEM would be in the State of PE. Can PE access the treaty? Illustration POEM in Denmark for non shipping operations PE in Norway which manages shipping operations Source of shipping income from operations in international traffic in Canada 27

28 Pool Arrangement 28

29 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 29

30 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) 30

31 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] 31

32 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? 32

33 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 33

34 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 Back received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature 34

35 Section 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 (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 Back of tax found payable by him on such assessment shall be paid by him or refunded to him, as the case may be. 35

36 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.] Back 36

37 Sudhir Nayak, Partner Thank You Disclaimer: This is a general presentation for information and educational purpose only and should not be construed as a professional advice 37

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