ARABIAN EXPRESS LINE LTD. OF UNITED KINGDOM VS UNION OF INDIA
1997 P T D 833
[212 I T R 31]
[Gujarat High Court (India)]
Before M. B. Shah and H. L. Gokhale, JJ
ARABIAN EXPRESS LINE LTD. OF UNITED KINGDOM and others
versus
UNION OIF INDIA
Special Civil Application No. 4628 of 1993, decided on 06/04/1994.
Income-tax---
Double taxation avoidance agreement---Effect of S-90 --- Provisions of agreement prevail over those of the Income Tax Act---Double taxation Avoidance Agreement between India and U.K.---Petitioner-Company, a shipping line, incorporated in U.K.---Under Art. 9 of the Agreement entire gypping income of petitioner exempt from tax in India---Petitioner-Company is an enterprise of a contracting State---Income of petitioner from shipping operations in India not taxable in India---Indian Income Tax Act, 1961, Double Taxation Avoidance Agreement between India and U.K., Art-9 ---Central Board of Direct Taxes Circular No.333, dated 2-4-1982.
The petitioner-company a shipping line, incorporated in the United Kingdom, contended that the respondents, the union of India, be directed to give effect to Article 9 of the covenant between the Government of India and the Government of Great Britain for the avoidance of double taxation and prevention of fiscal evasion with respect to tax on income and capital gains executed under section 90 of the income Tax Act, 1961, on the ground that under Article 9(1) of the agreement for avoidance of double taxation, the entire shipping income of the petitioner-company was exempt from tax in India as per the certificate issued by The Assistant Commissioner of Income- tax. The Income Tax Officer however, imposed tax and penalty on the "t also, held that the provisions of section 172 of the Income Tax Act, 1961, were applicable as the petitioner-company was not a genuine, company engaged in the business of shipping:
Held, (i) that in view of the convention between the Government o India and the Government of the United Kingdom, the petitioner company, was an enterprise of a contracting State. Under Article 9 of the said convention, income of an enterprise of a contracting State from the operation of ships in international traffic shall be taxable only in that State, i.e., in the United Kingdom. In view of this specific Article, the income of the petitioner from shipping operations in India was not taxable in India. Therefore, the Income Tax Officer would have no jurisdiction to assess the petitioner-company under section 172.
(ii) That subsection (2) of section 90 of the Income Tax Act, 1961, specifically provides that where the Central Government has entered into an agreement with the Government of any country outside India under subsection (1) for granting relief of tax, or, as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee.
(iii) That Circular No.333, dated April 2, 1982, issued by the Central Board of Direct Taxes provides that where a specific provision is made in the double taxation avoidance agreement, that provision will prevail over the general provisions contained in the Income Tax Act, 1961, and that as per the agreement, the law in force in either country will continue to govern the' assessment and taxation of income in the respective country except where provisions to the contrary have been made in the agreement.
(iv) That, therefore, the order passed by the Income Tax Officer was illegal and contrary to the circular issued by the Central Board of Direct Taxes and the convention between the Government of India and the United Kingdom.
C.I.T. v. R.M. Muthaiah (1993) 202 ITR 508 (Kar.) and CIT v. Davy Ashmore India Ltd. (1991) 190 ITRR 626 (Cal.) fol.
McDowell & Co. Ltd. v. CTO (1985). 154 ITR 148; (1985) 59 STC 277 (SC) ref.
S.N. Shelat for Petitioners
M.J. Thakore instructed by M.R. Bhatt of Messrs R.P. Bhatt & Co. for Respondent.
JUDGMENT
M.B. SHAH, J.---It is the contention of the petitioners that the first petitioner Arabian Express Line Limited of the United Kingdom---is a company incorporated in the United Kingdom (U.K.). The second petitioner is a director of the first petitioner-company and is a non-resident Indian. The company was incorporated on June 18, 1992, in the name of "Cookquick Trading Limited". The name of the company was changed from "Cookquick Trading Limited" to "Arabian Express Line Limited" with effect from July 10, 1992. Copies of the certificate of incorporation of the company named Cookquick. Trading Company and the certificate of incorporation of change of name as Arabian Express Line Limited with effect from July 10, 1992, are produced on record of this petition. ,
In this petition, it is contended that the respondents be directed to give effect to Article 9 of the covenant between the Government of India and the Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income d capital gains executed under section 90 of the income Tax Act, 1961. In Support of that, it is pointed out that the Assistant Commissioner of Income ax Company Circle, Calcutta, has issued a certificate, dated June 18, 1993 (Annexure "K"), to the effect that M/s. Arabian Express Line Limited, United Kingdom, is a resident of the United Kingdom and that in accordance with Article 9(1) of the Agreement for the Avoidance of Double Taxation between the Government of India and the Government of the United Kingdom, the entire shipping income of the United Kingdom Company is exempt from tax in India with effect from April 1, 1992. It is also stated that the aforesaid certificate would be in force till the validity of the relevant provisions exempting such income in the double taxation avoidance agree vent with the United Kingdom and is subjected to any other order that ay be passed subsequently in this behalf. The petitioners have also produce similar certificate, dated November 16,1992, issued by the Assistant Commissioner of Income-tax, Circle 2(1), Bombay. In that certificate, it is so expressly stated that the operation of ships by M/s. Arabian Express Line Limited, United Kingdom, is exempt from the production of the necessary port clearance certificate as required under section 172(6) of the Income-tax Act. It is submitted that, as the first petitioner-company is incorporated in the United Kingdom, under Article 9 of the covenant between the Covenant of India and the Government of the United Kingdom, the petitioners are not liable to be taxed under the provisions of the Indian Income Tax Act. Despite the documentary evidence produced before the income tax Officer, the Income-tax Officer, Gandhidham, vide his order, dated March 30, 1994, levied tax and imposed Penalty. He has also issued notice under section 27(1)(c) of the Income-tax Act for furnishing inaccurate particulars of income. That order is challenged before this Court by filing this petition.
At the time of hearing 0 this matter, it is submitted by learned counsel, Mr. Shelat, that the provisions of section 172 of the income tax Act would not be applicable to the petitioners in view of the covenant entered into between the Government of India and the Government of the United Kingdom and in view of section 90(2) of the Income-tax Act.
As against this, it is contended by learned counsel for the respondents that the provisions of section 172 of the Income-tax Act are applicable in the present case, because it is found by the Income-tax officer that the first petitioner-company was not a genuine company engaged in the business of shipping. He further submitted that the Income-tax Officer has rightly applied the principles laid down in the case of McDowell & Co. Ltd. v. C.T.O. (1985) 154 I.T.R. 148 (SC). ; He lastly submitted that against the order passed by the Income-tax Officer, the petitioners have approached the appellate authority, who has rejected the appeal and, therefore, this petition is not maintainable.
For appreciating the contentions raised by the parties, it would be necessary to refer to the relevant provisions of section 90 of the Income Tax Act, which are as under:
"90. Agreement with foreign to countries.--(1) The Central Government may enter into an agreement with the Government of any country outside India--
(a) for the granting of relief in respect of income in which have been paid both income-tax under this Act and income-tax in that country,
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or ....
and may, by notification in the official Gazette, make such provisions as may be necessary f or implementing the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India under subsection (1) for granting relief of tax, or, as the case may be, avoidance of double taxation, them, in relation or t to the assessee to whom such agreement applies, the provisions, of this Act shall apply to the extent they are mote beneficial that assessee. "
It is an admitted fact that there is a covenant between the Government of India and the Government it of the United Kingdom of Great Britain for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and cap ital gains executed under section 90 of the Income-tax Act. For this purpose, the Central Government has issued a notification, dated 'November 23, 1981 (see (1982) 133 I.T.R. (St.) 34). Article 1 of the said convention provided that it shall apply to persons who are residents of one or both of the Contracting States. Article 2 provides for the taxes which are coversed by the convention. It expressly covers income -tax corporation tax, capital gains tax in the United Kingdom of Great Britain and Northern Ireland and income-tax in India. Article 3 provides for general definitions. In the present case we are concerned mainly with Article 9(1) which reads as under (see (1982) 133 I.T.R. (St.) 34, 40):
" 1.Income of an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in that State."
It is not disputed that the other provisions of convention are not applicable to the present case. Therefore, we would not refer to other Articles.
In view of the aforesaid convention, it is apparent that he first n petitioner-company is an enterprise of the Contracting State. Under Article 9 of the said convention, income of an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in that State, i.e. in the United Kingdom. In view of this specific Article, the income of the petitioner from shipping operations in India is not taxable in India.
The Central Board of Direct Taxes has also issued a Circular No. 333 (see (1982) 137 I.T.R. (St.) 1), dated April 2, 1982 to the effect that it has come to the notice of the Board that sometimes effect to the provisions of a double taxation avoidance agreement is not given by the assessing officers when they find that the provisions of the agreement are not in conformity with the provisions of the Income Tax Act, 1961. To avoid such a situation, the Board clarified that--
(a) the correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provision will prevail over the general provisions contained in the Income Tax Act, 1961, and that as per the agreement, the law in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the agreement.
Even subsection (2) of section 90 specifically provides that where the Central Government has entered into an agreement with the Government of any country outside India under subsection (1) for granting relief of tax, or, as the case may be, avoidance of double taxation then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. Further, in the present case, there is a specific provision in Article 9 of the convention to the effect that income of an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in that State. In view of this specific covenant, the Income-tax Officer would have no authority or jurisdiction to assess the petitioner under section 172 of the Income-tax Act.
However, Mr. Thakore, learned counsel for the respondent, submitted that section 172 of the Income-tax Act is a special provision which provides for the summary mode of assessment of a shipping business of non residents and subsection (1) thereof provides that notwithstanding anything contained in the other provisions of this Act, the said section shall 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. In our view, this submission is without any substance in view of section 90(2) of the Income-tax Act which provides that where the Central Government has entered into an agreement with the Government of any country outside India under subsection (1), the provisions of the Income-tax Act to the extent of the agreement would not be applicable and in case of double taxation avoidance agreement, though in force in other countries, will continue to govern the taxation laws in the respective country, except where provisions to the contrary have been made in the agreement. Admittedly, there is no provision to the contrary made with regard to shipping business by a non-resident. On the contrary, there is provision in Article 9 which as stated above specifically provides that income, of an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in that State. It is to be noted that section 172 of the Income-tax Act occurs in Chapter XV which provides for liability in various special cases. The subheading of section 172 is "Profits of non-residents from occasional shipping business". This section provides that the profits made by non-residents from occasional shipping shall be taxed by adopting the summary method of assessment by holding that 7-1/2 percent of the amount paid or payable on account of such carriage to the owner or the charterer is deemed to be income accruing in India to the owner or charterer on account of such carriage. It also provides that before departure of the ship, the master of the ship has to furnish to the Assessing Officer a return of the full amount paid or payable to the owner or charterer on account of the carriage of all passengers shipped at that port since the last arrival of the ship thereat. Subsection (3) provides that if the master is unable to do so, he has to make satisfactory arrangement for the filing of the return and payment of the tax by any other person on his behalf. Subsection (6) provides that a port clearance certificate shall not be granted to the ship until the Collector of Customs is satisfied that the tax assessable under this section has been duly paid or that satisfactory arrangements have been made for the payment thereof. In our view, the aforesaid procedure of assessing the income of a non-resident Indian. Because of his occasional activity in shipping business in India would not be applicable in a case where there is a convention between the Government of India and the foreign countries as provided under section 90 of 'the Income-tax Act. In the case of such agreement, section 90 would have overriding effect.
For this purpose, learned counsel Mr. Shelat, rightly relied upon the decision in the case of CIT v. R. M. Muthaiah (1993) 202 LT.R. 508 (Kar.), wherein the court has considered the provisions of section 90 of the Income Tax and also the Double Taxation Avoidance Agreement between India Tax Act an and Malaysia and Circular No. 333 (see (1982) 137 ITR (St.) 1) issued by the Central Board of Direct Taxes. The Court has, inter alia, observed that the provisions of sections 4 and 5 of the Income-tax Act shall have to be read subject to the provisions of the agreement in question and that the agreement in question, by necessary implication, takes away the power of the Indian Government to levy tax on the income in respect of certain categories as mentioned in the agreement. The court further held that if a tax liability is imposed by the Income-tax Act, the agreement may be resorted to for negativing or reducing it and in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of the Income-tax Act and can be enforced by the appellate authorities and the Court.
To the same effect, the Calcutta High Court in the case, of CIT v. Davy Ashmore India Limited (1991) 190 ITR 626, has observed that whenever any specific arrangement or agreement has been made regarding the taxability of any income under the agreement for avoidance of double taxation, such arrangement or agreement will necessarily prevail over the provisions of the statute.
In this view of the matter, in our view, the order passed by the Income-tax Officer, Gandhidham, dated March 30, 1994, is illegal and is contrary to the circular issued by the Central Board of Direct Taxes and the convention between the Government of India and the United Kingdom.
Learned counsel, Mr. Thakore, has further contended that the first petitioner-company is not a genuine company. In our view, this contention is also without any substance. The petitioner has produced on record a certificate dated March 26, 1993, issued by H. M. Inspector of Taxes (Inland Revenue, South London) (at page 70/25) to the effect that Arabian Express Line Limited is a resident of the United Kingdom for corporation tax purposes. The petitioner has also produced a certificate, dated August 13, 1993, to the effect that they have paid advance corporation tax in the office of the Inland Revenue, Account Office, as per Schedule 13 of the Income and Corporation Taxes Act, 1988. Apart from this aspect, as stated earlier, the petitioner has produced on record the certificate to the effect that the first petitioner-company is incorporated in the United Kingdom. In this view of the matter, in our view, the Income Tax Officer does not have any authority or jurisdiction to levy tax on the petitioner-company. Further, the Income Tax Officer was not having jurisdiction to decide whether or not the petitioner which is incorporated in the United Kingdom is a genuine company. It seems that he has forgotten the fact that he is not having jurisdiction to assess the petitioner-company in view of the covenant under section 90 of the Income-tax Act between the Government of India and the Government of the United Kingdom. In any set of circumstances, the fact whether or not the petitioner-company which is incorporated in the United Kingdom is a genuine company, is not required to be investigated by the Income Tax Officer under the Indian Income-tax Act, that too by ignoring the necessary certificates produced by the petitioner-company.
In the result, the petition is allowed. The order, dated March 30, 1994, at Annexure "C" passed by the Income-tax Officer Gandhidham, is quashed and set aside. Rule made absolute in terms of paragraph 7-A with no order as to costs.
M.B.A./1080/F Petition allowed.