India-Swiss DTAA: Shipping profits not taxable in India even if there is a PE

ADIT vs. Mediterranean Shipping Co. S.A (ITAT Mumbai)

The assessee, a Swiss company, earned shipping profits. Article 7 of the India-Swiss DTAA excluded shipping profits from its ambit. Article 22 of the DTAA provided that any other income not specifically dealt with would be taxable only in Switzerland and not in India. The assessee claimed that in accordance with Article 22, its shipping profits were taxable only in Switzerland. However, the department held, relying on Gearbulk AG 184 Taxman 383 (AAR), that as shipping profits had been “dealt with” in the DTAA, Article 22 would not apply and the income would be assessable u/s 44B of the Act. It was also held that even if Article 22 (1) applied, as the assessee’s agent in India constituted a PE, the shipping profits were assessable to tax in India under Article 22(2). The CIT(A) accepted the assessee’s stand that Article 22 of the DTAA applied to it. He further held that though the assessee’s agent was its’ PE, the income from the ships was not “effectively connected” with the PE as the ships were owned by the assessee and not by the agent. On appeal by the department, HELD by the Tribunal:

(i) Article 22 (1) provides that items of income of a resident of Switzerland “which are not dealt with” in the foregoing Articles of the DTAA shall be taxable only in that State. The department’s argument that by agreeing to exclude shipping profits from Article 8 as well as Article 7 of DTAA, it has been “dealt with” and, therefore, Article 22(1) shall not apply is not correct. The expression “dealt with” contemplates a positive action and it is necessary that the relevant article must state whether Switzerland or India or both have a right to tax such item of income. Vesting of such jurisdiction must positively and explicitly stated and it cannot be inferred by implication. It is also the view of the Competent Authorities in the letters exchanged that shipping profits would be governed by Article 22 & not s. 44B of the Act (Gearbulk AG 184 Taxman 383 (AAR) not followed);

(ii) As regards Article 22(2), the agent did constitute a PE as it (the agent) was legally and economically dependent on the assessee and the assessee was managing and controlling some of its business operations in India through the said agent. However, the property in respect of which the shipping income was received by the assessee was not “effectively connected” with the PE. Economic ownership has to be taken as the basis or criteria to apply the concept of “effectively connected with”. Since the economic ownership of the ships cannot be allocated to the PE but always remained with the assessee, it cannot be said that the property in the said ships is “effectively connected” with the PE in India (Sumitomo Mitsui Banking Corp followed)