Hire Charges Received Under ‘Time Charter Agreement’ Not Taxable As Royalty, If Control Over Ship Remained With Owner: ITAT

The Mumbai bench of the ITAT has ruled that hire charges received by the owner of a ship for chartering its vessel under a ‘Time Charter Agreement’, is not taxable as ‘royalty’ under Section 9(1) (vi) of the Income Tax Act, 1961, if control and dominance over the ship remained with the assessee/ owner and not with the charterer. The bench of Amit Shukla (Judicial Member) and Gagan Goyal (Accountant Member) held that to fall within the ambit of “use or right to use” an equipment under Clause (iva) to Explanation 2 of Section 9(1)(vi), it is sine qua non that the hirer or the charterer has complete control and ownership of the equipment (ship) for the period of lease and the owner/ assessee is only earning passive income by simply letting out the equipment. The assessee, Nan Lian Ship Management LLC, is a tax resident of UAE and is engaged in the business of shipping operation. The assessee entered into a Time Charter contract with M/s Poompuhar Shipping Corp. Ltd. (PSCL) for transporting coal from one port to another through its ship. The assessee showed the receipts received from PSCL as income from shipping business and offered the same to tax under Section 44B of the Income Tax Act. The Assessing Officer (AO) opined that the assessee simply let out its vessel and PSCL hired the same for the period of 13 months. The AO held that PSCL paid the assessee for the use/right to use the vessel in form of leasing or letting out, and, therefore, the receipts were taxable as ‘royalty’ under Section 9(1)(vi) of the Income Tax Act. The AO concluded that the assessee was paid a fixed amount irrespective of whether the vessel was being used by the charterer or not. He held that the assessee was not paid for transporting coal from one port to another and, therefore, the income cannot be taxed under Section 44B. The AO thus passed an assessment order, holding the receipts received by the assessee on account of Time Charter of its ship as ‘royalty’, and taxing the same under Section 9(1)(vi). The said order was confirmed by the Dispute Resolution Panel (DRP). The assessee challenged the assessment order by filing an appeal before the Income Tax Appellate Tribunal (ITAT). The assessee, Nan Lian Ship, argued that it is a non-resident company and the income derived from the business of operation of ships has to be taxed under the special provision, i.e., Section 44B. Referring to the time charter agreement, the assessee contended that PSCL had only taken the ship on a time charter basis for transporting coal from one port to another. It reiterated that at all time, the possession, control and ownership of the ship was with the assessee company and PSCL was only using the ship on a time charter basis. Relying on the decision of the Madras High Court in Poompuhar Shipping Corporation Ltd. v. ITO (2013), the revenue department contended that the Madras High Court has clearly held that payment made to a non-resident company who has given its ship on time charter basis, is ‘royalty’ within the meaning of Section 9(1)(vi). The department argued that the ship is an ‘equipment’ which was let out by the assessee and hired by the charterer. The receipts were in the nature of hire charges, which arose from ‘use of the equipment’, the department said. Accordingly, the receipts must be taxed as ‘royalty’, in terms of clause (iva) to Explanation 2 to Section 9(1)(vi), it pleaded. The ITAT took note that as per Clause (iva) to Explanation 2 of Section 9(1)(vi), the term ‘royalty’ includes payments received for “use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44B”. Referring to the Time Charter Agreement, the ITAT concluded that the vessel was charted and used by the charterer for a specific purpose of transporting the coal. Further, the charterer had to pay for the use and hire of the vessel per running day of the calendar month. Also, the remunerating payable to the assessee was calculated purely on the basis of the load to be carried by the charterer/PSCL. Further, the charterer had no control of the ship except for carrying the coal as per its requirement, and at all time the ownership and control of the ship remained with the owner/ assessee, the ITAT observed. The ITAT added: “To fall within the ambit of use or right to use equipment, it is sine qua non that the hirer or the charterer has complete control and ownership of the equipment for the period of lease and the owner is only earning passive income by simply letting out the equipment.” The Tribunal concluded: “…the hire charges are not independent of the loading capacity and therefore, it cannot be inferred that payment of hire is for letting out of equipment as assumed by the AO. Thus, it is not a case of leasing out of an equipment and use or right to use of equipment is for the carriage in the vessel...

Hire Charges Received Under ‘Time Charter Agreement’ Not Taxable As Royalty, If Control Over Ship Remained With Owner: ITAT

Parina Katyal

Tags