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Arabian Express Line Ltd. Of United Kingdom And Others. v. Union Of India.

Gujarat High Court

Apr 6, 1994

Judgment

Subsequent
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Structured Summary of the Opinion: Arabian Express Line Limited

Factual and Procedural Background

The first petitioner is Arabian Express Line Limited, a company incorporated in the United Kingdom. The company was initially incorporated on June 18, 1992 as "Cookquick Trading Limited" and changed its name to "Arabian Express Line Limited" effective July 10, 1992; certificates of incorporation and change of name were produced on the record. The second petitioner is a director of the first petitioner and is a non-resident Indian.

The petitioners sought a direction that respondents give effect to Article 9 of the Double Taxation Avoidance Agreement (DTAA) between India and the United Kingdom (entered under section 90 of the Income-tax Act, 1961), arguing that by that Article the entire shipping income of the UK company from operation of ships in international traffic is taxable only in the United Kingdom. The petitioners produced certificates from Income-tax authorities in India (dated June 18, 1993, and November 16, 1992) and certificates from UK authorities supporting residency and tax payments.

Despite documentary evidence, the Income-tax Officer, Gandhidham, by order dated March 30, 1994, levied tax, imposed penalty and issued notice under section 271(1)(c) of the Income-tax Act for furnishing inaccurate particulars of income. The petitioners challenged that order before the court by filing this petition.

Legal Issues Presented

Whether, in view of Article 9 of the DTAA between India and the United Kingdom and section 90(2) of the Income-tax Act, the income of Arabian Express Line Limited from operation of ships in international traffic is taxable only in the United Kingdom and therefore not taxable in India.
Whether the Assessing Officer had jurisdiction and authority to assess and tax the petitioners under section 172 of the Income-tax Act notwithstanding the DTAA provisions.
Whether the Income-tax Officer could proceed to levy tax, impose penalty and issue a notice under section 271(1)(c) when the petitioner had produced certificates of incorporation, UK tax residency and advance corporation tax payment.
Whether the petition is maintainable in view of the respondents' contention that the petitioners approached the appellate authority and that appeal was rejected.

Arguments of the Parties

Petitioners' Arguments

The first petitioner is a company incorporated in the United Kingdom, supported by certificates of incorporation and change of name.
Article 9(1) of the DTAA between India and the United Kingdom 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 (the United Kingdom), and thus such income is not taxable in India.
Section 90(2) of the Income-tax Act and Circular No. 333 issued by the Central Board of Direct Taxes indicate that where a DTAA contains a specific provision, that provision prevails over conflicting provisions of the Income-tax Act; the petitioners rely on this to argue section 172 does not apply.
The petitioners produced certificates from UK authorities (HM Inspector of Taxes; proof of advance corporation tax payment) and Indian Income-tax officers corroborating residency and exemption; consequently the domestic Assessing Officer lacked jurisdiction to assess and levy tax.

Respondents' Arguments

The respondents contended that section 172 of the Income-tax Act is applicable because the Income-tax Officer found that the first petitioner-company was not a genuine company engaged in the business of shipping.
They asserted that the Income-tax Officer rightly applied the principles laid down in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC).
The respondents also submitted that because the petitioners had appealed to the appellate authority and that appeal had been rejected, the present petition was not maintainable.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC)	Relied upon by respondents to support assessment where a company is not "genuine" or where substance-over-form or similar anti-avoidance reasoning is invoked.	The court noted the respondents' reliance on McDowell but rejected the contention that McDowell justified applying section 172 in this case where a specific DTAA provision (Article 9) and section 90(2) operate to displace the domestic provision. Thus McDowell was not accepted as displacing the DTAA in the circumstances of this case.
CIT v. R. M. Muthaiah [1993] 202 ITR 508 (Kar)	Interpreted section 90 and DTAA principles — held that provisions of the Income-tax Act are to be read subject to the agreement and that an agreement may negativate or reduce tax liabilities imposed by the Act.	The court relied on this decision to support the proposition that DTAA provisions prevail over conflicting statutory provisions and can be enforced by appellate authorities and courts; it was cited in support of the petitioners' position and the court accepted its relevance.
CIT v. Davy Ashmore India Limited [1991] 190 ITR 626 (Cal)	Held that specific arrangements in a DTAA regarding taxability of income prevail over domestic statutory provisions.	The court cited this authority as supporting the general rule that specific DTAA provisions will prevail over conflicting provisions of the domestic statute; the court relied on this precedent in reaching its conclusion.
Central Board of Direct Taxes — Circular No. 333 (dated April 2, 1982) [1982] 137 ITR (St.) 1	Clarified that where a specific provision exists in a double taxation avoidance agreement, that provision prevails over general provisions of the Income-tax Act, and explained that where DTAA applies, assessing officers should give effect to it.	The court relied on the Circular to reinforce that assessing officers must give effect to specific DTAA provisions and that section 90 and its implementing notification have overriding effect in cases covered by the agreement. The court treated the Circular as confirming the correct legal position on application of DTAAs.

Court's Reasoning and Analysis

The court's analysis proceeds from statutory text, treaty provision and administrative guidance to jurisdictional conclusion, in the following steps:

Statutory and treaty framework: The court reproduced section 90 of the Income-tax Act and Article 9(1) of the India–UK DTAA which provides: "Income of an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in that State."
Preliminary factual finding: It was not disputed that a DTAA exists between India and the United Kingdom and that notifications implementing it have been issued. The petitioners produced documentary evidence (certificates of incorporation, UK tax residency certificate and evidence of advance corporation tax paid in the UK).
Legal effect of the DTAA and section 90(2): The court emphasized that section 90(2) provides that where the Central Government has entered into an agreement for avoidance of double taxation, the provisions of the Income-tax Act shall apply to the extent they are more beneficial to the assessee. The court relied on Circular No. 333 and precedent (R. M. Muthaiah and Davy Ashmore) to state the rule that a specific provision in a DTAA prevails over conflicting general provisions of the Income-tax Act.
Interaction with section 172: The respondents argued that section 172 is a special provision for summary assessment of occasional shipping business and therefore applicable notwithstanding the DTAA. The court rejected this, reasoning that section 90 (and the DTAA) has an overriding effect where the DTAA contains a specific provision on the point — and Article 9 specifically covers shipping income. Therefore section 172 could not be applied to tax shipping income of an enterprise of a Contracting State when Article 9 is applicable.
Jurisdiction and genuineness argument: The respondents asserted the company was not genuine and thus section 172 could be applied. The court held this contention without substance because the petitioners had produced a UK HM Inspector of Taxes certificate confirming UK residency for corporation tax purposes and evidence of having paid advance corporation tax. Moreover, the court observed that the Income-tax Officer had no jurisdiction to assess the petitioner-company under section 172 in view of the DTAA and thus was not the proper forum to investigate the question of genuineness for the purpose of levying tax under Indian law.
Conclusion on legality of impugned order: Applying these principles, the court concluded that the order of the Income-tax Officer dated March 30, 1994, was illegal and contrary to both the Central Board Circular and the DTAA; the officer had no authority to make the assessment and impose penalty under section 172 in the circumstances.

Holding and Implications

Holding: The petition is allowed; the order dated March 30, 1994, passed by the Income-tax Officer, Gandhidham (annexure "C"), is quashed and set aside. The court made the rule absolute in terms of paragraph 7A and made no order as to costs.

Implications:

Direct effect on the parties: The tax assessment, penalty and the notice under section 271(1)(c) issued by the Income-tax Officer in the impugned order are set aside in respect of Arabian Express Line Limited.
Jurisdictional principle reaffirmed: Where a specific provision in a DTAA (here Article 9 regarding shipping income) applies to an assessee who is an enterprise of a Contracting State, the domestic provision (section 172) cannot be applied to tax that income in India; section 90(2) and relevant administrative guidance require giving effect to the DTAA provision.
On precedent and broader law: The court applied existing authorities and the Central Board Circular to reach its decision. The opinion addresses application of established treaty-override principles and does not purport to lay down a novel legal doctrine beyond applying those principles to the facts of this case.

Order made absolute; no order as to costs.

Show all summary ...

1. 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.

2. 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 and 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-tax, 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 agreement with the United Kingdom and is subjected to any other order that may be passed subsequently in this behalf. The petitioners have also produced similar certificate dated November 16, 1992, issued by the Assistant Commissioner of Income-tax, Circle 2(1), Bombay. In that certificate, it is also 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 Government 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 271(1)(c) of the Income-tax Act for furnishing inaccurate particulars of income. That order is challenged before this court by filing this petition.

3. At the time of hearing of 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.

4. 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 McDowell and Co. Ltd. v. CTO [1985] 154 ITR 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.

5. 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 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 on which have been paid both income-tax under this Act and income-tax in that country, or

(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 for implementing the agreement.

(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (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."

6. It is an admitted fact that there is a covenant between the Government of India and the Government 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 capital 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 ITR (St.) 34). Article 1 of the said convention provides 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 covered 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 ITR (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."

7. 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.

8. In view of the aforesaid convention, it is apparent that the first 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.

9. The Central Board of Direct Taxes has also issued a Circular No. 333 (see [1982] 137 ITR (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 sub-section (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 sub-section (1) for granting relief of tax, or, as the ease 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 petitioners under section 172 of the Income-tax Act.

10. 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 sub-section (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 sub-section (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 sub-heading 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 per cent. 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. Sub-section (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. Sub-section (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.

11. For this purpose, learned counsel, Mr. Shelat, rightly relied upon the decision in the case of CIT v. R. M. Muthaiah [1993] 202 ITR 508 (Kar), wherein the court has considered the provisions of section 90 of the Income-tax Act and also the Double Taxation Avoidance Agreement between India 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.

12. 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.

13. 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.

14. 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, Accounts 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.

15. 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 7A with no order as to costs.