Exemption of Shipping Income Rights under India–Singapore Tax Treaty

In the case of Bengal Tiger Line P Ltd (taxpayer) Bengal Tiger Line (P.) Ltd. v. DCIT [2020] 121 taxmann.com 165 (Chennai - Trib.) the Chennai Bench of Income-tax Appellate Tribunal (tribunal) treated the global income of a Singapore tax resident shipping entity eligible for exemption under Article 8 of the India–Singapore tax treaty (tax treaty), where such income was earned by the taxpayer outside Singapore is taxable only in Singapore on an accrual basis.; considering the provisions of Article 24 of the tax treaty do not apply as not allowing the benefit of exemption since the income was not taxed in Singapore due to a specific exemption.

Facts

The taxpayer is a Singapore tax resident engaged in international traffic shipping operations earning freight income from vessels sailing across ports in the Indian sub-continent and South East Asia without constituting a permanent establishment (PE) in India.

In order to gain certainty, the taxpayer obtained a tax relief certificate from the revenue authorities (revenue) for its shipping income arising from international traffic operations as not taxable in India by applying Article 8 of the tax treaty on such income from the shipping operation as taxable only in the resident country, i.e. Singapore in this case.

The taxpayer filed its return of income in India, claiming tax exemption on the income received from shipping operations in India under Article 8 of the tax treaty. The revenue rejected the taxpayer’s claim of shipping income as not taxable in India under tax assessment and taxed shipping income attributable to the Indian operations based on the premise that:

• Article 8 read with Article 24 of the tax treaty prescribes the treaty benefit in India only for such income that has suffered/paid taxes in Singapore, hence the income is not liable for tax in Singapore and is not entitled to any tax exemption or benefits in India;
• the purpose of the treaty was to avoid double taxation and not facilitate double non-taxation.

The shipping income was also exempt in Singapore under Singapore domestic tax laws where the taxpayer claimed income exemption in both countries. Effectively, no shipping income of the taxpayer was subject to double taxation to apply tax treaty provisions, hence the taxpayer’s income was liable to tax in India. The revenue also disregarded the tax relief certificate/letter issued by the Singapore tax authority as the shipping income was taxable only in Singapore on accrual basis.

The case was referred to the Dispute Resolution Panel that upheld the revenue’s order and, aggrieved by the final order of the revenue, the taxpayer filed an appeal before the tribunal.

Tribunal Ruling

The tribunal analyzed and observed the provisions of Article 8 of the tax treaty that provide profit derived by Singapore tax resident from ships or aircraft operations in international traffic is regarded taxable only in Singapore since the taxpayer did not have a PE in the source country India. Technically, exemption under Article 8 should be read with the provisions of Article 24 of the tax treaty on satisfaction of the following conditions:

• income is sourced in India and such income is exempt/taxed at a reduced rate as per the tax treaty;
• prerequisite to review before applying Article 24 of the tax treaty is that income of the nonresident is taxable on “receipt” basis in Singapore.

The tribunal observed that Article 8 of the tax treaty did not provide exemption, it rather assigned exclusive taxing rights of a nonresident shipping income to a Singapore resident.

The provisions of Article 24 (limitation of benefits (LOB)) of the tax treaty apply only for income exempt from tax under the tax treaty following the prescribed conditions not being satisfied in the taxpayer’s case:

• Article 8 of the tax treaty anticipated taxing rights of a particular income in a specific state that did not provide for exemption/reduced tax rates of such income;
• internal communication of the Singapore tax authority clarified that income of the Singapore company with a shipping operation in international traffic is taxable in Singapore on an “accrual” basis.

The tribunal recognized the significance of taxing rights of two sovereign nations entered bilaterally agreed for specific source of income where the beneficial provisions of such agreement should be merely implemented and given effect.

It was also a settled principle as confirmed by the Gujarat High Court ruling of M.T. Maersk Mikage that interpreted the Article 24 LOB clause as not applicable once the shipping income of a nonresident is taxable on an accrual basis in the resident country. Thus, international shipping income earned by the taxpayer is not exempt in India but is regarded as taxable only in the resident country, Singapore.

The tribunal also noted that the competent authorities of India and Singapore were aware of the domestic income tax exemption in Singapore and decided to keep the taxing right of the shipping income, usually vested to the resident country, as unchanged. Effectively, treating profits derived by an international shipping enterprise in Singapore as exempt from taxation under Singapore domestic laws is effectively liable to tax in Singapore.

The tribunal believed that the revenue misinterpreted the general rules of interpretation of the Vienna Convention under the Law of Treaties in Article 31 that prescribe that a person need not be liable to tax; it is enough if the resident country has the right to tax such person, whether or not such a right is exercised, as supported from the Supreme Court’s ruling of the Azadi Bachao Andolan case.

The fact is emphatically placed in Article 31(1) of the Vienna Convention where it is stated that, as per the general rule of interpretation, ordinary meaning should be given to the terms of the treaty in the context and in the light of its object and purpose.

The revenue enforced the right to tax shipping income arising from offshore operations not expressly provided in the tax treaty where the taxpayer did not have a PE in India being ultra vires the power of the revenue to reject the bilateral tax agreement entered between India and Singapore. Singapore had exclusive right to tax shipping income under a specific article, limiting or denying such benefit by interpreting other provisions even though such income is exempt or taxed at reduced rate in India will be contrary to the purpose of the tax treaty.

The tribunal also noted that a similar issue was dealt with in the taxpayer’s group entity case, regarding the India–Cyprus tax treaty, where the tribunal concluded that for a nonresident company engaged in a shipping business with effective management of enterprise in Cyprus, income earned by such Cyprus entity from shipping operations is not taxable in India.

The tribunal relied on the Gujarat High Court case of Arabian Express Line Ltd and CBDT Circular No. 333 to confirm that income earned by a nonresident taxpayer is taxable only in the resident country under the provisions of the India–U.K. tax treaty relating to the taxation of shipping business are pari materia.

The tribunal also regarded the tax relief certificate issued by the revenue, the tax residency certificate and other supporting documentary evidence to conclude that the international shipping income of the taxpayer earned from international waters including India was taxable only in Singapore on an accrual basis, hence the shipping income of the taxpayer cannot be taxed in India under Article 8 of the tax treaty.

Key Takeaways

The ruling is in line with numerous precedents to confirm that Article 8 of the tax treaty assigns exclusive taxing rights of shipping income to the resident state which is different from the exemption or reduced rate of taxation. It enforces the principle that tax liability is not dependent on whether taxes are actually paid or not in the resident jurisdiction, relying on various judgments including the applicability of the LOB clause in such case interpreting the principles of tax treaties under the Vienna Convention.

It is pertinent to note that post the implementation of BEPS Action plan under the Multilateral Instrument (MLI), it is relatively established that Article 6 of the MLI modifies the preamble of the covered tax agreements where tax treaties tend to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for double non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions).

Effectively, only genuine double non-taxation cases may explore the beneficial provision of the tax treaties without imposing any restrictions when two sovereign nations have entered into a bilateral agreement and specifically agreed on the taxing rights of a particular source of income.

Accordingly, the treaty benefits claimed by the taxpayers would require an added level of due diligence and robust documentation to benefit from the tax treaty claim especially in light of the widened scope of dependent agent PE under Article 12 of the MLI.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Shailendra Sharma is a Chartered Accountant associated with a multinational financial services firm, India.