The Hindu Business Line : Charter hire paid to foreign shipping lines taxable: CBDT

THE charter hire paid by domestic ship-owners to foreign shipping lines while hiring their ships to meet domestic contractual obligations will be liable to withholding tax in India, the Central Board of Direct Tax (CBDT) has ruled.

Invoking this argument, the International Taxation wing of the Income-Tax Department has issued notices to a few shipping lines including Shipping Corporation of India (SCI) for default on account of failure to deduct tax at source (TDS) from charter hire paid to foreign ship-owners.

"In case of failure by the person making such payments to deduct tax at source, action under Section 201 of the Income Tax Act would become mandatory," the CBDT has said.

Given the shortage of Indian tonnage, the domestic shipping industry has to hire ships on charter from the international market to meet the national requirements in general and the oil industry in particular.

The charter hire to be paid annually runs into crores of rupees.

As per relevant provisions in the I-T Act, any payments made by a resident to a non-resident for use of industrial, commercial or scientific equipment should be treated as payment for `royalty' and therefore, such payment shall be deemed to be income of the non-resident taxable in India, the I-T Department has contended.

The I-T Department treats a ship/oil tanker/vessel as `industrial equipment'.

"Hence, payments made by the shipping industry to foreign ship-owners for use of such equipment is liable to withholding tax," the CBDT has said in a note explaining its views on the issue.

The shipping industry had taken up the issue with the Finance Ministry through the Shipping Ministry, arguing that ships cannot be treated as "equipment".

"The interpretation of the I-T Department is completely erroneous. Ships can by no stretch of imagination be regarded as an equipment," a shipping industry official told Business Line.

The I-T Department has also rejected arguments that such charter hire payments are covered under the Double Taxation Avoidance Agreements (DTAAs) signed between Indian and other nations.

"The definition of royalty is incorporated in our DTAAs signed with other countries. In terms of internationally accepted meaning and also in terms of definition in DTAAs, the payments made by a resident to a non-resident owner of the ship on a bare-boat basis hire arrangement by a resident is held to be a payment for use of industrial equipment," the CBDT said.

To buttress its stand, it has quoted Mr Klaus Vogel, a world-renowned expert in international taxation.

"In his commentary on double taxation conventions, Mr Vogel has mentioned that earnings from bare-boat charters are royalties."

Further, OECD models, in certain cases, consider income from bare-boat charter as business income while in the UN model, the same is treated as royalty.

Besides, in terms of the Employers Liability, Defective Equipment Act 1969, ships are included within the ambit of equipment.

"On this basis, the payment made to foreign ship-owners on bare-boat charter basis is considered as royalty and would be subjected to withholding tax," the CBDT said.

The shipping industry said that the deduction of tax at source from charter hire payments would affect the bottomline of many domestic shipping lines.

"Already hit by intense global competition, the industry will further lose its competitive edge in the world market, leading to loss of business and erosion of profits," the industry official said.

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