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P. Manoj

New Delhi , Dec. 16

WITH the Central Board of Direct Taxes (CBDT) refusing to budge from its stand that the charter hire paid to foreign ship owners is liable to withholding tax in India, the domestic shipping industry has marshalled its arguments to contest the issue.

The industry has sought to draw a fine distinction between ships hired from foreign owners on bare-boat charter basis and those hired on time charter basis.

The Finance Ministry was of the view that ships hired by domestic ship owners on bare-boat charter basis is considered as "industrial equipment" and that earnings from such charters are treated as "royalties".

The Income-Tax Act defines "royalty" as " use or right to use any industrial, commercial or scientific equipment.''

Since the payments made to foreign ship owners on bare-boat basis is considered as "royalties", it should be subjected to withholding tax under Section 195 of the IT Act, the CBDT has contended.

But, the shipping industry says that hiring ships on bare-boat charter basis and on time charter basis are entirely different concepts.

Ships hired on bare-boat charter basis have an element of ownership inherent in the deal. Under this method, the domestic ship owner who charters the ship, pays for everything including standing charges, crew wages, insurance, dry-docking, repairs, maintenance.

Besides, the domestic ship owner pays the foreign owner a fixed charter hire for a certain period at the end of which the ownership of the vessel will be passed on to the Indian entity.

Whereas, in the case of ships hired on time charter basis, the domestic ship owner will have to pay only the time charter hire ratesplus the operating cost of the vessel including bunkering costs and port charges. There is no ownership involved in this method.

The International Taxation wing of the IT Department had issued notices to shipping companies including the state-run Shipping Corporation of India (SCI) and the Tamil Nadu Government-owned Poompuhar Shipping for their failure to deduct tax at source from charter hire paid to foreign owners while hiring ships.

Significantly, both these companies were served notices for "default" under Section 195 for their failure to levy withholding tax while paying freight charges to foreign ship owners for hiring vessels on time-charter basis.

``Whereas, in support of their argument to levy withholding tax, the CBDT has referred to the payments made by a resident to a non-resident ship owner on bare-boat basis hire arrangement as payment for use of an industrial equipment as defined under the term royalty,'' a leading domestic ship owner told Business Line.

The shipping industry has also contested the interpretation of the IT Department that a ship is an "equipment".

The difference in connotation of the term "ship" and the term "equipment" has been clearly recognised for income tax purposes. Section 44 BB defines the term "plant" as including a "ship" as well as "equipment". " If the term equipment included ship, there would be no need to include the term ship separately. But, the term equipment does not include ship and therefore ship was separately included,'' argues an industry official.

Further, the Income-Tax rules which provide for rates of depreciation clearly acknowledge this distinction. This establishes beyond a shadow of doubt that the law regards a "ship" on the one hand and "equipment" on the other as totally different concepts.

In view of this distinction, the provisions of Section 9 dealing with "royalty" are not attracted with regard to chartering of a foreign ship and the proceedings initiated against the shipping companies should be dropped, the official demanded.

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