Friday, November 9, 2012

Indo-Swiss treaty relief extended to international shipping profits, ITAT explains meaning of ‘dealt with’

The assessee, a Swiss-company, was engaged in the business of operations of ships in international waters through chartered ships. During the relevant year, the assessee had declared his total income at nil on the following grounds:

1) There was no article in the India-Swiss treaty dealing specifically with taxability of shipping profit;

2) Article 7 of the treaty dealing with business profits specifically excluded profits from the operation of ships in international traffic; and

3) Article 22 of the treaty dealing with other income subjected to tax shipping profits only in the State of residence viz. Swiss confederation.

The AO rejected the assessee’s contention and held that the shipping profits were taxable in India under section 44B of the IT Act. CIT(A) however, allowed assessee’s appeal. The department then preferred an appeal to the ITAT.

The Tribunal held in favour of assessee as under:

1) Para 1 of Article 22 of indo-swiss treaty provides that the ‘items of income of a resident of a contracting State, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State’;

2) When Article 7 provides for taxability of business profits other than international shipping profits, then it can’t be said that the said article ‘dealt with’ international shipping profits;

3) The fact that the expression used in Article 22(1) of the Indo-Swiss treaty is “dealt with” clearly demonstrates that the expression “dealt with” is some thing more than a mere mention of such income in the article.

Article 22(1) of Indo-swiss treaty contemplates that items of income covered under this article will be taxable in the state of resident only i.e. Switzerland in the instant case. Therefore, the same couldn’t be taxed in India – ADIT v. Mediterranean Shipping Co. [2012] 27 77 (Mumbai - Trib.)