Section 172 l Shipping Business of Non-Residents

911. Tax deduction at source from payment made to foreign shipping companies

1. Representations have been received regarding the scope of sections 172, 194C and 195 of the  Income-tax Act, 1961, in connection with tax deduction at source from payments made to the foreign shipping companies or their agents.

2. Section 172 deals with shipping business of non-residents. Section 172(1) provides the mode 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. An analysis of the provisions of section 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non-resident, undertakes from any port in India. Section 172 is a self-contained code for the levy and recovery of the tax, ship-wise, and journeywise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship.

3. The provisions of section 172 are to apply, notwithstanding anything contained in other provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of section 172.

4. Section 194C deals with work contracts including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in clauses (a) to (j) of sub-section (1) to any “resident” (termed as contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any “resident”. On the other hand, section 172 operates in the area of computation of profits from shipping business of non-residents. Thus, there is no overlapping in the areas of operation of these sections.

5. There would, however, be cases where payments are made to shipping agents of non-resident ship-owners or charterers for carriage of passengers etc., shipped at a port in India. Since, the agent acts on behalf of the non-resident ship-owner or charterer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of sections 194C and 195 will not apply.

Circular: No. 723, dated 19-9-1995.

912. Whether non-resident assessees engaged in business of carriage by shipping of passengers and goods, etc., shall neither be liable to pay interest under sections 234B and 234C nor entitled to interest under section 244A in respect of their income attributable only to business of such carriage of passengers and goods, etc.

1. Section 172 of the Income-tax Act, 1961, deals with shipping business of non-residents. The scheme of section 172 is that every time a ship belonging to or chartered by a non-resident makes a voyage from a port in India, carrying passengers, livestock, mail or goods, shipped at the airport, 7½ per cent of the amount paid or payable on account of the carriage of the passengers, etc., is taken as the income and tax levied on such income at the rate applicable to a foreign company. The rate, at present, is 55 per cent.

2. The assessment and the payment is to be made before the ship is granted the port clearance. The exception is that insuitable cases the ship may be allowed to leave, provided satisfactory arrangements are made to ensure that the return is filed within 30 days of the departure of the ship and for payment of taxes.

3. Under section 172(7), the non-resident owner or charterer is allowed to claim before the end of the relevant assessment year that he be assessed on his total income of the previous year and the tax payable on the basis thereof be determined in accordance with other provisions of the Act. When such a claim is made and an assessment is made thereupon, the tax paid under section 172(4) by the non-resident owner or charterer would be treated as a payment in advance of the tax leviable for that assessment year before determining the amount of tax finally due. It may be noted that under section 172(7), the choice is entirely that of the non-resident tax-payer to be assessed under the other provisions of the Act.

4. The payments made under section 172(4) by a non-resident ship owner is a payment of tax on actual assessments under that section and it is not a payment of advance tax within the meaning of the Income-tax Act there being no advance tax liability within the scheme of section 172.

5. The question that arises for consideration in such a regular assessment made under section 143(3), read with the provisions of section 172(7), is whether such an assessee is liable to levy of interest under sections 234B and 234C or not. As the payment of any tax under section 172(4) is not considered to be payment of advance-tax within the meaning of the Income-tax Act, the Board is of the view that the assessee who exercises his option under section 172(7) to get his total income assessed in the normal course, is not liable to pay advance tax under section 208 in respect of income of the nature referred to in sub-section (2) of section 172 of the  Income-tax Act.

6. Hence the Board is of the opinion that non-resident assessees engaged in the business of carriage by shipping of passengers and goods, etc., shall neither be liable to pay interest under sections 234B and 234C nor entitled to interest under section 244A of the Income-tax Act, 1961 in respect of their income attributable only to the business of such carriage of passengers and goods, etc.

Circular : No. 730, dated 14-12-1995.

913. Whether in cases where no tax is payable in India, the Assessing Officer shall be competent to issue an annual ‘No Objection Certificate’, valid for a year, in respect of taxation of shipping profits under section 172, after carefully verifying applicability of relevant provisions concerning taxation of shipping profits in double taxation agreement with country of which owner or charterer is resident

1. Under the provisions of section 172 of the Income-tax Act, 1961 seven and a half per cent of the amount paid or payable to the owner or charterer of a ship on account of carriage of passengers, livestock, mail or goods shipped at a port in India, is deemed to be income accruing in India to the owner or the charterer. The port clearance is granted only after the return of the full amount to be paid is filed, evidence of payment of tax on such income is produced before the Customs authorities, or satisfactory arrangements are made to file the return and pay the tax within thirty days of departure of the ship.

2. In cases where such ships are owned by an enterprise belonging to a country with which India has entered into an agreement on avoidance of double taxation, which provides for taxation of shipping profits only in the country of which the enterprise is a resident, no tax is payable by such ships at the Indian ports. Under such circumstances, a ‘No Objection Certificate’ is to be obtained by the master of the ship from the concerned income-tax authority.

3. It has been represented to the Board that in cases where no tax is payable in India, the procedure of obtaining a ‘No Objection Certificate’ from the income-tax authorities before each voyage, should be done away with.

4. The Board have considered the matter. It has been decided that in such cases, the Assessing Officer shall be competent to issue an annual NOC, valid for a year, in respect of taxation of shipping profits under section 172 of the Income-tax Act, 1961 after carefully verifying the applicability of the relevant provisions concerning taxation of shipping profits in the DTAA with the country of which the owner or the charterer is a resident.

5. While examining the relevant Articles of the DTAA, the Assessing Officer should ensure that the non-resident shipping company is engaged in ‘international traffic’, a term which is invariably defined in the DTAA itself. An undertaking from the non-resident company that during the period of the currency of the NOC, no ship belonging to it will be in any traffic other than ‘international traffic’, shall be obtained before the issue of the NOC.

Circular: No. 732, dated 20-12-1995.

914. Clarification regarding treatment of tax paid under section 172(3)/(4) by a non-resident engaged in shipping business

1. The Board had earlier issued Circular No. 730 regarding treatment of tax paid under section 172(3) by a non-resident engaged in the shipping business. Under the provisions of section 172, every time a ship belonging to or chartered by a non-resident makes a voyage from a port in India, carrying passengers, livestock, mail or goods shipped at a port in India, 7.5 per cent of the amount paid or payable on account of the carriage of the passengers etc. is deemed as the income and tax is levied on such income at a rate applicable to a foreign company. The assessment and the payment is to be made before the ship is granted the port clearance. The exception is that, in suitable cases the ship may be allowed to leave provided satisfactory arrangements are made to ensure that the return of income if filed and payment of tax is made within 30 days of the departure of the ship.

2. Under the provisions of section 172(7), the non-resident owner or charterer is allowed an option to be assessed on his total income of the previous year in accordance with other provisions of the Act. When such option is exercised and an assessment is made accurately, the tax already paid under the provisions of section 172(4) by the non-resident owner or charterer would be treated as tax paid in advance for that assessment year before determining the amount of tax finally due.

3. The question that arose for consideration of the Board at the time of issue of Circular No. 730 was that when a regular assessment is made under section 143(3), read with the provisions of section 172(7), whether such an assessee would liable to levy of interest under sections 234B and 234C or not. On the other hand, in case of a refund, the question of entitlement of interest under section 244A would also rise. The Board, vide Circular No. 730, dated 14-12-1995 clarified that the assessee, who exercises his option under section 172(7) to get his total income assessed in accordance with the other provisions of the Act, is neither liable to pay interest under sections 234B and 234C, nor entitled to receive interest under section 244A of the Income-tax Act, 1961.

4. This issue has subsequently been discussed and decided by the Supreme Court in the case of A.S. Glittre D/5 I/S Garonne  v. CIT [1997] 225 ITR 739. It has been held that the payment of tax under section 172(3)/(4) is at par with advance tax instalments. Hence, in case of a regular assessment under section 172(7) the assessee is entitled to refund, as well as interest on such refund.

5. The Circular No. 730 issued by the Central Board of Direct Taxes on this issue is, under the circumstances, no longer legally tenable and is, therefore, withdrawn. It is clarified that in case of a regular assessment under section 172(7), the non-resident assessee is liable to pay interest under sections 234B and 234C and also entitled to receive interest under section 244A of the Income-tax Act, 1961 as the case may be.

Circular : No. 9/2001, dated 9-7-2001.