Karnataka High Court
V. M. Salgaocar & Brothers Ltd. vs Deputy Controller, Reserve Bank Of ... on 27 March, 1990
Equivalent citations: (1991)93CTR(KAR)49
ORDER
M. P. CHANDRAKANTARAJ URS, J. :
These four writ petitions are disposed of by the following common order as the grievances of the petitioner therein are identical and they have sought the same relief. The petitioner in W.P. No. 6979/1989 is M/s. V. M. Salgaocar and Brother Ltd., of Vasco de Gama Goa. The petitioner in W.P. No. 7166/1989 is M/s. Chowgule & Company Ltd., Mormugao Harbour, Goa. The petitioner in W.P. No. 7273/1989 is M/s. Sociedade de Fomento Industrial Ltd., Margao, Goa. The petitioner in W.P. No. 10636/1989 is M/s. V. S. Dempo & Company Ltd., Campal, Panaji, Goa.
2. All the petitioners are mine owners, mining among other things manganese and iron ores and they are also exporters of the ores to foreign countries mostly to Japan and Korea. It is alleged in the first of the petitions (I propose to go by the facts stated in that petition), that it entered into the agreement with the foreign buyer on credit price for iron and/or manganese ore and foreign buyers sent their ships either owned by them or chartered by them and the petitioners loaded their ore stacked at the berth at the port side by mechanical means into the vessel which carried the ore and sometimes it used barges and loaded the ships on the sea when convenient depending on the size of the ship which was to be loaded. In any event all the contracts entered into with the foreign buyers were on the basis of f.o.b. All such contracts provided a clause for detention of a ship in the port for unforeseen reasons and in that behalf the exporters, i.e., the petitioners bad to bear the demurrage charges and pay the same to the owner of the ship or the charterer. The practice all along had been to pay such demurrage and subsequently work out details having regard to the requirement of complying with certain formalities, the payments were made after obtaining the necessary permission from the Reserve Bank of India through the regular bank channels.
3. It is alleged that some time in February, 1988, the 1st respondent-Deputy Controller, Reserve Bank of India, Exchange Control Department, Panaji, Goa, issued circular letters to all exporters requiring them to obtain income-tax clearance for remittances of demurrage payments. One such specimen of the circular letters is produced at Annexure-B to the petition. Substance of that letters that on the advice (opinion) of the CBDT. The overseas owners vessels chartered by Indian parties attract income-tax and therefore the exporters should ensure that applications for remittances towards demurrage payable on chartered vessels should be duly supported by income-tax clearance certificates.
4. The 2nd respondent in this petition is the Chairman, CBDT, Ministry of Finance, New Delhi. By yet another communication dated 11th October, 1988 as at Annexure-C all exporters of Goa Region have been informed by the 1st Respondent that all demurrage amounts payable in respect of foreign vessels chartered for carriage of goods exported from India under any type of contract, i.e., C & F/CIF/FOB, attract Indian income-tax. Therefore, the exporters are advised to ensure that all applications for remittances towards demurrage payable to foreign vessels to overseas parties should be duly supported by income-tax clearance certificates or documentary evidence that tax is withheld along with no objections certificate from the IT authorities. These facts have not been disputed.
5. The petitioners feel aggrieved by the circular instructions as at Annexures B and C. Annexure B apparently is based on the opinion formed by the 2nd respondent, Chairman, CBDT.
6. The petitioners have impleaded the CIT, Karnataka and the Union of India by its Secretary, Ministry of Finance as respondents 3 and 4 as necessary and proper parties.
7. The main contest to the petitions has been entered by the 3rd respondent, the CIT in Karnataka.
8. Mr. G. Sarangan, learned counsel appearing for the petitioners, has pleaded and contended that income from shipping of non-resident ship-owners or charterers of such ships is covered exclusively by the provisions made in ss. 44B and s. 172 of the IT Act 1961 (hereinafter referred to as the Act) and as such, having regard to the provisions made in the said sections, no other income-tax or procedure is required to be followed and thus being self-contained provisions in regard to incidence, quantum and procedure for payment of tax any other method prescribed would be outside the purview of the Act and on the facts of the cases of the petitioners, the demurrage received by a non-resident ship-owner or charterer of a ship is not exigible to income-tax under the Act in as much as in both ss. 44B and 172 of the Act, it is only when such a ship as is described in sub-s. (2) of s. 44B and sub-s. (1) of s. 172 of the Act earns the income by the modes specified in the said sub-sections, the need to pay tax in accordance with the procedure laid down would arise and not otherwise. The thrust of the argument simply stated is that a demurrage paid to the owner of a foreign ship or charterer of a foreign ship who is not a resident in India would not be exigible to tax under ss. 44B and 172 of the Act.
9. As against the contention, Mr. G. Chandarkumar appearing for the 3rd respondent has strenuously contended that having regard to ss. 4, 5 and 9 of the Act any payment to a foreign ship-owner would answer to the description of income or income deemed to accrue or arise in India and therefore under s. 195 of the Act, a person making the payment to a non-resident is liable to deduct income-tax thereof at the rates in force at the time of payment, and as such, the view of the 2nd respondent, Chairman, CBDT, on demurrage being exigible to tax and consequent directive issued to exporters as per Annexure B and C are valid and cannot be questioned in law. He has also urged that the relief prayed for may not be granted by this Court in as much as Annexures B and C are not orders passed under any of the provisions of the Act but only letters addressed to the exporters and grievance, if any, arise only if action is taken under the directive contained in letters at Annexures B and C and in any event the hierarchy of appeals under the Act would be available to the petitioners only after assessments are concluded. Therefore, he prays that the petitions are premature and they may be dismissed. In the light of these rival contentions, this court has to examine the correctness or otherwise of the stand of petitioners.
10. To begin with, I will take up the second contention advanced by Sri Chandarkumar that the petitions are liable to be dismissed in limine as premature, first. I do not think there is much substance in the contention. The petitioners have averred that in the matter of payment of tax to a foreign non-resident ship-owner or a charterer under s. 44B or s. 172 of the Act as contended by Mr. Sarangan for the petitioners, question of dismissing the petitions in limine would not arise, unless the Court decides whether demurrage is an income falling under ss. 4, 5 or s. 9 of the Act. As such, the second contention must be rejected depending on the conclusion that will be reached by this Court in the light of the arguments advanced on the merits of the first contentions noticed earlier. In any event, if, as contended demurrage is not income exigible to tax under other provisions of the Act, question of initial jurisdiction will come into play and this Court must therefore decide the issue raised.
11. Sec. 44B and s. 172 of the Act are as follows :
"44B(1). Notwithstanding anything to the contrary contained in ss. 28 to 43A in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts specified in sub-s. (2) shall be deemed to the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession".
"172. (1) The provisions of this section shall, notwithstanding anything contained in the other provisions of this Act, apply for the purpose of the levy and recovery of the case of any ship, belonging to or chartered by a non-resident, which carried passengers, livestock, mail or goods shipped at a port in India.
(2) Where such a ship carries passengers, livestock, mail or goods shipped at a port in India seven and a half per cent of the amount paid or payable on account of such carriage to the owner or the charterer or to any person on his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be income accruing in India to the owner or charterer on account of such carriage.
(3) Before the departure from any port in India of any such ship, the master of the ship shall prepare and furnish to the Assessing Officer a return of the full amount paid or payable to the owner or charterer or any person on his behalf, on account of the carriage of all passengers, livestock, mail or goods shipped at the port since the last arrival of the ship thereat;
Provided that where the Assessing Officer is satisfied that it is not possible for the master of the ship to furnish the return required by this sub-section before the departure of the ship from the port and provided the master of the ship has made satisfactory arrangements for the filing of the return and payment of the tax by any other person on his behalf, the Assessing Officer may, if the return is filed within thirty days of the departure of the ship, deem the filing of the return by the person so authorised by the master as sufficient compliance with this sub-section.
(4) On receipt of the return, the Assessing Officer shall assess the income referred to in sub-s. (2) and determine the sum payable as tax thereon at the rate or rates in force applicable to the total income of a company which has not made the arrangements referred to in s. 194 and such sum shall be payable by the master of the ship.
(5) For the purpose of determining the tax payable under sub-s. (4), the Assessing Officer may call for such accounts or documents as he may require.
(6) A port clearance shall not be granted to the ship until the Collector of Customs, or other officer duty authorised to grant the same, is satisfied that the tax assessable under this section has been duly paid or that satisfactory arrangements have been made for the payment thereof.
(7) Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming before the expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian port falls, that an assessment be made of his total income of the previous year and the tax payable on the basis thereof be determined in accordance with the other provisions of this Act, and if he so claims, any payment made under this section in respect of the passengers, livestock, mail or goods shipped at Indian ports during that previous year shall be treated as a payment in advance of the tax leviable for that assessment year, and the difference between the sum so paid and the amount of tax found payable by him on such assessment shall be paid by him or refunded to him, as the case may be."
12. The thrust of the argument of Mr. Sarangan is that having regard to the non-obstance clause with which both the sections begin, the sections must be read as excluding the other provisions of the Act in regard to income derived by a non-resident ship-owner or charterer and only income-tax in the manner at the rate prescribed under the other sub-sections of s. 172 of the Act is liable to be paid and not in accordance with the assessment made under s. 143 of the Act as in the case of other income-tax assessees.
13. It is significant to notice that there is this difference between s. 44B and s. 172 of the Act. In s. 44B of the Act, no procedure for assessment and collection of tax is provided. The use of non-obstante clause refers only to ss. 28 to 43A and not to the other provisions of the Act as contemplated under sub-s. (1) of s. 172 of the Act. Sec. 28 and the following sections upto s. 43A are to be found under the heading D - "Profits and gains of business", in Chapter IV of the Act. In other words, income from shipping accrued or deemed to have accrued to a non-resident ship-owner or charterer falls outside the scope of trade and business normally so understood. The incidence of tax under s. 44B of the Act is on a non-resident engaged in the business of operation of ships owned or chartered by him or it, and if such income constituted the amounts earned on account of the carriage of passengers, livestock, mail or goods shipped from any port in India and the amount so received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods etc.
14. In contrast, s. 172 of the Act does not refer to a non-resident assessee. It only refers to levy and recovery of tax in case of any ship belonging to or chartered by a non-resident which carries passengers, livestock, mail or goods shipped from a port in India. If this difference is borne in mind, then the want of special procedure for levy and collection under s. 44B of the Act becomes patent and obvious. In the result, a non-resident engaged in shipping business subject to the qualification of carrying goods, passengers, livestock, mail or goods etc. being an assessee shall be assessed in accordance with s. 143 of the Act and not in accordance with the procedure prescribed for a non-resident ship owner or charterer covered by s. 172(1) and (2) of the Act. Therefore, the inveitable conclusion is that the ship-owner or charterer in s. 172(1) of the Act is not an assessee as defined in cl. (7) of s. 2 of the Act. The definition assessee in the Act is as follows :
"Sec. 2(7) "assessee" means a person by whom any tax or any other sum money is payable under this Act, and includes ..............."
15. A person who is required to be covered and controlled by the provision contained in s. 172 of the Act is therefore not an assessee. He is a mere ship-owner who is a non-resident or a charterer of a ship, also a non-resident. In other words the heading under H in Chapter XV assumes some significance in interpreting s. 172 of the Act. The Court is bound to take notice of it. That heading is as follows :
"H-Profits of non-residents from occasional shipping business."
That heading denotes the persons intended to be covered by s. 172 of the Act. They are persons who are not regularly in shipping trade or business in India. If it is so understood, then it is not difficult to differentiate between income from shipping business accrued or deemed to have accrued in India in respect of non-residents owners or charterers and income derived from occasional shipping business by non-residents owners of ships of charterers of such ships. Once that distinction is clearly established then it is not difficult to come to the conclusion that when s. 172 of the Act is attracted only that procedure which is contemplated under s. 172 of the Act under sub-ss. (3) to (7) should be followed and no other. On this point even Mr. Chandarkumar learned counsel for the Revenue does not disagree.
16. Again Mr. Sarangans contention is that payment of demurrage does not constitute an income at all attracting the rigour of either s. 44B or s. 172 of the Act. He has contended in order to attract the two sections dealing with the income from shipping business regular or occasional, the incidence of paying tax arisen only if the ship carries goods, passengers, livestock or mail from an Indian port and not otherwise. If there is no income from doing any or all of those thing contemplated for purposes of carriage in the ship, then it does not constitute income.
17. Annexures A and B patently deal with the procedure required to be followed by exporters of ores in regard to payment of demurrage.
18. At this stage I must notice the difference in Annexures B and C. In Annexure B reference is to charterers being Indian parties and not foreign-non-resident charterer. In Annexure C the reference is to foreign vessels chartered for carriage of goods exported from India. In that view of the matter it is possible to say that the petitioners are not at all affected by Annexure-B as admittedly they are not the charterers.
19. Demurrage has the following meaning in New Websters Dictionary (College Edition, at page 418 at right hand column, third entry from the bottom) :
"The detention of a vessel by a freighter, as in loading or unloading, beyond the time agreed upon; similar detention of a freight train or truck; a charge for such detention."
It is normally associated with transportation of goods and the detention of the means of transportation and the compensation paid for such detention. Undoubtedly, the word has been the subject matter of numerous judicial decisions. In regard to vessel following is found in Words and Phrases, Permanent Edition Volume-12, at page 74 :
"Demurrage is the compensation provided for in a contract of affreightment for the detention of a vessel beyond the time agreed on for loading or unloading. Fisher vs. Abeel N.Y. 44 How. Prac. 432, 440"
xx xx xx xx "Demurrage" was originally a term applied to remuneration to a ship owner for the detention of his vessel beyond a stated period fixed for loading or unloading but of later years the usage of exacting demurrage has not been confined to maritime transactions and it may now be regarded as well settled that a railway carrier may adopt and enforce a reasonable schedule of charges for the detention of its cars beyond a reasonable period for loading and unloading.
Troy Wagon Works Co. vs. Cincinnati H. & D.R. Co. 16 Ohio Dec. 111, 3 Ohio N.P., N.S. 412"
xx xx xx xx "Demurrage", in maritime sense, is charge allowed to vessel for delaying her in unloading, in nature of compensating her for freight she might have earned, had she not been so delayed. California & Eastern S.S. Co. vs. 138,000 Feet of Lumber, D.C. Md. 23 F. 2d 95, 96."
20. Thus, the normal meaning and the judicial definition of demurrage does not vary. Even in the Law Lexicon by P. Ramanatha Aiyar at page 314, the same meaning is attributed.
21. Similarly, in Strouds Judicial Dictionary, 4th Edition, Vol. 2, page 738 : "Demurrage". (1) The strict meaning of "demurrage" is the agreed amount to be paid by the charterer of a ship for each day taken in loading or discharging beyond the respective times fixed for those operations; the word demurrage appears to me to be more applicable to delay in time after the expiration of a fixed time than to delay after the expiration of a reasonable time. That is the principle which underlies the authorities; it is that upon which Lockhart vs. Falk (L.R. 10 Ex. 132) proceeded; and it appears to me to be a reasonable one. I do not think that the term can be easily applied to time after the expiration of a reasonable time [per Fry L.J., Dunlop vs. Balfour (1892) 1 Q.B. 507], e.g., where the loading or discharge is to be "in the customary manner". But sometimes, e.g., where a cesser clause (exonerating the charterer) is accompanied by a lien on cargo for "freight, dead freight, demurrage, and average," or such like - "demurrage" will include detention other than that which is technically demurrage (see per Brett J., Kish vs. Cory L.R. 10, Q.B. 559, 560, per Bowen L.J., Clink vs. Radford (1891) 2 Q.B., 625. On the other hand, where the lien is not co-extensive with the charterers liability, the cesser clause will not, under "demurrage", include damages for a detention not covered by the lien [Lockhart vs. Falk, Dunlop vs. Balfour (supra)]."
22. However, Mr. Sarangan, drew my attention to the decision of the Supreme Court int he case of Union of India vs. Gosalia Shipping (P) Ltd. (1978) 113 ITR 307 (SC). In that case it was held as follows :
"the amount which the company was required to pay to the owners of the ship was not payable "on account of" the carriage of goods to the owners of the ship within the meaning of s. 172(2) of the IT Act, 1961. The company paid hire charges to the owners of the ship and since it loaded the ship with the companys own goods, the company received nothing on account of carriage of the goods. Neither the owners of the ship nor the company, therefore, received any amount "on account of" the carriage of the goods. No tax was, therefore, exigible under s. 172(2) and the demand notice was rightly quashed. It was true that one could not place over-reliance on the form which the parties gave to their agreement or on the liable which they attached to the payment due from one to the other. One must have regard to the substance of the matter and, if necessary, tear the veil in order to see whether the true character of a payment was something other than what, by a clever device of drafting. It was made appear. But in this case the real intention of the parties was not something different from what the words used by them conveyed in their accepted sense."
23. Therefore, having regard to the terms and conditions set out between the foreign buyer who had chartered the ship as in the instant cases and the agreement with the mine-owner shipper in India, payment of demurrage clearly falls outside the amount mentioned in s. 44B and s. 172(2) of the Act. Thus, it is difficult to hold that it constitutes income.
24. In an earlier case (it is also relied upon by Mr. Sarangan) the Judicial Commissioner of Goa, in the case of Lima Leitao & Co. Ltd. vs. Union of India Represented by Administrator of Goa, Daman and Diu, & Anr. (1968) 70 ITR 518 (Goa-JC) analysed in detail s. 172 of the Act and came to the conclusion that demurrage was not liable to be subjected to tax under s. 172 of the Act. It suffices to state, the learned Judge did no more than apply the test of liability arising out of carriage of passengers, goods, livestock or mail from Indian port. In the absence of such carriage any other payment, he concluded would not attract s. 172 of the Act.
25. Per contra, Shri Chandarkumar, learned counsel appearing for the Revenue, has relied upon the case of Czechoslovak Ocean Shipping International Joint Stock Company & Anr. vs. ITO, A Ward, Companies Dist. III & Ors. decided by the Calcutta High Court, (1971) 81 ITR 162 (Cal). The learned single Judge of the High Court took the view that learnings of a non-resident shipowner could not escape exigibility to income-tax under the Act, even though he may not be liable under s. 172 of the Act, if the income was derived on behalf of such non-resident or foreign shipowner on account of carrying goods from foreign ports consigned to India. Even if such income was derived or deemed to have been derived in the hands of those who were responsible for such shipowner. He categorically ruled that s. 172 of the Act could not exclude the operation of s. 5(2) read with s. 195(2) of the Act. While it is difficult to agree with the learned Judge, s. 172 of the Act does not exclude the operation of the other provisions of the Act, I cannot find fault with the conclusion reached by the learned Judge because of the difference in the facts of the case considered by him in Czechoslovak Ocean Shipping Internationals case (supra). Sec. 172 of the Act relates to income derived by carrying passengers from Indian ports of goods, mail or livestock. It does not deal with income derived on account of bringing any one of those items mentioned in sub-s. (2) of s. 172 of the Act to an Indian port from a foreign port. Sec. 44B of the Act was not at all considered by the learned single Judge in Czechoslovak Ocean Shipping International Joint Stock Companys case. Yet another feature distinguishes that case from the case on hand, and that is, that company was an assessee filing regular returns in India through their shipping agents. In upholding the contentions of the Revenue, the learned Judge noticed at page 165 of the report as follows :
"The respondent No. 1 is perfectly justified in asserting that the freight or cargo unloaded at Indian ports and received in India is chargeable to tax under s. 5(2). Sec. 9(1)(i) defines income which is deemed to accrue or arise in India, namely, all income accruing or arising, whether directly or indirectly, through or from any business connection in India or through or from any property in India, or through or from any assets or source of income in India, or through or from any money lent at interest and brought into India in cash or in kind through the transfer of a capital asset situate in India. The next section to be considered is s. 160 which defines a representative-assessee and such an assessee under cl. (i) means in respect of the income of a non-resident specified in cl. (i) of sub-s. (1) of s. 9, the agent of the non-resident including a person who is treated as an agent under s. 163, while sub-s. (2) of that section provides that every representative-assessee shall be deemed to be an assessee for the purposes of the Act."
26. Therefore, Exhibits B and C do not relate to assessment of a representative-assessee in terms of the provisions contained in the Act nor are the petitioners non-resident ship-owners carrying on shipping business to attract s. 172 of the Act. They are mere exporters who are made to pay demurrage which undoubtedly is money received by the ships captain as compensation for detention. Whether that is assessable to income-tax under s. 172 of the Act as representative-assessee is not the question before the Court. It is not paid for the purpose of carriage of passengers, goods, mail or livestock from an Indian port is the question posed in these petitions and not goods brought to India from foreign ports. If it was so paid for those specified purposes such income at the rate specified in sub-s. (2) of s. 172 of the Act shall be assessable and recoverable in terms of the sub-sections that follow sub-s. (2) of s. 172 of the Act. But demurrage amount is not paid for carriage of passengers, goods mail or livestock and therefore does not attract s. 172 of the Act.
27. In the Calcutta case the learned single Judge has not noticed that s. 172 of the Act is specifically meant for ships which Indian port and clear goods, passengers, livestock or mail from Indian ports and which may not again call at an Indian port at all or may call after a long interval. Normally, in shipping parlance such carriers are called tramps; they are the cargo vessels equipped and fitted out to carry livestock, mail and passengers etc. They have no regular ports of call. Any time the ship may pickup goods, passengers, livestock or mail according to charterers wishes and the same ship may not be chartered by the foreign buyer to carry ores once again from the petitioners and the like. It is not always that demurrage is paid. It is paid only when the ship is detained. It may not be too often. Therefore, on the probabilities the ship which leaves the Indian port and only casually visits the Indian port is covered by s. 172 of the Act. Those port and only casually visits the Indian port is covered by s. 172 of the Act. Those who do regular shipping business are covered by s. 44B of the Act applicable at the rate specified in Sec. 44B of the Act and at any other rate; but for the same purpose indicated in sub-s. (2) of S. 44B of the Act if he accrual of the income or amount is on that account and not otherwise.
28. Thus, demurrage though a receipt as compensation for detention will not for the purpose of s. 172 of the Act, be an income. Therefore, the contention of Mr. Sarangan must be upheld that Annexures B and C cannot prescribe a mode of recovery and payment in respect of demurrage paid by exporters from India when the ship in question clearly falls within the ambit of s. 172 of the Act. In that view of the matter, the petitioners are not entitled to the relief they have prayed for but only to a declaration of the law in relation to s. 172 of the Act. In that view of the matter, the procedure required to be adopted as indicated in the circular as at Annexure-C is clearly without the authority of law but this Court cannot prevent the CBDT in forming a legal opinion as indicated in Annexure-C. Annexure-B refers to Indian (resident) charterer and therefore the petitioners not being the charterers are not affected by the same.
29. However, it is to be hoped in the light of the reasons I have given to hold that demurrage paid is not income exigible to tax under s. 44B or s. 172 of the Act, the respondents will not cause undue hardship to exporters in India like the petitioners as indirectly such action as is proposed in Annexures B and C will affect international shipping.
30. Subject to the observations made, the writ petitions are disposed of.
31. Parties will bear their own costs.