1. Case Introduction
Company A is a tax resident of Singapore and is engaged in international shipping business between India and Singapore. During the 2014-2015 financial year, i.e. the 2015-2016 tax year, Company A in Singapore received freight business income remitted to Singapore by its local agent in India after deducting the agent’s commission.
Under Section 172(3) of the Income Tax Act, 1961 (ITA), before any vessel owned or leased by a non-resident taxpayer leaves an Indian port, the master of the vessel must prepare and submit to the tax authorities a return of all amounts receivable from the carriage of goods or passengers since the vessel’s last arrival at the port. Company A filed the required return through its local agent in India, arguing that its cargo income was tax-exempt under Article 8 of the India-Singapore Tax Agreement.
During the investigation, the Indian tax authorities held that the taxpayer was not eligible to claim any tax relief on the commission income retained by the Indian agent under Article 24 (Limitation of Relief) of the India-Singapore Tax Agreement. Indian-source income received in Singapore is generally taxable in Singapore, but income not remitted to Singapore or not received in Singapore may be taxed in India under Indian domestic law. Therefore, the tax authorities held that the commission income withheld by the Indian agent was taxable in India and issued an administrative order for the tax payable under Section 172 of the Indian Income Tax Act (ITA).
Company A insisted that all its income was tax-free under the India-Singapore tax treaty and should not be taxed in India. Therefore, Company A filed an administrative appeal with the Hyderabad Bench of the Indian Income Tax Appellate Tribunal (ITAT).
2. Focus of the Dispute
(I) Relevant provisions of the India-Singapore Tax Agreement
Article 8 of the India-Singapore Tax Treaty (Sea and Air Transport): “Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State…”.
Article 24 of the India-Singapore Tax Agreement (Limitations on Relief and Exemptions): “Where this Agreement provides (without any other conditions) that income from a Contracting State shall be exempt from tax or taxed at a lower rate in that State, and under the law in force in the other Contracting State such income is taxable on the amount remitted to or received in that State and not on the entire amount thereof, then the exemption or reduction of tax allowed in the first Contracting State under this Agreement shall apply to the income remitted to or received in the other Contracting State.”
(II) Company A’s view
1. Tax administrative orders should be based on the provisions of the India-Singapore Tax Agreement rather than the Indian Income Tax Act (ITA).
2. Article 8 of the India-Singapore Tax Treaty takes precedence over the provisions of the Indian Income Tax Act and therefore the income derived by the taxpayer from the shipping business is taxable only in Singapore.
3. It is Article 8 of the India-Singapore Tax Agreement that applies, not Article 24. The tax authorities are wrong to cite the provisions of Article 24.
4. According to Article 24 of the India-Singapore Tax Agreement, Company A only needs to pay tax on its income earned in India. In this international shipping business, Company A believes that it has no income earned in India.
3. Views of Indian tax authorities
1. For the tax administrative order issued, it is agreed that Article 8 of the India-Singapore Tax Agreement should apply. If Article 8 of the Tax Agreement is not applied, then the tax authorities will determine that all income of Company A is taxable in India. However, Article 8 of the India-Singapore Tax Agreement cannot be applied alone, especially considering the impact of Article 24.
2. Article 24 of the India-Singapore Tax Treaty limits tax relief to the amount of income “remitted” to or “received” in the other contracting state.
3. Company A agrees that not all of its income from India was remitted to Singapore. The balance of the Indian agent’s commission was not remitted to the taxpayer’s Singapore bank account but remained in India.
3. Final Decision
On April 27, 2022, the Hyderabad bench of the Indian Income Tax Appellate Tribunal (ITAT) issued a ruling: According to Article 8 of the India-Singapore Tax Treaty, income that is entitled to tax benefits (including income from sea and air transport) is limited to income remitted to or received in Singapore, and those income not remitted to Singapore are subject to tax in India. The Indian Income Tax Appellate Tribunal (ITAT) held that the other provisions of the India-Singapore Tax Treaty must be read together with Article 24, because the specific provisions of Article 24 are not isolated, and ruled that the tax authorities were correct in determining that Singapore Company A was applicable to Article 24 of the India-Singapore Tax Treaty (read together with Article 8) and only provided benefits on the amount of income remitted to or received in Singapore. Company A will pay tax in India on its agent commission income that remains in India.
4. Implications for “Going Global” Enterprises
The ruling of the Indian Income Tax Appellate Tribunal (ITAT) comprehensively considered the relationship between the scope of exemptions and reductions stipulated in Article 24 of the India-Singapore Tax Treaty and Article 8. According to the India-Singapore Tax Treaty, taxpayers are only entitled to enjoy the preferential tax treaty treatment for income remitted to or received in Singapore. For Chinese companies with the same case facts, it is necessary to make an assessment of their specific situation in advance in this ruling to avoid unnecessary tax costs.
