JUDGMENT appeal has been filed by Revenue challenging order of Income-tax Appellate Tribunal "A" Bench, Chennai, dated March 29, 2007, made in I. T. A. No. 1894/Mds/2005 for assessment year 2003-04. brief facts of case are as under: assessee is company incorporated in Netherlands and falls within definition of foreign company under section 2(23A) of Income-tax Act, 1961 (for brevity, "the Act"). management and control of assessee-company is situated in Netherlands. assessee, during year 2002-03, let out dredging equipment to their Indian company, namely, Van Oord ACZ India P. Ltd. assessee filed return of income along with brief note elucidating provisions of Double Taxation Avoidance Agreement signed by Government of India with Government of Netherlands and stating that income earned by letting out of industrial equipment would not be taxable in India. However, Assessing Officer held that since definition of royalty, as enumerated in section 9 of Act, means consideration for use or right to use any industrial, commercial or scientific equipment, consideration received by assessee- company falls within definition of royalty in section 9 of Act and, accordingly, same is liable to tax in India. Assailing assessment order, assessee filed appeal before Commissioner of Income-tax (Appeals). Commissioner of Income-tax (Appeals) after taking note of: (i) documents produced by assessee from Income-tax Department of Netherlands to effect that equipment rent is included in total income of appellant as per laws of Netherlands and tax has also been paid on same, and (ii) amended provisions of Double Taxation Avoidance Agreement, held that contracting country (in present case-India) should not levy income-tax on said income. Accordingly, Commissioner of Income-tax (Appeals) deleted tax so imposed by Assessing Officer. Aggrieved by abovesaid order, Revenue preferred appeal before Tribunal. Tribunal, while confirming order passed by Commissioner of Income-tax (Appeals), observed that when assessee has no permanent establishment in India, there is no charging provision in Act to bring this income under provisions of said Act for purpose of bringing same to tax. Challenging above said order, Revenue has filed this appeal on following substantial question of law: "Whether, in facts and in circumstances of case, Tribunal was right in holding that amount received by assessee for hiring out dredgers to Indian company of same name for use in Indian ports is not taxable in India in terms of Double Taxation Avoidance Agreement with Netherlands?" main contention of learned senior standing counsel appearing for Revenue is that as per clause (iva) of Explanation 2 to section 9(1) of Act, consideration received for use or right to use, any industrial, commercial or scientific equipment but not including amounts referred to in section 44BB, is royalty and since section 44BB is not applicable to case on hand, income is chargeable to tax in India. next contention of learned senior standing counsel appearing for Revenue is that as per article 12(1) of Double Taxation Avoidance Agreement, royalty arising in Contracting State may be taxed in other State and, therefore, there is no restriction on Revenue to impose tax in India, solely because assessee has paid tax in Netherlands. learned counsel for Revenue would further submit that payment made towards chartering of ship should be considered as business income and such business income would attract provisions of Income-tax Act under article 7 of DTAA. He also placed reliance on article 5 which defines permanent establishment chargeable to tax in India. learned counsel relied on Poompuhar Shipping Corporation Ltd. v. ITO [2014] 360 ITR 257 (Mad) and contended that consideration paid for use of equipment is liable to be treated as royalty as defined in Explanation 2 to section 9(1)(i) of Income-tax Act. On other hand, contention of learned senior counsel for respondent company is as follows: - respondent company is incorporated in Netherlands and entire management and control is situated outside India. Therefore, there is no permanent establishment in India. - foreign company was engaged in business of hiring out of dredging equipment and had let out such dredging equipment to its sister concern, which is incorporated in India and for such use of equipment, company has raised invoices and Indian company deducted income-tax at source (TDS) for which foreign company is not liable to, and made claim for refund. - amount received by foreign company is payment for use of equipment and foreign company is governed by provisions of Double Taxation Avoidance Agreement (DTAA) and, according to amended DTAA, income earned from hiring of dredging equipment was not taxable in India. - payment towards hire of dredging equipment is not royalty as defined under clause (iva) of Explanation 2 to section 9(1) of Act. - dredging equipment was leased out on bareboat understanding (i.e.) without master and crew and, therefore, it is not ship as stated by Department. Therefore, decision rendered in Poompuhar Shipping Corporation Ltd. v. ITO [2014] 360 ITR 257 (Mad) is not applicable. - As per decision rendered in case of Union of India v. Azadi Bachao Andolan reported in [2003] 263 ITR 706 (SC), if tax liability is imposed by Income-tax Act provisions of DTAA would prevail over provisions of Income-tax Act and, therefore, there is no tax liability on foreign company. - In similar cases involving Netherlands companies doing business in India, High Court of Uttarakhand and High Court of Calcutta had clearly held under article 5 of DTAA between India and Netherlands, Netherlands companies are not permanent establishment in India and, therefore, there is no tax liability. Reliance was also placed in case of ABN Amro Bank, N.V. v. CIT reported in [2012] 343 ITR 81 (Cal) and also in case of CIT v. BKI/HAM v. o. f. reported in [2012] 347 ITR 570 (Uttarakhand). Heard both sides and perused materials available on record. following facts are not disputed: respondent is company incorporated in Netherlands and had let out dredging equipment to one of its sister concerns which is company incorporated in India for purpose of dredging as per contract awarded by Gujarat Adhani Port Ltd. respondent company raised invoices for use of equipment from July 1, 2001, to March 31, 2003, amounting to Rs. 18,87,40,695. Indian company deducted TDS of Rs. 5,49,04,367 under section 195(2) of Act. respondent company filed its return claiming entire TDS amount by way of refund stating that they are not liable for tax under provisions of DTAA. However, Assessing Officer found that with effect from April 1, 2002, any consideration for use or right to use any industrial, commercial or scientific equipment are included in term "royalty" by amending clause in Explanation 2(iva) to section 9(1)(i) of Act and held that consideration received by appellant was taxable and levied income-tax at rate of 10 per cent. on amount of royalty. On appeal, Commissioner of Income-tax (Appeals) considered DTAA and also modified provisions of article 12 of DTAA where definition to royalty was modified and words "payments of any kind received as consideration for use of or right to use industrial, commercial or scientific equipment" were deleted from definition. Therefore, appellate authority deleted levy of tax at 10 per cent. on equipment rent earned by respondent company. On further appeal by Department, Tribunal has also accepted that respondent company is not liable for tax as per provisions of DTAA and also held that there is no permanent establishment in India to bring income under provisions of Income-tax Act. Before adverting to merits of case it is necessary to deal with Double Taxation Avoidance Agreement which is known as DTAA. Under Notification No. GSR 382(E), dated March 27, 1989 (see [1989] 177 ITR (St.) 72), convention between Government of Republic of India and Kingdom of Netherlands for Avoidance of Double Taxation and Prevention of fiscal evasion with respect to taxes on income and on capital, came into force with effect from January 21, 1989. Both Governments have agreed and DTAA with seven Chapters and 30 articles was signed. protocol with additional article was also signed. definitions under article 3(1)(a) defines "State" and "States", which read as follows: "(a) term'State' means Netherlands or India, as context requires, term'States' means Netherlands and India;" Article 5 deals with permanent establishment clauses (1) and (2) are as follows: "1. For purposes of this Convention, term'permanent establishment' means fixed place of business through which business of enterprise is wholly or partly carried on. 2. term'permanent establishment' includes especially: (a) place of management; (b) branch; (c) office; (d) factory; (e) workshop; (f) mine, oil or gas well, quarry or any other place of extraction of natural resources; (g) warehouse in relation to person providing storage facilities for others; (h) premises used as sales outlet; (i) installation or structure used for exploration of natural resources provided that activities continue for more than 183 days." Article 7 deals with business profits. Article 12 deals with royalties, fees for technical service and payments for use of equipment. Originally, clause (1) to sub-clause (4) of article 12 stood as follows: "1. Royalties, fees for technical services and payments for use of equipment arising in one of States and paid to resident of other State may be taxed in that other State. 2. However, such royalties, fees and payments may also be taxed in state in which they arise and according to laws of that State, but if recipient is beneficial owner of these categories of income, tax so charged shall not exceed 20 per cent. of gross amount of royalties, of fees and payments. 3. competent authorities of States shall by mutual agreement settle mode of application of paragraph 2 4. term'royalties' as used in this article means payments of any kind received as consideration for use of, or right to use, any copyright of literary, artistic or scientific work, including motion picture films and works on film or video tape for use in connection with television, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." (emphasis supplied) Subsequently, there was amendment with effect from April 1, 1991, and clauses (1), (2) and (4) of article 12 were modified as follows: "(1) Royalties and fees for technical services arising in Contracting State and paid to resident of other Contracting State may be taxed in that other State. (2) However, such royalties and fees for technical services may also be taxed in Contracting State in which they arise and according to laws of that State; but if beneficial owner of royalties or fees for technical services is resident of other Contracting State, tax so charged shall not exceed. (a) in case of royalties referred to in sub-paragraph (a) of paragraph 4 and fees for technical services as defined in this article (other than services described in sub-paragraph (b) of this paragraph);... (A) 15 per cent. of gross amount of royalties or fees for technical services as defined in this article, where payer of royalties or fees is Government of that Contracting State, Political sub-division or public sector company; and (B) 20 per cent. of gross amount of royalties or fees for technical services in all other cases; and (ii) during subsequent years, 15 per cent. of gross amount of royalties or fees for technical services; and (b) in case of royalties referred to in sub-paragraph (b) of paragraph 4 and fees for technical services as defined in this article that are ancillary and subsidiary to enjoyment of property for which payment is received under paragraph (4)(b) of this article, 10 per cent. of gross amount of royalties or fees for technical services... (4) term'royalties' as used in this article means: (a) payments of any kind received as consideration for use of, or right to use, any copyright to literary, artistic or scientific work including motion picture films and works on films or videotape for use in connection with television, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for use of, for right to use industrial, commercial or scientific equipment, other than payments derived by enterprise described in paragraph (1) of articles 8 and 8A (Shipping and Air Transport) from activities described in paragraph (2)(a) of article 8 or paragraph (4)(b) of article 8A." In further modification with effect from April 1, 1997, sub-clause (2) was modified as follows: "2. However, such royalties and fees for technical services may also be taxed in Contracting State in which they arise and according to laws of that State, but if recipient is beneficial owner of royalties, or fees for technical services, tax so charged shall not exceed 10 per cent. of gross amount of royalties or fees for technical services." With effect from April 1, 1998, sub-clause (4) of article 12 was also modified as follows: (4) "The term'royalties' as used in this article means payment of any kind received as consideration for use of, or right to use, any copyright to literary, artistic or scientific work including cinematography films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific expression." Clause (1) of article 12 originally covered "royalties", "fees for technical services" and "payments for use of equipment". plain reading would show that if any one of above category arises in one of "States", viz., Netherlands and India and paid to resident of other "State", i.e., Netherlands or India, same may be taxed in that other "State", i.e., Netherlands or India. Clause (2), however, stated that such royalties, fees, payments may also be taxed in State in which they arise and according to laws of State. But tax so charged shall not exceed 20 per cent. of gross amount. Sub-clause (4) defines royalties which will include any consideration received for use of any copy right of literary, artistic or scientific work including motion picture films and works on film or video tape for use in connection with television, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Clause 5 defines "fees for technical services" and clause (6) defines term "payments for use of equipment" and means payment of any kind term "payments for use of equipment" and means payment of any kind received as consideration for use of or right to use industrial, commercial or scientific equipment. However, clause (1) of article 12 as modified with effect from April 1, 1991, would show that "royalties" and "fees for technical services" arising in Contracting State and paid to resident of other Contracting State may be taxed in that other State. In this modification, category "payments for use of equipment" does not figure. Coming to modification to clause (2), first part of clause (2) is similar to earlier clause (2), however, method of tax so charged is divided into two categories with reference to modified (a) and (b) of clause (4). However, clause (2) was again modified with effect from April 1, 1997, to its original position with slight change of "tax so charged shall not exceed 10 per cent." as against original 20 per cent. Similarly, with effect from April 1, 1998, clause (4) was also restored its original position deleting sub-clause (a) and sub- clause (b). In modification with effect from April 1, 1991, clause (6) definition for payments for use of equipment did not figure. Clause (5) defines fees for technical services and clause (6) defines amount which does not include for fees for technical services. above said clause (6) was further modified with effect from April 1, 1995. Sub-clause (b) of clause (4) as modified with effect from April 1, 1991, defined payments of any kind received as consideration for use of, for right to use industrial, commercial and scientific equipment, thereby literally including category "payments for use of equipment" into category of "royalties". However, clause (4) of article 12 was restored to original position with effect from April 1, 1998. above would show that for all practical purposes, "payments for use of equipment" originally found in clause (1) of article 12 as defined in clause (6) was incorporated in definition of term "royalties" in clause (4) with effect from April 1, 1991, and, subsequently, deleted with effect from April 1, 1998, and thereby completely taken out from clause (1) and clause (2) of article 12. This means that payment for use of equipment or any consideration for use of, for right to use industrial, commercial or scientific equipment is deleted and it is not taxable in Contracting State in which they arise, viz., in given case India. Section 90 of Income-tax Act, 1961, enables and empowers Central Government to issue notification for implementation of terms of Double Taxation Avoidance Agreement. In Union of India v. Azadi Bachao Andolan reported in [2003] 263 ITR 706 (SC), hon'ble Supreme Court considered section 90 of Act and held as follows (headnote): "No provision of Double Taxation Avoidance Agreement can possibly fasten tax liability where liability is not imposed by Act. If tax liability is imposed by Act, Agreement may be resorted to for negativing or reducing it; and, in case of difference between provisions of Act and Agreement, provisions of Agreement would prevail over provisions of Act and can be enforced by appellate authorities and court. Section 90 is specifically intended to enable and empower Central Government, to issue notification for implementation of terms of double taxation avoidance agreement. provisions of such agreement, with respect to cases to which they apply, would operate even if inconsistent with provisions of Income-tax Act. If it was not intention of Legislature to make departure from general principles of chargeability to tax under section 4 and general principle of ascertainment of taxable income under section 5, then there was no purpose in making those sections "subject to provisions of Act. Section 90 was brought into statute book precisely to enable executive to negotiate double taxation avoidance agreement and quickly implement it. Even accepting that powers exercised by Central Government under section 90 are delegated powers of legislation, there is no reason why delegatee of legislative power, in all cases, has no power to grant exemption. delegate of legislative power can exercise power of exemption in fiscal statute. When requisite notification has been issued under section 90, provisions of sub-section (2) of section 90 spring into operation and assessee who is covered by provisions of Double Taxation Avoidance Agreement is entitled to seek benefits thereunder, even if provisions of Double Taxation Avoidance Agreement are inconsistent with those of Act." Therefore, Notification No. S. O. 693(E), dated August 30, 1999 (see [1999] 239 ITR (St.) 56), was issued under section 90 of Income-tax Act bringing in abovesaid modification, as India and Netherlands are members of Organisation for Economic Co-operation and Development (OECD) to limit taxation in line with conventions between India and other countries. Therefore provisions of Agreement would prevail over provisions of Act. Clause (iva) of section 9(1) of Income-tax Act defines "royalties" with effect from April 1, 2002. But, in our considered view, clause (iva) of section 9(1) is not applicable for simple reason that payments for use of equipment was no longer taxable in Contracting State, viz., India after modification dated April 1, 1998, in DTAA. learned standing counsel for Department would rely upon judgment rendered in case of Poompuhar Shipping Corporation Ltd. v. ITO (International Taxation) reported in [2014] 360 ITR 257 (Mad). main question before Division Bench in above decision was whether payment made for taking ship on time charted basis would constitute royalty as defined under section 9(1)(vi)(b) of Income-tax Act. DTAA of Australia, USA, France, Germany, Norway, Singapore and Switzerland were considered and particularly, article 12(3) which defined term "royalties" was under consideration. said article 12(3) is in pari materia to article 12(4) as modified with effect from April 1, 1991 of DTAA with Netherlands. For better appreciation, paragraphs 88 to 92 in case of Poompuhar Shipping Corporation's case (cited supra) are reproduced hereunder (page 316 of 360 ITR): "This takes us to consideration on article 12 under DTAA. Article 12 of Australian DTAA deals with jurisdiction of and State on taxability of royalty. It states that article 8-Ships and aircraft-1. Profits from operation of ships or aircraft, including interest on funds connected with that operation, derived by resident of one of Contracting States shall be taxable only in that State. definition of'royalty' as given under article 12(3) of DTAA with Australia is same as in definition in DTAA with France in article 13, with Germany in article 12; with Norway in article 13; with Singapore in article 12; with Switzerland in article 12 and with U. S. A. in article 12. U. S. A. DTAA specifically reads that'royalty' would mean payments of any kind, as follows: '12. Royalties and fees for included services.-(1) Royalties and fees for included services arising in Contracting State and paid to resident of other Contracting State may be taxed in that other State... (3) term "royalties" as used in this article means: (a) payments of any kind received as consideration for use of, or right to use, any copyright of literary, artistic, or scientific work, including cinematography films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from alienation of any such right or property which are contingent on productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for use of, or right to use, any industrial, commercial, or scientific equipment, other than payments derived by enterprise described in paragraph (1) of article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of article 8.' Thus, while some of DTAAs include payment for use of or right to use of industrial, commercial and scientific experience as heading under royalty, invariably, in all DTAAs payment for use of or right to use of industrial, commercial and scientific equipment, is included in meaning of'royalty'. provision contained in section 9(1)(vi), Explanation 2(iva) is modelled after U. N. Model and is different from what one has in OECD model at present. Thus, while OECD Model got amended to bring payment for use of or right to use of industrial, commercial scientific experience as'royalty', all DTAAs under consideration contain clauses on consideration for use of or right to use of industrial, commercial and scientific equipment as well as experience as'royalty'. Thus, when use or right to use ship for economic benefit is given to assessee, consideration for use of industrial, commercial and scientific equipment is'royalty', assessable under Explanation 2(iva) to section 9(1)(vi) of Income-tax Act. Thus, for purposes of Income-tax Act, under time charter, payment made being for use of ship, same comes within meaning of word'royalty'." While considering DTAA that is applicable to present case and DTAA that was considered in Poompuhar Shipping's case, referred supra, we find that amendment to clause (4) of article 12 with effect from April 1, 1998, by deleting term "payments for use of equipment" from definition of "royalties" makes present case distinguishable on facts. In Poompuhar Shipping's case, referred supra, it was case of hiring of ship on time-charter basis, whereas in present case, dredging equipment is leased out on bareboat basis, namely, without master and crew. Therefore, on facts, decision in Poompuhar Shipping case, referred supra, is distinguishable. learned standing counsel for Department referring to paragraph (2) of article 5 which states that installation or structure used for exploration of natural resources is permanent establishment, provided that activities continue for more than 183 days, pleaded that stand of Department is justified. We are not inclined to accept such plea, as in case on hand dredging equipment was leased out on bare boat basis, viz., without master and crew. Therefore, it will not come under permanent establishment and entire control over equipment was not with foreign company but with Indian company. Therefore, abovesaid plea is not accepted. For foregoing reasons, appellate authority below has rightly considered article 12(4) of DTAA between India and Netherlands and is right in holding that amount received by assessee for hiring out dredgers to Indian company of same name for use in Indian ports is not taxable in India and substantial question of law is answered against Revenue-appellant. In result, appeal is dismissed and order of Income-tax Appellate Tribunal Chennai "A" Bench, dated March 29, 2007, made in I. T. A. No. 1894/Mds/2005 for assessment year 2003-04 is confirmed. No costs. *** Commissioner of Income-tax v. Van Oord ACZ Equipment BV