IN HIGH COURT AT CALCUTTA Constitutional Writ Jurisdiction Original Side Present: Hon ble Justice Arindam Sinha W.P. no.1295 of 2008 with W.P.no.272 of 2009 MAERSK LINE U.K. LTD & ANR Versus DEPUTY DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATION-2(1), KOLKATA & ANR For petitioners : Mr. Porus Kaka, Sr. Adv. Mr. Vipul Kundalia, Adv. Mr. Manish Kanth, Adv. Ms. Sonal Saha, Adv. For respondents : Mr. U. Chakraborty, Adv. Ms. Mamta Bhargava, Adv. Heard on : 20.08.2015, 13.10.2015 & 02.12.2015. Judgment on : 22nd December, 2015. Court: These two writ petitions are at instance of two partners of partnership firm. petitioner no.1 is UK based partner while petitioner no.2 is partner based in Netherlands. partnership is assessee known as P & O Nedlloyd which suffered issuance of notices under Section 148 of Income Tax Act, 1961 relating to assessment years 2005-2006 and 2006- 2007. notices are annexures P-9 and P-13 to respective writ petitions. challenge in these writ petitions is to said notices. Mr. Kaka, learned senior Advocate appearing on behalf of petitioners had drawn attention to assessment order dated 10th November, 2008 relating to noticee s assessment year 2006-07. In paragraph 5 of said order department was of view that as per provisions of Double Taxation Avoidance Agreement (DTAA), income from operation of ships in international traffic is not liable to tax in India in hands of either of two corporate partners. However department went on to say further that which petitioners contend, cannot be sustained. PONP being partnership firm based in U.K., it is fiscally transparent entity in U.K. and hence outside ambit of treaty between India and U.K. Its income is therefore, exigible to tax as per provisions domestic law. On other hand income of partner in firm is exempt u/s.10(2A) of Income-tax Act 1961. Mr. Kaka submitted, distinction between partnership and its partners regarding same income cannot be drawn for purpose of taxing partnership in India. He submitted, DTAA had everything to do with income and avoidance of double taxation on it. income sought to be made subject matter of assessment proposed by impugned notices, was already accepted as nil in hands of partners. That same income could not thereafter be taken to be income exigible to tax in India in hands of partnership. He referred to Articles 9(5) and 8A (4) of respective treaties that India has with UK and Netherlands. He then submitted position had been made clear by Supreme Court in case of Union of India vs. Azadi Bachao Andolan reported in (2003) 263 ITR 706. He submitted Supreme Court had interpreted law on this aspect to be that it was crucial to define fiscal residence of company very accurately. State of residence is one entitled to levy tax on corporation s worldwide profit. He relied on following portions of judgment: In our view, contention of respondents proceeds on fallacious premise that liability to taxation is same as payment of tax. Liability to taxation is legal situation; payment of tax is fiscal fact. For purpose of application of article 4 of DTAC, what is relevant is legal situation, namely, liability to taxation, and not fiscal fact of actual payment of tax. If this were not so, DTAC would not have used words, liable to taxation , but would have used some appropriate words like Pays tax . On language of DTAC, it is not possible to accept contention of respondents that offshore companies incorporated and registered under MOBA are not liable to taxation under Mauritius Income-tax Act; nor is it possible to accept contention that such companies would not be residence in Mauritius within meaning of article 3 read with article 4 of DTAC . Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx ..In John N. Gladden v. Her Majesty Queen 85 D.T.C 5188 at 5190, principle of liberal interpretation of tax treaties was reiterated by Federal Court, which observed: Contrary to ordinary taxing statute tax treaty or convention must be given liberal interpretation with view to implementing true intentions of parties. literal or legalistic interpretation must be avoided when basic object of treaty might be defeated or frustrated in so far as particular item under consideration is concerned. Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx ...To extent that exemption is agreed to, its effect is in principle independent of both whether other contracting State imposes tax in situation to which exemption applies, and of whether that State actually levies tax. Commenting particularly on German Double Taxation Convention with United States, Vogel comments: Thus it is said that treaty prevents not only current , but also merely potential double taxation . Further, according to Vogel, only in exceptional cases, and only when expressly agreed to by parties, is exemption in one Contracting State dependent upon whether income or capital is taxable in other Contracting State, or upon whether it is actually taxed there. (see in this connection Klaus Vogel, Double Taxation Convention, pages 26-29, third edition). It is, therefore, not possible for us to accept contentions so strenuously urged on behalf of respondents that avoidance of double taxation can arise only when tax is actually paid in one of Contracting States. He thus submitted partners of firm had fiscal domicile offshore and income of it was taxed in their hands in respective countries of residence of partners, which was situation better than facts in Azadi Bachao Andolan (supra) where companies operating out of Mauritius were not taxed in that State. Revenue could not seek to make distinction between partners and partnership to maintain impugned notices against firm. In any event, according to him, reasons to believe also included contention of Revenue alleged to have been established in case of assessee firm for assessment year 2002-03 which was negated by this Court in case of P & O Nedlloyd Ltd. & Ors. vs. Assistant Director of Income-tax reported in (2014) 269 ITR 282 (Cal). Mr. Kaka submitted still further, fiscal domicile of partnership based in UK and constituted by petitioners being offshore companies, was in that country. He relied on abstract of Section 12 (AA) of Tax Management Act, 1970 of UK which provides for partnership returns. He further relied on Article 3(1)(h) of UK India DTAA for definition of term enterprise of contracting State . said definition provides that such enterprise is one carried on by resident of contracting State. He then relied on Article 9 of said convention in particular sub-Articles (1) and (5) to submit that partnership being enterprise of UK was only taxable in that State. Mr. Chakraborty assisted by Ms. Mamta Bhargav, learned Advocates appeared on behalf of Revenue and had initially submitted matter should be adjourned pending decision of Supreme Court in Appeal by Special Leave preferred against P & O Nedlloyd Ltd. & Ors. (supra) which submission was vehemently opposed and thereafter matter heard. He then had submitted on instructions that notices under Section 148, issued to partnership, were good notices and should not be interfered with. Mr. Chakraborty relied on Article 3 of Convention between Government of Republic of India and Government of United Kingdom of Great Britain and Northern Ireland for avoidance of double taxation in particular paragraphs 1(e) and 1(f) thereunder, to submit that noticee, being partnership firm, was transparent to fiscal laws of UK. It cannot be said that noticee had fiscal domicile there. partners having fiscal domicile elsewhere could not be taken to mean that partnership though based in UK also had fiscal domicile there. He submitted, furthermore noticee was not person under convention to be able to resist issuance of impugned notices to it. Mr. Kaka, in reply reiterated that argument of Revenue stood negated by decision in P & O Nedlloyd Ltd. & Ors. (supra). He submitted, another better interpretation of Article 3 of said convention than one given in P & O Nedlloyd Ltd. & Ors. (supra) was possible. According to him, better interpretation of paragraph 2 of said Article was that thereby, Indian partnerships were brought within meaning of term person defined by treaty, to be covered by it, who, in event did business in UK, would be able to resist demands of income tax by that State under treaty as having fiscal domicile in India. He added, interpretation of Article 3, paragraph 1(f), according to him, was that partnerships per se were not persons thereunder and, therefore said partnership not being Indian partnership could not have had impugned notices issued to it by Revenue. Two contentions were raised by Revenue in seeking to resist challenge made in writ petitions. first was that writ petitions should be adjourned pending decision of Supreme Court in appeal by Special Leave Petition against P & O Nedlloyd Ltd. & Ors. (supra). That decision was rendered by this Court in two writ petitions containing challenge to notices issued under Section 148 of Income-tax Act, 1961 against said partnership relating to escapement of assessment of income for assessment years 1997- 98,1998-99,1999-2000,2000-01 and 2001-02. assessments made of those years were of nil tax to be paid, reassessment by issuance of notices as aforesaid was sought and successfully challenged by petitioners therein who are petitioners herein also. In these two writ petitions petitioners have challenged said notices relating to assessment years 2005-06 and 2006-07. respective assessment orders dated 31st October, 2007 and 10th November, 2008 relating to those assessment years are annexures P-8 and P-10 to writ petitions. Assessments made by both orders were that income tax payable on income from operation of ships by partnership for years of assessment was nil. Hence, notices seeking reassessment. Since said assessment orders are not subject matter of appeal pending before Supreme Court, this Court accepted vehement opposition on part of petitioners to adjournment of hearing of writ petitions and had proceeded with same on their submission that points arising out of challenge made were partly covered by said earlier decision of this Court, pending adjudication in appeal. department has treated noticee as being partnership firm based in UK and transparent to tax laws of that country. noticee is not person under treaty was also submission made on behalf of both parties. Its income is, therefore, exigible to tax as per provisions of domestic law according to Revenue. petitioners have annexed to their writ petitions note on partnership provisions in 1993 UK-India DTAA written by Head of Tax Treaty Negotiations and Competent Authority, HM Revenue and Customs, London from which following is extracted. Under UK tax law, partnership established in UK is required to file partnership return which includes partnership statement disclosing income received by partnership from partners joint business operations. trading profit of enterprise is then calculated in hands of partnership. However, once calculated, trading profits are allocated to partners according to their agreed shares and partners are then subject to corporation tax on their share as if it derived from trade carried on alone by that partner. It is partners that are subject to UK tax on partnership profits. Common contentions of parties appear to be that:- i) noticee is partnership firm based in UK; and ii)the noticee is not person under treaty. relevant clauses of treaty in this regard are reproduced below: ARTICLE 3-General Definitions 1 . (a) (b) (c) (d) . (e) term Contracting State and other Contracting State mean India or United Kingdom as context requires: (f) term person includes individual, company and any other entity which is treated as taxable unit under taxation laws in force in respective Contracting States, but subject in paragraph 2 of this article does not include partnership: (g) .. (h) term enterprise of Contracting State and enterprise of other Contracting State mean respectively enterprise carried on by resident of Contracting State and enterprise carried on by resident of other Contracting State: (i) . (j) (k) 2. partnership which is treated as taxable unit under Income tax Act, 1961 (43 of 1961) of India shall be treated as person for purposes of this Convention. ARTICLE 9- Shipping 1. Income of enterprise of Contracting State from operation of ships In international traffic shall be taxable only in that State. 2 .. 3 .. 4 .. 5. provisions of this Article shall apply also to income derived from participation in pool, joint business or international operating agency. 6 . contention of Revenue appears to be that noticee is fiscally transparent entity in UK being outside ambit of treaty between India and that country as not being person thereunder. Its income is exigible to tax in India under Income-tax Act, 1961 while partners thereof exempt under Section 10(2A) of said Act. It follows that Revenue has treated noticee as person within meaning of Section 2(31) of said Act to apply charging Section 4 thereof which is reproduced below: 4.(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to provisions including provisions for levy of additional income-tax of, this Act in respect of total income of previous year of every person: Provided (2) .. Similar situation was dealt with in P & O Nedlloyd Ltd. & Ors. (supra) where this Court held noticee to be person covered by treaty. Applying that decision to facts of this case noticee stands covered by treaty as person thereunder and being enterprise of Contracting State, taxable only in that State. Nevertheless, since on behalf of petitioner it was also submitted in alternative that noticee is not person covered by treaty though such submission not made in agreement with submission to same effect made by Revenue, purportedly similar submissions must be considered. At first instance, if noticee is not covered by treaty then contention of Revenue will be correct that it is tax transparent in UK and, therefore, its income exigible to tax under domestic law. At second instance if by application of Article 3, paragraph 2 of treaty only Indian partnerships are to be covered thereby then such partnerships cannot be taxed in UK as having fiscal domicile in India. That situation is not however borne out by facts in this case. This court is unable to take different view than one already taken P & O Nedlloyd Ltd. & Ors. (supra) on this issue as persuaded by submissions made on behalf of petitioners. Partnerships are not taxed in UK, be it partnership based there or here in India. Only partnerships established in UK are required to file return there as noted above. On other hand, where partnership based in UK is treated as person under domestic law as its income exigible to tax thereunder, it follows that paragraph 2 of Article 3 of convention is to be given interpretation so as to benefit such partnership based in UK which since not taxed under laws there might be treated as liable to tax in India. Mr. Chakraborty had fairly submitted that there was subsequent amendment made to treaty and duly notified whereby similar issue would not arise in future against noticee. For reasons aforesaid, this Court is of view that noticee is person covered under treaty and being enterprise of UK, same has fiscal domicile in UK where it is based. Its income from operation of ships in international traffic is not exigible to tax under domestic law. Consequently impugned notices are set aside and writ petitions disposed of. Urgent photostat certified copy of this judgment, if applied for, be given to parties on usual undertaking. (ARINDAM SINHA, J.) Maersk Line U.K. Ltd & Anr v. Deputy Director of Income Tax, International Taxation-2(1), Kolkata & Anr