Circular No. 732

What this is

Circular No. 732 was issued by the Central Board of Direct Taxes on 20 December 1995. Its subject is 732 dated 20 12 1995.

This one is about a tax treaty. India’s treaties enter Indian law by notification under section 90; where the instrument below is that notification, its date decides from when the treaty may be applied, and where it is a circular, it is the Board telling its officers how it reads the treaty — which is not the same thing.

What it does

Replaces the voyage-by-voyage no objection certificate with an annual one where a treaty puts shipping profits beyond Indian tax. Under section 172, 7.5 per cent of the freight paid or payable for carriage from an Indian port is deemed to accrue in India, and port clearance follows only on a return, evidence of payment, or satisfactory arrangements to file and pay within thirty days of departure. Where the ship belongs to an enterprise of a country whose double taxation agreement with India taxes shipping profits only in the country of residence, no tax is payable here, and the Board decides that the Assessing Officer may issue a no objection certificate valid for a year after carefully verifying the relevant treaty provisions. Before issuing it, he must be satisfied that the company is engaged in 'international traffic' as defined in the treaty, and must take an undertaking that no ship of the company will be in any other traffic while the certificate runs.

Why it was issued

It was represented to the Board that where no tax is payable in India the requirement of a fresh no objection certificate before every voyage should be done away with.

Who it reaches

• Non-resident shipping companies from treaty countries calling at Indian ports
• Masters and agents obtaining port clearance
• Assessing Officers issuing no objection certificates under section 172
• Customs authorities granting clearance

The provisions it speaks to

The instrument, as the Board published it

915. 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.

What to watch

• The annual certificate depends on the treaty actually reserving shipping profits to the residence State; a different article means no relief.
• The undertaking on international traffic is a condition of issue, and coastal or other traffic during the year would fall outside it.
• The concession is procedural; the section 172 charge itself is untouched where the treaty does not exempt.
• The term 'international traffic' takes its meaning from the particular treaty, so it must be read in each case.

Where you meet it

When a shipping agent applies for a no objection certificate before port clearance for a foreign-flag vessel.

On the same provision

• Circular No. 9 — 916. Clarification regarding treatment of tax paid under section 172(3)/(4) by a non-resident engaged in shipping busine 9 July 2001
• Circular No. 730 — 914. Whether non-resident assessees engaged in business of carriage by shipping of passengers and goods, etc., shall nei 14 December 1995
• Circular No. 723 — Section 172 l Shipping Business of Non-residents 19 September 1995

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