TDS on Ocean freight

No TDs on Foreigh agancy and his authorised agent. for ocean freight

Payments of Freight to Chinese Shipping Companies not Subject to TDS

We are a Freight forwarding company HQ at Cochin. We have recently indulged in forwarding business with our Chinese counterpart. Now it is time for Freight remittance to Chinese counterpart for an FOB import shipment. We need to know the Income Tax liabilities in this reg. especially in view of DTAA with the Govt. of India & Govt. of China. Also advise further procedures / govt. dues if any for the freight remittance purpose.

One circulars and Article 8 of the Double Taxation Avoidance Agreement signed between India and China gives the answer. The remittance to Chinese counterpart, as facts narrated by you, is not taxable in India, therefore not subject to TDS provision.

In my opinion, if the ships are owned by Chinese, as per the DTAA signed with India, the profit of shipping profits are taxable only in China. Therefore, in my opinion, the freight remittance should be made without TDS, because if the income is not taxable in India, TDS should not be done there.

Read Circular 732 dt 20/12/1995 which says

"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 charter 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.

Now read Article 8 of Double Taxation Avoidance Agreement to understand that in case of shipping industry the profit is taxable only in Contracting State of which the owner of ship is a resident.

"Shipping and air transport -

1. Profits derived by an enterprise which is a resident of a Contracting State from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in that Contracting State.

2. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean profits derived by an enterprise described in paragraph 1 from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft including :

(a) The sale of tickets for such transportation;

(b) The rental of ships or aircraft connected with such transportation; and

(c) Income from use, maintenance, or rental of containers (including trailers, barges, and related equipment for the transport of containers) operated in international traffic.

3. For the purposes of this Article, interest on funds directly connected with the operation of ships or aircraft in international traffic shall be regarded as profits described in this Article, and the provisions of Article 11 (interest) shall not apply in relation to such interest.

4. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency."

TDS is not deductible for Ocean frieght. (Refer Circular No. 5 issued by CBDT in 1995)