Section 172: Freight Must Be Earned by Non Reisdent Ship !

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The company ‘LL’ was acting as an as agent for its foreign principal ‘GOI’. Its work assignment was to facilitate departure of ship after cargo was loaded with iron ores, to execute guarantee bonds guaranteeing payment of tax. They were disponee owners of ships. ‘GG’ took ship on daily hire rate basis. ITO held that one-sixth of hire paid to owners of ship by time charters was regarded as taxable income for purpose of section 172 and the agent was held liable to pay tax. Whether the agent-company was not liable to pay the tax. On writ, the agent company raised the issues; (1) that the petitioner-company was not liable to pay the tax as guarantor in terms of the guarantee bond because the time characters were not liable under section 172; (2) that the agent company was not the guarantor for the owners of the ship and, consequently, it was not liable for tax liability, if any, incurred by these owners and (3) that the order of assessment violated the principles of natural justice.
The Gajarat in case of Lima Leitao and Co. Ltd vs Un ion O f India held vide its order dt:11/13/1967 as under :

As will appear from the terms and conditions of the charter party agreement, the ship was chartered for a single voyage from Cochin to Japan via Mormugao. The charterers were given the liberty to sublet the ship for all or any part of the time covered by the charter party agreement. The ship was to be placed at the disposal of the charterers on sailing from Cochin on dropping pilot. The charterers were required to pay for hire charges the use on ship’s total deadweight carrying capacity. The hire was to continue until the hour of the day of re-delivery of the ship, at Japan, at a safe port specified in the agreement. The captain with ship’s crew was to be under the orders and directions of the charterers as regards employment and agency. The agreement was not to be construed as a demise of the ship to the time charterer. It will appear from this agreement that for the voyage determined the time charterers were the disponee owners and the master of the ship was their agent. The dictionary meaning of the words “dispone” mean “to convey legally” and “disponee”, “the person to whom anything is disponed”. In certain cases, the master of a ship may be regarded for the purposes of the law relating to carriage of goods by sea as two persons rolled into one. He is the agent of the ship owner. He is also the agent of the owner of the cargo shipped as in the instant case. In each of these capacities he has certain duties and a certain authority.

The guarantee bond implied that in case the principals, i.e., the time charterers were not liable to pay the tax under section 172, the petitioner-company would then be absolved from all liability to pay the tax assessed and later demanded by the ITO in terms of the guarantee bond. There can be no default when there is no liability. The liability is to be restricted on the bond consistent with its recitals. There can be no contract of guarantee if liability does not exist. The liability of the guarantor presupposes the existence of a separate liability of the principal debtor and his liability is thus secondary which comes into existence only in default by the principal debtor.

It is true that section 172 does not state that freight should be paid or payable to the owner or time charterer before tax liability is incurred. It may, however, be stated that when payment is made to the owner or charterer on account of the carriage of goods shipped that payment is to be regarded as freight for the purposes of a contract of affreightment. When a ship owner or charterer agrees to carry goods in return for some money paid or payable such a contract is called a contract of affreightment and the amount paid is called “freight”. “Freight” in the ordinary mercantile sense is the reward payable to the carrier for the carriage of the goods. The true test of the right to freight is the question whether the service in respect of which the freight was contracted to be paid has been performed. When the time charterers carried their own iron ore in this case they served their own interests, and, this kind of self-service is not what seems to be contemplated for the purposes of assessment. It is correct that what is liable to tax under sub-section (2) of section 172 is the amount paid or payable on account of carriage of goods to the owner or charterer whether this amount is termed as freight or termed charter hire.

Where a ship earned freight for carriage of goods then section 172 would seem to be attracted, but not when it earned no freight, as in the instant case. The amount paid to the owners of the ship by the time or voyage characters by way of daily hire, was not the determining factor for the purposes of assessment under section 172. The time charter hire was for the use and hiring of the ship at a certain rate, but this hire paid to the owners of the ship was not on account of carriage of iron ore shipped on the ship chartered by the time charterers. There has to be a shipper of goods other than a time charterer carrying his own cargo before liability to tax can arise. What was paid or payable to the owners of the ship-strictly speaking was not freight at all, but it was in the nature of a rent for the use and the hire of the ship .The ITO ought not to be permitted to levy tax on the basis of misconstruction of section 172. The petitioner was not liable to pay the tax as guarantor in terms of the guarantee bond, because this section was not applicable. The guarantee bond would seem to show that the liability of the petitioner-company is qua the time charterers and not qua the owners of the ship. The ITO proceeded to assess the petitioner-company without ascertaining whether it represented the owners or the time charterers.

Moreover, the petitioner-company acted as agents for the master of the ship, but, the master of the ship was an agent of the time charterers for the duration of the voyage of the ship and, therefore, as there were no freight earnings by the time charterers, consequently, the petitioner-company would not be liable. The master of the ship combined two roles for the purposes of the charter party agreement. The owners of the ship after the ship was let out on hire to the time charterers and placed at their disposal, had nothing to do with the carriage of the iron ore. Therefore, prima facie, the owners of the ship also might not be liable. But this question did not call for determination in this case for the guarantee bond was given on behalf of the time charterers and not on behalf of the owners of the ship. The liability of the petitioner-company arose out of the guarantee bond, and not independently thereof. The ITO proceeded on the basis of this bond in support of the demand notice requiring the petitioner-company as guarantor to pay the tax. It was open to the ITO to assess the owners of the ship in case they were liable.

As will appear from the scheme of section 172 of the Act, the assessment proceeding is a quasi-judicial proceeding. There was a lis between the petitioner-company representing the time charterers and the ITO. The former repudiated the liability on the ground that the time charterers were not liable. The latter regarded the petitioner-company as liable. The liability was not merely contractual in terms of the guarantee bond. It was dependent on the liability of the time charterers to the tax assessed. The lis had to be determined objectively after ascertainment of facts and possibly legal argument and not according to the personal opinion of the ITO. The assessment was to be arrived at on objective as distinguished from a purely subjective consideration.

The petitioner-company was not given any reasonable opportunity to convince the ITO that the view taken by him was not in conformity with the scheme of section 172. A personal hearing is not a necessary pre-requisite in all cases of quasi-judicial proceedings, but a reasonable opportunity is necessarily to be given. The petitioner-company was confronted with fait accompli and this was not fair play. The ITO was under a duty to act judicially. He was acting quasi judicially when he proceeded to assess the petitioner-company.

The fact that the assessment was arrived at in absence of any return received either from the petitioner or the time charterers, was one more ground of the vulnerability of the order of assessment. Thus, the principles of natural justice were not observed in the instant case. The assessment proceedings under section 172 being quasi-judicial in its nature, the respondents are subject to the writ of prohibition or certiorari . This writ will not issue against an executive officer, but the High Courts have power to issue in a fit case an order prohibiting him from acting without jurisdiction or in excess of jurisdiction. Assuming the ITO acted as an executive officer, when he proceeded to act in terms of the guarantee bond, even then he would be subject to the direction prohibiting him from acting arbitrarily.

Writ was, accordingly, issued quashing the assessment order and the notice of demand based thereon.

Reference 70 Itr 518