2010 (5) TMI 670 - AT - Income Tax

Tribunal Upholds Exemption on Inland Haulage Charges Income; Corrects Tax Rate Error

Safmarine Containers Lines NV. Versus Deputy Director of Income-tax (International Taxation), 2(1), Mumbai

The Tribunal dismissed the Revenue's appeal, upholding that Inland Haulage Charges (IHC) income is exempt from tax in India under Article 8 of the ... Double taxation relief Issues Involved:1. Taxability of Inland Haulage Charges (IHC) under Article 8 of the Indo-Belgium DTAA.2. Taxability of interest on income-tax refund under Article 11 of the Indo-Belgium DTAA.3. Correct rate of tax to be applied on interest income.Detailed Analysis:1. Taxability of Inland Haulage Charges (IHC):The Revenue argued that income from Inland Haulage Charges (IHC) should be taxable in India as it is not covered under Article 8 of the Indo-Belgium DTAA, which pertains to 'International Transport.' The Revenue claimed that IHC should be taxed as 'Business Profits' under the Income-tax Act since it is not directly connected with the operation of ships in international traffic.The Assessee, a non-resident company engaged in the business of operating ships, argued that IHC is incidental and closely connected with the direct operation of ships and thus falls under Article 8 of the Indo-Belgium DTAA, which exempts such income from being taxed in India.The Tribunal noted that the issue had already been decided in favor of the Assessee in earlier years, where it was held that income from IHC is covered under Article 8 of the DTAA. The Tribunal reiterated that the Assessee's inland transportation activities are directly connected with the operation of ships in international traffic, as they facilitate the transportation of goods from the place of origin to the destination. Thus, the income from IHC is exempt from tax in India under Article 8 of the DTAA.2. Taxability of Interest on Income-tax Refund:The Assessee received interest on an income-tax refund for the assessment year 1990-91 and argued that this interest should be exempt under Article 8(2)(a) of the Indo-Belgium DTAA, which states that interest on funds directly connected with the operation of ships in international traffic shall be regarded as income from such operations and not subject to withholding tax.The Assessing Officer disagreed, stating that the interest on income-tax refund is not directly connected with the operation of ships and should be taxed under Article 11 of the DTAA, which pertains to interest income.The Tribunal upheld the view of the Assessing Officer and CIT(A), concluding that the interest on income-tax refund is not directly connected with the operation of ships in international traffic. The interest arose due to the delay in refunding taxes and is considered income from debt claims, thus falling under Article 11 of the DTAA and subject to tax in India.3. Correct Rate of Tax to be Applied on Interest Income:The Assessee contested the rate at which tax was charged on the interest income. The Assessing Officer had initially stated that the tax rate should be 15% as per Article 11(2) of the DTAA but then calculated the tax at 40%.The Tribunal directed the Assessing Officer to apply the correct tax rate of 15% on the interest income, as per the provisions of Article 11(2) of the DTAA, thereby correcting the error in the tax calculation.Conclusion:The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision that IHC income is exempt from tax in India under Article 8 of the Indo-Belgium DTAA. The Tribunal also upheld the taxability of interest on income-tax refund under Article 11 of the DTAA but directed the Assessing Officer to apply the correct tax rate of 15%. Thus, the Assessee's appeal was partly allowed.