Tribunal rules in favor of assessee under India-France DTAA, excluding service tax and upholding arm's length principle

The Tribunal ruled in favor of the assessee, dismissing all revenue's appeals and allowing the assessee's appeals and cross-objections. The Inland Haulage Charges and freight charges from feeder vessels were deemed part of shipping income under Article 9 of the India-France DTAA, exempting them from Indian taxation. Service tax was excluded from gross receipts, and the Indian agent was not considered an Agency PE if remunerated at arm's length. The decision was pronounced on 14.3.2018.

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Issues Involved:
1. Taxability of Inland Haulage Charges.
2. Taxability of freight charges received from transportation of cargo through feeder vessels.
3. Inclusion of service tax as part of gross receipts.
4. Existence of Agency Permanent Establishment (PE).

Issue-wise Detailed Analysis:

1. Taxability of Inland Haulage Charges:
The Inland Haulage Charges (IHC) received by the assessee were contested for their taxability under Article 9 of the India-France Double Taxation Avoidance Agreement (DTAA). The assessee argued that these charges are part of shipping income from international traffic and thus exempt from taxation in India. The Ld. DRP initially ruled in favor of the assessee for AY 2012-13, citing the Bombay High Court's decision in Safmarine Container Lines N.V., which considered such charges as incidental and directly connected with the operation of ships in international traffic. However, for AY 2013-14 and 2014-15, the Ld. DRP reversed its stance, distinguishing between the India-Belgium and India-France DTAAs, noting that the latter does not explicitly include "any other activity directly connected with such transportation."

The Tribunal upheld the assessee's view, emphasizing that the OECD Model Tax Convention and its Commentary support the inclusion of profits from ancillary activities in shipping operations. The Tribunal referred to similar cases under the India-Denmark DTAA and concluded that the Inland Haulage Charges should be considered part of shipping income from international traffic, thus eligible for relief under Article 9 of the India-France DTAA.

2. Taxability of Freight Charges from Feeder Vessels:
The freight charges received for transporting cargo through feeder vessels to mother vessels were another point of contention. The Ld. DRP initially ruled in favor of the assessee for AY 2012-13, based on the Bombay High Court's decision in the assessee's own case and Balaji Shipping UK Ltd. However, for AY 2013-14 and 2014-15, the Ld. DRP reversed its decision, stating that the revenue had not accepted the earlier rulings and had filed Special Leave Petitions (SLPs) before the Supreme Court.

The Tribunal referred to the Bombay High Court's decision in the assessee's own case for AY 2002-03, which held that freight charges from feeder vessels are part of shipping income under Article 9(1) of the India-France DTAA. Consequently, the Tribunal upheld the Ld. DRP's decision for AY 2012-13 and reversed the decisions for AY 2013-14 and 2014-15, ruling in favor of the assessee.

3. Inclusion of Service Tax as Part of Gross Receipts:
The inclusion of service tax collected on Inland Haulage Charges in gross receipts was another issue. The Ld. DRP initially ruled in favor of the assessee for AY 2012-13, citing the Delhi High Court's decision in Mitchell Drilling International Pty Ltd., which held that service tax should not form part of gross receipts. However, for AY 2013-14 and 2014-15, the Ld. DRP reversed its decision, noting divergent views from different High Courts and referring to the Uttarakhand High Court's decision in Halliburton Offshore Services Inc.

The Tribunal upheld the assessee's view, emphasizing that in cases of divergent views, the view favorable to the assessee should be adopted. The Tribunal upheld the Ld. DRP's decision for AY 2012-13 and reversed the decisions for AY 2013-14 and 2014-15, ruling that service tax should not be included in gross receipts.

4. Existence of Agency Permanent Establishment (PE):
The Ld. DRP held that the Indian agent of the assessee, CMA CGM Agencies (India) Private Limited, constituted an "Agency PE" under Clause 6 of Article 5 of the India-France DTAA. The assessee contested this, arguing that the agent was remunerated at arm's length and thus should be considered an independent agent, negating the existence of an Agency PE.

The Tribunal agreed with the assessee, stating that if the agent is remunerated at arm's length, no Agency PE would exist. The Tribunal held that the Indian agent cannot be considered an Agency PE if remunerated at arm's length, thus ruling in favor of the assessee.

Conclusion:
The Tribunal dismissed all the revenue's appeals and allowed the assessee's appeals and cross-objections. The Inland Haulage Charges and freight charges from feeder vessels were held to be part of shipping income under Article 9 of the India-France DTAA, exempting them from Indian taxation. Service tax was excluded from gross receipts, and the Indian agent was not considered an Agency PE if remunerated at arm's length. The order was pronounced on 14.3.2018.

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