2020 (1) TMI 1555 - AT - Income Tax

Tribunal rules on taxability of freight charges under India-Germany DTAA

Hapag Lloyd AG C/o Hapag Lloyd India Pvt. Ltd. Versus Deputy Commissioner of Income-tax (Internatioal Taxation), Range-2 (2) (2), Mumbai.

The Tribunal ruled in favor of the assessee regarding the taxability of freight charges under Article 8 of the India-Germany DTAA and the levy of interest ... Taxability of freight charges from transportation of cargo through feeder vessels - whether freight income from transportation of cargo through feeder vessels is not eligible for benefit under Article 8 of India-Germany DTAA? - HELD THAT:- In the case of the assessee for A.Y. 2007-08 in Hapag–Llyod Container Line GMBH Vs. Addl. Director of Income-tax (International Taxation), Mumbai [2012 (5) TMI 9 - ITAT MUMBAI] keeping in view the observations of the Hon‟ble High Court in the case of Director Of Income-tax (International Taxation) Vs. Balaji Shipping U.K Ltd. [2012 (8) TMI 681 - BOMBAY HIGH COURT], had held, that the assessee would be eligible for exemption under the treaty provisions in respect of revenue that was earned by it from feeder vessels obtained on slot hire arrangement basis We have perused the aforesaid orders and find ourselves to be in agreement with the view taken by the Tribunal in the aforesaid years in the case of the assessee. On the basis of our aforesaid observations, we are of the considered view that the benefits of Article 8 of the India-Germany DTAA would also be available to the assessee in respect of the revenue that was earned by the assessee from the feeder vessels obtained on slot hire arrangement basis. Accordingly, we set aside the order of the CIT(A) in terms of our aforesaid observations. The Grounds of appeal No. 2 to 4 raised by the assessee before us are allowed. Agency PE in India - HELD THAT:- We are further of the view that as we have held that the benefit of Article 8 of the India– Germany DTAA would also be available to the assessee in respect of the revenue earned by it from the feeder vessels obtained on slot hire arrangements, therefore, the Grounds of appeal Nos. 5 to 7 as to whether the assessee had an agency PE in India having been rendered as academic are not being adverted to and adjudicated upon by us and are left open. The Grounds of appeal No. 5 to 7 are dismissed in terms of our aforesaid observations. Interest levied on the assessee u/s 234B - HELD THAT:- We find, that the said issue is covered in favour of the assessee by the decision of the Hon’ble High Court of Bombay in the case of DDIT(IT) Vs. NGC Network Asia LLC [2009 (1) TMI 174 - BOMBAY HIGH COURT] as held that interest under Sec. 234B would not be applicable to a non-resident assessee. Issues Involved:1. Taxability of freight charges from transportation of cargo through feeder vessels.2. Agency Permanent Establishment (PE) status of Hapag Lloyd India Private Limited (HLIPL).3. Short grant of TDS credit.4. Levy of interest under section 234B of the Income Tax Act.5. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.Issue-wise Detailed Analysis:1. Taxability of Freight Charges from Transportation of Cargo through Feeder Vessels:The core issue was whether the freight income earned from feeder vessels, which were neither owned, chartered, nor leased by the assessee, would fall within the scope of Article 8 of the Double Taxation Avoidance Agreement (DTAA) between India and Germany. The assessee argued that such income should be covered under Article 8, citing the judgment of the Bombay High Court in the case of DIT (IT) Vs. Balaji Shipping Ltd. (UK) [77 DTR 361](Bom) and the OECD guidelines. The AO, however, held that since the India-Germany DTAA did not explicitly include feeder vessels, the income was taxable under Section 44B of the Income Tax Act. The DRP upheld the AO's view, but the Tribunal, relying on previous orders in the assessee's own case and the High Court's judgment in Balaji Shipping, concluded that the benefits of Article 8 would be available to the assessee for revenue earned from feeder vessels obtained on a slot hire arrangement basis.2. Agency Permanent Establishment (PE) Status of Hapag Lloyd India Private Limited (HLIPL):The AO held that HLIPL constituted an agency PE of the assessee in India, as it was not an independent agent under Article 5 of the India-Germany DTAA. The DRP upheld this view, noting that HLIPL worked solely for the assessee. However, since the Tribunal held that the benefits of Article 8 were applicable to the revenue from feeder vessels, the question of agency PE was rendered academic and was not adjudicated.3. Short Grant of TDS Credit:The assessee contended that there was a short grant of TDS credit amounting to Rs. 60,06,811, which was incorrectly deposited in the PAN of the agent (HLIPL). The Tribunal restored this matter to the AO for verification. If the income corresponding to the TDS was assessed in the hands of the assessee and no credit was claimed by the agent, the AO was directed to allow the necessary credit.4. Levy of Interest under Section 234B of the Income Tax Act:The assessee disputed the levy of interest under Section 234B amounting to Rs. 29,82,996. The Tribunal, following the Bombay High Court's decision in DDIT(IT) Vs. NGC Network Asia LLC (2009) 313 ITR 187 (Bom), held that interest under Section 234B would not be applicable to a non-resident assessee. The Ground of appeal was allowed in favor of the assessee.5. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:The assessee also challenged the initiation of penalty proceedings under Section 271(1)(c). The Tribunal dismissed this ground as premature.Separate Judgments:The Tribunal delivered a common judgment for both the appeals (ITA No. 5898/Mum/2019 and ITA No. 218/Mum/2020), addressing the issues comprehensively and providing detailed directions for verification and reconsideration where necessary. The appeals were allowed in terms of the Tribunal's observations.Conclusion:The Tribunal ruled in favor of the assessee on the major issues related to the taxability of freight charges under Article 8 of the India-Germany DTAA and the levy of interest under Section 234B. The matter of short TDS credit was remanded for verification, and the initiation of penalty proceedings was dismissed as premature. The judgment underscores the importance of adhering to treaty provisions and established judicial precedents in international taxation matters.