Treaty protection for inland haulage charges excludes section 44B taxation and related service tax receipts

Inland haulage charges incidental to shipping operations in international traffic were treated as covered by the shipping-income article of the India-France treaty, so they could not be brought to tax under section 44B. The Tribunal also held that service tax collected on those haulage charges was not separately includible in taxable receipts, because the addition depended on taxing the underlying freight-related income. The article notes that the appeal succeeded on these substantive additions and granted partial relief to the assessee.

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Issues: (i) Whether inland haulage charges received by the assessee were taxable in India under section 44B or were exempt as income from operation of ships in international traffic under Article 9 of the India-France Double Taxation Avoidance Agreement. (ii) Whether service tax collected on inland haulage charges was includible in the assessee's taxable receipts.

Issue (i): Whether inland haulage charges received by the assessee were taxable in India under section 44B or were exempt as income from operation of ships in international traffic under Article 9 of the India-France Double Taxation Avoidance Agreement.

Analysis: The inland haulage charges were held to be incidental to and directly connected with the assessee's shipping operations in international traffic. The Tribunal followed its earlier decision in the assessee's own case and the reasoning adopted in the connected group matters, holding that the absence of an express reference to "any other activity directly connected with such transportation" in the India-France treaty did not alter the character of the receipt. The treaty provision governing shipping income applied, and the amount could not be brought to tax under section 44B.

Conclusion: The issue was decided in favour of the assessee. Inland haulage charges were held not taxable in India.

Issue (ii): Whether service tax collected on inland haulage charges was includible in the assessee's taxable receipts.

Analysis: The addition of service tax was founded on the premise that inland haulage charges themselves were taxable under section 44B. Since the underlying inland haulage charges were held to fall within the treaty protection as shipping income in international traffic, the basis for including service tax in gross receipts failed. The Tribunal also followed its earlier view that the service tax issue was covered in favour of the assessee.

Conclusion: The issue was decided in favour of the assessee. Service tax collected on inland haulage charges was held not taxable in India.

Final Conclusion: The appeal succeeded on the two substantive additions, while the remaining grounds were either consequential or did not survive for separate adjudication, resulting in partial relief to the assessee.

Ratio Decidendi: Inland haulage charges that are incidental to shipping operations in international traffic are taxable, if at all, only under the applicable treaty provision for shipping income and not under section 44B, and ancillary levies collected on such receipts do not become taxable once the underlying receipt is protected by the treaty.

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