TaxTMI 
TaxTMI 
2012 (8) TMI 681
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.... As regards the second question, we have proceeded on the basis of the appellant's case that income on account of slot chartering is taxable under section 44B. The question is answered accordingly as regards income from slot chartering. It is not necessary to answer the question in respect of income from use of containers as the respondent's case does not concern the same. 4. The CIT (A) dealt with the appeals filed by the respondent in separate orders. The Tribunal dealt with the appellant's appeals and the respondent's cross-objections by a common order. 5. The respondent - assessee is incorporated in the United Kingdom and is engaged inter-alia in the international transportation of goods by sea. The facts of Income Tax Appeal No.3024 of 2009 pertaining to A.Y. 2001-2002 are these. The respondent filed its return of income on 5.10.2001 declaring a total income of Rs. 3,00,25,837/-. It showed gross receipts pertaining to freight in the sum of Rs. 40,03,44,489/-. Relying upon section 44B of the Act, the respondent computed its profits and gains chargeable to tax at 7.5% of these receipts to be Rs. 3,00,25,837/-. The respondent claimed exemption under Article 9 of the "Con....
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....tern sectors by using the chartered vessels or availing container slot spaces on vessels owned or chartered by other operators pursuant to Connecting Carrier Agreements. The Connecting Carrier Agreements were entered into by the respondent with OEL, Bengal Tiger Line, GMBH, Germany, Oram Shipping(S) Pte Ltd. Singapore and Shreyas Shipping Limited. The respondent had also chartered two vessels - "Orient Stride" and "Trade Fast" from M/s. Balaji Shipping UK Limited, Dubai and M/s. Orient Express Lines, Mauritius respectively. The respondent owned about 5200 containers and had leased about 2750 containers. A part of the cargo collected from the Indian ports was delivered to the ports outside India directly availing the slot hire agreements. A part of the cargo was also shipped from the Indian ports availing the slot hire agreements to the hubs outside India from where the same were carried to the ultimate destinations also abroad on vessels hired by the respondent. The bills of lading were however, always issued by the respondent in its own name and payment for transportation of the cargo even by connecting carriers on the feeder vessels was made by the respondent. The appellant, a....
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....y were issued by the respondent in either case. 11. The question that falls for consideration therefore, is whether the freight earned from or attributable to the portion of the voyage utilizing the Slot Hire Agreements falls within the ambit of Article 9 of the DTAA. 12. Before referring to the provisions of the Act and the DTAA, it is necessary to understand the nature of Connecting Carrier Agreements which provide for the hire of container slot spaces. In Maritime Law (6^th Edition) the author Christopher Hill states :- "SLOT CHARTERPARTIES This has reference to the carriage of containers, or to use current jargon, TEUs (20-foot equivalent units). The shipowner or operator 'rents out' or hires a 'piece' of space (a percentage of the total space available on the vessel) for carrying TEUs in return for which he receives hire calculated in accordance with the number of slots (accommodation for each TEU) payable whether or not those slots or spaces are actually used. In his judgment in the Tychy (1999) 2 Lloyd's Rep.21) Clarke LJ said '....... there is no distinction in principle between a slot charter and a voyage charter of a part of a ship. They are both in a sense....
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....ships in international traffic shall be taxable only in that State. 2. The provisions of paragraph 1 of this Article shall not apply to income from journeys between places which are situated in a Contracting State. 3. For the purposes of this article, income from the operation of ships includes income derived from the rental on a bareboat basis of ships if such rental income is incidental to the income described in paragraph 1 of this Article. 4. Notwithstanding the provisions of Article 7 (Business profits) of this Convention, the provisions of paragraphs 1 and 2 of this Article shall likewise apply to income of an enterprise of a Contracting State from the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) used for the transport of goods or merchandise. 5. The provisions of this Article shall apply also to income derived from participation in a pool, a joint business or an international operating agency. 6. Gains derived by an enterprise of a Contracting State from the alienation of ships or containers owned and operated by the enterprise shall be taxed only in that State....
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....-section, the amount referred to in clause (i) or clause (ii) shall include the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature.)" 18. Article 9 (1) refers to "Income ... from the operation of ships ... ". Section 44B refers to profits and gains of "the business of operation of ships". The ambit of the identical phrases "operation of ships" in section 44B and Article 9(1) is the same. This conclusion is not arrived at by plucking out the three words from both the provisions and comparing them de hors the context in which they are used in the respective provisions. They are used in a similar context namely in the context of "income" [(as used in article 9(1)] or "profits and gains" (as used in section 44B) from the operation of ships. Both the provisions relate to the same subject namely taxation. The comparison between Article 9(1) and section 44B is, therefore, apposite and in accordance with the mandate of Article 3(3) of the DTAA. The words not having been defined in the DTAA must be given the meaning which they have under the laws of India relating to taxes ....
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....rtered or otherwise operated by the respondents itself. 22. Mr. Singh did not dispute that income from slot hires are taxable under section 44B. He in fact stated that the slot hire charges have always been taxed under section 44B and that it is the Revenue's case even today that they fall within section 44B. The question is whether they also fall within Article 9(1) of the DTAA. 23. A case of the first type clearly falls within Article 9 of the DTAA. Firstly, Article 9 does not require the ship to be owned by an enterprise/assessee. It merely requires the income to be "from the operation of ships in international traffic". There is no warrant for adding to the Article the requirement of the ship being owned by the enterprise. A charter is certainly contemplated by Article 9. So would an enterprise that controls the management/operation of the ship be included in Article 9 even if it does not own the ship. Such enterprises earn income from the operation of ships chartered or otherwise controlled and managed by them. If Article 9 is to be construed narrowly, as suggested by the appellant, it would be denuded of much of its effect. 24. Slot hire agreements have been and r....
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....ned or chartered or otherwise controlled or managed by it in respect of certain routes. It would however, on account of the business exigencies, be required to carry cargo on such routes. Business expediency could arise on account of a number of reasons and different situations such as obliging regular clients, or cultivating new ones. If it were not to do so, it may well loose clientele. Ships owned or chartered or otherwise controlled or managed by an enterprise may not be available on the particular route on a given day or for a particular period. The enterprise may already have entered into contracts or may even be required to enter into contracts for the carriage of goods on that route on that day or during that period. The trade would expect the enterprise to perform its contracts and/or ensure there is no break in its services. This it can do by availing slot hire agreements. Their refusal or failure to do so, may well affect their business and reputation adversely. 27. By availing the facility of slot hire agreements, the enterprise does not arrange the shipment on behalf of the owner of the said vessel, but does so on its own account on a principal to principal basis wi....
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....o-U.K. DTAA per-se, the respondent would still be entitled to the benefit of the provisions for in any event such slot hire agreements are an integral part of the shipping operations of the respondent, who admittedly had also chartered two ships. A view to the contrary would affect the business of such parties merely because the ships chartered by them do not ply on certain routes such as India. 31. It is necessary to preface a reference to the commentaries with a qualification. The reference to the commentaries is only to the extent that they consider as included within the expression "operation of ships" activities that are connected therewith. Whether a particular activity is to be included or not would depend upon the terms of the convention in question and based on the facts and circumstances of the case. 32. Mr. Kaka relied upon the July, 2008 edition of the commentary on Model Tax Convention on Income and on Capital (Condensed Version) OECD published by the Organisation for Economic Co-Operation and Development (OECD). It is useful first to note the nature of the OECD, which is briefly referred to in the commentary as under :- "ORGANISATION FOR ECONOMIC CO-OPERATION....
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....rticle 9(1) of the India -U.K. DTAA. (C) This brings us to the following commentary at pages 139 and 140 of the publication on the Model Tax Convention relied upon by Mr. Kaka. "COMMENTARY ON ARTICLE 8 CONCERNING THE TAXATION OF PROFITS FROM SHIPPING, INLAND WATERWAYS AND AIR TRANSPORT : 4. The profits covered consist in the first place of the profits directly obtained by the enterprise from the transportation of passengers or cargo by ships or aircraft (whether owned, leased or otherwise at the disposal of the enterprise) that it operates in international traffic. However, as international transport has evolved, shipping and air transport enterprises invariably carry on a large variety of activities to permit, facilitate or support their international traffic operations. The paragraph also covers profits from activities directly connected with such operations as well as profits from activities which are not directly connected with the operation of the enterprise's ships or aircraft in international traffic as long as they are ancillary to such operation. 4.1 Any activity carried on primarily in connection with the transportation, by the enterprise, of passengers or ....
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.... or support the international traffic operations. 36. As far as the first type of case is concerned viz. where the slot hire facility is availed of for carriage of goods from a port in India only upto the hub port abroad and is thereafter transhipped on vessels actually operated by the assessee upto the final destination, it is irrelevant whether slot hire agreements are considered to be directly connected with the operation of ships or not directly connected with the operation of ships by the enterprise. In such cases, the slot hire agreements are inextricably interlinked with and connected to the operation of ships by the enterprise. The first type of case would in fact be covered by paragraphs 4 and 4.1 of the commentary. 37. The commentary however, indicates that even the second type of case would be covered by Article 9(1) if the same is only ancillary to the operation of ships by the enterprise. These cases fall within paragraph 4.2 of the commentary. 38. Mr. Kaka also relied upon the commentary of Klaus Vogel on Double Taxation Conventions. He relied upon the Explanatory Notes on the Model Conventions at page 482 to indicate the possible reasons for introducing such....
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....mentary states that, in the first place, this covers profits from the carriage of passengers or cargo, but that it also covers other classes of profits which by reason of their close relationship may be placed in the same category. Certain specific items are discussed in the Commentary. Profits from the leasing of ships or aircraft except where the leasing is on the basis of a bare boat charter are included. (NOTE :- Article 9(3) of the India - U.K. DTAA is different.) This may also cover profits from the cross-leasing of spare aircraft between airlines. Auxiliary activities more or less closely connected with the direct operation of ships and aircraft (discussed in paragraphs 8 and 9 of the Commentary) are also included. An example of this is found in a Rhodesian case where, for a commission, an airline arranged onward sea passages for its passengers with shipping lines. The Board held that this income was entirely incidental to the business of operating aircraft and was therefore exempted by the relevant convention. Similarly, the Internal Revenue Service have ruled that the gains from the sale of obsolete aircraft, engines and spare parts of aircraft previously used for internat....
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....the business of operating aircraft and was therefore exempted by the relevant convention. Similarly, the Internal Revenue Service has ruled that the gains from the sale of obsolete aircraft, engines and spare parts of aircraft previously used for international airline activities are exempted as falling within the scope of "profits from the operation of ..... aircraft and international traffic." 42. Our views on the two types of cases involved in the present appeal are in consonance with the view of the Delhi High Court, the OECD commentary and the commentaries referred to above. 43. Indeed if certain activities connected with the actual operation of ships in international traffic are included in Article 9(1), it must follow that income from utilizing slot hire facilities as availing of in these cases would fall within Article 9(1) for slot hires have a closer nexus, connection and relationship to the actual operation of ships than the illustrative activities mentioned in the above commentaries. 44. Mr. Kaka then relied upon section 115-VB of the Act, which reads as under :- "115-VB. Operating ships.-For the purposes of this chapter, a company shall be regarded as operat....
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....; its profits from core activities referred to in sub-section (2); (ii) its profits from incidental activities referred to in sub-section (5): The provision is not relevant. (2) The core activities of a tonnage tax company shall be- (i) its activities from operating qualifying ships; and (ii) other ship-related activities mentioned as under:- (A) shipping contracts in respect of- (i) earning from pooling arrangements; (ii) contracts of affreightment. Explanation.- ................... (B) specific shipping trades, being- (i) on-board or on-shore activities of passenger ships comprising of fares and food and beverages consumed on board; (ii) slot charters, space charters, joint charters, feeder services, container box leasing of container shipping. (3) and (4)** ** ** (5) The incidental activities shall be the activities which are incidental to the core activities and which may be prescribed for the purpose". 48. While section 115VB includes slot charter agreements in the phrase "operating a ship", section 115-VI draws a distinction between "operating ....... ships" on the one hand and....