TaxTMI 
TaxTMI 
2013 (9) TMI 14
X X X X Extracts X X X X
X X X X Extracts X X X X
...., erred in denying the benefit of Article 9 of the Double Taxation Avoidance Agreement between India and Denmark ('Tax Treaty') in respect of total freight income of Rs. 18,50,00,320/- earned from four vessels namely Atlantic Lady, PONL Los Angels, Independent Spirit and Orient Patriot despite the fact that the appellant is undisputedly a shipping company which is engaged in the business of operation of ships in international traffic. 1 (b) Without prejudice to the above, learned DDIT and DRP erred in estimating income of Rs. 1,85,00,032/- in respect to above-mentioned four vessels (c) 10% of total freight receipts, applying Rule 10 of the Income- tax Rules, 1962. 1 (c) Without prejudice to above, the DDIT and DRP erred in not appreciating that since the Indian agent of the appellant has been remunerated with a commission at arm's length, no further attribution can be made in the hands of the appellant since its tax liability is extinguished. 1 (d) Without prejudice to above, the learned DDIT and DRP erred in not treating the income from four vessels as income from business of operation of ships in international traffic and, thereby erred in not applying the provisions of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e tax on the basis of (a) Double Income-tax Relief Certificate issued by the Tax Department itself, and (b) the fact that the income of Appellant was anyway tax deductible at source". 4. Grounds no. 1(a) to 1(e) pertain to estimation of Rs. 1,85,00,032/- as business income, distinct from shipping business. 5. The facts, as emerging from the final order of the AO, in pursuance of direction given by the DRP are that the assessee is a Danish Public Limited Company and is a tax resident of Denmark. The assessee is engaged in operation of ships on international waters, wherein it operates handling of cargo and containers on global basis. The assessee has disclosed its income from freight at Rs. 26,369,766,322/-. As per the AR and as per the impugned assessment order, the assessee touched Indian ports and carried on 145 voyages. Out of these 145 voyages, the assessee was able to provide evidence for the claim of Indian Demark DTAA in 140 cases, which included ship Registration Certificates and copies of Chartered Party Agreements. With respect of 5 ships, each evidence could not be produced, but in the proceedings before the DRP, the assessee was able to provide documents in respec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te. 9. Article 9: Shipping "1. Profits derived from the operation of ships in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 2. Notwithstanding the provisions of paragraph 1, such profits may be taxed in the other Contracting State from which they are derived provided that the tax so charged shall not exceed: (a) during the first five fiscal years after the entry into force of this Convention, 50 per cent, and (b) during the subsequent five fiscal years, 25 per cent, of the tax otherwise imposed by the internal law of that State. Subsequently, only the provisions of paragraph 1 shall be applicable. 3. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency engaged in the operation of ships. 4. For the purpose of this Article: (a) interest on funds connected with the operation of ships in international traffic shall be regarded as income from the operation of such ships and the provisions of Article 12 shall not apply in relation to such interest; and (b) profits from the o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....res 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 art. 9. So would an enterprise that controls the management/operation of the ship be included in art. 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 art. 9 is to be construed narrowly, as suggested by the appellant, it would be denuded of much of its effect. Slot hire agreements have been and remain a regular feature of the shipping industry for decades. Whether they constitute a charter of a portion of a ship or not is a different matter. In a case of the first type, the carriage of goods by availing of the slot hire facility is an integral part of the contract of carriage of goods by sea. Without it, the enterprise/assessee would be greatly hampered in its business in relation to international traffic, carriage of goods by sea. Enterprises operating in any mode or manner, do not always ply their ships all over the globe. Even if they do, their ships may not be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. Article 9(1) of the India UK DTAA, art. 8(1) of the Model Tax Convention and the suggested alternative thereto are similar. Each of them refers to profits or income of an enterprise "from the operation of ships in international traffic". The commentary on Model Tax Convention on Income and on Capital (Condensed Version) OECD published by the OECD would therefore, apply equally to art. 9(1) of the India UK DTAA. 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 transshipped 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 44B, which talks about shipping business only. The AR pointed out that the AO not only ignored the provisions of section 44B but applied old Rule 10 and computed the income at 10% of receipts. 15. The AR further argued that how and on what basis the AO employed 10% is known to the AO, and on the issue of PE the AR placed reliance on the decision of ANL Singapore Pte. Ltd. v DDIT, ITA No. 8874/Mum/2010, it was held, "... that where the AE is remunerated on ALP, nothing further would be left to attribute to PE". 16. The AR, therefore, concluded his submissions on this issue that since the assessee is in business of shipping and cargo/containers movement in international waters, no receipts are attributable and taxed in India, as the taxing state is Denmark. 17. The DR placed reliance on the orders of the revenue authorities and submitted that the issue in question requires investigation with regard to the character of receipts in so far as receipts of the four ships are concerned and also that the assessee has placed additional evidence, it would be better if the issue is restored to the AO. 18. We have heard the arguments from both the sides. In so far as the business ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....customers, whose cargo, the assessee is handling. The AR submitted that since the cargo tracking system is provided to its customers, it cannot be held as FTS, but pure and simple income from business of shipping. The issue came up before the ITAT Mumbai Bench in the case of Aktieselskabet Dampskibsselskabet Svendborg, C/o Maersk India Private Limited, vs. Assistant Director of Income Tax (IT)-1(1) in ITAs no. 2080, 2081, 2082/Mum/2009 and in ITA no. 4687/Mum/2009 in case of A.P. Moller Maersk A/S v Assistant Director of Income Tax (IT)-1(1) wherein it was held, "17. The payments received by the Assessee are for providing a facility to its agents. The payment received is nothing but a payment by way of reimbursement of the cost for providing a particular facility. The Assessee is in the business of shipping and not in the business of providing any technical service. We are of the view that this ratio of Hon'ble Madras High court will apply to the facts of the present case. The Assessing Officer in coming to the conclusion that the payment was for fee for technical services has relied on the fact that there has been use of sophisticated equipments. This by itself will not be suff....