TaxTMI 
TaxTMI 
2009 (9) TMI 36
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....r the Treaty? 2. The following facts are stated in the application: 2.1. The applicant enters into medium and long term shipping contracts for the transportation of cargo worldwide. In the course of performance of such contracts, the applicant enters into further contracts with port agents, brokers and stevedores. The applicant only undertakes transportation of cargo. 2.2. During the financial years 2007-08 and 2008-09, the applicant entered into a shipping contract with USL, Shipping FZE ("Dubai Charterer) for transportation of cargo from Indian ports to China. The Dubai Charterer is an independent party engaged in the business of transportation/arranging transportation of cargoes. As per the Charter Agreement, the amount of freight for transportation of cargo from the Indian port to a port outside India is invoiced and received by the applicant. The Dubai Charterer receives a percentage of the freight amount as its commission. The applicant procures contracts utilizing brokering services from Gearbulk Shipping brokers/Kriship (UK) Ltd. which in turn hires the services of Globus Ltd., an independent brokering agent based in India. In consideration of its services, the sai....
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.... are applied, the applicant's income derived from the shipping of cargo from the Indian ports cannot be subjected to tax at all having regard to the fact that the applicant has no permanent establishment in India. 3.1. Before proceeding further, we may clarify one factual aspect regarding the option under Section 172(7). Though the applicant stated in the application that it elected for assessment under the regular provisions of the Act as per Section 172(7), it is seen from the clarification furnished by the applicant on 22nd September (in reply to our query) that such option was exercised for one year i.e. 2008-09 in the return filed on 30th March, 2009 pursuant to which the assessing authority issued a notice under section 143(2) of the I.T. Act on 7.8.2009. It needs to be stated here that the application before AAR was filed on 2nd April, 2009 and an order was passed on 17th June, 2009 admitting the application. For the next year i.e., 2009-10, the time for exercising the option is still there and so far, the applicant has not formally made its claim/option under section 172(7). 4. The relevant provisions of the Income Tax Act, 1961 and the DTAA may now be noticed. 4.1....
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....of the passengers, livestock, mail or goods shipped at Indian ports during that previous year shall be treated as a payment in advance of the tax leviable for that assessment year, and the difference between the sum so paid and the amount of tax found payable by him on such assessment shall be paid by him or refunded to him, as the case may be. 4.2. In Union of India vs. Gosalia Shipping P. Ltd. 113 ITR 307, the Supreme Court analyzed and discussed the scope and object of Section 172 in the following words : "Section 172 occurs in Chapter XV which is entitled "Liability in special cases" and the sub-heading of the section is "Profits of non-residents from occasional shipping business." It creates a tax liability in respect of occasional shipping by making a special provision for the levy and recovery of tax in the case of a ship belonging to or chartered by a non-resident which carries passengers, livestock, mail or goods shipped at a port in India. The object of the section is to ensure the levy and recovery of tax in the case of ships belonging to or chartered by non-residents. The section brings to tax the profits made by them from occasional shipping, by means of a summar....
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....fits. The next Article i.e. Article 8 makes a special provision in respect of the profits derived from the operation of aircraft in international traffic. Such profits shall be taxable only in the State to which the enterprise belongs. That means the State of residence can alone tax such profits and the existence or otherwise of a permanent establishment which is an ingredient of Art.7 is not material under Art.8. 5.2 Then, the Treaty proceeds to deal with various other items of income such as dividends, interest, royalties and fees for technical services, independent and dependent personal services, director's fees, income derived by entertainers, pension and annuities, Government remuneration and pensions and payments received by students, teachers and researchers (vide Art.10 to 21). Then comes Art.22 which is in the nature of a residuary article bearing the caption 'other income'. Art.22 was not there in the original DTAA. It was introduced in the year 2001. The two relevant paragraphs of Art.22 are extracted hereunder : "Art.22-Other income - 1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreem....
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....s in international traffic are left untouched by the Treaty because of the specific exclusion clause in Art.7. The obvious implication of exclusion is that such income can be subjected to domestic law discipline. Therefore, such income was liable to be taxed in accordance with and in the manner laid down in Section 172 of the IT Act. If this legal position was intended to be changed by the amendments made to the Treaty in 2001, a specific reference to this 'item' of income and specific language to bring it within the ambit of the Treaty should have been there. Neither a separate article is devoted to it nor is there explicit language in Art.22 to bring it within the coverage of that Article. When a particular species of income excluded from the ambit of the Treaty is sought to be brought within the scope of the Treaty for the first time, we would expect clear and specific language to express the intendment rather than leaving it to be taken care of by Art.22 by implication. At this juncture, it may be seen that a separate Article namely, Art.8 is devoted to the profits derived from the operation of aircraft in international traffic. For this, the explanation of the learned counsel ....
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....nal operation of ships are only a species of business profits just as the profits from international air transport. The latter is dealt with separately in Art.8 for the reason that it does not fall in line with the scheme of taxation of business profits under Art.7. Exclusive right is given to the State in which the enterprise resides. Permanent Establishment test is irrelevant under Art.8. Hence, a separate Article. As far as the profits from international operation of ships are concerned, it is an integral part of business profits; at the same time, they are excluded from the business profits-Article for the obvious reason that it is not intended to be covered by the Treaty. That income has been left to the care of domestic law under which the burden of taxation on such income has been minimized (vide Section 172 of IT Act). We are of the considered view that a particular species of income which is specifically referred to in Art.7 and deliberately left out of its genus, namely business profits, cannot be said to be an item of income not dealt with under Article 7. The expression 'deal with' is a comprehensive expression having different shades of meaning. In the New Chambers The....
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.... to dealing with that item of income. We find it difficult to accept this contention. Allocation of taxing right to the source State can well be done by such a process of exclusion. There is no particular manner or methodology of achieving that result. The expression 'dealt with' does not necessarily mean that there should be a detailed or elaborate treatment of the subject. 9.2 Another argument projected by the learned counsel for the applicant was with reference to the language used in the DTAAs of some other countries viz. Australia, Malaysia, Singapore where the expression used is "not expressly mentioned". According to the learned counsel, such language employed in Article 22/23 of those treaties might be suggestive of the interpretation sought to be placed by the Revenue; but, the expression "not dealt with" has a different dimension. We do not find merit in this contention. We have explained how the expression "dealt with" should be construed in the context of Art.7 and we reached the conclusion that the profits arising from international shipping operations have in fact been dealt with by that Article in the manner intended by the sovereign States which are signatories t....
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....idence can tax the shipping profits. The applicant agrees that the shipping profits can be taxed by the State of source if the enterprise concerned has a PE in that state. Thus, the applicant cannot derive much of assistance from the Commentaries referred to above. 10. A comparative study of the Treaties which India has entered into with various countries viz. USA, U.K., Australia including the land-locked countries (Switzerland being one such) like Uganda, Kazakstan and Mongolia would reveal that the item shipping profits was dealt with separately or in conjunction with air transport. Further in the treaties that Switzerland had entered into with certain other countries, towit, USA, Australia and Italy, a separate Article with respect to taxation of profits from the operation of ships and aircrafts, is found. A perusal of limited DTAAs which India had entered into with Oman and Russian Federation reveals that the profits from operation of ships and aircraft are both dealt with together and the power of taxation is given to the country of residence. In the limited DTAAs with Pakistan and UAE, such exclusive power has been conferred on the State of residence only in regard to air....