TaxTMI 
TaxTMI 
2008 (8) TMI 389
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....the total freight receipt of Rs. 40,03,44,489 by applying net profit rate of 7.5 per cent prescribed under section 44B of Income-tax Act, 1961 (the Act). However, the tax liability was declared nil by claiming exemption under Article 9 of Indo-UK Treaty. The copy of Tax Residency Certificate (TRC) was also filed. In the similar manner, the assessee declared the total income of Rs. 5,34,45,380 against the total freight receipt of Rs. 71,27,91,727 for assessment year 2002-03 and claimed exemption from payment of tax under Article 9 of the said Treaty. 3. In the course of assessment proceedings for the assessment year 2001-02, the Assessing Officer examined the Charter Hire Agreement between the assessee and M/s. Littleton Services Inc. for the vessel 'Orient Aishwarya' as well as Connecting Carrier Agreement between the assessee and the Orient Express Lines Ltd. Mauritius (the carrier). It was revealed that the carrier operated its feeder services from/to ports in Indian sub-continent to/from UAE, Colombo and Singapore. Clause 2 of this agreement provided that the carrier had offered containers slots space to the assessee and the assessee had accepted to use such space on ....
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....7 of the said Treaty also. Accordingly, he computed the income at Rs. 2,87,22,050 by applying the net profit rate of 7.5 per cent on the total freight of Rs. 38,29,60,671. 4. In respect of assessment year 2002-03, the facts are almost similar. However, certain new facts were noted by the Assessing Officer which are being narrated. It was noticed that the assessee owned 4760 containers of 20 ft. size and 466 containers of 40 ft. size. In addition, 2767 containers had been taken on lease. These containers were used in the transportation of cargo in the international traffic. It was also noted that the assessee does not operate any ship. It was further noted that the risk in operating the ships was borne by the carrier and the assessee was responsible for its own containers as well as the material loaded in the containers. Considering the facts that (i) it did not operate any ship and (ii) no operating risk was borne by the assessee, it was held by him that the assessee was not eligible for the benefit of Article 9 of the said Treaty. It appears that the assessee had also claimed exemption under Article 9(4) which provides that the income from use, maintenance or rental of containe....
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....that the appellant is a shipping company which operate through own or connecting carriers engaged in international traffic. Nowhere is the requirement that to get the benefits under DTAA the appellant has to own or charter vessels." In view of the above, it was held by him that the assessee was entitled to the benefit of Article 9 of the said Treaty since some part of the connected shipping activity was carried out through connecting carriers not owned or chartered by the assessee. Consequently, the income from the entire freight receipts of the assessee was excluded from taxation under section 44B of the Act. 6. However, the CIT(A) examined the legal position in detail while adjudicating the grounds raised by the Revenue relating to assessment year 2002-03. After referring to Article 9(1) of the said Treaty, he observed as under :- "The business activity is a organised activity with a motive to earn profit. It is not that each and every activity of the business should be necessarily and directly linked with the main goal of the business. It is sufficient if the transactions carried out by a business are with a purpose to achieve the objective of the business. It is ....
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..... The appellant company is collecting cargo from Indian port and is drawing Bill of Lading for the entire transportation i.e., from the port of loading to the port of destination. The Charterer ship of the appellant company do not always come to the Indian port but the cargo is being collected from Indian port and transported to the hub port at Dubai. For this purpose, connecting carrier agreements have been entered into with several parties including Orient Express Lines. The agreements with OEL is for the use of vessel from Indian ports to hub port only. The OEL, Mauritius is company operating its feeder services from/to ports in the Indian sub-continent to/from UAE, Colombo & Singapore as mentioned in the definition of the agreement. Thereafter, the appellant company has agreed that OEL will operate its feeder vessels from/to Indian sub-continent ports to/from UAE, Colombo & Singapore. For this purpose Orient Express Lines has provided container slot on its feeder vessels. Undoubtedly, the feeder vessels are being operated by the connecting carrier viz., OEL, therefore the risk is of the appellant company only in respect of such feeder vessel regarding its own containers. Clause....
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....ng Article 9(4) of the said Treaty, it was observed by the CIT(A) as under :- "Article 9(4) provides that "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 transport of goods or merchandise" is entitled to the benefit of Article 9(1). The proper meaning is to be given to the words, use, maintenance or rental. The Assessing Officer has limited the meaning only to the lease. The lease of containers is covered by rental. However, the use of container for transporting the goods is much wider term than the rental or leasing. In the case of appellant, the use of container is a integral part of its shipping. The containers are being used for the transport of the cargo. The appellant is not using containers for separate business. Further containers are only used to transport cargo and as such I am of the opinion that the income from the use of containers used for transport of goods or merchandise by the appellant is entitled to the benefit of Article 9(1)." 11. In view of the above discussion, it was held by him that the assessee company was engage....
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....ships' as: (a) Income from rental on the bareboat basis of the ships when such rental income is incidental to the income from operation of ships; (b) Income from use or maintenance of containers; (c) Income derived from participation in a pool or a joint business; and (d) Income from alienation of ships. The income earned by the assessee by purchase and sale of space in the ship operated by others cannot be said to be covered by the above paras. (e) Guidance can be taken from commentary of OFCD as well as the commentary of Klause Vogel. As per para 4 of the OECD commentary, the profit covered by such Article are the profits directly obtained by the enterprise from transportation of goods by ships whether owned, leased or otherwise at the disposal of the enterprise. Where no ship is in the possession or disposal of the enterprise, it cannot be regarded as engaged in the operation of ship in the international traffic. In case of slot purchase, the ship is not at the disposal of the assessee as is evident from the agreement and therefore, Article 8 of the Treaty would not apply. (f) According to the commentary by Klause Vogel, it would be very difficult to apport....
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.... CIT(A) was not justified in granting relief merely on the ground that activity of operation of ship as a charterer and income from slot chartering formed part of the common business carried on by the assessee. In this case, it is easy to segregate income which qualify for the benefit of the treaty and therefore the concept of common business has been wrongly extended by the learned CIT(A) to the entire activity of the assessee particularly when the other activities do not fulfil the conditions of the treaty. Similar view has been expressed by the learned author, Klause Vogel, in his commentary on page 448 para 39. (i) Even as per OECD commentary, the benefit of the treaty can be given when the assessee is primarily engaged in the operation of ship in the International Traffic and the activity of slot chartering is directly connected to its operation of ships in International Traffic. Thus, independently, the activity of slot chartering is not eligible for the benefit of the treaty. In the case of the assessee, the activity of slot charter is an independent activity and is the main business of the assessee. This is apparent from the fact that the freight income from the sh....
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....e contentions raised by the learned D.R. by making various submissions. He has also filed written submissions which are briefly narrated as under :- (a) That 'slot chartering arrangement' with other international shipping companies is nothing but an integral part of its business of operation of ships in the international traffic which is akin to 'code sharing arrangement' in the airline industry. A shipping company may own/charter very few ships and at the same time avail slot spaces on ships of other companies meant for carriage of cargo internationally. This is because - (i) it may not be commercially viable or own a ship due to the huge cost involved; and (ii) the shipping company cannot be expected to shut down its business operations till the time its owned/ chartered ship comes back to the Indian port after a long voyage in the international waters. He tried to explain by giving example of Air India which offers transportation services to its passengers to approximately 16 destinations in Europe while it operates only for three destinations i.e., London, Paris and Frankfurt which shows that only 19 per cent of the time it operates its owned/chartered ....
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.... (d) That according to OECD commentary as well as commentary by Klause Vogel, the scope of the term operation of ships is not restricted one but has been understood in a broader sense so as to include chartering of part of ship which is owned as slot chartering and also includes other activities which are incidental to the operation of ships. Therefore, a narrow view canvassed by the revenue cannot be accepted. 14. Alternatively, it is pleaded that the case of the assessee falls under the provisions of Article 9(4) of Indo-US Treaty which exempts income of an enterprise by a contracting state from use, maintenance or rental of containers (including trailers and related equipment for transportation of containers) used for the transport of goods or mercantiles. Admittedly, the assessee has several owned/leased containers which it uses on its chartered vessels or slot basis on vessels of other operators. Thus, the income of the assessee would fall under the aforesaid provisions and consequently, the same cannot be taxed in India. Reliance was also placed on the technical explanation on Article 8(3) of the US Model Convention released by the Treasury department of US. 15.....
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.... the revenue is that in the absence of any definition, such expression should receive its plain and natural meaning. The expression, if so construed, would not include the transportation of goods by the ships not owned or chartered by it. According to the learned DR, slot chartering cannot be equated with chartering of complete ship inasmuch as, in the case of slot chartering, the control and possession of ship does not vest in the assessee. On the other hand, the contention of the assessee is that in case of treaties, in the absence of any definition, the expression used in the treaty should be understood in the sense in which it was understood by the contracting parties at the time when treaty was executed. If so construed, then commentaries on the subject would play a key role in understanding the scope of such expression. 18. At this stage, it would be appropriate to refer to the following observations of their Lordships of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan at pages 751-53. "The principles adopted in interpretation of treaties are not the same as those in interpretation of statutory legislation." "An important principle which....
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....oreign jurisdiction or in any other agreements." However it is pertinent to note that in the same judgment, the following observations were also made at the same page :- "Therefore, the contention advanced by the learned Attorney-General that it is not a part of the treaty cannot be accepted because in the terms of the treaty wherever any expression is not defined the expression defined in the Income-tax Act would be attracted. The definition of 'income' would, therefore, include capital gains. Thus, capital gains derived from immovable property is income and therefore Article 6 would be attracted." The above judgment is, therefore, an authority for the proposition that if a particular word or expression is defined in the treaty then the treaty has to be understood in that sense only. If such word or expression is not defined in the treaty but the same has been defined in the local law then it should be understood in accordance with such definition. However, if any word or expression is not defined either in the treaty or under the local law then scope of the same is to be understood in accordance with the rule of contemporaneous thinking as laid down by the ....
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....n." 20. In view of the above discussion it is held that - (i) rule of interpretation for interpreting a statute are not applicable for interpreting the covenants of tax treaties between the contracting states; (ii) the words or expression used in the treaties, if not defined in the treaties itself, should be understood in the sense in which the contracting states understood at the time the treaty was executed i.e., contemporaneous thinking; and (iii) contemporaneous thinking can be gathered from the provisions of domestic laws of the contracting states and in the absence thereof from the various commentaries available at the time of such contract. 21. In the present case, we are concerned with the scope of the expression 'operation of ships' used in Article 9 of Indo-UK Treaty. This expression is neither defined in such treaty nor in the Indian Income-tax law as existed at the time when the treaty was executed. Reference to the provisions of Chapter XIIG in the Income-tax Act, 1961 by the learned Counsel for the assessee has no relevance in ascertaining the contemporaneous thinking since this chapter was inserted with effect from 1-4-2005. Nothing has been brought to ....
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....d vide para Nos. 4 to 14. The same are being reproduced as under :- "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 cargo by ships or aircraft that it operates in international traffic should be considered to be directly connected with such transportation. 4.2 Activities that the enterprise does not need to carry on f....
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....f destination by any mode of inland transportation operated by other enterprises. In such a case, any profits derived by the first enterprise from arranging such transportation by other enterprises are covered by the paragraph even though the profits derived by the other enterprises that provide such inland transportation would not be. 8. An enterprise will frequently sell tickets on behalf of other transport enterprises at a location that it maintains primarily for purposes of selling tickets for transportation on ships or aircraft that it operates in international traffic. Such sales of tickets on behalf of other enterprises will either be directly connected with voyages aboard ships or aircraft that the enterprise operates (e.g., sale of a ticket issued by another enterprise for the domestic leg of an international voyage offered by the enterprise) or will be ancillary to its own sales. Profits derived by the first enterprise from selling such tickets are therefore covered by the paragraph. 8.1 Advertising that the enterprise may do for other enterprises in magazines offered aboard ships or aircraft that it operates or at its business locations (e.g., ticket of....
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.... its place of effective management in another country. 13. [Deleted/renumbered as paragraph 17.1]. 14. Investment income of shipping or air transport enterprises (e.g., income from) stocks, bonds, shares or loans) is to be subjected to the treatment ordinarily applied to this class of income, except where the investment that generates the income is made as an integral part of the carrying on of the business of operating the ships or aircraft in international traffic in the Contracting State so that the investment may be considered to be directly connected with such operation. Thus, the paragraph would apply to interest income generated, for example, by the cash required in a Contracting State for the carrying on of that business or by bonds posted as security where this is required by law in order to carry on the business : in such cases, the investment is needed to allow the operation of the ships or aircraft at that location. The paragraph would not apply, however, to interest income derived in the course of the handling of cash-flow or other treasury activities for permanent establishments of the enterprise to which the income is not attributable or for associa....
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....her enterprises under slot chartering arrangement. In our view, this paragraph would cover the facts of the present case since the assessee not only transports its cargo through the ships chartered by it but also transports the cargo in the international traffic by the ships operated by other enterprises under slot chartering arrangement. Since Article 8 of OECD Model Convention and Article 9 of Indo-UK Treaty are similarly worded. Paragraph 6 of OECD Commentary discussed above would apply in defining the scope of Article 9(1) of Indo-UK Treaty as per the rule of contemporaneous exposition discussed in the earlier part of the order. Accordingly it is held that the freight income earned by the assessee on account of transportation of cargo in the international traffic by ships operated by other enterprises under slot chartering arrangement would be taxable only in State of residence and consequently, such income would be exempt from taxation under the Indian Income-tax Law. 24. Before parting with this order, we would like to mention that the reason given by the CIT(A) for granting relief to the assessee is not in conformity with the OECD commentary. The test laid down by him was....