By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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Part C — International Tax Decisions
14 DDIT v. Balaji Shipping (UK
Ltd.)
(12 DTR 93) (Mum.)
Article 9 of India-UK treaty
A.Ys. : 2001-02, 2002-03. Dated : 13-8-2008
Issue :
Transportation of goods in international traffic by ships
operated by other enterprises under slot-chartering arrangement is entitled to
the benefit of Article 9 of India-UK treaty where the treaty provision matches
with that of the OECD Model.
Facts :
The assessee, UK Company, is a shipping company engaged in
transportation of goods in international traffic. The appeal relates to two
assessment years viz. A.Y. 2001-02 and A.Y. 2002-03. For both the years,
the assessee computed income on presumptive basis @ 7.5% of the total freight
receipt. Relying on Article 9 of India-UK treaty, it claimed that no part of the
income was taxable in India as Article 9 granted exclusive right of taxation to
UK.
For A.Y. 2001-02 (Year 1), the Assessing Officer found that
from out of the total freight receipts of about Rs.40 Cr.,1
only a small amount of freight receipt of Rs.1.7 Cr. was on account of the
freight carried in the vessels chartered by the assessee. The AO noted that
major part of the freight was in respect of cargo lifted from Indian ports
pursuant to the carrier agreement which the assessee had signed with a shipping
company at Mauritius (Mauco or Carrier). The carrier offered service of
container slot space to the assessee for transportation of cargo from Indian
port to the hub port at Dubai, Singapore, etc. (hub port).
The assessee collected cargo from Indian ports from the
consignors at its own risk and issued bill of lading for the entire
transportation from the port of loading to the port of destination. The Mauco
provided service bill of lading in respect of the containers carried in the
feeder vessel. The AO denied benefit of treaty in respect of freight earned
pursuant to carrier arrangement, but accepted computation of income @7.5% of the
total freight.
In year 2, the AO observed that the assessee did not furnish
evidence about the ships operated by it pursuant to the charter or similar
arrangement. The AO noted that the assessee had containers which were used in
transportation of cargo pursuant to the carrier arrangement. The benefit of
Article was denied in respect of the entire income on the ground that the
assessee did not operate any ship and did not bear risk of operating ship. The
AO denied benefit of the treaty and computed income @10% of the total freight
receipt. For both the years, the AO held that the assessee had PE in India in
view of Agent’s presence and hence the amount of income so determined was
chargeable under Article 7.
The CIT(A) admitted the benefit of treaty in respect of
entire freight receipts for both the years. The CIT(A) concluded that to qualify
for the treaty benefit, it was not necessary to examine whether every operation
was performed through the ship owned or chartered by the appellant. If the
assessee was engaged in operation of ship, the benefit of the treaty was
available in respect of all the ancillary and auxiliary activities connected
with the business even though they were performed through the ship belonging to
and operated by others.
Before the ITAT, the DR assailed the order of the CIT(A) by
raising following contentions :
(a) The assessee can be said to be engaged in the operation
of ship only if the ship is placed at the disposal of the assessee and the
assessee performed all the functions necessary for the purpose of running and
operating the ship in the business of transportation and earning the profit.
(b) OECD Commentary as also Klaus Vogel Commentary grants
benefit of the Article only in respect of profit obtained from ‘operation of
ship’ i.e., the ship should be in possession and at the disposal of the
assessee either on account of ownership, lease or charter arrangement and risk
of operation should be on the assessee.
(c) The activity of the assessee pursuant to the carrier
arrangement is in the nature of trading activity viz. that of purchase
of slot space and resell thereof and therefore the activity conducted pursuant
to slot arrangement does not amount to operation of ship.
(d) In the case of the assessee, almost entire income was
from purchase of space on slot basis and hence not from operation of ship. The
activity was thus not incidental or auxiliary to overall shipping operations.
In the circumstances, the activity was an independent activity and the main
business of the assessee. Since the slot charter arrangement constituted main
source of income, the activity was not eligible on the ground of it being
ancillary to the business of operation of the ship.
On the other hand, the AR supported the order of the CIT(A)
and supported eligibility to the treaty benefit by contending :
(a) The slot arrangement is an integral part of business of
operation of the ship in the international traffic.
(b) Since the term operation of ship is not defined in the
India-UK treaty, reference can be made to the OECD and other commentaries.
OECD Commentary and Klaus Vogel Commentary was relied to contend that the term
operation of ship needs to be understood in a broader sense to include even
slot arrangement.
Held :
ITAT held :
(1) Any expression defined in the treaty needs to be
understood in the sense as given in the treaty definition. If the term is not
defined in the treaty, it needs to be understood as per definition, if any, in
the local law of the contracting state as of the date the treaty is signed. If
the term is undefined, the same needs to be understood in accordance with the
rule of contemporaneous thinking. For the purpose of ascertaining
contemporaneous thinking, guidance can be taken from provisions of domestic
law or from the various commentaries available at the time of signing of DTAA.
(2) India-UK treaty does not define scope of expression
‘operation of ship’. The definition provided in Chapter XII-G introduced in
2005 in domestic law is not of relevance for interpretation of India-UK treaty
signed in year 1993.
