Charter arrangement includes slot charter arrangement and covered within the ambit of Article 8, shipping income, of India-Malaysia DTAA ?Facts: Taxpayer, a tax resident of Malaysia, is engaged in the business of shipping in international traffic. The Taxpayer operates ships that are either owned by it or taken on lease. Insofar as the shipping business from India is concerned, the Taxpayer books cargo from shippers/customers in India up to the final destination port, with all risks and responsibility. The bill of lading is issued for the entire voyage.
The Taxpayer, under a slot charter arrangement, arranges for transport of cargo from the Indian port to the hub port, using the service of feeder vessels which are owned by a third party.
From the hub port, the Taxpayer’s containers are transhipped on the mother vessel, which are owned/ leased by the Taxpayer, and from the hub port it is carried to the final destination port.
The Taxpayer had claimed the benefit of Article 8 of the India-Malaysia DTAA on the entire freight income which comprised two components: (i) Transportation of cargo in international traffic by operating ships owned or pooled by the Taxpayer. (ii) Carriage of goods by feeder vessels belonging to another shipping line wherein the Taxpayer did not have any pool arrangements.
However, the Tax Authority allowed the benefit of Article 8 on the first component and denied the benefit of Article 8 on freight income on the second component. The Tax Authority contended that Article 8 of India-Malaysia DTAA applies only when the taxpayer is the owner, lessee or charterer of a ship.
Held:
Article 8(1) of the India – Malaysia DTAA provides that profits derived by an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in the State in which the ships are operated. The activity of “operation of ships” carried on by a person cannot be understood merely as a person who operates the ships. It has to be understood in the broader sense of carrying out shipping activity. Carrying out of shipping activity could be as an owner or as a lessee or as a charterer of a ship. Where the word “owner” has to be inferred as a person who owns a ship and the word “lessee” as one who owns a ship for a given lease period, the word ”charterer” has to be understood as a person who charters/hires a ship for a voyage.
Reliance was placed by the Tribunal on several definitions and Bombay HC decision in the case of Balaji Shipping UK Ltd. [253 CTR 460] to support the following:
• Operation of a ship can be done as a charterer who does not mean to own or control the ship, either as an owner or as a lessee.
• Charterer is a hirer of a ship under an agreement to acquire a right to use a vessel for transportation of goods on a determined voyage, either the whole/part of the ship in a charter party agreement.
• The word “charterer” includes a voyage charter of part of a ship/slot, since it is an arrangement to hire space in a ship owned and leased by other persons.
The concept “charterer of ships” under the Act includes slot charter arrangement. The facility of slot hire arrangement is not merely an auxiliary or incidental activity to the operation of ships, but is inextricably linked to such activity.
The risk under the charter party agreement or arrangement is upon the owner of the ship who generally assumes an operational risk for transporting cargo of a person who has hired the ship. The risk of the Taxpayer is towards its customers with whom it has agreed to transport the cargo.
Transportation of cargo in the container belonging to the Taxpayer from the Indian port i.e., the port of booking to the hub port through feeder vessel by way of space charter/ slot charter arrangement falls within the ambit of the word “charterer”. This component cannot be segregated from the scope of “operation of ships” as defined in Article 8 of India- Malaysia DTAA .
The voyage between the Indian port to the hub port through feeder vessel and from the hub port to the final destination port through mother vessel owned/leased by the Taxpayer are inextricably linked and there is complete linkage of the voyage. Therefore, the entire profits derived from the transportation of goods carried on by the Taxpayer is to be treated as profits from operation of ships and, therefore, the benefit of Article 8 cannot be denied to the Taxpayer on the part of the freight from voyage by the feeder vessels.
