By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
fiogf49gjkf0d
New Page 2
Part C — International Tax Decisions
16 DDIT
v. M/s. Cia De Navegacao
Norsul
(2008) TIOL 621 ITAT (Mum.)
Article 8 of India-Brazil treaty
A.Y. : 2001-02. Dated : 25-11-2008
Issue :
Transportation of goods in international traffic by ships
operated by other enterprises under slot- chartering arrangement is not entitled
to the benefit of Article 8 of India-Brazil treaty.
Facts :
In this case, the assessee, a Brazil shipping company, earned
freight income in respect of cargo transported from Indian port to the ultimate
destination in the subcontinent of America.
The assessee was a member of a consortium between various
shipping companies. The members of the consortium owned/leased/chartered various
ships and agreed to a pool arrangement. The assessee had about 2 vessels which
were part of such pool arrangement. The vessels of the consortium members were
operated from hub port to final destination — say, in South Africa to the
subcontinent of America.
The assessee entered into freight arrangement with various
consignors in India and provided bill of lading for transportation from India to
the final destination (say, subcontinent of America). However, for
transportation from India to the hub port, it entered into slot arrangement with
third parties.
The third parties carried the cargo from Indian ports to the
hub port in feeder vessels. The mother vessel operated by the consortium members
carried the cargo onwards to the final destination. The following presents the
information in a schematic manner.
/Deepali/Files/1-Feb2008.JPG)
The assessee claimed benefit of India-Brazil treaty on the
ground that the entire income was earned from operation of ship.
The AO asked the assessee to file ship registration
certificate/charter party arrangement of ships operated by it and also to
substantiate that the cargo lifted by the feeder vessel, was on one-to-one
basis, transported further by the mother vessel. Since this requirement of the
AO was not met, the benefit of Article 8 was denied to the assessee. The amount
was taxed as business income in view of presence of agency PE. The amount of
income was calculated @ 10% of the freight under Rule 10.
The CIT(A) granted the benefit on the basis that the assessee
was engaged in the business of operation of ship in international traffic.
Before the Tribunal, the DR contended that the assessee
merely owned/chartered two ships and therefore all the voyages from Indian port
by feeder vessels were not continued by the mother vessel owned or chartered by
the assessee and therefore benefit of Article 8 was not available.
Held :
The Tribunal noted that the profit from operation of ship
would qualify for exemption in terms of India-Brazil treaty which grants
exclusive right of taxation to country of residence.
The Tribunal noted that unlike OECD Model, India-Brazil
treaty defined the term ‘operation of ships’ as under :
“The term ‘operation of ships or aircraft’ shall mean
business of transportation of persons, mail, livestock or goods carried on by
the owners or lessees/charterers of the ships or aircraft, including the sale
of tickets for such transportation on behalf of other enterprises”.
Having noted the above and having referred to the decision of
DDIT v. Balaji Shipping (UK) Ltd., (12 DTR 93) (Mum.), the Tribunal
concluded :
(1) Since the term operation of ship is specifically
defined in India-Brazil treaty, the same will need to be given the meaning as
defined and the scope of expression cannot be extended beyond the definition.
The OECD or other commentaries dealing with undefined terms are of no
assistance on interpretation of defined term.
(2) The expression ‘operation of ship’ as defined in
India-Brazil DTAA is restrictive to include business of transportation only by
the owner, lessee or charterer of the ship. The definition requires both the
conditions viz. (i) the business of transportation by ship, and (ii)
the assessee has to be a person who owns/leases/charters the ship.
(3) The transportation from Indian port to the hub port
pursuant to the slot arrangement is not covered by Article 8, as the feeder
vessel is not owned/leased/chartered by the assessee. The benefit was denied
in respect of feeder activity.
(4) The benefit of the treaty was restricted to the profit
attributable to transportation by mother vessel. The Tribunal noted that
Article 8(3) of India-Brazil treaty specifically made the Article applicable
to profits from the participation in a pool, a joint business or an
international operating agency. Accordingly, the consortium arrangement
pursuant to which the mother vessels were available at the disposal of the
assessee pursuant to pool arrangement were accepted to be the ships which
could be regarded as owned/leased/chartered by the assessee.
(5) Since the evidence about the ships owned/
leased/chartered were not available, the matter was restored to the file of
the CIT(A) with the direction that the benefit of Article 8 was to be
restricted only to the extent of transportation by the ships which were
owned/leased/chartered by the consortium members.
