The Director Of Income Tax (International Taxation)-1 v. M/S. Safmarine Container Lines Nv

JUDGMENT (Per B.P Colabawalla J.)

1. This Appeal under section 260A of the Income Tax Act 1961 has been filed by the The Director of Income Tax (International Taxation) -I challenging the order passed by the Income Tax Appellate Tribunal (hereinafter referred to as “the ITAT”) dated 5th August 2011. The A.Y in question is 2006-2007. The ITAT dismissed the Appeal preferred by the Revenue challenging the order of the CIT(Appeals) dated 29 October 2009 under which the CIT(Appeals) held that Inland Haulage Charges earned by the Assessee were only a part of the income derived from the operation of ships, and therefore, were covered under Article 8 of the Double Tax Avoidance Agreement (DTAA) entered into between India and Belgium and consequently not taxable as business profits in India.

2. Mr. Tejveer Singh, the learned counsel appearing on behalf of the Revenue, submitted that the dispute in the present Appeal is in relation to collection of Inland Haulage Charges by the Assessee from its customers in respect of transportation of goods kept in containers at Inland Container Depots (ICDs) to the port where the goods are loaded in ships for international traffic. He submitted that the Assessing Officer had correctly held that such Inland Haulage Charges are not within the purview of section 44B of the Income Tax Act and were neither directly connected to the activity of international operations of ships. He submitted that such charges earned by the Assessee were therefore taxable as business profits in India and not covered under the Double Tax Avoidance Agreement between India and Belgium. He submitted that the CIT (Appeals) as well as the ITAT were in error in deleting the addition made by the Assessing Officer to the income of the Assessee which has given rise to the following substantial questions of law that need to be answered by this Court and read as under:-

(I) Whether, on the fact and circumstances of the case and in law, the Hon'ble Tribunal was justified in upholding that Income from Inland Transport of Cargo within India was covered under Article 8(2)(b)(ii) and 8(2)(c) of the tax treaty between India and Belgium and therefore not liable to tax in India?

(II) Whether Article 8(2)(b)(ii) and 8(2)(c) of the tax treaty between India and Belgium includes within its Ambit the activity of Inland Transport of Cargo from various places within India?

3. The facts stated briefly are that the Assessee is engaged in the business of operation of ships in international traffic. It is incorporated in Belgium and is a tax resident of that country. The Assessee filed its return of income on 30 November 2006 declaring a total income of Rs. NIL. During the course of its business, the Assessee collected Inland Haulage Charges from it's customers in respect of transportation of goods from Inland Container Depots (ICDs) to the Port where the goods were loaded in the ships for international traffic. The Assessing Officer passed his Assessment Order on 15 December, 2008 and held that such Inland Haulage Charges are not within the purview of section 44B of the Act and therefore are chargeable to tax as business profits under the provisions of the Act.

4. Being aggrieved by the assessment order dated 15 December 2008, the Assessee filed an Appeal before the CIT (Appeals). Before the CIT (Appeals) the Assessee submitted that it was incorporated in Belgium and is a tax resident of that country. India had entered into a Double Taxation Avoidance Agreement (DTAA) with Belgium and that the Appellant is engaged in the business of the operation of ships. It was further submitted that during the business of handling of ships, the appellant had received Inland Haulage Charges from its clients and the same were included in receipts under the head “permanent handling charges”. The Assessee claimed that Inland Haulage Charges are part of its shipping business and are in the nature of “handling charges” and are therefore covered by phrase “any other amount of similar nature” mentioned in the explanation to section 44B of the Act. Since such charges were part of the shipping business of the Assessee, they were therefore eligible for DIT relief, was the submission of the Assessee. After examining the entire factual matrix, the CIT (Appeals) held that it was undisputed that the Assessee was charging freight from the place inside India where the goods were picked up and upto to the point of destination port or destination station. He therefore held that the Assessee was undertaking the job of transportation from the collecting station to the destination station which may be from the ports of loading or unloading of the cargo. From the freight so collected, the Assessee was arranging the transportation of the cargo from the port to the destination and vice versa. For this activity, the Assessee issued a combined bill of lading and it was not disputed by the Assessing Officer that the Assessee was engaged in the business of operation of ships in international traffic. After analysing article 8 of the DTAA between India and Belgium, the CIT (Appeals) held that it was clear beyond any doubt that the fraction of the freight earned by the Assessee towards Inland Haulage Charges was with reference to cargo which was carried for onward international traffic by the Assessee and was only a part of the income derived from the operation of ships. In view thereof, the CIT (Appeals) held that the said income formed part of the income from the operation of ships in international traffic and therefore could not be taxed in the hands of the Assessee. The CIT (Appeals) also noted that the facts and circumstances in the current Assessment Year were identical and similar to that of Assessment Years 2001-02, 2003-04 and 2005-06 where this very issue had been examined and decided in favour of the Assessee. In view thereof, the CIT (appeals) by its order dated 29 October 2009 allowed the appeal filed by the Assessee and held that the Assessee was entitled to the benefit under Article 8 of the DTAA between India and Belgium.

5. Being dissatisfied with the order of the CIT (Appeals), the Revenue preferred an Appeal before the ITAT. The ITAT by its order dated 5 August 2011, dismissed the Appeal of the Revenue. Whilst dismissing the Appeal, the ITAT observed that this very issue had been considered and adjudicated by the ITAT in the Assessee's own case for the Assessment Years 2001-02, 2003-04 and 2005-06 and decided in favour of the Assessee. Accrdingly, after relying upon its earlier orders, the ITAT decided the issue in favour of the Assessee and dismissed the appeal filed by the Revenue. It is this order of the ITAT that is in challenge before us.

6. Mr. Porus Kaka, the learned Senior Counsel appearing on behalf of the Assessee, placed reliance on an order dated 17 January 2013 passed by this Court in Income Tax Appeal No. 952 of 2011 with Income Tax Appeal No. 147 of 2009 passed in the case of this very Assessee. According to Mr. Kaka, the issue involved in this Appeal was squarely covered by the order passed by this Court on 17 January 2013. On going through the said order, we find that the questions of law framed in the said Appeals are identical to the ones framed in the present Appeal before us and projected as substantial questions of law. After setting out the questions of law in paragraph 3, this Court held as under:-

“The Advocates for the parties state that the issue arising in these appeals stand covered in favour of the respondent-assessee and against the revenue by the decision of this court rendered on 06.08.2012 in ITXA No. 3024 of 2009 in the matter of Director of Income Tax v. Balaji Shipping UK Ltd. In this view of the matter, the questions as raised in the present appeals are not entertained. Accordingly, both the appeals are dismissed with no order as to costs.”

7. Mr. Tejveer Singh, being faced with the situation, submitted that the concession made in the order dated 17 January 2013 was not correct and the case of the present Assessee did not stand covered against the Revenue by the decision of this Court in Income Tax Appeal No. 3024 of 2009 in the matter of Director of Income Tax v. Balaji Shipping UK Ltd. which is now reported in (2012) 253 CTR (Bom) 460.

8. At the outset, we fail to see how this submission can be made by the learned advocate for the Appellant. The said concession was made by the very same Advocate i.e Mr. Tejveer Singh, who appeared in that matter and is also appearing before us. We therefore fail to see on what basis he submits that the concession made by him earlier was incorrect. He was not able to substantiate this submission. Be that as it may, to ensure that justice is done between the parties, we have examined the judgment of this Court in the case of Balaji Shipping UK Ltd. (supra). On going through the said judgment, we find that the concession made earlier by Mr. Tejveer Singh was in fact correct and the case of the Assessee in the present case also stands covered by the judgment in the case of Balaji Shipping UK Ltd. (supra). The relevant portion of the said judgment is reproduced hereunder:-

21. Mr. Singh contended that in either case Article would not be applicable as the voyages undertaken by availing the slot hire facility do not fall within the ambit of the phrase “operation of ships”. In other words the appellant advocates a narrower interpretation of the phrase restricting it to cases where the cargo is transported only on vessels owned or chartered or otherwise operated by the respondents itself.

22. Mr. Singh did not dispute that income from slot hires are taxable under section 44B. He in fact stated that the slot hire charges have always been taxed under section 44B and that it is the Revenue's case even today that they fall within section 44B. The question is whether they also fall within art. 9(1) of the DTAA?

23. A case of the first type clearly falls within art. 9 of the DTAA.

Firstly, art. 9 does not require the ship to be owned by an enterprise/assessee. It merely requires the income to be “from the operation of ships in international traffic”. There is no warrant for adding to the Article the requirement of the ship being owned by the enterprise. A charter is certainly contemplated by art. 9. So would an enterprise that controls the management/operation of the ship be included in art. 9 even if it does not own the ship. Such enterprises earn income from the operation of ships chartered or otherwise controlled and managed by them. If art. 9 is to be construed narrowly, as suggested by the appellant, it would be denuded of much of its effect.

24. Slot hire agreements have been and remain a regular feature of the shipping industry for decades. Whether they constitute a charter of a portion of a ship or not is a different matter. In a case of the first type, the carriage of goods by availing of the slot hire facility is an integral part of the contract of carriage of goods by sea. Without it, the enterprise/assessee would be greatly hampered in its business in relation to international traffic, carriage of goods by sea. Enterprises operating in any mode or manner, do not always ply their ships all over the globe. Even if they do, their ships may not be readily available when required on a particular route in connection with a contract of carriage of goods. It is necessary, therefore in such cases for them to resort to slot hire agreements. This enables them to transport the goods not on behalf of the owner of the vessel which has granted them a slot hire facility, but in their own name on behalf of their clients. The contract of carriage of goods by sea is thus performed by such enterprises on a principal to principal basis with their clients and not as agents of the owners of the ships and/or their clients. The slot hire agreements are therefore, at least indirectly, if not directly, connected and interlinked with and are an integral part of the enterprise's business of operating ships.

25. Without availing slot hire facilities, an enterprise would be unable to carry on its business of operating ships in international traffic at all in many cases. They may well loose much of their business. Even if business expediency is irrelevant to the interpretation of the DTAA, it indicates the close nexus between slot hires and the business of operation of ships in international traffic. If the DTAA is construed to include activities directly or indirectly connected to the operation of ships, it would include slot charters.

26. The second type of case poses some difficulty. We are, however, of the view that even such cases fall under art. 9(1). Article 9 would apply in respect of an enterprise that carries on the business of operation of ships in international traffic but for a valid reason is required to transport the cargo availing entirely a slot hire facility obtained by it on a ship of another. The illustrations we furnished in respect of the first type of case will also apply to these cases.

An enterprise may not ply the ships owned or chartered or otherwise controlled or managed by it in respect of certain routes. It would however, on account of the business exigencies, be required to carry cargo on such routes. Business expediency could arise on account of a number of reasons and different situations such as obliging regular clients, or cultivating new ones. If it were not to do so, it may well loose clientele. Ships owned or chartered or otherwise controlled or managed by an enterprise may not be available on the particular route on a given day or for a particular period. The enterprise may already have entered into contracts or may even be required to enter into contracts for the carriage of goods on that route on that day or during that period. The trade would expect the enterprise to perform its contracts and/or ensure there is no break in its services. This it can do by availing slot hire agreements. Their refusal or failure to do so, may well affect their business and reputation adversely.

27. By availing the facility of slot hire agreements, the enterprise does not arrange the shipment on behalf of the owner of the said vessel, but does so on its own account on a principal to principal basis with its clients. Such cases also have a nexus to the main business of the enterprise of the operation of ships. They are ancillary to and complement the operation of ships by the enterprise. If they are not merely ancillary to the main business of operation of ships but constitute the primary and main activities of the enterprise, it may be a different matter, which we are not called upon to consider in the facts and circumstances of the present case.

28. Our view is supported by the judgment of a Division Bench of the Delhi High Court. It is also in consonance with the various commentaries which deal with similar provisions. We will now refer to the same.

29. Mr. Kaka relied upon the judgment of the Delhi High Court in Director of Income-Tax v. KLM Royal Dutch Airlines (2009) 178 Taxman 291. Article 8 of the Indo-Netherlands DTAA which fell for the consideration of the Court reads as under:-

Air Transport:

1. Profits from the operation of aircraft in international traffic shall be taxable only in the State in which the place of effective management of the enterprise is situated.

Article 8(1) is similar to art. 9(1). In that case the assessee had obtained a licence in respect of premises at Mumbai from the Airport Authority of India. This licence was for the purpose of cargo handling only. The assessee entered into an agreement with CSC (P) Ltd. for cargo handling at Mumbai on its behalf. The agreement provided for payment by the assessee to CSC (P) Ltd. for cargo handling at Mumbai. The payment made by the assessee to CSC was after the adjustment of the licence fee/rent paid by the assessee to the Airport Authority of India. The adjustment was considered by the department as the income of the assessee chargeable to tax under art. 6 of the Indo-U.K DTAA. The Division Bench upheld the decision of the Tribunal to the effect that the adjustment was directly and inextricably linked to the cargo handling business of the assessee and was not in the course of a separate business of renting out the premises. As the assessee established a link between the renting of the premises and the business of operating an airline in international traffic, it was held that art. 8 would apply.”

9. In this view of the matter, we find that the reliance placed by Mr. Porus Kaka on the order of this Court dated 17 January, 2013 in Income Tax Appeal No. 952 of 2011 with Income Tax Appeal No. 147 of 2009 is fully justified and squarely covers the issue raised in the present appeal. We therefore find, that this Appeal does not give rise to any substantial question of law as projected by the learned counsel appearing on behalf of the appellant. We find no infirmity in the order passed by the ITAT and impugned in this appeal. The appeal is therefore dismissed. No order as to costs.