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Deputy Director of Income-tax, (International Taxation) 1(2), Mumbai v. Cia de Navegacao Norsul

Income Tax Appellate Tribunal

Nov 25, 2008

Judgment

CaseIQ

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Factual and Procedural Background

The assessee is a non-resident company engaged in transportation of cargo in international traffic by sea. It declared gross receipts of Rs. 4,27,55,706 for cargo transported from Indian ports to destinations in the sub‑continent of South America and computed income using a 7.5% profit rate (reported income Rs. 32,06,568). The assessee claimed full exemption from Indian income‑tax on that income invoking Article 8 of the India‑Brazil Double Taxation Avoidance Agreement (DTAA).

During assessment proceedings the Assessing Officer (AO) asked for ship registration certificates and charter‑party agreements for all ships the assessee purportedly operated from India. The assessee replied that none of the ships owned/chartered by it called at Indian ports and that the vessels shown in freight statements were feeder vessels owned by other lines with which the assessee had slot arrangements. The AO required voyage‑wise linkage between feeder vessels and mother vessels and registration/charter documents for mother vessels; the assessee furnished lists but did not file registration certificates for any claimed operated vessel for 73 voyages from Mumbai Port.

The AO concluded the assessee failed to establish voyage‑wise linkage and rejected the Article 8 exemption. He treated the receipts as business profits, held the assessee had a Permanent Establishment in India through its agent Barwil Forbes Shipping Services Ltd., and applied section 44B and Rule 10 to estimate profits at 10%, fixing total income at Rs. 42,72,570.

The assessee appealed to the CIT(A), arguing that it had filed the requested details, that linkage was irrelevant, and that being engaged in operation of ships entitled it to Article 8 relief. The CIT(A) accepted the assessee's position (drawing on commentaries by Klaus Vogel and Philip Baker), held feeder vessels qualified as "ships", and allowed full Article 8 relief. The Revenue appealed to the Tribunal. The Tribunal heard both sides, analyzed the treaty wording (India‑Brazil DTAA Article 8), compared it with the OECD Model, considered prior Bench decisions, examined pool/consortium arrangements and evidentiary gaps, and remanded limited issues for verification.

Legal Issues Presented

Whether the assessee is entitled to 100% exemption from Indian income‑tax under Article 8 of the India‑Brazil DTAA for freight receipts arising from carriage of goods from Indian ports to destinations in Brazil/South America.
Whether carriage by feeder vessels (not owned, leased or chartered by the assessee) falls within the defined expression "operation of ships" under Article 8(4) of the Indo‑Brazil Treaty.
Whether participation in a pool/consortium (Article 8(3)) can bring voyages performed by consortium members' ships within the Article 8 exemption and, if so, what evidence is required to attribute profits to voyages covered by ships owned/chartered/leased by the assessee or consortium members.
Procedural/ancillary: whether, if full Article 8 relief is denied, the alternate contentions concerning Permanent Establishment under Article 5 and the applicable tax rate remain for adjudication by the CIT(A).

Arguments of the Parties

Revenue's Arguments (Appellant)

Article 8 should be read in the restricted sense because Article 8(4) of the Indo‑Brazil DTAA defines "operation of ships or aircraft" — once the treaty defines a term, commentaries cannot expand it.
The definition requires transportation to be carried on by ships owned, leased or chartered by the enterprise; feeder vessels were not owned, leased or chartered by the assessee, so their voyages cannot qualify for Article 8 relief.
The assessee had only two ships owned/chartered by it; therefore, relief (if any) should be limited to transactions actually carried in mother vessels owned/leased/chartered by the assessee, not all cargo moved through feeder vessels.
OECD commentaries (Klaus Vogel) are not applicable because the Indo‑Brazil DTAA deviates from the OECD Model and expressly defines the key term; the Bench's prior decision in Balaji Shipping supports this approach.
Even in pooling arrangements, exemption cannot be given for profits not attributable to carriage by ships owned/chartered/leased by the assessee (verification required).

Assessee's Arguments (Respondent)

The assessee submitted it filed all details requested and therefore discharged its onus; the AO's finding of nondisclosure was unjustified.
Feeder vessels are "ships" and the phrase "operation of ships" should be read broadly to include carriage by other ships under slot/consortium arrangements; the commentaries by Klaus Vogel and Philip Baker support this broader interpretation.
The assessee relied on bills of lading and documentary details showing a single Bill of Lading covering the entire transport from Mumbai to Brazil (via Durban) and contended the voyage was integral; the same container was carried on feeder to mother vessel and then onward on mother vessel.
The existence of consortium/pool and slot arrangements (including alleged chartering of space) brings voyages within Article 8(3) and the assessee relied on precedents (including Eltek SGS and Balaji Shipping) to support wider treatment.
Any alleged slot charter could be oral and does not require a formal written agreement to be effective (the assessee relied on earlier Bench decisions to support this contention).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Dy. DIT v. Balaji Shipping (U.K.) Ltd. [2008] 25 SOT 325 (Mum.)	Authority that where a treaty defines a term, meaning must be taken from the treaty and not expanded by reference to international commentaries; also considered treatment of slot/charter arrangements in earlier Bench decisions.	The Tribunal relied on the principle taken in Balaji Shipping to hold that where Article 8(4) defines "operation of ships", the commentaries (Klaus Vogel) cannot be used to enlarge the defined meaning. The Bench also considered Balaji when assessing the evidentiary strength of alleged slot charter arrangements.
Asstt. DIT v. Delta Airlines Inc. [2008] 26 SOT 514	Reinforcement of the proposition that if an expression is defined in the treaty itself, its meaning cannot be ascertained by looking into commentaries.	The Tribunal cited Delta Airlines as corroborative authority for the rule that treaty definitions take precedence over external commentaries when construing defined terms in the treaty.
Commissioner Of Income‑Tax v. Eltek SGS P. Ltd. [2008] 300 ITR 61	Used by the assessee to support a broader reading of "business of transportation" or related treaty interpretation arguments.	The Tribunal recorded that the assessee relied on Eltek SGS to argue for a wider scope of Article 8; the decision was noted in the submissions though the Tribunal's final conclusion rested on the Indo‑Brazil treaty text rather than this precedent.
Union of India v. Azadi Bachao Andolan [2003] 263 ITR ...	Supreme Court authority on treaty interpretation and the rule that where an expression is not defined in a treaty or local law, contemporaneous commentaries may be considered to determine meaning.	The Tribunal relied on the principle extracted from Azadi Bachao Andolan (as discussed in the Bench's earlier Balaji Shipping decision) to explain when commentaries may be consulted — namely, only if the treaty does not itself define the term.
CIT v. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR ...	Authority cited (via Balaji Shipping analysis) on the approach to treaty interpretation and use of contemporaneous commentaries where treaty/local law is silent.	The Tribunal referred to the rule set out in this case (as relied upon in Balaji Shipping) to support its interpretative framework for deciding whether commentaries may be used to construe treaty terms.

Court's Reasoning and Analysis

Step 1 — Threshold question: whether the Court may resolve the dispute by reference to international commentaries (Klaus Vogel / Philip Baker) or whether the treaty language must govern. The Tribunal held that the first step is to ascertain the parties' intention from the treaty wording. If a term is defined in the treaty, that definition governs and external commentaries cannot be used to alter the defined meaning. The Tribunal relied on its earlier decisions (Balaji Shipping; Delta Airlines) and on the principles in Azadi Bachao Andolan and P.V.A.L. Kulandagan Chettiar as authority for this interpretive rule.

Step 2 — Textual comparison: the Tribunal compared Article 8 of the Indo‑Brazil DTAA with Article 8 of the OECD Model Convention and observed that the Contracting States deliberately deviated from the OECD Model by expressly defining "operation of ships or aircraft" in Article 8(4) of the Indo‑Brazil Treaty. Because the Indo‑Brazil Treaty contains a definition in para 4, the Tribunal concluded that the meaning must be taken from that treaty provision rather than from OECD commentaries.

Step 3 — Construction of Article 8(4): the Tribunal parsed the definition which states that "'operation of ships or aircraft' shall mean business of transportation ... carried on by the owners or lessees or charterers of the ships or aircraft, including the sale of tickets ... on behalf of other enterprises." The Tribunal observed that the words "carried on by the owners or lessees or charterers" qualify and limit "business of transportation". The defined phrase cannot be read in isolation; the requirement that transportation be carried on by ships owned, leased or chartered by the enterprise is an essential element of the definition.

Step 4 — Application to facts concerning feeder vessels: the Tribunal agreed with the CIT(A) that a feeder vessel is a "ship" (the treaty does not define "ship", so external commentaries may inform that word), but rejected the assessee's argument that mere engagement in the business of transportation (or carriage by feeder vessels not owned/chartered by the assessee) suffices. Because the feeder vessels were neither owned, leased nor chartered by the assessee (admitted), profits from voyages carried by feeder vessels from Mumbai to Durban fall outside Article 8(4).

Step 5 — Mother vessels, pools/consortiums and Article 8(3): the Tribunal held that transportation performed by ships owned/leased/chartered by the assessee (or by members of a consortium/pool in which it participated) falls within Article 8. Article 8(3) expressly brings profits from participation in a pool or joint business within para 1. The Tribunal accepted that the assessee had two ships as part of a consortium/pool and that other consortium members' ships could carry the goods; therefore, profits arising from the pool are attributable to participation and are taxable only in the State of residence. However, the Tribunal emphasized that exemption can be granted only if it is shown that the goods were transported from Durban to Brazil on ships owned/leased/chartered by the assessee or consortium members; hence verification is necessary.

Step 6 — Evidentiary and procedural conclusions: the Tribunal rejected the assessee's late‑raised contention of oral slot chartering because it was unsupported by material and was not raised earlier. The Tribunal also noted that the Assessing Officer had cited an incorrect Article in one place (apparently from another treaty), but proceeded on the correct Article 8. Because the assessee furnished a single Bill of Lading for the full journey and documentary material indicating carriage continuity via feeder to mother vessel, the Tribunal concluded the assessee may be entitled to relief in respect of the portion of voyage performed by ships owned/chartered by it or consortium members; but since voyage‑wise linkage between feeder and mother vessels and the evidence to attribute profits was incomplete for some voyages, the matter was remitted to the CIT(A) for verification.

Holding and Implications

CORE RULING: The Revenue's appeal is PARTLY ALLOWED.

Direct effects on the parties:

The Tribunal modified the CIT(A)'s order by holding that the assessee is not entitled to any exemption under Article 8 of the Indo‑Brazil DTAA in respect of profits arising from transportation of cargo carried on feeder vessels which were not owned, leased or chartered by the assessee.
The Tribunal held that transportation from Durban to the ultimate destination in Brazil/South America by ships that were owned/leased/chartered by the assessee (or by members of the consortium/pool in which the assessee participated) falls within Article 8 and may be entitled to 100% relief, but only to the extent the assessee proves that the goods were actually transported by such qualifying ships.
The matter is restored to the CIT(A) to verify, voyage‑wise, whether cargo sent from Indian ports was transported through mother vessels owned/leased/chartered by members of the consortium and to determine the profits attributable to those qualifying voyages; the assessee is permitted to furnish all relevant material or evidence to establish entitlement.
The alternate issues (whether the AO was justified in treating the income as business profits under Article 5 for Permanent Establishment concerns, and whether the correct rate of tax applied was 35% vs. the 48% applied by the AO) were not decided by the CIT(A) earlier and are remanded to the CIT(A) for adjudication after giving the assessee opportunity to be heard.

Broader implications:

The Tribunal reaffirmed the interpretive principle that where a treaty expressly defines a term, that definition governs and international commentaries cannot be used to expand its scope; consequently, parties to a DTAA who deviate from OECD Model wording fix the scope of key expressions by treaty text.
The decision clarifies that Article 8(3) (pools/consortiums) can bring profits from pooled arrangements within Article 8 relief, but the exemption is contingent on evidence linking the relevant voyages to ships owned/leased/chartered by the taxpayer or by consortium members; absent such linkage and evidence, source‑country taxation may not be displaced.
No novel, sweeping precedent altering treaty interpretation principles was announced; the Tribunal applied established rules and remanded factual verification to the CIT(A). The ultimate entitlement to relief depends on voyage‑specific proof of carriage on qualifying ships or valid pooling attribution.

Order reference: appeal partly allowed; matter remitted to CIT(A) for verification and further adjudication on alternate issues.

Show all summary ...

ORDER

1. The only issue arising in this appeal is whether the assessee is entitled to 100 per cent relief from payment of income-tax in view of the provisions of Article 8 of the Double Taxation Avoidance Agreement ('DTAA') between India and Brazil.

2. Briefly stated, the facts are that the assessee-company is a non-resident, which was engaged in the business of transportation of cargo in the international traffic by sea. It declared gross receipt of Rs. 4,27,55,706 in respect of the cargo transported from Indian ports to the ultimate destination in the sub-continent of South America against which income of Rs. 32,06,568 was declared applying profit rate at the rate of 7.5 per cent. However, the exemption from tax was claimed in respect of such income in view of the provisions of Article 8 of the DTAA between India and Brazil. In the course of assessment proceedings, the Assessing Officer asked the assessee to file copies of the ship registration certificates and the charter party agreements of all the ships operated by it from India. Despite various opportunities given the assessee could not file the same. However, the assessee vide letter dated 17-2-2004 stated - (1) that none of the ships owned/chartered by it called at Indian ports and (2) that all the vessels shown in the freight statement were feeder vessels which were owned by other shipping lines with whom the assessee had slot arrangements. In view of the above reply, the Assessing Officer asked the assessee to link the feeder vessels with the mother vessels in respect of the voyages to establish that the particular feeder vessel was linked with particular mother vessel. The assessee was also asked to file copies of the ship registration certificate and charter party agreements of all the mother vessels. In response to the same, a list of feeder vessels and mother vessels was furnished before the Assessing Officer. It was noted by the Assessing Officer that the assessee had shown 73 voyages from Mumbai Port but it had not filed the ship registration certificates in respect of any vessel which it claimed to have operated. Accordingly, it was held by him that the assessee had failed to link and establish the voyage-wise that its feeder vessels were actually loading the goods into mother vessels which the assessee had claimed that it was operating. The claim of the assessee under Article 8 was, therefore, rejected.

In view of the above finding, the Assessing Officer was also of the view that the income arising from such freights was to be treated as business profits. Since the assessee had its agent, viz., Barwil Forbes Shipping Services Ltd., in India, it was also held by him that business place of such agent was to be treated as Permanent Establishment (PE) and consequently the assessee was liable to pay income-tax under the provisions of section 44B of the Income-tax Act, 1961 ('the Act'). As a result thereof, the Assessing Officer estimated the profit at 10 per cent in view of Rule 10 of the Income-tax Rules, 1962 ('the Rules') and determined the total income at Rs. 42,72,570.

3. The matter was carried in appeal before the CIT(A), before whom it was submitted that the assessee had filed all the details as asked for by the Assessing Officer and, therefore, the Assessing Officer was not justified in holding that the relevant details were not filed by the assessee and consequently, the Assessing Officer was also not justified in holding that the assessee had failed to discharge its onus. It was further submitted - (i) that the linkage of feeder vessel with mother vessel was not at all relevant in adjudicating the issue, (ii) since it was engaged in the business of operation of ships, it was entitled to relief under Article 8 and (iii) what is relevant for claiming relief is that the assessee must carry on the business of shipping that is operation of ships. Once it was proved that the assessee was engaged in such business, the relief under Article 8 could not be denied. The commentary by Klaus Vogel and Philip Baker was relied on to contend that the feeder vessels were to be considered as ships and the expression 'operation of ships' would not only include transportation of cargo by its own ships but it would also include transportation of cargo in the international traffic by other ships.

4. The CIT(A) considered the submissions of the assessee as well as the commentary by Klaus Vogel and Philip Baker. He also examined the provisions of Article 8 of the DTAA. According to him, the assessee was entitled to exemption under Article 8 if two conditions were fulfilled - firstly, that enterprises should be engaged in the international traffic and secondly, that enterprise should be engaged in operation of ships. After referring to the commentary by Klaus Vogel and Philip Baker, it was held that feeder vessel fell within the definition of ship and, therefore, the same could not be excluded while adjudicating the issue under Article 8 of the DTAA. Accordingly, it was also observed by him that as per the above commentaries, the expression "operation of ships" would include not only the transportation of cargo in the international traffic but also include the incidental activity. According to him, once the assessee was engaged as an inter-national carrier, there could not be any doubt as to the treatment of entire income as income from operation of ships. It was further observed that linkage of feeder vessel with the mother vessel is not a condition for grant of exemption under Article 8 of the DTAA. It was held by him that so long as the assessee was shown to be engaged in the business of operating ships in the inter-national traffic and the source of income was such operation, then it was immaterial whether carriage of goods from feeder vessel was linked with the mother vessel or not in all the cases. In view of the same, he allowed relief under Article 8 of the DTAA. Aggrieved by the same, the revenue is in appeal before the Tribunal.

5. The learned Departmental Representative has vehemently assailed the order of the CIT(A) by contending that scope of Article 8 is a restricted one inasmuch as the term 'operation of ships or aircraft' used in paragraph 1 of Article 8 has been defined in para 4 of the said Article. According to her, once an expression has been defined in DTAA, then the commentaries on the international taxation cannot be looked into for ascertaining scope of such expression. Reliance has been placed on the recent decision of this Bench in the case of Dy. DIT v. Balaji Shipping (U.K.) Ltd. [2008] 25 SOT 325 (Mum.) . She drew our attention to para 4 of Article 8 which defines the expression "operation of ships or aircraft". As per this definition, such expression shall mean business of transportation of persons, goods, etc., carried on by the owners or lessees or charterers of the ships or air- craft, including the sale of tickets for such transportation on behalf of other enterprises. It was emphasized by her that to avail the relief under Article 8, the assessee must carry on the activity of transportation of persons or goods, etc., by ships owned/leased/chartered by it. Accordingly, it is contended by her that since the feeder vessels, admittedly were not owned, leased or chartered by the assessee, it cannot claim relief under Article 8 of DTAA. Regarding transportation by mother vessel, it is contended by her that the assessee had only two ships which were owned or chartered by it and, therefore, the entire cargo transported by the assessee from Mumbai Port through feeder vessels was not transported further by mother vessel owned, leased or chartered by the assessee. Therefore, relief, if any, could be allowed only in respect of that transaction which was carried through the mother vessel which were owned or chartered by the assessee.

6. On the other hand, the learned counsel for the assessee has vehemently relied on the order of the CIT(A). However, it has been reiterated by him that all details were filed before the Assessing Officer and the CIT(A). Further, it is admitted by him that none of the feeder vessels was owned, leased or chartered by the assessee. He also drew our attention to various details filed in form of paper book to point out that Bill of Lading issued by the feeder vessel described the assessee as consignor as well as the consignee. The destination was shown from Mumbai Port to Durban Port in South Africa. He then referred to the Bill of Lading issued by the assessee wherein the Indian party was shown as consignor and party of Brazil in the Sub-continent of America was shown as consignee. He also pointed out that the same container was transported by the mother vessel which was transported by the feeder vessel from Mumbai to Durban. In view of the same, it was contended that the entire voyage was integral one. It was also pointed by him that there was a consortium between various shipping companies and mother ships were owned/leased or chartered by the members of the consortium. Therefore, it was a pool arrangement which fell within the scope of Article 8(3). Hence, the claim of the assessee could not be rejected on the ground that all the mother vessels were not owned, leased or chartered by the assessee. It is further contended by him that Article 8 refers to business of transportation which is much wider than mere operation of ships. According to him, the assessee is engaged in the business of transportation in the international traffic and this fact is not disputed. Therefore, the claim of the assessee cannot be disallowed merely on the ground that part of the transportation was through feeder vessels not owned, leased or chartered by the assessee. Reliance has also been placed on the decision of the Hon'ble Delhi High Court in the case of Commissioner Of Income-Tax v. Eltek Sgs P. Ltd. [2008] 300 ITR 61 . He also referred to the decision in the case of Balaji Shipping (U.K) Ltd. (supra) to contend that the term "operation of ships" was considered in the wider sense in view of the commentaries by Klaus Vogel. Regarding the slot arrangement, it was submitted by him that there is no requirement that there must be a formal agreement. According to him, the assessee had chartered the space in the feeder vessels and, therefore, the decision of this Bench in the case of Balaji Shipping (U.K) Ltd. (supra) would apply.

7. In reply, the learned Departmental Representative has submitted that there is no similarity between OECD Model and Indo-Brazil Treaty. According to her, the provisions like Article 8(4) of the DTAA do not find place in OECD Model Convention and, therefore, the OECD Commentary by Klaus Vogel would not apply. It was also submitted by her that the concept of business adopted by the CIT(A) had already been rejected by this Bench in Balaji Shipping (U.K) Ltd.'s case (supra). It is also argued by her that even in the pooling arrangement, the entire profit could not be allowed as exemption. According to her, it is only the profit attributable to the freight earned on the transportation through mother vessel would be exempted.

8. Rival submissions have been considered carefully. The question for consideration is whether the CIT(A) was justified in holding that assessee was entitled to 100 per cent relief in respect of freight received on transportation of cargo from Indian port to ultimate destination in Brazil or sub-continent of South America as the case may be in view of Article 8 of DTAA between India and Brazil. The perusal of order of the CIT(A) shows that his findings in favour of the assessee are based on commentaries by Klaus Vogel and Philip Baker. Therefore, the first question to be consi-dered is whether the controversy between the parties could be resolved on the basis of the views expressed in various commentaries ignoring the language employed by the Contracting States in the DTAA. In our opinion, the intention of the parties has to be first ascertained from the language of the agreement itself. If a particular term or expression used in the agreement has been defined in the agreement itself then it would be illogical to ascertain the meaning of such term or expression by referring to the commentaries. However, if any term or expression is not defined in the agreement then only the judicial authorities can look into the commentaries prevailing at the time when the agreement was executed since commentaries have persuasive value and would represent the contemporaneous thinking. This aspect has been dealt with by us in the case of Balaji Shipping (UK) Ltd. (supra) after considering the observations of the Hon'ble Supreme Court in various cases, namely, Union of India v. Azadi Bachao Andolan [2003] 263 ITR 7061 , CIT v. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR 6542 . The relevant observations contained in para-19 of the said decisions are having reproduced as under :

"19. **

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 Apex Court in the case of Azadi Bachao Andolan (supra)."

Subsequently, this Bench in the case of Asstt. DIT v. Delta Airlines Inc. [2008] 26 SOT 514 again considered this aspect of the issue and held that if any expression has been defined in the treaty itself then the meaning of such expression cannot be ascertained by looking into the commentaries.

9. In this present case, we are concerned with the provisions of Article 8 of the Indo-Brazil Treaty which reads as under :

SHIPPING AND AIR TRANSPORT

"Article 8.—(1) Profits from the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

(2) If the place of effective management of a shipping enterprise is aboard a ship, then it shall be deemed to be situated in the Contracting State in which the home harbour of the ship is situated, or, if there is no such home harbour, in the Contracting State of which the operator of the ship is a resident.

(3) The provisions of paragraph 1 shall apply to profits from the participation in a pool, a joint business, or an international operating agency.

(4) 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. On the other hand, Article 8 of OECD Model Convention reads as under:

OECD MODEL CONVENTION

"Article 8.—Shipping, inland waterways transport and air transport

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

2. Profits from the operation of boats engaged in inland waterways transport shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

3. If the place of effective management of a shipping enterprise or of an inland waterways transport enterprise is aboard a ship or boat, then it shall be deemed to be situated in the Contracting State in which the home harbour of the ship or boat is situated, or, if there is no such home harbour, in the Contracting State of which the operator of the ship or boat is a resident.

4. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency."

The comparative study of both the provisions reveals that Contracting States have deviated from the OECD Model Convention while drafting DTAA. Since contracting parties have defined the expression 'operation of ships' in paragraph 4 of Article 8, meaning of such expression cannot be ascertained by looking into OECD commentaries in view of our decision in the case of Balaji Shipping (UK) Ltd. (supra) and Delta Airline Inc.'s case (supra). Hence, the scope of the expression 'operation of ships' used in para 1 of Article 8 has to be ascertained from the definition given in para 4 of Article 8 itself.

10. Article 8(1) of DTAA provides that profits from the operation of ships or aircraft in the international traffic shall be taxable in the country of residence. That means that such profits shall not be taxable in the country of source. The expression 'operation of ships' has been defined in para 4 of Article 8. According to this definition, such expression means the business of transportation of persons, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft, including sale of tickets for such transportation on behalf of other enterprises. Thus, the scope of such expression cannot be extended beyond what has been defined in Article 8(4). Thus, in our opinion, the CIT(A) was not justified in adjudicating the issue just by looking into the commentaries by Kalus Vogel and Philips Baker.

11. As far as the definition of ship is concerned, we are in agreement with the CIT(A) that the feeder vessel would fall within the ambit of the word 'ship'. The word 'ship' has not been defined in the agreement and, therefore, its meaning can be ascertained by looking into the commentaries. The learned Departmental Representative has also not challenged this finding. Accordingly, such finding is upheld.

12. Coming to the definition of the expression 'operation of ships or aircraft' in Article 8(4), the emphasis by the learned counsel for the assessee is on the words 'business of transportation' which, according to him, is much wider than the actual operation of ships. According to him, if the assessee is engaged in the business of transportation of persons, mail livestock or goods, then it would be irrelevant whether the ship belongs to the assessee or to other parties. Hence, the transportation of goods by feeder vessels would be covered even by the definition given in Article 8(4). According to him, the assessee is admittedly in the business of shipping, i.e., business of transportation of goods in the international traffic and consequently, its claim under Article 8 of DTAA cannot be rejected. We are unable to accept such contention of the assessee's counsel for the reasons given hereafter. The learned counsel for the assessee has referred to half the definition by referring to the words 'business of transportation of persons, mail, livestock or goods' only. The definition does not stop there. Such words are further qualified by the words 'carried on by the owners or lessees or charterer of ships or aircraft including the sale of tickets for such transportation on behalf of other enterprises'. In our opinion, the intention of the parties is clear to the effect that the business of transportation must be by the ships owned or leased or chartered by the assessee. Had the intention of the parties what the learned counsel for the assessee has contended, thus, they would have not used the words "by the owners or lessees or charterers of the ships". If the particular expression has been defined by using particular words then due weightage has to be given to such words. The words, 'business of transportation' cannot be read in isolation. These words have to be understood as per the entire wordings used by the parties.

13. The contracting parties were well aware about the OECD Model Convention as well as the commentaries on such Model Convention by Klaus Vogel. Despite the same, they had not adopted the model convention qua Article 8. By defining the expression 'operation of ships or aircraft', the contracting parties have deviated from the scope of the expression 'operation of ships' expressed in the OECD Commentaries. Therefore, the wider meaning as contended by the learned counsel for the assessee cannot be given to such expression under the Indo-Brazil Treaty. In our opinion, scope of expression 'operation of ships' under the treaty has to be restricted to the business of transportation of persons, mails, livestock or goods by the ships owned or leased or chartered by the assessee. In other words, there must be nexus between the transportation activity in the international traffic and the ships owned/leased/chartered by the assessee. Any other meaning given to such expression would frustrate the intention of the parties and, therefore, cannot be accepted.

14. In order to make it more clarificatory, we may explain through examples.

Example I - Assessee may be merely booking cargo and sending the same to other countries through the ships owned/leased/chartered by other enterprises. Such cases would be clearly outside the scope of Article 8 of such treaty since business of transportation in international traffic is not by owners/lessees/charterer of ships.

Example II - Assessee may be owner/lessee/charterer of a ship but such ship may be operating between other countries say between U.K. and U.S.A. The cargo from India may be going to a destination in Australia. In such case, question of transporting the cargo through the ship owned by the assessee would not arise. Hence, if the cargo is shipped through the ships of other enterprises then, such activity, in our opinion, would also be outside the scope of Article 8(4). The claim of the assessee cannot be allowed merely on the ground that the assessee engaged in shipping business globally or is owner/lessee/charterer of some ship. In our opinion, the claim would be allowed in the above example if the ship carrying the goods to Australia is owned/chartered/leased by the assessee.

15. In the present case, admittedly, the assessee is neither the owner nor lessee nor the charterer of the feeder vessel carrying

the cargo from Mumbai Port to destination in South Africa, i.e., Durban. Therefore, profits attributable to such voyage would be outside the scope or Article 8 of Indo-Brazil Treaty even though the assessee may be engaged in the business of transportation of goods in the international traffic.

16. It has also been contended by the learned counsel for the assessee that there was slot charter agreement with feeder vessel orally and, therefore, claim of the assessee cannot be rejected in view of the decision of this Bench in the case of Balaji Shipping (UK) Ltd. (supra). We are unable to accept such contention since such contention is not supported by any material or evidence. Further such contention was never raised before the lower authorities. It has also been admitted before us that there is no material or evidence to support such contention. Hence, the contention raised by him is rejected.

17. Now, the next question is whether the transportation of cargo from Durban to destination in Brazil or destination in sub-continent of South America by the ship owned/leased/chartered by the assessee would fall within the ambit of Article 8 of the above DTAA. In our opinion, such transportation would clearly fall within the ambit of expression 'operation of ships' as defined in Article 8(4). It has been shown from record that the assessee had issued one single Bill of Lading covering the entire transportation from Indian Port to a destination in Brazil. The entire transportation is one and independent and the claim of the assessee regarding voyage between Durban to Brazil cannot be denied merely because the goods were not sent from Mumbai Port through the ship owned/leased/chartered by it. Even if a part of the transportation is covered by the definition, assessee would be entitled to relief in respect of the profits attributable to the voyage covered by the ships owned/leased/chartered by the assessee. Hence, in our opinion, the assessee would be entitled to 100 per cent relief in respect of profits attributable to voyage between Durban to destination to Brazil or South America on the case may be transported by the ship owned, leased or chartered by the assessee.

18. Another aspect of the issue which requires consideration is whether the assessee is entitled to such relief in respect of transportation of goods though the ship owned/chartered/leased by members of consortium. Copy of the consortium agreement has been filed. Under this agreement, the goods can be trans- ported by any ship owned/leased/chartered by any member of the consortium. This agreement is, in fact, a pool arrangement. Article 8(3) of DTAA between India and Brazil clearly provides that para 1 shall also apply to profits from participation in a pool, a joint business or an international agency. The materials placed before us shows that assessee owned/chartered two ships which were part of the consortium. Other ships are owned/chartered by other members of the consortium. Any member can transport the goods through any of such ships. There is no dispute that goods were transported from Durban to destination in Brazil though such ships as per sample detail shown before us. The only dispute by revenue is that the assessee could not link the goods sent through feeder vessel and mother vessels (owned/chartered by consortium). We are in agreement with the contention of the learned Departmental Representative that exemption can be granted only when it is shown that goods were transported from Durban to Brazil through the ships either belonging to the assessee or to the members of the consortium. If the goods had been transported by some other ships then Article 8 would not apply since in such cases it cannot be said that goods were transported through ships owned/leased/chartered by the assessee. Therefore, some verification is required.

19. The learned Departmental Representative has disputed the question of profit arising from participation in pool. We are unable to accept such contentions. Profits from pool arrangement arise because of participation of assessee in such arrangement. Therefore, any profit arising from such arrangement would be taxable only in the State of residence. There is no distinc- tion between the profits from operation of ships falling under paragraphs 3 and 4 of Article 8. Therefore, in our opinion, profits from such arrangement cannot be taxed in India.

20. Before parting with this order, we would like to mention that the Assessing Officer has referred to Article 8 which does not find place in DTAA. It appears that by mistake, he has referred to an Article from some other treaty. We have referred to the correct Article in our order and parties to the dispute have also argued on that basis only.

21. In view of the above discussion, the order of the CIT(A) is modified by holding that the assessee would not be entitled to any relief in respect of profits arising from transportation of cargo through feeder vessels. Regarding transportation of cargo through mother vessels from Durban to destination in Brazil or sub-continent of America, as the case may be, the matter is restored to the CIT(A) for verification as to whether the cargo sent from Indian Port was transported through mother vessels owned/leased/chartered by members of consortium. The assessee would be entitled to relief in respect of freight attributable to the voyage between Durban to destination in sub-continent of America to the extent the assessee proves that goods were transported through the mother vessels owned/leased/chartered by the members of consortium. However, the assessee would be entitled to furnish all the relevant material or evidence to prove the above facts.

22. Before parting with this order, it is mentioned that the assessee had alternatively, claimed before the CIT(A) that the Assessing Officer was not justified in holding that the income was assessable as business profits under Article 5 of the DTAA inasmuch as the assessee had the permanent establishment in India. It was also contended by the assessee before the CIT(A) that the Assessing Officer was not justified in applying the rate of tax at the rate of 48 per cent instead of 35 per cent. The CIT(A) has not adjudicated these issues since relief was allowed under Article 8 itself. Since it has been held by us that the assessee is not entitled to 100 per cent relief, the alternate claims of the assessee remains to be adjudicated by the CIT(A). Accordingly, the CIT(A) is further directed to adjudicate such issues after giving adequate opportunity of being heard to the assessee.

23. The appeal of the revenue is, therefore, partly allowed.

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