2008-VIL-412-ITAT-MUM

Equivalent Citation: [2009] 27 SOT 441 (MUM.)

Income Tax Appellate Tribunal MUMBAI

IT APPEAL NOS. 5824 AND 6076 (MUM.) OF 2006

Date: 28.11.2008

DEPUTY DIRECTOR OF INCOME-TAX, (INTERNATIONAL TAXATION)-1(2), MUMBAI

Vs

DELMAS FRANCE

BENCH

K.C. SINGHAL AND R.S. SYAL, JJ.

JUDGMENT

1. These are the cross appeals by the Revenue as well as the assessee which have been heard together and are being disposed of by this common order for the sake of convenience.

2. The main issue arising in the revenue’s appeal is whether the assessee is entitled to 75 per cent relief regarding payment of income-tax in view of the provisions of Article 9 of the Double Taxation Avoidance Agreement (‘DTAA’) between India and France.

3. Briefly stated, the facts are that the assessee company is a non-resident and tax resident of France which was engaged in the business of transportation of cargo in the international traffic by sea. It declared gross receipt of Rs. 11,88,09,049 in respect of the cargo transported from Indian ports to the ultimate destination in France against which income of Rs. 89,10,680 was declared applying profit rate at the rate of 7.5 per cent. The tax on the above income was computed at Rs. 42,77,126 applying tax rate of 48 per cent against which relief of Rs. 32,07,845 was claimed being 75 per cent of the tax in view of Article 9(2) of the DTAA between India and France. 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 all 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 certificates 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 111 voyages from Mumbai Port, 17 from Tuticorin, 27 from Chennai and 5 from Cochin. However, it had filed the ship registration certificates in respect of only 3 mother vessels namely, Roland Delmas, Veronique Delmas and Saint Roch but the assessee 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. After examining the provisions of Article 9 of the said DTAA, the Assessing Officer observed as under :

"It is clear from the above that the benefit under Article 9 is only available to the person who is operating the ship, i.e., either the owner or the charterers or the lessee of the ships. In the case of Delmas it is not able to establish that it is operating the ships. It is quite possible that the some or all the ships it claims might be operated by third parties. The mere fact that a person has certain ships chartered in its name or registered in its name while that particular ship is not used for the voyages shown will not lead to the conclusion that the income if from operation of ships."

In view of the above discussion, the Assessing Officer held that the assessee was not entitled to relief under Article 9 of the said ‘DTAA’.

4. The matter was carried in appeal before the CIT(A) before whom certain additional evidence was filed on the ground that proper opportunity was not granted to the assessee by the Assessing Officer for furnishing the relevant material or evidence. The said evidence was admitted by the CIT(A) after giving proper opportunity to the Assessing Officer. On merits it was contended on behalf of the assessee - (i) that the assessee issues a composite bill of lading for carrying the cargo from the Indian Port to the port of destination and that the total freight earned for carrying cargo from the Indian port to the port of destination was offered to tax in the return filed; (ii) that the insistence of the Assessing Officer on the linkage between the feeder vessels carrying cargo from Indian ports and transshipment of these cargo to the ships owned/chartered by the appellant was unjustified and (iii) that it is not necessary to establish that the cargo collected by feeder vessels from India was transshipped to mother vessels of the assessee for further transportation in international traffic. However, on sample basis the assessee had produced two examples of such transshipment to prove the linkage between the feeder vessel and mother vessel.

5. After considering the additional evidence and the material produced before the Assessing Officer, the CIT(A) noted that the assessee had been able to file the ship registration certificate in respect of four ships, namely, Caroline Delmas, Blandine Delmas, Adeline Delmas and Therese Delmas to establish that the assessee is the owner of the ships. Further, it was noted that the assessee had filed ship registration certificates before the Assessing Officer in respect of three vessels, namely, Roland Delmas, Veronique Delmas and Saint Roch. Accordingly, it was held by him that the Assessing Officer was not justified in observing that the assessee had not been able to produce the ship registration certificates. Thereafter, the CIT(A) examined the provisions of Article 9 of the said DTAA in the light of the OECD Commentary by Klaus Vogel and accordingly opined - (i) that paragraph (1) of Article 9 only requires that the enterprise should be engaged in international traffic; (ii) that the totality of shipping business is to be examined; (iii) that all the activities which are incidental and closely related with the operations of ships would be treated as part of the same business. Preparatory and auxiliary activities relating to the business of operation of shipping would be included as part of it; (iv) that each and every activity of the business need not be necessarily and directly linked with the main goal of the business. It is sufficient if the transactions carried out by a business are with a purpose to achieve the objective of the business; (v) that the benefit of paragraph (1) of Article 9 of the DTAA can be denied only when it is established that the activities of the business even though carried out along with the business of operation of ships are in reality amounting to a separate business; (vi) that the incidental use of ships belonging to others for transportation of a small fraction of the freight through the ships neither owned nor leased by the appellant, does not amount to a separate business and (vii) that it is not necessary to establish one to one connection of voyage-wise details of the feeder vessel with the mother vessel.

6. In view of the above discussion, the CIT(A) recorded a finding of fact that the assessee was able to prove that it was in the business of operation of ships in the international traffic. It was further held by him that the activity of transportation of cargo from India by feeder vessels which are also ships is integral part of the shipping business of the assessee and, therefore, income derived for arising from such transportation from India to France by feeder vessels is part of the profits arising from the operation of ships. Consequently, it was held that the assessee was entitled to relief under Article 9 of the said DTAA. In view of such finding, the CIT(A) did not examine the other issues, i.e., issues relating to the profits under Article 5 of the Treaty as well as the rate of tax. Aggrieved by the same, the revenue is in appeal before the Tribunal.

7. Both parties have been heard at length. The first contention of the learned Departmental representative on behalf of the revenue is that the CIT(A) was not justified in ascertaining the scope of the expression ‘operation of ships’ appearing in Article 9 of the DTAA since Article 9 of DTAA and Article 8 of OECD Model Convention are not similarly worded. She has pointed out that article 9 of the DTAA refers to the profits derived from the operation of ships while in the OECD Model Convention the word ‘derived’ is not there. Secondly the provisions contained in Article 9(2) of the DTAA are missing from Article 8 of the OECD Model Convention. Similarly, the provisions contained in Article 9(3) of the DTAA are missing from Article 8 of the OECD Model Convention. We are unable to accept the above contention of the learned Departmental Representative for the reasons given hereafter. It would be appropriate to reproduce Article 9 of the DTAA which reads as under:

ARTICLE 9: SHIPPING:

"1. Profits derived by an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in that Contracting State.

2. Notwithstanding the provisions of paragraph 1, such profits may be taxed in the other Contracting State from which they are derived, provided the tax so charged shall not exceed:

(a )During the subsequent five fiscal years, 25 per cent,

(b )During the subsequent five fiscal years, 25 per cent of the tax otherwise imposed buy the internal law of that Contracting State. Subsequently, only the provisions of paragraph 1 shall be applicable.

3. The provisions of paragraphs 1 and 2 shall also apply to profits from the participation in a pool, a joint business or an international operating agency engaged in the operation of ships.

4. For the purposes of this article interest arising on funds connected, with the operation of ships in international traffic shall be regarded as profits derived from the operation of such ships and the provisions of article 12 shall not apply in relation to such interest."

8. A bare perusal of the above provisions shows that the expression "operation of ships" has not been defined in the Article itself. The comparison made by the learned Departmental Representative between the provisions of Article 9 of DTAA and Article 8 of OECD Model Convention has no relevance. The word ‘derived’ in para 1 of the above Article is followed by the words ‘by an enterprise of Contracting State’ and not by the words ‘from operation of ships’. The provisions contained in Article 9(2) of the DTAA have nothing to do with the definition of the expression ‘operation of ships’. The provisions of Article 9(3) provides that para 1 would apply to the profits from the participation in pool, a joint business or an international operating agency. This only extends the meaning of the expression ‘operation of ships’ appearing in para 1 of Article 9 but does not define the expression appearing in para 1 of Article 9. Thus, in our opinion, the above Article does not define the expression of ‘operation of ships’. In the case of Dy. Director of Income-tax v. Balaji Shipping (UK) Ltd. [2008] 25 SOT 325 (Mum.), it has been held by us that in the absence of any definition of expression ‘operation of ships’, the CIT(A) was justified in ascertaining the scope of such expression by looking into the OCED Commentary available at the time when the agreement between the contracting parties was, executed. Such view was taken after considering the observations of the Hon’ble Supreme Court in various cases, namely, Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706, CIT v. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR 654 . Therefore, following the decision of this Bench in the case of Balaji Shipping (UK) Ltd. (supra) it is held that the CIT(A) was justified in ascertaining the scope of expression "operation of ships" by looking into the OECD Commentary by Klaus Vogel.

9. On merits, the contention of the learned Departmental Representative is that the CIT(A) was not justified in holding - (i) that benefit of Article 9 would be available if it is shown that the assessee is engaged in the business of transportation in the international traffic; (ii) that benefit would be available with reference to the entire voyage if use of the feeder vessel is incidental to the main business; (iii) that each and every activity of the business need not be directly linked with the main business of the assessee and (iv) that it was not necessary to link the transportation of cargo by the feeder vessel with the transportation of the same by mother vessel. It has been strongly contended by her that if the claim of the assessee is to be allowed without establishing such nexus then it would amount to allowing the claim of the assessee even in a case where the entire transportation from Indian Port to the ultimate destination in the world is by a ship which is neither owned or leased or chartered by the assessee. Such is not the intention either under the agreement or as per the OECD Commentary. According to her, transportation of cargo by ships belonging to other enterprises cannot be brought within the scope of the expression "operation of ships". On the other hand, the learned counsel for the assessee has strongly relied on the order of the CIT(A) on this aspect of this issue.

10. After hearing both the parties, we find some merit in the contention of the learned Departmental Representative on behalf of the revenue. This aspect of the issue has been considered recently in the case of ANL Container Line (P.) Ltd. [IT Appeal No. 1939 (Mum.) of 2006] which was also argued by the present counsel, Shri F.V. Irani. In that case it has been held by us as under :

". . .This Bench in the case of Balaji Shipping (UK) Ltd. (supra) has also held that in the absence of any definition such expression would include not only direct activity of transportation in the international traffic but also the indirect activities which are incidental or auxiliary to the main activity. Accordingly, it was held that transportation of cargo through feeder vessels with whom slot charter agreement/arrangement has been made would be included within the scope of the expression ‘operation of ships’ and consequently, profits arising from such activity would be taxable only in the State of residence. The commentary by Klaus Vogel further provides that even the inland transport incidental to main transportation of cargo in the international traffic would also be within the scope of such expression. Applying the aforesaid principle, it has to be held that the transportation of cargo in the international traffic by feeder vessel would fall within the ambit of such expression if such transportation is incidental or auxiliary to the main transportation. It is clarified that in order to claim benefit under Article 8, it must be established that cargo in the international traffic was by the ship owned/leased/chartered by the assessee. It is only in such case that transportation by feeder vessel belonging to other parties would be considered as incidental to the main activity. If the entire voyage in the international traffic is through the ship belonging to other enterprises then benefit under Article 8 would not be available. We are not in agreement with the broad proposition laid down by the CIT(A) that benefit would be available under Article 8, even if it is established that the assessee is engaged in business of shipping. Klaus Vogel in his commentary nowhere says that entire voyage through ships belonging to other enterprise would be considered by such expression. The relevant portion of the commentary by Klaus Vogel has been reproduced by us in the case of Balaji Shipping (UK) Ltd. (supra) in para 22 of the order. It provides that in the first place, it would cover profits directly obtained by the enterprise from the transportation of passengers or cargo by ships or aircraft (whether owned, leased or otherwise at the disposal of the enterprise). Thereafter, it says that this would also cover profits from activities not directly connected with such operation as long as they are ancillary to such operation. Therefore, CIT(A) is not justified in holding that there is no need to link the transportation of cargo by feeder vessel with transportation by the mother vessel owned/leased/chartered by the assessee. Transportation of cargo by feeder vessel can be said to be ancillary activity only if it can be linked with the main voyage by mother ship. If the proposition of CIT(A) is accepted then it would cover the entire voyage undertaken by the ship belonging to other shipping companies. For example, assessee may transport the goods by one ship from Mumbai to Singapore belonging to other enterprises and load the cargo in another ship which is also not owned/leased/chartered by the assessee for transporting the cargo from Singapore to Australia. Such type of voyage is never intended to be covered by the expression ‘operation of ships’. Therefore, broad proposition laid down by the CIT(A) cannot be accepted. In our opinion, the benefit under Article 8 would be available in respect of transportation of cargo by feeder vessel belonging to other enterprises only if such transportation is ancillary to the main transportation of the cargo by mother vessel. Accordingly, the onus would be on the assessee to establish that cargo transported through feeder vessel from Indian Port was loaded in the mother vessel for the transportation of the same to the ultimate destination." [Emphasis supplied]

11. Following the aforesaid decision, it is held - (i) that the expression "operation of ships", in the absence of any definition in the Article 9 of the DTAA, would include not only the direct activity of transportation of cargo by ships owned, leased or chartered by the assessee but also transportation of cargo by feeder vessels from Indian Port to the mother vessel if such transportation is ancillary or incidental to the main activity; (ii) that benefit of Article 9 would not be available merely on the ground that the assessee is engaged in the business of shipping globally; (iii) that benefit of Article 9 would be available to transportation of the cargo by feeder vessels only if the assessee is able to establish the link between the transportation of cargo by feeder vessels with transportation by mother vessels owned, leased or chartered by the assessee.

12. The learned counsel for the assessee has submitted before us that on similar facts, the Tribunal has decided the issue in favour of the sister concern - Delmas Shipping South Africa (Pty.) Limited. In this connection, it is mentioned that in that case there was no dispute of the fact that there was slot charter arrangement with the feeder vessels but in the present case this fact has been disputed and the submission of the assessee in this regard is not substantiated by any material on record. Further, no arguments were advanced regarding linkage of feeder vessels with mother vessels. Therefore, the said decision would not cover the present case.

13. In the present case, the assessee could not furnish the relevant details before the Assessing Officer. However, it filed additional evidences before the CIT(A) to establish the linkage between the feeder vessel and the mother vessel on sample basis. That shows that the entire evidence was not furnished before the CIT(A) in this regard. In our opinion, the relief cannot be allowed on the basis of sample evidence. If relief is allowed on sample basis then it would give the absurd results as benefit could be obtained even when the cargo is transported by mother vessels belonging to other enterprises. Hence, the approach of the CIT(A) for granting relief on the basis of sample evidence has to be rejected. The interest of justice would be met if one more opportunity is provided to the assessee to establish such linkage.

14. It may also be mentioned that the CIT(A) has referred to certain ships namely, Caroline Delmas, Blandine Delmas, Adeline Delmas and Therese Delmas which are stated to be owned by the assessee but these ships do not find place in the list furnished before the Assessing Officer (page 2 of the assessment order) which carried the cargo. Therefore, the ownership of such ships would not be relevant in adjudicating this issue. It is further noted that the assessee had furnished registration certificates in respect of three mother ships, out of which the ship namely, Saint Roch, also does not find place in the list of mother ships. It is also not known whether the other mother ships given in the above list are owned or leased or chartered by the assessee or not. All these aspects need verification. As already stated, the assessee would be at liberty to establish that the transportation of cargo was carried out by mother vessel either owned or leased or chartered by the assessee. The order of the CIT(A) is, therefore modified and the matter is restored to his file for fresh adjudication in the light of the observations made in the preceding paragraphs.

15. The only issue which remains to be adjudicated relates to the treatment of Inland Haulage Charges. This represents local transport from customer’s place to Indian Port. This issue stands covered by our decision in the case of Dy. Director of Income-tax v. Safmarine Container Lines N.V. [2008] 24 SOT 211 (Mum.) wherein it has been held that such charges would fall within the scope of the expression "profits from operation of ships" if such amount is minor in comparison to freight relating to main voyage. Admittedly, the amount of haulage charges of Rs. 11,65,400 is negligible and, therefore, would fall under Article 9(1) itself. However, such treatment would depend on the treatment of freight relating to the voyage by feeder vessels. If the CIT(A) finds that freight attributable to feeder vessel falls under Article 9(1) then such charges would also fall under Article 9(1). Otherwise, such charges would be treated as business profits falling under Article 7 of the DTAA. Accordingly, the CIT(A) would pass appropriate order in this regard.

16. Before parting with this order, it may be mentioned that the assessee had alternatively claimed before the CIT(A) that if the exemption is not allowable under Article 9, then such business profits falling under Article 5 would not be assessable in the hands of the assessee inasmuch as the assessee has no permanent establishment in India. It has also been contended before the CIT(A) that the rate of tax would have been 35 per cent instead of 48 per cent. If the CIT(A) finds that a portion of the profit earned by the assessee is not exempt under Article 9, then he would also adjudicate the above issues after giving adequate opportunity to the assessee. This would dispose of the grounds contained in the assessee’s appeal.

17. In the result, the appeal of the revenue is partly allowed while the appeal of the assessee is allowed for statistical purposes.

 

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