2012 (8) TMI 681 - HC - Income Tax

India-UK DTAA - income on account of slot chartering - taxable u/s 44 B OR 28 to 43 - Held that - Section 115VB includes slot charter agreements in the phrase operating a ship , section 115-VI draws a distinction between operating .... ships on the one hand and other ship related activities such as slot charters on the other. Therefore slot charters are not considered as operating .... ships . In other words, a slot charter is considered to be a ship related activity but not the activity of operating .... ships - On clarifying that section 115VI does not lead to the exclusion of slot charters from the ambit of the phrase operation of ships in Article 9 of the DTAA. Nor does section 115VB include them within the phrase in the DTAA. Chapter XII-G is of no assistance in this regard as the definitions therein appear to be for the purpose of the Chapter alone unless otherwise required. Article 9 (1) refers to Income ... from the operation of ships ... . Section 44B refers to profits and gains of the business of operation of ships . The ambit of the identical phrases operation of ships in section 44B and Article 9(1) is the same. This conclusion is not arrived at by plucking out the three words from both the provisions and comparing them de hors the context in which they are used in the respective provisions. They are used in a similar context namely in the context of income (as used in article 9(1) or profits and gains (as used in section 44B) from the operation of ships. Both the provisions relate to the same subject namely taxation. The comparison between Article 9(1) and section 44B is, therefore, apposite and in accordance with the mandate of Article 3(3) of the DTAA. The words not having been defined in the DTAA must be given the meaning which they have under the laws of India relating to taxes which are the subject of the Convention. Thus as income from slot hire agreements fall within section 44B they must be held to be within the ambit of Article 9(1)- As a result of the view it is not necessary to consider the submissions as to the manner in which an international treaty must be interpreted. We are of the opinion that Article 9 of the Indo-U.K. DTAA includes slot charters/slot hire agreements as availed of and utilized in these cases - in favour of the assessee

Summary

Issues Involved:

1. Whether the income of the assessee by way of slot chartering would form a part of income from operations of ships exempt under Article 9 of the Tax Treaty between India and the UK.
2. Whether the income of the Respondent on account of slot chartering and use of containers in India is taxable under Section 44B or Sections 28 to 43 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Income from Slot Chartering under Article 9 of the DTAA:

The primary question was whether the income derived from slot chartering falls under the exemption provided by Article 9 of the DTAA between India and the UK. The respondent, a UK-based company engaged in international transportation of goods by sea, claimed that its income from slot chartering should be exempt under Article 9 of the DTAA. The Assessing Officer initially denied this benefit, but both the Commissioner of Income Tax (Appeals) and the Tribunal ruled in favor of the respondent.

Key Points:

- Nature of Slot Chartering: The judgment elaborated on slot chartering, referring to it as a practice where a shipowner or operator rents out space for carrying containers. The court cited maritime law and previous judgments to define slot chartering as akin to a voyage charter of part of a ship.

- Article 9 of the DTAA: Article 9 states that income from the operation of ships in international traffic shall be taxable only in the contracting state where the enterprise resides. The court noted that the phrase "operation of ships" is not explicitly defined in the DTAA or the Income Tax Act but has been considered in the context of Section 44B of the Act.

- Section 44B of the Income Tax Act: This section deals with the computation of profits and gains from the shipping business of non-residents, deeming 7.5% of the aggregate amounts received as profits. The court concluded that since income from slot chartering is taxed under Section 44B, it should also fall within the ambit of Article 9(1) of the DTAA.

- Two Types of Cases: The judgment distinguished between two scenarios:
- First Type: Where goods are transported from India to an international hub port using slot hire facilities and then further transported to the final destination by ships chartered by the respondent. The court held that this type clearly falls under Article 9.
- Second Type: Where goods are transported directly from India to the final destination using slot hire facilities. The court acknowledged some difficulty but ultimately held that even these cases fall under Article 9, as they are ancillary to the main business of operating ships.

2. Taxability under Section 44B or Sections 28 to 43 of the Income Tax Act:

The second issue was whether the income from slot chartering and the use of containers should be taxed under Section 44B or Sections 28 to 43 of the Income Tax Act. The court proceeded on the basis that income from slot chartering is taxable under Section 44B, which deals specifically with the shipping business of non-residents.

Key Points:

- Income from Slot Chartering: The court confirmed that income from slot chartering falls under Section 44B, as it has always been taxed under this provision. This section deems 7.5% of the aggregate amounts received as profits and gains from the shipping business, simplifying the tax computation for non-resident shipping companies.

- Use of Containers: The court noted that the respondent's case did not concern income from the use of containers, so it was unnecessary to address this part of the question.

Conclusion:

The court concluded that income from slot chartering falls within the ambit of Article 9 of the DTAA between India and the UK, and is therefore exempt from taxation in India. This applies to both types of cases discussed. Additionally, the court confirmed that such income is taxable under Section 44B of the Income Tax Act, not under Sections 28 to 43. The appeals were dismissed, and the judgment was in favor of the respondent.