2008 (7) TMI 444 - AT - Income Tax

Double Taxation Relief - Taxability of income in India u/s 44B - Inland haulage charges (IHC) - main activity of transportation by the operation of ships in the international traffic - Applicability of art. 8 of the DTAA between India and Belgium - whether inland transportation charges can be brought within the ambit of an activity directly connected with such transportation - CIT(A) held that inland haulage charges are incidental and closely connected with direct operation of ships and hence not liable to tax in India in terms of art. 8 of the Indo-Belgium DTAA - HELD THAT - Handling charges are the charges paid for loading/unloading/stacking etc. of the containers and the demurrage charges are in nature of penalty for non-removal of the cargo in time. On the contrary the IHC are towards transporting the goods from the exporter place to the port. The very nature of inland transportation charges clearly differentiates it from handling or demurrage charges which are of a different genus. We therefore do not find any substance in this submission made on behalf of the assessee that IHC are covered u/s. 44B as these are equal to or part and parcel of the amount or account if carriage of goods shipped at any port in or outside India and hence are automatically covered under art. 8. This contention is therefore repelled. It would not be out of place to take stock of the overall activity of the assessee company. Its business is to collect the cargo from the station of the exporter then bring it to Mumbai port from where its vessels carry it to the destination station out of India. paper book copy of bill of lading for the combined transport of the cycle parts from Ludhiana to Nairobi. The assessee is carrying the Hero Cycles parts etc. in its containers from Ludhiana bringing the same to Mumbai and then shipping them to Nairobi. Insofar as the assessee s income from Mumbai to the Nairobi is concerned the AO has accepted the applicability of art. 8 on it and held it to be not taxable in India. Whether such inland transportation charges can be brought within the ambit of an activity directly connected with such transportation - HELD THAT - Since the assessee is itself trans-shipping the goods to other destination countries this small portion of its total receipts which hardly accounts for 5 per cent. cannot be detached from the main activity of transportation by the operation of ships in the international traffic. It is not the case of the Revenue that the assessee earned freight for carrying the goods of other parties also upto Mumbai port for shipment by some third party. It therefore shows that all the IHC received by the assessee are in connection with the goods which are finally loaded on its own ships at Mumbai for shipping to the other countries - In the instant case the assessee has gone by the provisions of DTAA and has also claimed that no tax is payable on its gross receipt. AO has accepted the assessee s point of view for the applicability of art. 8 on the gross receipts and has only put to tax the remaining which represents IHC by estimating the profit @ 7.5 per cent. Thus the assessee has opted to go by the DTAA and the AO has also accepted the same. We are of the considered opinion that in this treaty the inland transportation if coupled with the further shipping of cargo also by the assessee from Indian port to the foreign country would be construed as the activity directly connected with such transportation . Hence the case would squarely fall under art. 8(2)(b)(ii). We appreciate that in some treaties the income from journey between States connected with the Contracting States has been kept outside the purview of income from the operation of ships in the international traffic. For example cl. 2 of art. 9 of DTAA between India and UK specifically provides that the provisions of para 1 of this article shall not apply to income from journeys between places situated in a Contracting State. In the absence of any similar clause in the DTAA between India and Belgium we are of the considered opinion that the inland transportation would be covered within art. 8(2)(b)(ii). As the assessee has transported the containers for the purpose of transportation in international traffic we find that the case is also caught within the sweep of cl. (c). Since the activity of transporting the goods from Ludhiana to Mumbai is incidental to the activity directly connected with the transportation of goods from Mumbai to Nairobi we do not find any difficulty in granting the benefit of art. 8 under this clause as well. To sum up we hold that the IHC earned by the assessee are covered within the scope of income derived from the operation of ships in the international traffic as per art. 8 of the DTAA between India and Belgium and hence cannot be subjected to tax in India in the present circumstances. The view taken by the learned CIT(A) on this count is therefore upheld. In the result the appeal is dismissed.

Summary

Issues Involved:
1. Taxability of Inland Haulage Charges (IHC) under the Indo-Belgium Double Taxation Avoidance Agreement (DTAA).
2. Applicability of Section 44B of the Income Tax Act, 1961 to IHC.
3. Interpretation of Article 8 of the Indo-Belgium DTAA in relation to IHC.

Detailed Analysis:

1. Taxability of Inland Haulage Charges (IHC) under the Indo-Belgium Double Taxation Avoidance Agreement (DTAA):
The primary issue revolves around whether the inland haulage charges (IHC) received by the assessee, a non-resident company registered in Belgium, are taxable in India. The assessee argued that IHC should not be taxed in India as per Article 8 of the Indo-Belgium DTAA, which covers income from the operation of ships in international traffic. The Assessing Officer (AO) contended that IHC is not part of international transport and should be taxed in India as business profits under Article 7 of the DTAA.

2. Applicability of Section 44B of the Income Tax Act, 1961 to IHC:
The AO argued that IHC is not covered under Section 44B of the Income Tax Act, 1961, which deals with the computation of profits and gains of shipping business in the case of non-residents. The assessee, however, relied on the Explanation to Section 44B, which includes demurrage charges, handling charges, or any other amount of similar nature, to argue that IHC should be considered within its purview.

3. Interpretation of Article 8 of the Indo-Belgium DTAA in relation to IHC:
The core of the dispute is the interpretation of Article 8 of the Indo-Belgium DTAA. The assessee claimed that IHC is covered under Article 8(2)(b)(ii) and Article 8(2)(c), which include income from activities directly connected with the transportation of goods in international traffic and the use, maintenance, or rental of containers, respectively. The AO and the Departmental Representative argued that IHC does not fall within the scope of these clauses and should be taxed in India.

Comprehensive Analysis:

Taxability of Inland Haulage Charges (IHC):
The tribunal examined the nature of IHC and its connection to the international transportation of goods. It was noted that the assessee's business involved collecting cargo from various locations in India, transporting it to Mumbai port, and then shipping it internationally. The tribunal emphasized that the activity of transporting goods from the exporter's location to the port is directly connected with the international transportation of goods. The tribunal referred to the OECD Commentary and Klaus Vogel's Commentary on Double Taxation Conventions, which support the inclusion of such inland transportation within the scope of international traffic. Therefore, the tribunal concluded that IHC is an integral part of the transportation process and should be covered under Article 8 of the DTAA.

Applicability of Section 44B:
The tribunal analyzed the Explanation to Section 44B, which includes demurrage charges, handling charges, or any other amount of similar nature. It was observed that the nature of IHC is different from demurrage or handling charges, which are related to the loading/unloading and penalty for non-removal of cargo, respectively. IHC pertains to the transportation of goods from the exporter's place to the port, which is a distinct activity. The tribunal concluded that IHC is not covered under Section 44B, and thus, the assessee's reliance on this section was misplaced.

Interpretation of Article 8 of the Indo-Belgium DTAA:
The tribunal examined the language of Article 8 of the DTAA, which exempts income derived from the operation of ships in international traffic from taxation in the other Contracting State. Article 8(2)(b)(ii) includes income from activities directly connected with such transportation, and Article 8(2)(c) includes income from the use, maintenance, or rental of containers. The tribunal found that the transportation of goods from various locations in India to Mumbai port is directly connected with the international transportation of goods. The tribunal also noted that the bill of lading issued by the assessee covered the entire journey from the exporter's location to the international destination, indicating a single, composite activity. Therefore, the tribunal held that IHC falls within the scope of Article 8 and should not be taxed in India.

Conclusion:
The tribunal upheld the decision of the CIT(A) that IHC is covered under Article 8 of the Indo-Belgium DTAA and is not taxable in India. The appeal by the Revenue was dismissed.