2008 (8) TMI 389 - AT - Income Tax

Double Taxation Relief - S cope of the expression operation of ships - Eligibility for the benefit of Article 9 of Indo-U.K. Treaty - non-resident company - whether freight income of the assessee on account of transportation of cargo in international traffic through slot charter arrangement by the ships operated by other enterprises can be said to be profits from operation of ship under Article 9 of Indo-UK Treaty in view of the OECD Commentary? HELD THAT - There is no dispute between the parties before us that the assessee is entitled to the benefit of treaty with reference to freight income qua the transportation of cargo in the international traffic by the ships chartered by the assessee inasmuch as the AO himself had allowed such benefit in AY 2001-02. However, no such benefit was allowed by the AO in AY 2002-03 since the assessee could not file evidence regarding ships chartered by it. 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 2003 (10) TMI 5 - SUPREME COURT . This aspect of the matter has been recently considered by us in the case of Dy. CIT v. Safmarine Container Lines N.V. 2008 (7) TMI 444 - ITAT BOMBAY-L . Therefore, we are of view that - (i) rule of interpretation for interpreting a statute are not applicable for interpreting the covenants of tax treaties between the contracting states; (ii) the words or expression used in the treaties, if not defined in the treaties itself, should be understood in the sense in which the contracting states understood at the time the treaty was executed i.e., contemporaneous thinking; and (iii) contemporaneous thinking can be gathered from the provisions of domestic laws of the contracting states and in the absence thereof from the various commentaries available at the time of such contract. We are concerned with the scope of the expression 'operation of ships' used in Article 9 of Indo-UK Treaty. This expression is neither defined in such treaty nor in the Indian Income-tax law as existed at the time when the treaty was executed. Nothing has been brought to our notice about the domestic law of UK. Thus, contemporaneous thinking can be gathered from the commentaries available at the time of contract. In our view, since the assessee not only transports its cargo through the ships chartered by it but also transports the cargo in the international traffic by the ships operated by other enterprises under slot chartering arrangement. Since Article 8 of OECD Model Convention and Article 9 of Indo-UK Treaty are similarly worded. Paragraph 6 of OECD Commentary would apply in defining the scope of Article 9(1) of Indo-UK Treaty as per the rule of contemporaneous exposition. Accordingly, it is held that the freight income earned by the assessee on account of transportation of cargo in the international traffic by ships operated by other enterprises under slot chartering arrangement would be taxable only in State of residence and consequently, such income would be exempt from taxation under the Indian Income-tax Law. We would like to mention that the reason given by the CIT(A) for granting relief to the assessee is not in conformity with the OECD commentary. The test laid down by him was whether the activity carried on by the assessee forms part of main business of operation of ships or was a separate and distinct business. Article 9(1) of Indo-UK Treaty would include either the direct activity i.e., operation of ships or the ancillary activity. The concept of two activities constituting the same business as applied by the learned CIT(A) is not the criteria for bringing the case of the assessee under Article 9(1) of the Treaty. The case of the assessee would fall under Article 9(1) if it is found that activity is either directly connected or incidental to the main activity. Hence the reason given by the learned CIT(A) is hereby vacated. However, we are in agreement with the final conclusion arrived at by him for the reason given by us in the preceding para. Therefore, the orders of CIT(A) are upheld though for different reasons - In the result, the appeals filed by the revenue and the cross-objections by the assessee are dismissed.

Summary

Issues Involved:
1. Eligibility for the benefit of Article 9 of the Indo-U.K. Treaty.
2. Determination of whether the assessee operates ships in international traffic.
3. Applicability of Article 9(4) of the Indo-U.K. Treaty.
4. The role of slot chartering in the operation of ships.

Detailed Analysis:

1. Eligibility for the Benefit of Article 9 of the Indo-U.K. Treaty:
The primary issue in the appeals was whether the assessee, a non-resident company incorporated in the UK and engaged in transportation of goods in international traffic by ships, was eligible for the benefit of Article 9 of the Indo-U.K. Treaty. The assessee claimed exemption from tax under Article 9, which states, "Profits of an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in that State."

2. Determination of Whether the Assessee Operates Ships in International Traffic:
The Assessing Officer (AO) examined various agreements and concluded that the assessee was only operating the vessel "Orient Aishwarya" and not other vessels. Consequently, the AO held that Article 9 was not applicable to income from other vessels, and the income was assessable under section 44B of the Income-tax Act, 1961. The CIT(A) disagreed, holding that the assessee was engaged in the business of operation of ships, whether through its own chartered vessels or through connecting carriers.

3. Applicability of Article 9(4) of the Indo-U.K. Treaty:
The AO denied the benefit of Article 9(4) of the Treaty, which provides that "income from the use, maintenance, or rental of containers" is taxable only in the State of residence. The AO argued that the benefit is extended only to income earned as lease rental by an enterprise owning a container and giving it on lease. The CIT(A) disagreed, stating that the use of containers for transporting goods is an integral part of the shipping business, and hence, the income from such use is entitled to the benefit of Article 9(1).

4. The Role of Slot Chartering in the Operation of Ships:
The AO contended that slot chartering, where the assessee hires space on ships operated by others, does not qualify as "operation of ships." The CIT(A) and the Tribunal disagreed, referencing the OECD commentary which states that profits from transportation of cargo by ships operated by other enterprises under slot-sharing arrangements are covered under the operation of ships in international traffic.

Tribunal's Conclusion:
The Tribunal upheld the CIT(A)'s decision, though for different reasons. It relied on the OECD commentary to conclude that the freight income earned by the assessee from transportation of cargo in international traffic by ships operated by other enterprises under slot chartering arrangements would be taxable only in the State of residence. Consequently, such income would be exempt from taxation under Indian law.

The Tribunal emphasized that the term "operation of ships" should be understood in the sense in which it was understood by the contracting parties at the time the treaty was executed, as per the rule of contemporaneous exposition. The Tribunal also noted that the CIT(A)'s reasoning was not entirely in conformity with the OECD commentary but agreed with the final conclusion.

Final Judgment:
The Tribunal dismissed the appeals filed by the revenue and the cross-objections filed by the assessee, upholding the CIT(A)'s orders.