2008 (11) TMI 280 - AT - Income Tax

Entitled to the benefit of Article 8 of DTAA between India and Brazil - operation of ships or aircraft - transportation of cargo - 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 art. 8 of DTAA between India and Brazil? HELD THAT - 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 of art. 8 of Indo-Brazil treaty even though the assessee may be engaged in the business of transportation of goods in the international traffic. 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 art. 8 of the above DTAA? - HELD THAT - Such transportation would clearly fall within the ambit of expression 'operation of ships' as defined in art. 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, as the case may be, transported by the ship owned, leased or chartered by the assessee. Whether the assessee is entitled to such relief in respect of transportation of goods though the ship owned/chartered/leased by members of consortium? - HELD THAT - The 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 art. 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. Profit arising from participation in pool - HELD THAT - 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 distinction between the profits from operation of ships falling under paras 3 and 4 of art. 8. Therefore, in our opinion, profits from such arrangement cannot be taxed in India. Appeal allowed in part.

Issues Involved:
1. Entitlement to 100% relief from payment of income-tax under Article 8 of the DTAA between India and Brazil.
2. Definition and scope of "operation of ships" under Article 8 of the DTAA.
3. Validity of the linkage requirement between feeder vessels and mother vessels.
4. Applicability of relief for profits from transportation through consortium arrangements.
5. Assessment of business profits and the rate of tax applicable.

Detailed Analysis:

1. Entitlement to 100% Relief from Payment of Income-Tax under Article 8 of the DTAA:
The primary issue in this appeal is whether the assessee is entitled to 100% relief from income-tax under Article 8 of the DTAA between India and Brazil. The assessee, a non-resident company engaged in the transportation of cargo in international traffic by sea, claimed exemption from tax under Article 8. The AO rejected this claim, stating that the assessee failed to provide necessary documentation to establish the linkage between feeder vessels and mother vessels.

2. Definition and Scope of "Operation of Ships" under Article 8 of the DTAA:
The CIT(A) allowed the relief based on the interpretation that feeder vessels fall within the definition of "ships" and that the "operation of ships" includes incidental activities. However, the Tribunal emphasized that the term "operation of ships" must be understood as per the definition provided in Article 8(4) of the DTAA, which restricts it to the business of transportation carried on by owners, lessees, or charterers of ships. The Tribunal rejected the broader interpretation based on international commentaries, stating that the specific language of the DTAA must prevail.

3. Validity of the Linkage Requirement Between Feeder Vessels and Mother Vessels:
The Tribunal agreed with the CIT(A) that the linkage of feeder vessels with mother vessels is not a condition for exemption under Article 8. However, the Tribunal clarified that the business of transportation must be carried out by ships owned, leased, or chartered by the assessee to qualify for the relief. The Tribunal found that the assessee did not own, lease, or charter the feeder vessels, and thus profits attributable to such voyages fall outside the scope of Article 8.

4. Applicability of Relief for Profits from Transportation Through Consortium Arrangements:
The Tribunal examined whether profits from transportation through consortium arrangements (pool arrangements) qualify for relief under Article 8. The Tribunal held that profits from such arrangements are taxable only in the State of residence, provided the goods are transported through ships owned, leased, or chartered by the members of the consortium. The Tribunal remanded the matter to the CIT(A) for verification of whether the cargo was transported by such ships.

5. Assessment of Business Profits and the Rate of Tax Applicable:
The Tribunal noted that the AO had incorrectly referred to an article from another treaty. The Tribunal instructed the CIT(A) to adjudicate the alternate claims of the assessee regarding the assessment of business profits under Article 5 of the DTAA and the applicable tax rate, as these issues were not previously addressed due to the relief granted under Article 8.

Conclusion:
The Tribunal modified the CIT(A)'s order, holding that the assessee is not entitled to relief for profits from transportation through feeder vessels but may be entitled to relief for transportation through mother vessels owned, leased, or chartered by the consortium members, subject to verification. The Tribunal also directed the CIT(A) to adjudicate the alternate claims regarding the assessment of business profits and the applicable tax rate. The appeal of the Revenue was partly allowed.

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