2012 (5) TMI 9 - AT - Income Tax

Article 8 of DTAA between India and Germany - Reference to DRP - Pooling/slot arrangements - Permanent Establishment (PE) - the entire ship was chartered by the assessee and the same was operated by the assessee and other carriers operated its feeder service. - held that - the DRP has already granted relief to the assessee to the extent of the profit earned from transportation of cargo by feeder vessels and the assessee is able to establish the link between the feeder vessels with mother vessels voyage wise. Feeder services - operation of ships in international traffic - held that - The assessee has not disputed the fact that freight receipts taxed u/s 44B is towards transportation of the cargo by feeder vessels under slot/pooling arrangements and the mother vessels was not owned, leased or chartered by the assessee. Hence, when there is no link between the transportation of cargo by the feeder vessels and transportation by mother vessels owned or chartered by the assessee, then the said activity cannot be termed as operation of ships in international traffic and subsequently the benefit of Article 8 of Indo German DTAA would not be available on such profit. - the benefit of Article 8 would be available only on the profit from the operation of ships in international traffic would not necessarily be available to the profits computed u/s 44B. What is a participation in a pool - held that - it is clear that slot sharing is not the same as participation in a pool or a joint business or an international operating agents. Hence the nature of arrangement does not fall in Article 8(4) of DTAA. - Section 115V-(2)(ii)(A) Explanation (a), explains pooling arrangement. This does not include slot charter, etc. Section 115VB definition cannot be applied to DTAA as the definition is for the purpose of that chapter only and even then the requirement is that the slot has to be chartered. Application of article 7 of DTAA - held that - There is no dispute that the assessee carrying out the business of operation of ships in India through its Agent M/s Hapag-Lloyd India Pvt Ltd. The agent in India concluding the contract of cargo transportation by issuing bill of lading which are legally binding on the assessee; therefore, the assessee is carrying out the business of operation of ships in India and thus is having a PE in India as per article 5 of DTAA. This is not a case of availing service of agent in support of the business but the assessee is carrying out business through the agent in India. Therefore, the source of income to the extent of booking of cargo by the agent in India and physically transported the cargo from port in India to the mother vessels is in India and constitute a PE in India. The assessee has earned income through such business in India and thus certainly said to have a source of income in India Apart from having a PE, when the assessee is carrying out the business in India and earned income from such source in India, then, the contention of the assessee is not acceptable that the income is not assessable to tax in India. As it is clear from the facts in the case in hand that the assessee has carried out the business in India and the agent was concluding the contract which is legally binding on the assessee; therefore, remuneration paid to the agent is not relevant factor for taxing the profits and gain at source from India.

Issues Involved:
1. Assessment of total taxable income.
2. Entitlement to benefits under Article 8 of the India-Germany Double Taxation Avoidance Agreement (DTAA).
3. Nature of pooling arrangements and slot arrangements.
4. Taxation under Section 44B of the Income Tax Act.
5. Levy of interest under Section 234B of the Income Tax Act.
6. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.
7. Permanent Establishment (PE) in India and attribution of profits.

Issue-Wise Detailed Analysis:

1. Assessment of Total Taxable Income:
The assessee, a non-resident company engaged in the operation of ships in international traffic, filed a return declaring nil income. The Assessing Officer (AO) assessed the total taxable income at Rs. 125,815,348 based on the directions of the Dispute Resolution Panel (DRP). The AO observed that the assessee was transporting goods through feeder vessels under slot/pooling arrangements and assessed the income under Section 44B of the Income Tax Act at 7.5%.

2. Entitlement to Benefits Under Article 8 of the India-Germany DTAA:
The primary issue was whether the assessee was entitled to the benefits of Article 8 of the DTAA on the freight income earned from the transportation of cargo by feeder vessels under pooling/slot arrangements. The AO and DRP denied the benefit, holding that the income from slot arrangements did not qualify as income from the operation of ships in international traffic. The DRP directed the AO to verify the linkage between feeder vessels and mother vessels. It was observed that if the linkage was established, the benefit of Article 8 would be allowed except for receipts from slot sharing arrangements.

3. Nature of Pooling Arrangements and Slot Arrangements:
The assessee contended that pooling arrangements were permissible under the DTAA and should be considered as part of the core activity of ship operations. The Tribunal referred to the decision in the case of Balaji Shipping (UK) Ltd., which held that profits from slot/pooling arrangements were taxable only in the state of residence. However, the Tribunal distinguished the facts of the present case, noting that the mother vessels were neither owned nor chartered by the assessee, and thus the income from slot arrangements did not fall under Article 8.

4. Taxation Under Section 44B of the Income Tax Act:
The AO computed the total taxable income of the assessee at 7.5% of the freight and THC earnings on feeder vessels, amounting to Rs. 12,58,15,348. The Tribunal clarified that the computation of profits under Section 44B does not necessarily mean that the income is from the operation of ships in international traffic. The benefit of Article 8 would not be available if there was no linkage between the transportation by feeder vessels and mother vessels owned or chartered by the assessee.

5. Levy of Interest Under Section 234B of the Income Tax Act:
The issue of levying interest under Section 234B was consequential in nature and was dismissed in view of the findings on other grounds of the appeal.

6. Initiation of Penalty Proceedings Under Section 271(1)(c) of the Income Tax Act:
The issue of initiation of penalty proceedings was deemed premature and was dismissed as it could not be challenged directly before the Tribunal.

7. Permanent Establishment (PE) in India and Attribution of Profits:
The assessee argued that it did not have a PE in India and thus was not liable to tax in India. The DRP held that the assessee's agent in India had the authority to conclude contracts on behalf of the assessee, constituting a PE in India. The Tribunal upheld this view, stating that the assessee was carrying out business through its agent in India, thus having a PE. The Tribunal also noted that remunerating the agent at arm's length was irrelevant for taxing the profits and gains at source from India. The matter was set aside to the AO for de novo adjudication to determine the profit attributable to the PE.

Conclusion:
The appeal was partly allowed. The Tribunal concluded that profits from participation of cargo under "Slot Arrangement" were not eligible for the benefit of Article 8 of the Indo-German DTAA and that the assessee had an agency PE in India. The issue of levy of interest under Section 234B was dismissed as consequential, and the initiation of penalty proceedings was deemed premature. The matter was remanded to the AO for determining the profit attributable to the PE.

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