2016 (5) TMI 1025 - AT - Income Tax

Assessment under section 172(4) - Shipping business of non-residents - Taxability of income in a situation in which transportation of goods has been done by using the slot charter - Held that - The assessee is entitled to treaty protection, under article 9, from source taxation of income arising from transportation of goods by operation of ships in international traffic- irrespective of whether or not such ships were owned or chartered by the assessee The profits earned by the assessee in respect of the slot hire operations, or for that purpose any other part of the business of operations of ships or aircraft in international traffic, are taxable only in the country of its fiscal domicile, i.e. Indonesia. Therefore, uphold the grievance of the assessee on merits. The demands raised on the assessee by the impugned assessment order, accordingly, hereby stands vacated. - Decided in favour of assessee

Summary

Issues Involved:
1. Applicability of Section 172 of the Income Tax Act, 1961.
2. Eligibility for benefits under the India-Indonesia Double Taxation Avoidance Agreement (DTAA).
3. Taxability of income from slot chartering under international traffic operations.

Detailed Analysis:

1. Applicability of Section 172 of the Income Tax Act, 1961:
The appellant challenged the correctness of the order passed by the CIT(A), which denied the benefits under Section 172(4) of the Income Tax Act, 1961. The Assessing Officer (AO) had disallowed the exemption claim on the grounds that the vessels were not owned or chartered by the assessee, but rather the assessee had only taken some slots or loaded a few containers. Section 172 pertains to the levy and recovery of tax from non-resident ship owners or charterers carrying goods at Indian ports. Since the assessee was neither the owner nor the charterer, the AO argued that Section 172 did not apply, making the exemption claim erroneous.

2. Eligibility for Benefits under the India-Indonesia Double Taxation Avoidance Agreement (DTAA):
The appellant, an Indonesian tax resident, claimed benefits under the India-Indonesia DTAA. Article 8 of the DTAA, which deals with the taxation of income from the operation of ships in international traffic, states that such profits are taxable only in the resident state (Indonesia). The CIT(A) upheld the AO's decision, reiterating that the DTAA benefits were not available to slot charterers. However, the tribunal noted that Article 8(4) of the DTAA includes not only the transportation by owners or charterers but also any other activity directly connected with such transportation, which would cover slot chartering.

3. Taxability of Income from Slot Chartering under International Traffic Operations:
The tribunal emphasized that Article 8 of the DTAA provides a broad definition of "operation of ships or aircraft," which includes activities directly connected with transportation, such as slot chartering. The tribunal referenced a precedent from the Bombay High Court (CIT Vs Balaji Shipping UK Ltd), which held that slot hire facilities are integral to the contract of carriage of goods by sea and are thus eligible for treaty protection. Consequently, the tribunal concluded that the income from slot chartering is covered under the DTAA and is taxable only in Indonesia, not in India.

Conclusion:
The tribunal found that the assessee was entitled to treaty protection under Article 8 of the India-Indonesia DTAA, and the income from slot chartering operations was taxable only in the country of fiscal domicile (Indonesia). The demands raised by the AO were vacated, and the appeal was allowed, providing relief to the assessee. The judgment was pronounced on April 18, 2016.