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TMI Blog2014 (7) TMI 686X X X X Extracts X X X X X X X X Extracts X X X X ..... facility of slot hire agreement with the feeder vessels to complete the voyage is not merely an auxiliary or incidental activity to the operation of ships, but inextricably linked. If the transportation of cargo by feeder vessels belonging to other enterprise is only a part of main voyage by the mother ship i.e., owned or leased by the assessee enterprise, then it has to be taken as a part and parcel of the operation, which is inextricably linked with the completion of the entire voyage - The linkage between the transportation by feeder vessels, mother vessels of the ship owned by the assessee has to be established - insofar as the issue of linkage between the voyage performed between the feeder vessels and mother vessels, the assessee has been able to establish before the AO which is evident from the observations of the AO - there is no ownership or control of entire ship because the risk under the charter party agreement or arrangement is upon the owner of the ship who generally assumes an operational risk for transporting the cargo of the person who has hired the ship and the hirer agrees to pay for conveyance of goods on a determined voyage - The risk of the assessee is toward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no. 6503/Mum./2012 - - - Dated:- 16-7-2014 - SHRI P.M. JAGTAP AND SHRI AMIT SHUKLA, JJ. For the Appellant : Mr. Kanchan Kaushal a/w Mr. Dhanesh Bafna, Mr. Aliasger Rampurawala Mr. Faizan Nursumar For the Respondent : Dr. Narendra Kumar ORDER Per Bench The aforesaid appeals have been filed by the assessee as well as the Revenue against the consolidated impugned order dated 2nd July 2012, passed by the learned Commissioner (Appeals)-XI, Mumbai, for the aforementioned assessment years. The appeals preferred for the assessment year 2004-05 to 2007-08, relate to the quantum of assessment passed under section 143(3) r/w section 147 r/w section 144C(3), whereas, the appeal for the assessment year 2009-10, is in relation to the quantum of assessment passed under section 143(3) r/w section 144C(3). 2. Since all these appeals pertain to the same assessee involving common issues arising out of identical set of facts and circumstances, therefore, as a matter of convenience, these appeals were heard together and are being disposed off by way of this consolidated order. 3. We will first take up the issues which are arising in assessee's appeal and are pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances of the case and in law, the Hon'ble CIT(A) erred in not appreciating that Crescent is not a PE within the meaning of Article 5(7) of the Tax Treaty since Crescent is an independent agent as the transactions between the appellant and Crescent are on an arm's length basis. Furthermore, the Hon'ble CIT(A) erred in not appreciating that Crescent is a legally and economically independent entity. 5. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in not appreciating that no income of the appellant could be brought to tax in India as the arm's length commission paid to Crescent, which is taxable in India in the hands of Crescent, fully extinguishes the tax liability of the appellant in India. 6. On the facts and in the circumstances of the case and in law, the ADIT erred in estimating freight attributable to the feeder essels, by applying deemed rate of 10% instead of 7.5% under section 44B. 7. On the facts and in the circumstances of the case and in law, the. Hon'ble CIT(A) erred in confirming the action of the learned ADIT in levying interest of ₹ 36,60,770 under section 234B of the IT Act despite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to feeder vessels by applying deemed rate of 10% instead of 7.5% under section 44B; (v) Charging of interest under section 234B; and lastly (vi) Validity of the assessment order and the additions made on the ground of non-issuance/service of notice under section 143(2), after filing of the return of income in response to the notice under section 148, as raised in the additional ground. 7. Regarding the preliminary issue, the learned counsel though admitted that the issue of non-service of notice under section 143(2), has not been raised either before the Assessing Officer or before the learned Commissioner (Appeals), but raised for the first time before the Tribunal by way of additional ground, however, being a legal ground, arising from the facts and material on record which does not require any further investigation of facts, therefore, the same should be admitted. In support of the admission of the said ground, reliance has been placed on various decisions including that of the decision of the Hon'ble Supreme Court in National Thermal Power Co. Ltd. v. CIT, [1998] 229 ITR 383 (SC). 8. After hearing both the parties, the said additional ground, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shipping business. Being the first year of dispute before us, we are narrating the facts of the assessment year 2004-05. 10. Facts in brief:- The assessee, M/s. MISC Berhad, is a company incorporated under the laws of Malaysia having its registered office in Malaysia and is also a tax resident of Malaysia. The assessee is engaged in the business of shipping in international traffic and is also the owner of ships either owned by it or taken on lease. In India, the assessee has appointed an agent M/s. Crescent Shipping Pvt. Ltd., for booking of freights of cargo for transportation from one destination to other in international traffic. During the year under consideration, the assessee has received total freight of ₹ 1,54,59,46,952. In the computation of income filed along with the return of income on 9th September 2004, the assessee has sought for double tax relief @ 50%, as per Article-8 of India-Malaysia DTAA in the following manner:- Total Freight Collected ₹ 1,54,59,59,364 Income @ 7.5% Of ₹ 15,49,59,364 ₹ 11,59,46,952 Tax Payable @ 40% On ₹ 11,59,46,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ships (owned/chartered/pooled by it) including feeder vessels operated by third party feeder vessel operator. 8. As regard the freight earned from (i) above i.e, carriage of goods in international traffic by operation of hips owned/chartered/pooled by it, there is no dispute regarding the claim of benefit of Article/of DTAA. Even as regards (ii) above, the portion of the freight attributable to voyage performed on owned/chartered/pooled ships of the assessee, the assessee is allowed to Article 8 benefit since the assessee has furnished documentary proof to substantiate the linkage between the voyage performed on feeder vessel and mother vessel (which are owned/chartered/pooled by it). 9. As such, issue (which was also present in A.Y. 2008-09 on the basis of which the case has been reopened for A.Y. 2004-05 is regarding availability of Article-8 benefit to the portion of freight which is attributable to voyage performed on feeder vessels which are operated by third parties (and not the assessee). As per the details filed by the assessee, the total freight earned by the assessee from (ii) above is ₹ 43,22,62,275. This freight is for the entire voyage i.e., from the load p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allowed on the ships of 3rd party i.e., feeder vessels is not assuming such risk. The chartering of some space on feeder vessels cannot be equated with chartering of complete ship. Just by issuing of bill of lading, the assessee cannot be said to be involved in the operation of shipping as it has no control of such ships (i.e., feeder vessels) which are used in the transportation activities. He further noted that the present Indo- Malaysia treaty is different from OECD model convention because in the treaty itself the operation of ships has been defined. The wide interpretation given in the OECD commentary cannot be imported here. The contracting parties were very well aware of such a commentary of OECD and, therefore, have clearly intended that the business of transportation must be by the ships owned or leased or chartered by the assessee. In the present case, the Assessing Officer held that insofar as the transportation by feeder vessels, the assessee is neither the owner nor the lessee nor the charterer of the feeder vessels carrying the cargo up to the Hub port. Therefore, the income derived from such voyage would be outside the scope of Article-8, even though the assessee m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n port, is inextricably linked and cannot be segregated as held by the Assessing Officer and the learned Commissioner (Appeals). He further submitted that the Assessing Officer has, in fact, admitted that the assessee has furnished proof to substantiate the linkage of the voyage performed on feeder vessels and mother vessels (i.e., ships owned by the assessee). The Revenue's case is that since the feeder vessel is not owned/leased by the assessee, therefore, the benefit of Article-8, cannot be given on the goods carried through the feeder vessel is not a correct interpretation of Article-8(2). The carriage of goods from the feeder vessel is nothing but a charter only, in a sense that the assessee has booked space charter/slot charter for its containers which are owned by it. For the purpose of explaining the meaning of charter , as contemplated in Article-8(2) of the present treaty, he strongly referred and relied upon the decision of the Hon'ble Jurisdictional High Court in DIT v. Balaji Shipping U.K. Ltd., [2012] 253 CTR (Bom.) 460. In this case also, he explained that the assessee has transported the cargo through feeder vessels to the hub port and from hub port the car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naries which have been referred to by the Tribunal, in APL Co. Pte. Ltd. (supra). 16. Per contra, the learned Departmental Representative, Dr. Narendra Kumar, submitted that the ratio laid down by the Hon'ble Jurisdictional High Court in Balaji Shipping U.K. Ltd. (supra), cannot be referred and relied upon in the present treaty of Indo-Malaysia, where the operation of the ships has been clearly defined to mean profits derived from the transportation carried on by the owners or lessees or charterers of ships. Whereas, in Balaji Shipping U.K. Ltd. (supra), the decision was rendered in the context of Indo-U.K. treaty, wherein the operation of ships has not been defined. The Indo-U.K. treaty is based on OECD model convention which also speaks about ancillary and incidental services. Article-9 of Indo-U.K. treaty does not define operation of ships and, therefore, the meaning and the scope as explained in the commentary of model convention has been adopted by the High Court. This aspect of the matter has been clearly brought out by the Assessing Officer and the learned Commissioner (Appeals) in their respective orders, that the commentaries of model convention cannot be ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon as this decision is rendered prior to the decision of the Hon'ble Jurisdictional High Court in Balaji Shipping U.K. Ltd. (supra), where the High Court has considered the meaning of the term charterer in extensive manner to hold that even the slot charter falls within the ambit of the word charterer . Similarly, in other decisions also, the meaning of charterer has not been taken into consideration or the concept of the linkage of voyage. 18. We have heard the rival submissions, perused the relevant order of the Assessing Officer and the learned Commissioner (Appeals) and also the material placed on record qua the first issue. The assessee is a Malaysian company which is running a shipping line i.e., operating ships in the international traffic for carriage of goods. Insofar as the operation of shipping business from India is concerned, the assessee has been booking cargo from shippers/customers in India up till final destination port with all risks and responsibility. The bill of lading has been issued for the entire voyage. Since the assessee's ships owned/leased by it were not operating in the territorial waters of India, therefore, it has transport ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of goods from Indian Port to final destination port. 19. First of all, we have to understand the expression used in Article- 8 of Indo-Malaysia DTAA which reads as under:- ARTICLE-8 Shipping and Air Transport 1. Profits derived by an enterprise of a Contracting State from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in that State. 2. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean profits derived by an enterprise described in paragraph 1 from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft including: (a) the sale of tickets for such transportation non behalf of other enterprises; and (b) the rental of ships or aircraft incidental to any activity directly connected with such transportation; 3. Profits of an enterprise of a Contracting State described in paragraph 1 from the use, maintenance, or rental of containers (including trailers, barges and related equipment for the transport of containers) used in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nection with the transportation, by the enterprise, of passengers or cargo by ships or aircraft that it operates in international traffic should be considered to be directly connected with such transportation. 4.2 Activities that the enterprise does not need to carry on for the purposes of its own operation of ships or aircraft in international traffic but which make a minor contribution relative to such operation and are so closely related to such operation that they should not be regarded as a separate business or source of income of the enterprise should be considered to be ancillary to the operation of ships and aircraft in international traffic. 6. Profits derived by an enterprise from the transportation of passengers or cargo otherwise than by ships or aircraft that it operates in international traffic are covered by the paragraph to the extent that such transportation is directly connected with the operation, by that enterprise, of ships or aircraft in international traffic or is an ancillary activity. One example would be that of an enterprise engaged in international transport that would have some of its passengers or cargo transported internationally by ships or air ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke LJ said there is no distinction in principle between a slot charter and a voyage charter of a part of a ship. They are both in sense charterers of a space in a ship. A slot charter is simply an example of a voyage charter of part of a ship . Clarke LJ further on in his judgment at p. 22 gave his view that a slot charterer could even be described as the charterer of the ship, not merely a charterer. The reference to this commentary which in turn refers to the judgment is only to indicate what a slot charter is and that such agreements have been in use for decades. Needless to add that our reference to the same has no bearing upon Admiralty law including on the aspect of arrest of ships. The assessment order sets out clause 2 of the Connecting Carrier Agreement between the respondent and OEL, which reads as under:- 2(a) The carrier has offered container slots space to the line (respondent) and the line (respondent) has accepted to use such space on as/when required basis. [emphasis added] 22. Thereafter, their Lordships have also taken note of the fact that Article-9 does not define operation of ships and in that context they have referred to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the word owner has to be inferred as a person who owns a ship and the word lessee as a person who owns the ship for a given lease period. The word charterer has to be understood as a person who charters or hires a ship for a voyage. The Law Lexicon (P. Ramanatha Ayier, 2nd Edn.), defines the word charterer as one who, by contract acquired the right to use a vessel belonging to another. One who charters or hires or engages the whole or part of a ship under an agreement of Charter Party for a voyage . Here, the word charterer does not mean the owner or lessee of a ship. The word charter Party has been defined in Law Lexicon as an indenture of covenants and agreements made between merchants and mariners concerning their sea affairs. It is a contract by which a ship or some principal part thereof, is let to a merchant for conveyance of goods on a determined voyage to one or more places . From this definition, it is amply evident that the word charterer means hiring of a ship for a voyage, either whole of the ship or a part of a ship. The word charter completely eludes the concept of ownership. A charterer of a ship cannot be the owner of a ship. Therefore, the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder: A voyage charter whereby the ship owner agrees to place a certain number of container slots ( TEU and/or FEU) at the charterer's disposal. 24. From the above definitions of the term charter or charterer , one thing is amply clear that it means hiring of vessels or a ship or a part of its space under an agreement for a voyage. Thus, even a part of a space in the vessels for a particular journey is also considered as charter of ship or charterer . In the decision of Balaji Shipping U.K. Ltd. (supra), while referring to the judgment of Tychy (supra), the High Court have noted that a slot charter and a voyage charter of a part of a ship are in a sense charterers of a space in a ship. 25. From the above discussion, the following inferences can be deduced:- (i) Firstly, the operation of a ship can be done as charterer which does not mean to own or control the ship either as an owner or as a lessee; (ii) Secondly, charterer is a hirer of a ship under an agreement or arrangement to acquire the right to use a vessel or a ship for the transportation of a good on a determined voyage, either the whole of the ship or part of the ship or some space ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness. The said observations are as under:- 26. An enterprise may not ply the ships owned or chartered or otherwise controlled or managed by it in respect of certain routes. It would however, on account of the business exigencies, be required to carry cargo on such routes. Business expediency could arise on account of a number of reasons and different situations such as obliging regular clients, or cultivating new ones. If it were not to do so, it may well loose clientele. Ships owned or chartered or otherwise controlled or managed by an enterprise may not be available on the particular route on a given day or for a particular period. The enterprise may already have entered into contracts or may even be required to enter into contracts for the carriage of goods on that route on that day or during that period. The trade would expect, the enterprise to perform its contracts and/or ensure there is no break in its services. This it can do by availing slot hire agreements. Their refusal or failure to do so, may well affect their business and reputation adversely. 27. By availing the facility of slot hire agreements, the enterprise does not arrange the shipment on behalf of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of some space or slot charterer in a ship is actually a part and parcel of charter of a ship. Under the charterer agreement, there is no ownership or control of entire ship because the risk under the charter party agreement or arrangement is upon the owner of the ship who generally assumes an operational risk for transporting the cargo of the person who has hired the ship and the hirer agrees to pay for conveyance of goods on a determined voyage. The risk of the assessee is towards its customers from whom he has agreed to transport the cargo/goods from the destination port of booking to the final destination port. Thus, in our opinion, such a strict interpretation of the word charterer as adopted by the Department cannot be sustained. 30. Now coming to the decision of Cia-De-Navegacao Norsul (supra), we find that in the said decision, the assessee had failed to link and establish the voyage wise transportation, whether the feeder vessels were actually loading the goods into the mother vessels, which the assessee had claimed that it was operating. This is evident from Para- 2 of the said Tribunal order. Further, as pointed out by the learned counsel, the plea of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case, the voyage between the Indian Port to the Hub Port through feeder vessel and from Hub Port to final destination port through mother vessel owned/leased by the assessee are inextricably linked and there is complete linkage of the voyage and, therefore, the entire profits derived from the transportation of goods carried on by the assessee is to be treated as profits from operation of ships and, therefore, the benefit of Article-8, cannot be denied to the assessee on the part of the freight from voyage by the feeder vessels. Thus, ground no.2, raised by the assessee in all the years under appeal is allowed. 32. Since the benefit of Article-8, has been given to the assessee on the freight income earned by it, therefore, we are not adjudicating upon the plea for the benefit under Article-8(3). Likewise, the issue of Permanent Establishment Article-5, is also not adjudicated upon as the same will come into question, once the benefit under Article-8 is denied and income is to be computed as per Article-7. Thus, ground no.3, 4, 4(a), 4(b), 4(c), 4(d) and 5, in all the appeals are treated as academic in nature. 33. Now, coming to the issue of non-service of notice under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05-06, following ground has been raised:- 1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the interest levied u/s 234D without appreciating the fact that interest is chargeable on the excess amount so refunded. 40. Before the learned Commissioner (Appeals), it was submitted by the assessee that interest under section 234D, can be levied were the refund is granted under section 143(1) and no refund is due on regular assessment. In support of this contention, decision of the Tribunal, Vishakhapatnam Bench, in Dredging Corporation of India Ltd. v. ACIT, [2011] 142 TTJ 252 (Vizag), was relied upon. The learned Commissioner (Appeals) decided the issue in favour of the assessee following the Tribunal order. 41. Before us, the learned counsel further relied upon the decision of the Tribunal, Mumbai Bench, in ACIT v. BOR Ltd., ITA no.2246-2240/ Mum./2009 and the decision of Hyderabad Bench, in K. Anji Reddy v. DCIT, 59 SOT 92 (Hyd.) and submitted that in this case already assessment under section 143(3), was made accepting the returned income. Thereafter, the case was re-opened and the assessment under section 147/14 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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