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TMI Blog2008 (8) TMI 389X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yal. ORDER 1. The appeals by the revenue and the Cross Objections by the assessee for the years under consideration have been heard together and are being disposed off by the common order for the sake of convenience. The issue arising from the appeals of Revenue is whether assessee is eligible for the benefit of Article 9 of Indo-U.K. Treaty. 2. Briefly stated, the facts giving rise to these appeals are these. The assessee is a non-resident company incorporated in UK which was engaged in transportation of goods in international traffic by ships. M/s. NLS Agency (India) Pvt. Ltd., Mumbai was the agent of the non-resident in India. In respect of assessment year 2001-02, it filed the income-tax return declaring the total income of Rs. 3,00,25,837 against the total freight receipt of Rs. 40,03,44,489 by applying net profit rate of 7.5 per cent prescribed under section 44B of Income-tax Act, 1961 (the Act). However, the tax liability was declared nil by claiming exemption under Article 9 of Indo-UK Treaty. The copy of Tax Residency Certificate (TRC) was also filed. In the similar manner, the assessee declared the total income of Rs. 5,34,45,380 against the total freight rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose containers are integral part of its business of transporting the containers on slots provided by the Connecting Carrier. Thus, separate income of the assessee on this account cannot be quantified. Even otherwise, such quantification has not been provided by the A.R. of the assessee. In view of the above, the Assessing Officer held that Article 9 of the said Treaty was not applicable in the case of the assessee except in the case of receipts arising from the operation of the vessel Orient Aishwarya . Subsequently, it has been observed by him that the assessee had permanent establishment (PE) in India as NLS Agency (India) Pvt. Ltd. at Mumbai was the agent of the non-resident assessee. Consequently, the assessee could not avail the benefit of Article 7 of the said Treaty also. Accordingly, he computed the income at Rs. 2,87,22,050 by applying the net profit rate of 7.5 per cent on the total freight of Rs. 38,29,60,671. 4. In respect of assessment year 2002-03, the facts are almost similar. However, certain new facts were noted by the Assessing Officer which are being narrated. It was noticed that the assessee owned 4760 containers of 20 ft. size and 466 containers of 40 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, the CIT(A) considered the correctness of the assessment made by the Assessing Officer and then observed as under : The Assessing Officer has contradicted himself in his order by stating that appellant has not derived 'income from operations of ships' whereas he himself has concluded that freight receipts from Orient Aishwariya are eligible for the benefits of Article 9 of DTAA as the same pertain to income from operation of ships in international traffic. Thus, the Assessing Officer has concluded differently while granting benefit of DTAA and computing income of the appellant. In the present case, it is a consolidated business where appellant has been deriving income from operation of ships. It has been established beyond doubt that the appellant is a shipping company which operate through own or connecting carriers engaged in international traffic. Nowhere is the requirement that to get the benefits under DTAA the appellant has to own or charter vessels. In view of the above, it was held by him that the assessee was entitled to the benefit of Article 9 of the said Treaty since some part of the connected shipping activity was carried out through connecting car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of ships belonging to others is only an auxiliary or ancillary part of the main business and therefore benefit of DTAA cannot be denied to the operations. It is not necessary to establish one to one connection of voyage-wise details of the feeder vessels with the mother vessels. No where any condition has been prescribed that for the purpose of availing of benefit of the DTAA, it is necessary to carry out the business of operation of ships only through self owned or chartered ships. 7. Coming to the facts of the case, the CIT(A) examine the nature of activities and observed as under : In this regard the Assessing Officer failed to examine as to how the business operation is being carried on by the appellant. The appellant company is collecting cargo from Indian port and is drawing Bill of Lading for the entire transportation i.e., from the port of loading to the port of destination. The Charterer ship of the appellant company do not always come to the Indian port but the cargo is being collected from Indian port and transported to the hub port at Dubai. For this purpose, connecting carrier agreements have been entered into with several parties including Orient Expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business even though performed through the ships belonging to someone else have to be treated as part of the business of operation of ships. As mentioned above, even hotels for night accommodation, travel agency can be treated as part of the business of operation of ships, if they are inter linked with the business of ships. In the absence of any requirement anywhere in the DTAA or in the Income-tax Act, it is not necessary to insist on one to one linkage of the feeder vessel with the mother vessel. The carriage of freight though the feeder vessel belonging to others being integral part of the business of the appellant of ships, such activity is to be treated as part of the business of the appellant. 10. Regarding Article 9(4) of the said Treaty, it was observed by the CIT(A) as under : Article 9(4) provides that Income of an enterprise of a Contracting State from the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) used for transport of goods or merchandise is entitled to the benefit of Article 9(1). The proper meaning is to be given to the words, use, maintenance or rental. The Assessing Officer has li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the difference between the purchase and sale price of the space. Consequently, slot chartering would not fall within the scope of the term 'Operation of Ship'. (c) The term 'International traffic' is defined in Article 3 which means transport by ship operated by an enterprise except when the ship is operated solely between places in the other contracting state. Thus, the emphasis is on the undertaking of actual transportation of goods by the enterprise and not merely purchase of slot space on bulk basis and re-sale of the same on retail basis. (d) Paragraphs 3 to 6 of Article 9 specifically includes certain incomes which are to be considered as 'operation of ships' as: (a) Income from rental on the bareboat basis of the ships when such rental income is incidental to the income from operation of ships; (b) Income from use or maintenance of containers; (c) Income derived from participation in a pool or a joint business; and (d) Income from alienation of ships. The income earned by the assessee by purchase and sale of space in the ship operated by others cannot be said to be covered by the above paras. (e) Guidance can be taken from commentary of OF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will not qualify for the scheme under this Chapter. Lastly, this Chapter should be read in its entirety and the context. Since in the case of domestic companies, the entire global income is taxable in India this Chapter includes even the non-operating income. If any of the provision of this Chapter is to be applied to non-resident then the distinction made in section 115VI cannot be ignored. (h) Since almost the entire income of the assessee was derived from the purchase of space on slot basis and not from the operation of ships, the learned CIT(A) was not justified in holding that relief under Article 9 of the Treaty was available to the assessee. The learned CIT(A) was not justified in granting relief merely on the ground that activity of operation of ship as a charterer and income from slot chartering formed part of the common business carried on by the assessee. In this case, it is easy to segregate income which qualify for the benefit of the treaty and therefore the concept of common business has been wrongly extended by the learned CIT(A) to the entire activity of the assessee particularly when the other activities do not fulfil the conditions of the treaty. Similar view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions is not identical. Further, even the relevant para of Indo-US Treaty is not on the line of US Model convention. Therefore, any technical explanation relating to the same cannot have any direct application in the given case. Klause Vogel in his commentary has explained that great restraint must be observed while referring to the technical explanation issued as the same are unilateral explanations of domestic authorities and express the views of only one treaty partner. Reference can be made to para 82f at page 48 of the commentary of Klause Vogel. 13. On the other hand, the learned Counsel for the assessee has vehemently opposed the contentions raised by the learned D.R. by making various submissions. He has also filed written submissions which are briefly narrated as under : (a) That 'slot chartering arrangement' with other international shipping companies is nothing but an integral part of its business of operation of ships in the international traffic which is akin to 'code sharing arrangement' in the airline industry. A shipping company may own/charter very few ships and at the same time avail slot spaces on ships of other companies meant for carria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced on the judgment of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 70611. 132 Taxman 373. wherein it has been held that tax treaty has to be interpreted in a holistic manner keeping in mind the object and purpose of the treaty. Accordingly, the term 'operation of ship' should be understood in the manner in which it has been defined by the various commentaries. Further, reliance has also been placed on the decision of the Tribunal in the case of Metchem Canada Inc. v. Dy. CIT [2006] 100 ITD 251 (Mum.) and Graphite India Ltd. v. Dy. CIT [2003] 86 ITD 384 (Kol.). (d) That according to OECD commentary as well as commentary by Klause Vogel, the scope of the term operation of ships is not restricted one but has been understood in a broader sense so as to include chartering of part of ship which is owned as slot chartering and also includes other activities which are incidental to the operation of ships. Therefore, a narrow view canvassed by the revenue cannot be accepted. 14. Alternatively, it is pleaded that the case of the assessee falls under the provisions of Article 9(4) of Indo-US Treaty which exempts income of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee by ships chartered by it. The dispute before us is therefore, restricted to the freight income in respect of cargo transported by the assessee in international traffic by the ships in which slot is hired by it. According to the revenue, the assessee cannot be said to have earned such income by operating ships while according to the assessee, the business of operation of ships would include income derived from all incidental or auxiliary activities. So the answer to the question centres round the scope of the expression operation of ships used in Article 9 of the Indo-UK Treaty. 17. The contention of the revenue is that in the absence of any definition, such expression should receive its plain and natural meaning. The expression, if so construed, would not include the transportation of goods by the ships not owned or chartered by it. According to the learned DR, slot chartering cannot be equated with chartering of complete ship inasmuch as, in the case of slot chartering, the control and possession of ship does not vest in the assessee. On the other hand, the contention of the assessee is that in case of treaties, in the absence of any definition, the expression us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 004] 267 ITR 65411. 137 Taxman 460. which is often referred to by the revenue for the following observations made by their Lordships in the penultimate para of the judgment : Taxation policy is within the power of the Government and section 90 of the Income-tax Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the Income-tax Act, it would be unnecessary to refer to the terms addressed in the OECD or in any of the decisions of foreign jurisdiction or in any other agreements. However it is pertinent to note that in the same judgment, the following observations were also made at the same page : Therefore, the contention advanced by the learned Attorney-General that it is not a part of the treaty cannot be accepted because in the terms of the treaty wherever any expression is not defined the expression defined in the Income-tax Act would be attracted. The definition of 'income' would, therefore, include capital gains. Thus, capital gains derived from immovable property is income and therefore Article 6 would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 13. We have considered the rival submissions and perused the relevant material on record. From the language of Article 8 it clearly emerges that the income derived from the operation of ships in international traffic shall also include income from any other activity directly connected with such transportation. This expression has not been further elaborated in the DTAA in as much as such other activities have not been exhaustively spelt out. Under these circumstances, it is imperative to go by the Commentaries for ascertaining the true purport of this expression. 20. In view of the above discussion it is held 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 avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other Contracting State at the time of the alienation. A perusal of the above Article shows that the income from operation of ships is taxable only in the State of residence. Article 3 which contains various definitions of the words used in the treaty does not define the expression 'operation of ships'. Thus, in the absence of any definition under the domestic law of either of the contracting States as discussed earlier, the guidance can be taken from the OECD commentary wherein the scope of such expression has been discussed vide para Nos. 4 to 14. The same are being reproduced as under : 4. The profits covered consist in the first place of the profits directly obtained by the enterprise from the transportation of passengers or cargo by ships or aircraft (whether owned, leased or otherwise at the disposal of the enterprise) that it operates in international traffic. However, as international transport has evolved, shipping and air transport enterprises invariably carry on a large variety of activities to permit, facilitate or support their international traffic operations. The paragraph also covers profits from activities directly connected with such operations as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be that of an airline company that operates a bus service connecting a town with its airport primarily to provide access to and from that airpot to the passengers of its international flights. 7. A further example would be that of an enterprise that transports passengers or cargo by ships or aircraft operated in international traffic which undertakes to have those passengers or that cargo picked up in the country where the transport originates or transported or delivered in the country of destination by any mode of inland transportation operated by other enterprises. In such a case, any profits derived by the first enterprise from arranging such transportation by other enterprises are covered by the paragraph even though the profits derived by the other enterprises that provide such inland transportation would not be. 8. An enterprise will frequently sell tickets on behalf of other transport enterprises at a location that it maintains primarily for purposes of selling tickets for transportation on ships or aircraft that it operates in international traffic. Such sales of tickets on behalf of other enterprises will either be directly connected with voyages aboard ships or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Airlines Technical Pool agreement, to provide spare parts or maintenance services to other airlines landing at a particular location (which allows it to benefit from these services at other locations), activities carried on pursuant to that agreement will be ancillary to the operation of aircraft in international traffic. 11. [Deleted] 12. The paragraph does not apply to a ship-building yard operated in one country by a shipping enterprise having its place of effective management in another country. 13. [Deleted/renumbered as paragraph 17.1]. 14. Investment income of shipping or air transport enterprises (e.g., income from) stocks, bonds, shares or loans) is to be subjected to the treatment ordinarily applied to this class of income, except where the investment that generates the income is made as an integral part of the carrying on of the business of operating the ships or aircraft in international traffic in the Contracting State so that the investment may be considered to be directly connected with such operation. Thus, the paragraph would apply to interest income generated, for example, by the cash required in a Contracting State for the carrying on of that busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operation of ships in the international traffic by that enterprise. This covers a situation where the assessee is unable to transport the passengers/cargo from its own ship but transports the same through ships operated in international traffic operated by the other enterprises. This has been explained by giving an example also. According to this example, some of the passengers/cargo may be transported internationally by ships operated by other enterprises under slot chartering arrangement. In our view, this paragraph would cover the facts of the present case 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 discussed above would apply in defining the scope of Article 9(1) of Indo-UK Treaty as per the rule of contemporaneous exposition discussed in the earlier part of the order. Accordingly it is held that the freight income earned by the assessee on account of transportation of cargo in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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