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2008 (8) TMI 389 - AT - Income TaxDouble Taxation Relief - Scope of the expression "operation of ships" - Eligibility for the benefit of Article 9 of Indo-U.K. Treaty - non-resident company - whether freight income of the assessee on account of transportation of cargo in international traffic through slot charter arrangement by the ships operated by other enterprises can be said to be profits from operation of ship under Article 9 of Indo-UK Treaty in view of the OECD Commentary? HELD THAT:- There is no dispute between the parties before us that the assessee is entitled to the benefit of treaty with reference to freight income qua the transportation of cargo in the international traffic by the ships chartered by the assessee inasmuch as the AO himself had allowed such benefit in AY 2001-02. However, no such benefit was allowed by the AO in 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 scope of the expression 'operation of ships' used in Article 9 of Indo-UK Treaty. This expression is neither defined in such treaty nor in the Indian Income-tax law as existed at the time when the treaty was executed. Nothing has been brought to our notice about the domestic law of UK. Thus, contemporaneous thinking can be gathered from the commentaries available at the time of contract. In our view, 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 would apply in defining the scope of Article 9(1) of Indo-UK Treaty as per the rule of contemporaneous exposition. Accordingly, it is held that the freight income earned by the assessee on account of transportation of cargo in the international traffic by ships operated by other enterprises under slot chartering arrangement would be taxable only in State of residence and consequently, such income would be exempt from taxation under the Indian Income-tax Law. We would like to mention that the reason given by the CIT(A) for granting relief to the assessee is not in conformity with the OECD commentary. The test laid down by him was whether the activity carried on by the assessee forms part of main business of operation of ships or was a separate and distinct business. Article 9(1) of Indo-UK Treaty would include either the direct activity i.e., operation of ships or the ancillary activity. The concept of two activities constituting the same business as applied by the learned CIT(A) is not the criteria for bringing the case of the assessee under Article 9(1) of the Treaty. The case of the assessee would fall under Article 9(1) if it is found that activity is either directly connected or incidental to the main activity. Hence the reason given by the learned CIT(A) is hereby vacated. However, we are in agreement with the final conclusion arrived at by him for the reason given by us in the preceding para. Therefore, the orders of CIT(A) are upheld though for different reasons - In the result, the appeals filed by the revenue and the cross-objections by the assessee are dismissed.
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