TMI Blog2010 (5) TMI 670X X X X Extracts X X X X X X X X Extracts X X X X ..... and Haulage Charges is taxable in India as Business Profits as it is not covered by section 44B of the. Act. 2.The appellant prays that the order of the ld. CIT(A) on the above grounds he set aside and that of the Assessing Officer restored." 3. At the outset both the counsels agreed that the issue is covered against the Revenue by the order of the ITAT in ITA No. 5460/Mum/2006 for assessment year 2003-04 on identical facts. 4. The assessee is a non-resident. It is a tax resident of Belgium. It is a company engaged in the business of operation of ships. The statement of computation of income for assessment year 2005-06 of the assessee was as under : Business Income As per section 44B r.w.s. 172 : Freight collection including ancillary charges 4,904,845,111 (As per Annexure 1 2) Less : Feeder fright Collected by Assessee On behalf of other shipping Companies and paid to other Shipping companies, therefore not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charter basis where the leasing is incidental to any activity directly connected with such transportation; ( c )Income derived from the operation of ships in international traffic includes income derived from the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) in connection with the transportation of goods or merchandise in international traffic, where the income, is derived from, an activity which is incidental to any activity directly connected with such transportation." 5. The Assessee therefore claimed that there was no income from operation of ships that can be brought to tax in India. During the course of assessment proceedings and on the basis of details filed by the assessee, the Assessing Officer noticed that the assessee had received Rs. 57,39,61,908 as Inland Haulage Charges (IHC). Enterprises which operate ships in international traffic also undertake; to transport containers inland by arranging such transportation through service providers, recovering the costs for doing so from the exporters. This is called Inland Haulage charges (IHC). The Assessing Officer called upon the assessee to explain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed as the business profits of the assessee deemed to accrue or arise in India as per section 9(1)( i ) of the Act. The Assessing Officer called upon the assessee to give details of various expenses incurred on account of inland transportation. The assessee submitted that there were various expenses incurred and that collection of IHC is mainly to recover the actual cost incurred. The assessee could not file the details in this regard. In the circumstances, the Assessing Officer estimated the income of the assessee by taking a view that although the "Inland transportation", "Refunds" and Feeder Freight", is not covered under section 44B of the Act, but still for the purpose of estimation of profit, the rate is taken at the rate of 7.5 per cent of the gross collection of these three items. On this basis, the Assessing Officer estimated the income of the assessee at the rate of 7.5 per cent of the total of the receipt of IHC. 7. On appeal by the assessee, learned CIT(A) held mat Income derived from IHC arc only incidental and closely with the direct operation of ships and hence, it is covered by Article 8 of the DTAA between India and Belgium. Learned CIT(A) followed the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s containers from Ludhiana, bringing the same to Mumbai and then shipping them to Nairobi. In so far as the assessee s income from Mumbai to the Nairobi is concerned, the Assessing Officer has accepted the applicability of Article 8 on it and held it to be not taxable in India. The dispute centers around the transportation charges received by it for carrying the cargo from Ludhiana to Mumbai. Now, we have to determine as to whether such inland transportation charges can be brought within the ambit of "an activity directly connected with such transportation". OECD Committee on Fiscal Affairs has discussed this aspect in para 7 page 134. According to it, an enterprise that transports passengers or cargo by ships or aircrafts operating in international traffic which undertakes to have those passengers or 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 enterprise shall be considered as an example of the activities directly connected with the operation of ships or aircrafts in the international traffic. Klaus Vogel on Double Taxation Conventions has remarked in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transportation charges would, obviously have been outside the purview of any other activity directly connected with such transportation . Since the assessee in the present case is itself transshipping the goods to other destination countries, this small portion of its total receipts, which hardly accounts for 5 per cent. cannot be detached from the main activity of transportation by the operation of ships in the international traffic. It is not the case of the Revenue that the assessee earned freight for carrying the goods of other parties also up to Mumbai port for shipment by some third party. It, therefore, shows that all the inland transportation charges received by the assessee are in connection with the goods which are finally loaded on its own ships at Mumbai for shipping to the other countries. The learned D.R. has emphasized on the words "connected with such transportation" for understanding it to mean only the loading and unloading of the cargo at the port itself. We are not convinced with this view canvassed by her for the reason that the preceding words "any other activity directly" joined by "connected with such transportation", have to be interpreted in a logical ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducted withholding tax on the interest granted with refund. 3.The Learned. CIT(A) ought not to have confirmed the addition of Rs. 1,36,226 as taxable income. II. Wrong charging of tax rate on interest income : 1.The Learned CIT(A) erred in not adjudicating the issue of rate of tax to be charged on the interest income. 2.The Learned CIT(A) ought to have adjusted the issue of rate of tax to be charged on the interest income." 14. Briefly stated, the assessee has received interest on refund of tax by the Revenue for assessment year 1990-91. Assessee succeeded in getting relief in that assessment year and since taxes were collected they were refunded with interest of Rs. 13,61,226 vide order dated 25-3-2005. The taxability of interest is the disputed issue in ground No. 1. According to the assessee interest earned is forming part of Article 8(2)( a ) of the Indo-Belgium Treaty as the funds are directly connected with the operation of ships or aircrafts and shall be regarded as income from operation of such ships and provisions of Article 11 shall not be applied in relation to such interest. As the assessee had no activities in India than operation Of ships in internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all the funds deployed in the business of international traffic are to be considered as used in the course of business and interest earned thereon is covered by Article 8(2)( a ). He also referred to the note of the OECD, para 14 of the commentary of Article 8 to submit that the assessee has not deployed funds in the Treasury nor purchased any bond but has discharged its tax liability consequent to the profit determined on the business by the Revenue authorities and so the interest earned should be considered as earned out of funds directly connected to operation of ships in international traffic. Accordingly the interest is exempt from taxation. He further relied on the fact that the Department has not made any withholding tax on such income which also indicate that Article 8(2)( a ) has been accepted at the time of granting of interest. 16. The learned D.R. in reply submitted that the immediate source of interest is the Government policy of paying interest as and when the taxes collected were refunded and this interest was earned not because of activity of shipping but because of payment of taxes earned out of the business income. Relying on the principles laid down by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was contested in the next ground. It was the assessee s contention that the assessee s earning of interest is covered by Article 8, particularly, Article- 8(2)( a ). Accordingly, he claimed the exemption treating the interest as business income under the DTAA. In order to appreciate the intricacies of the issue, it is necessary to extract Article 8, particularly the relevant portion: "( a )interest on funds directly connected with the operation of ships or aircraft in international traffic shall be regarded as income from the operation of such ships or aircraft and the provisions of Article 11 shall not apply in relation to such interest; accordingly there will be no withholding tax on such income." 17.1 It was the assessee s contention that the taxes are paid out of funds directly connected with the operation of ships in international traffic and accordingly the interest on such funds should be regarded as income from operation of such ships and provisions of Article 1 1 shall not apply in relation to such interest. It was also the contention that there will be no withholding of taxes on such income and since the Assessing Officer has not made any withholding of tax t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6.Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State." 17.2 As can be seen from the above Article 11(3) defines the terms "interest" means income from debt claims of every kind. Article 11(4), however, does not apply in the assessee s case as assessee has no permanent establishment in India and debt claim in respect of which interest is paid is not connected with such permanent establishment of taxes base in which case provisions of Article 7 and 14 shall apply. It is Article 8, which gives exemption on interest on funds used in the business from Article 1 1 . Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith reference to rate of tax to be charged on the interest income. The Assessing Officer has given a finding that the interest will be taxed at 15 per cent as per Article 11 of DTAA between India and Belgium. However, he calculated tax at 40 per cent on the above income ignoring his own findings in the body of the order. Assessee contested the same before the CIT(A) and also filed petition under section 154 to the Assessing Officer Since the above was contested before the CIT(A), the Assessing Officer did not carry out any rectification. The CIT (A) seems to have not adjudicated this issue. 19. At the outset it is submitted that if Ground No. 1 is allowed, ground No. 2 becomes academic in nature as the entire income would be exempted, otherwise the rate at which tax is to be levied on interest income is to be decided. The learned D.R. accepted that the Assessing Officer has given a factual finding that tax rate to be accepted at 15 per cent. Accordingly he has no objection if the ground is decided by the Bench or remitted it back to the CIT(A). Since the ground No. 1 is held against the assessee and interest income is held liable to be taxed under Article 11, as provided in Art ..... X X X X Extracts X X X X X X X X Extracts X X X X
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