TMI Blog2012 (5) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... ps in international traffic and subsequently the benefit of Article 8 of Indo German DTAA would not be available on such profit. - the benefit of Article 8 would be available only on the profit from the operation of ships in international traffic would not necessarily be available to the profits computed u/s 44B. What is a participation in a pool - held that:- it is clear that slot sharing is not the same as participation in a pool or a joint business or an international operating agents. Hence the nature of arrangement does not fall in Article 8(4) of DTAA. - Section 115V-(2)(ii)(A) Explanation (a), explains pooling arrangement. This does not include slot charter, etc. Section 115VB definition cannot be applied to DTAA as the definition is for the purpose of that chapter only and even then the requirement is that the slot has to be chartered. Application of article 7 of DTAA - held that:- There is no dispute that the assessee carrying out the business of operation of ships in India through its Agent M/s Hapag-Lloyd India Pvt Ltd. The agent in India concluding the contract of cargo transportation by issuing bill of lading which are legally binding on the assessee; therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nying the benefit of Article 8 of the DTAA; 4. erred in holding that the linkage needs to be established between the cargo transported on feeder vessels with the mother vessels without appreciating the fact that the arrangements entered into by the appellant are in the nature of pooling arrangements only; 5. Without prejudice to the above, has taxed the appellant's income under section 44B of the Act which applies to companies engaged in operation of ships and erred in applying the same rationale under Article 8 of the DTAA. Levy of interest under section 234B of the Act 6. erred in levying interest under section 234B of the Act; Initiation of Penalty proceedings under section 271(1)(c) of the Act 7. erred in initiating penalty proceedings under section 271(1)(c) of the Act; 3. From the grounds 1 to 5, the only issue arises for our consideration and adjudication is whether in the facts and circumstances of the case, the assessee is entitled to the benefit of Article 8 of the DTAA between India German on the freight income of ₹ 1,67,75,37,979/- earned on account of transportation of cargo by feeder vessels under pooling/slot arrang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrangement within the meaning of the explanation to sub. sec. 2 of sec.115V-I of the I T Act or is a slot arrangement. In case it is a pooling arrangement, then the assessee would be entitled for the benefit of Article 8 of the DTAA between India and Germany. However, if the arrangement is on slot sharing basis, then in that case the slot charges will not be construed to be income derived from the operations of ships in international traffic and the receipts would be taxable as per sec. 44B of the I T Act. 5. The assessee also took an alternative plea that the income is not assessable u/s 44B as the assessee does not a have a Permanent Establishment (PE) in India and was accordingly not liable to tax in India. 5.1 The said objection did not find favour with the DRP and in their view, the assessee's agent in India who is issuing the bill of lading has the authority to conclude contracts on behalf of the assessee which are legally binding upon the assessee. The business operation of ships of the assessee is being carried on through the office of the Agent in India . Further, it was observed that Article 8 of DTAA presupposes the existence of a permanent establishme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee through feeder vessels under slot/pooling arrangements is taxable only in the state of residence and the benefit of treaty is available to the assessee. 6.2 The ld AR of the assessee has made an elaborate arguments on the point that slot and pooling arrangement is one and the same. The slot chartered arrangement with the other ship companies is nothing but the integral part of its business operation, which is similar to the code sharing arrangements in the airline industry. Therefore, the pooling/slot arrangement is common and essential practice in the industry and by using these arrangements cannot be said that the assessee does not operate its ships or chartered ships in the international traffic. 6.3 Under the pooling arrangements each party has the absolute obligation to provide the agreed level of tonnage and to provide compatible vessels. He has further submitted that terms and conditions in the agreement are standard terms and such terms are virtually present in each and every such agreement. Merely because in the arrangement referred to terms 'slot' does not alter the pooling arrangement into slot chartered agreement. The substance of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e meaning of terms 'operation of ships' as understood by the Tribunal in the case of Balaji Shipping (UK) Ltd has to be taken into consideration in the case in assessee's case. He has further pointed out that only 22% of the total freights is earned through slot/pooling arrangements; therefore, it is only a minor contribution relating to such operations and should not be regarded as separate business or source of business of the assessee but it should be considered to be part and parcel of the operation of ships. 6.6 He has further submitted that the Tribunal in the case of Jt. CIT (OSD)(IT) v. CMA CGM SA France [2009] 27 SOT 367 (Mum.) has also taken a similar view by following the order in the case of Balaji Shipping (UK) Ltd ( supra ). Further the Tribunal while deciding the appeal in the case of Dy. CIT v. Delmas Shipping South Africa(Pty) Ltd and Parekh Marine AG(P) Ltd in ITA No. 8471/Mum/2004 and ITA No.245/Mum/2005 vide order dated 27 th Oct 2008 decided the issue in favour of the assessee. The ld AR has submitted that slot charted arrangement is hiring of fixed space on the vessel by one party from another as against pooling arrangements whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the assessee but is substantial part. He has further submitted that in the subsequent decision, the Tribunal in the case of Dy. DIT v. Delmas France [2009] 27 SOT 441 (Mum.) has distinguished the decision in the case of Balaji Shipping (UK) Ltd ( supra ) as the facts are different. He has referred the said order and submitted that expression 'operation of ships would include international traffic activity of transportation of cargo by feeder vessels owned or chartered by the assessee and also transportation of cargo by feeder vessels from Indian port to the mother vessels, if such transportation is ancillary or incidental to the main activity. However, the benefit of article 9 would not be available merely on the ground that the assessee is engaged in the business of shipping globally but the benefit would be available to transportation of cargo by feeder vessels only if the assessee is able to establish the link between the transportation of cargo by feeder vessels with transportation by mother vessels owned, leased or chartered by the assessee. Thus, the ld DR has forcefully contended that the Tribunal in the subsequent decision clearly laid down the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinct activity. He has referred para 19 of the order of the Tribunal in the case of Balaji Shipping (UK) Ltd ( supra ) and submitted that if such word or expression is not defined in the treaty but the same has been defined in the local law then it should be understood in accordance with such definition. This concept was considered by the Tribunal in the case of Dy. CIT v. Safmarine Container Lines N.V. [2008] 24 SOT 211/[2009] 120 ITD 71 (Mum.) as quoted by the Tribunal in para 19 in the case of Balaji Shipping (UK) Ltd. ( supra ). Thus, he has further submitted that the order of the Tribunal in the case of A.P. Moller, Maersk Agency India (P.) Ltd. ( supra ) has also been considered by the Tribunal in the case of Balaji Shipping (UK) Ltd . ( supra ). 6.10 The ld AR has further submitted that though the slot rates are mentioned in the agreements; however, there is no actual payment or receipt of remuneration but only the corresponding space/slot is provided in each other fleet under slot/pooling arrangements. He has referred clause 6 of the agreement at page 40 of the paper book and submitted that the allocation as per clause 6.2 of the agreement, allocations wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates, if the enterprise as a PE in the other state. Whereas Article 8 stipulates the exception to the general PE tax jurisdictional state with reference to the profit from operation of ship or aircraft in international traffic and the same shall be taxable only in the contracting state in which the place of effective management of the enterprise is situated irrespective of a PE situated in other contracting state. 11. We are concerned only about paras 1 and 4 of Article 8 as the issue pertains to the profit and gain from transportation of cargo through feeder vessels under slot/pooling arrangements. Para 1 of Article 8 expressly mentions that profit from the operation of ships or aircraft in international traffic shall be taxed only in the state of residence. There is no dispute between the parties so far as para '1' of Article 8 of Indo German DTAA is concerned; but the dispute before us is narrow down to the applicability of para '4' of Article 8 of Indo German DTAA on so much of the profit earned by the assessee by transporting cargo under slot arrangement. The assessee's main thrust of arguments is that slot/pooling arrangement is only part of the cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo kinds of profits are covered by Article 8 of OECD Cormmentary which is similarly worded. In the first category are those profits which are directly obtained by the enterprise from the transportation of cargo/passengers in the international traffic by the ships whether owned or leased or at the disposal of such enterprise. It also covers profits from activities directly connected with such operation. In the second category are the profits from the activities which are not directly connected with operation of ship but are ancillary to such operation. Paragraph 4.2 defines the scope of ancillary activities. According to this para, ancillary activity is that activity which makes a minor contribution relative to the activity of operation of ship and such activity must be so closely related that it should not be regarded as separate business or source of income. Paragraphs 5 onwards discuss about various activities to which paragraph 4 can be applied. Paragraph 6 covers the profits derived by an enterprise from the transportation of passengers/cargo otherwise than by ships that it operates in the international traffic to the extent such transportation is directly covered with the oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... containers slots space to the assessee and the assessee had accepted to use such space on as/when required basis. However, agreement with Littleton Services Inc. showed that the entire ship was chartered by the assessee and the same was operated by the assessee. The Assessing Officer after referring to the commentary on Double Taxation Convention by Klaus Vogel held that receipts from the operation of the vessel Orient Aishwarya was covered by Article 9 of Indo-UK Treaty and consequently, the gross receipt amounting to ₹ 1,73,83,818 on this account was to be excluded from the taxation in view of the said treaty. However, in respect of the cargo transported through the ship of the carrier, it was held by the Assessing Officer that the assessee could not be said to be engaged in the business of operation of ships and consequently, the income arising to the assessee in this regard was assessable under section 44B of the Act. 14. Thus, a very important and material fact in the said case was that the entire ship was chartered by the assessee and the same was operated by the assessee and other carriers operated its feeder service. 15. It is pertinent to note that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s established that the assessee is engaged in business of shipping. Klaus Vogel in his commentary nowhere says that entire voyage through ships belonging to other enterprises would be considered by such expression. The relevant portion of the commentary by Klaus Vogel has been reproduced by us in the case of Balaji Shipping (UK) Ltd. ( supra ) in para 22 of the order. It provides that in the first place, it would cover 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). Thereafter, it says that this would also cover profits from activities not directly connected with such operation as long as they are ancillary to such operation. Therefore, CIT(A) is not justified in holding that there is no need to link the transportation of cargo by feeder vessel with transportation by the mother vessel owned/ leased/chartered by the assessee. Transportation of cargo by feeder vessel can be said to be ancillary activity only if it can be linked with the main voyage by mother ship. If the proposition of CIT(A) is accepted then it would cover the entire voyag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or chartered by the assessee. 16.1 We make it clear that the order in the case of Balaji Shipping (UK) Ltd ( supra ) was passed on 13.8.2008 and thereafter in the subsequent order dated 28.11.2008 in the case of Delmas France ( supra ), the Tribunal has made the distinction of facts for applicability of Article 9 of DTAA in the respective cases. Though, the Article 8 of Indo German DTAA and Article 9 of Indo UK DTAA and Indo France DTAA are not identical; however, as we are concerned with para 1 4 of Article 8 of Indo German DTAA, the wording of Article 9 of Indo-UK so far as corresponding to paras 1 4 is similarly. 17. In the case in hand, the DRP has already granted relief to the assessee to the extent of the profit earned from transportation of cargo by feeder vessels and the assessee is able to establish the link between the feeder vessels with mother vessels voyage wise. The DRP in para 3 in the direction passed u/s 144C(5) has observed as under: The assessee has furnished additional evidence before the DRP to establish the linkage between feeder vessels and the mother vessels. The A.O is accordingly directed to verify the following ( i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits computed u/s 44B. The computation of profits and gains u/s 44B is from shipping business as a whole, including in international traffic, if any. 18. One of the main arguments of the assessee which has to be adjudicated, is whether clause (iv) of Article-8, applies or not. This reads as follows:- Article -8 - SHIPPING AND AIR TRANSPORT (1) Profits from the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated (4) The provisions of paragraph I shall also apply to profits from the participation in a pool, a joint business or an international operating agency. 18.1 The assessee, in this case, has a slot charter arrangement or slots swap arrangement with other parties. The issue to be considered is whether the slot charter arrangement or slot swap arrangement can be considered as a pool arrangement . If it is a pool or a joint business, then it would be considered as operation of ships or vessels. 18.2 Legal definition of space charter, slot charter and pool arrangement, are as follows: Space ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due course, are distributed to individual owners under a pre-arranged weighing system by which each entered vessel should receive its fair share.... CHARACTERISTICS OF BULK SHIPPING POOLS The latter definition introduces also the idea of the weighing system which, from an academic point of view, is perhaps the most interesting one among the other pooling arrangements. The underlined parts in the above two defmitions summarise the main, more or less common to all, characteristics of bulk pools. These could be described as: (i) similar tonnage, (ii) central administration (pool management company), (iii) joint marketing, (iv) negotiation of freight rates, (v) centralization of voyage costs, (vi) freight collection, (vii) weighing system, (viii) revenue distribution, (ix) fair share. 18.4 The assessee has failed to demonstrate that the agreement in question fulfilled the characteristic of shipping pool. The learned Counsel argued that there is no payment but only a Barter system exists as per the agreement. So there is no revenue which are shared or distributed. 18.5 F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bill of Lading. He has submitted that agents sign bill of lading as a part of their duty and also, issuing bill of lading merely provides administrative convenience to the assessee and the agents issue the bill of lading as a part of their duty. 20.2 Without prejudice to the above, the ld AR has submitted that where the assessee is considered to have a PE in India, no further attribution of profits can be made to such PE of the assessee as the agents have been remunerated at arm's length. In support of his contention, the ld AR has relied upon the following judicial precedents: ( i ) The Hon'ble SC in the case of DIT v. Morgan Stanley and Company Inc. (292 ITR 416) has held that once the transactions are held to be at arm's length taking into account all the risk-taking functions of the multinational enterprise, then nothing further would be left to attribute to the PE of such a multinational enterprise. ( ii ) The Hon'ble Bombay HC in the case of SET Satellite (Singapore) Pvt. Ltd. v. DDIT (307 ITR 205) has held that if the foreign enterprise was paid at the arm's length price, nothing further would be left ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have a permanent establishment in the first- mentioned State, if this person; ( a ) has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; ( b ) has no such authority, but habitually maintains in the first mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or ( c ) habitually secures orders in the first mentioned State wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise. 22. This is not a case of availing service of agent in support of the business but the assessee is carrying out business through the agent in India. Therefore, the source of income to the extent of booking of cargo by the agent in India and physically transported the cargo from port in India to the mother vessels is in India and cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agent in India was remunerated on ALP principle, which is more than the profit computed under the provisions of the Act, then advertisement revenue received by the assessee was not taxable in India. 26. As it is clear from the facts in the case in hand that the assessee has carried out the business in India and the agent was concluding the contract which is legally binding on the assessee; therefore, remuneration paid to the agent is not relevant factor for taxing the profits and gain at source from India. 27 . Apart from this, it is pertinent to take note as to why it was felt necessary to make the provision of Article 8 in the Indo-German DTAA when all business incomes are covered under Article 7. There is no doubt that the profits from operation of ships and aircraft including in international traffic is business profits of the enterprise as the term used in Article 7 of Indo German DTAA. Thus, Article 7 covers all business profits and taxable only in the contracting state of domicile except in case of PE in another contracting state. Article 8 creates an exception to the rule of PE and makes the profit from operation of ships and aircrafts in international traff ..... X X X X Extracts X X X X X X X X Extracts X X X X
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