TMI Blog2012 (8) TMI 681X X X X Extracts X X X X X X X X Extracts X X X X ..... ips". The ambit of the identical phrases "operation of ships" in section 44B and Article 9(1) is the same. This conclusion is not arrived at by plucking out the three words from both the provisions and comparing them de hors the context in which they are used in the respective provisions. They are used in a similar context namely in the context of "income" [(as used in article 9(1)] or "profits and gains" (as used in section 44B) from the operation of ships. Both the provisions relate to the same subject namely taxation. The comparison between Article 9(1) and section 44B is, therefore, apposite and in accordance with the mandate of Article 3(3) of the DTAA. The words not having been defined in the DTAA must be given the meaning which they have under the laws of India relating to taxes which are the subject of the Convention. Thus as income from slot hire agreements fall within section 44B they must be held to be within the ambit of Article 9(1)- As a result of the view it is not necessary to consider the submissions as to the manner in which an international treaty must be interpreted. We are of the opinion that Article 9 of the Indo-U.K. DTAA includes slot charters/slot hire agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains" (hereafter referred to as the India-UK DTAA or the DTAA). 6. The Assessing Officer held that the respondent was not entitled to the benefit of the DTAA. 7. The Commissioner of Income Tax (Appeals) and the Tribunal however, held the respondent to be entitled to the benefit of the DTAA. 8. The respondent owned 5226 containers and had leased 2767 containers and used them in the course of its business. The respondent issued bills of lading to its customers for carriage of cargo from India to international ports. The vessels chartered by the respondent did not ply within Indian territorial waters. The respondent therefore, entered into Slot Hire Agreements (or Connecting Carrier Agreements) with M/s. Orient Express Lines Limited (OEL), Mauritius, under which OEL provided container slot spaces to the respondent on its ships (feeder vessels) on an as and when required basis. Availing the slot hire facility, the respondent arranged for the transportation of the goods from ports in India to their final destinations being international ports or to hubs, also ports outside India, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder :- S.No. Name of the party connecting carrier/charter party agreement Port Amount Total 1 Orient Express Lines Mumbai Kandla Chennai Cochin Tuticorin 22,88,43,843 3,94,28,724 2,08.09,081 2,37,48,923 3,16,18,554 2. Bengal Tiger Line, GMBH Chennai Cochin Tuticorin 40,52,052 7,92,628 10,47,843 3. Balaji Shipping (UK) Ltd. Chartered vessel - Orient Stride Mumbai Cochin Tuticorin 54,68,858 62,55,476 89,31,665 37,09,97,452 4. Others eg. ACL, Integrated Container Feeder Service Samudera Express Container Lines Mumbai Kandla Cochin Tuticorin 2,61,76,605 46,20,587 1,29,96,599 65,30,016 5,03,23,808 Add : THC Collected as per Return of Income 72,559,736 Add : Demurrage as per Return of Income 22,653,004 Total Freight, Demurrage and THC 516,534,001 Thus income from the chartered vessels was Rs. 37,09,97,452 and income from the utilization of the slot hire facilities was Rs. 5,03,23,808. Thus, more than 88% of the cargo from India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 13. The Assessing Officer observed as under : "Thus, in the final analysis, the matter rests on the determination of the following question of fact ; "Whether the assessee operates a ship(s) in international traffic of goods etc., or not ?' All other issues depend upon the resolving of this basic issue. As has been shown above, the assessee can be said to be operating ships in international traffic, in the case of the vessel orient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d outside the other Contracting State at the time of the alienation." 15. The phrase "operation of ships" is not defined in the Convention. Nor is it defined in the Act. It has however admittedly been considered while construing section 44B. Article 3 (3) of the DTAA reads as under: - "3(3). As regards the application of this Convention by a Contracting State any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes which are the subject of this Convention." 16. Mr. Kaka submitted that income from slot hire agreements have always been taxed under section 44B. Mr Singh did not dispute this. He further stated that the revenue's case even today is that income from slot hire agreements are liable to be taxed under section 44B. If they are right, and we must in view of their statements accept that they are, the phrase in Article 9 (1) must be given the meaning ascribed to it in section 44 B as the context in which it is used does not require it to be construed differently. 17. Section 44(B) of the Income Tax Act, 1961 reads as under : "44-B. Special provision for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19. Although what we have said thus far may indicate that income from slot hire agreements fall within the ambit of Article 9 (1) per-se we do not wish to go that far. We would restrict this judgement to cases such as those of the respondents in this case. In other words this judgement would not apply to assessees who carry on the business of shipping cargo only by availing the slot hire facilities obtained by them. In the present case the respondent admittedly is a charterer of at least two ships and owns and has leased a large quantity of containers. The respondents income from slot charters is therefore only a part of its total income. Further the respondent arranges for the transport of cargo availing the slot hire facilities acquired by it in two ways. Some of the cargo is transported directly to the final destinations abroad whereas some of it is transported to a hub port also outside India from where it is transhipped on vessels chartered by the respondent to the final destination. 20. The question whether the income attributable to a voyage undertaken from India by availing the slot hire facilities is liable to be taxed in India must, in this case, be addressed qua t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the carriage of goods by availing of the slot hire facility is an integral part of the contract of carriage of goods by sea. Without it, the enterprise/assessee would be greatly hampered in its business in relation to international traffic, carriage of goods by sea. Enterprises operating in any mode or manner, do not always ply their ships all over the globe. Even if they do, their ships may not be readily available when required on a particular route in connection with a contract of carriage of goods. It is necessary, therefore in such cases for them to resort to slot hire agreements. This enables them to transport the goods not on behalf of the owner of the vessel which has granted them a slot hire facility, but in their own name on behalf of their clients. The contract of carriage of goods by sea is thus performed by such enterprises on a principal to principal basis with their clients and not as agents of the owners of the ships and/or their clients. The slot hire agreements are therefore, at least indirectly, if not directly, connected and interlinked with and are an integral part of the enterprise's business of operating ships. 25. Without availing slot hire facilities, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terprise. If they are not merely ancillary to the main business of operation of ships but constitute the primary and main activities of the enterprise, it may be a different matter, which we are not called upon to consider in the facts and circumstances of the present case. 28. Our view is supported by the judgment of a Division Bench of the Delhi High Court. It is also in consonance with the various commentaries which deal with similar provisions. We will now refer to the same. 29. Mr. Kaka relied upon the judgment of the Delhi High Court in Director of Income-Tax v. KLM Royal Dutch Airlines [2009] 178 Taxman 291. Article 8 of the Indo-Netherlands DTAA which fell for the consideration of the Court reads as under : "Air Transport : 1. Profits from the operation of aircraft in international traffic shall be taxable only in the State in which the place of effective management of the enterprise is situated." Article 8(1) is similar to Article 9(1). In that case the assessee had obtained a licence in respect of premises at Mumbai from the Airport Authority of India. This licence was for the purpose of cargo handling only. The assessee entered into an agreement with CSC (P) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are : ........ ( NOTE : India is not a member) The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation's statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members." 33. The publication therefore, is an indication of the views on the basis of which the "Model Tax Convention on Income and on Capital" (hereafter referred to as the Model Tax Convention) was based. It is therefore, to say the least, a useful guideline in interpreting the provisions thereof. 34. (A)(i). Article 8(1) of the OECD Convention which is similar to Article 9(1) of the India - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 4.3 In light of these principles, the following paragraphs discuss the extent to which paragraph 1 applies with respect to some particular types of activities that may be carried on by an enterprise engaged in the operation of ships or aircraft in international traffic. 5.** ** ** 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... typically manifest themselves. Their operations spread out over a multitude of States in which permanent establishments are frequently set up to handle the business. Because a single flight or voyage will often involve stops in one foreign State after another, taxation under the permanent establishment principle would result in the difficulty of how to attribute to each of the permanent establishments its proper share in the profits made by the enterprise from transportation activities (Hund, D., supra m.no. 1, at 113). A further consequence of attributing shares in profits to the various permanent establishments would be fragmented taxation. It is in order to avoid these drawbacks of the permanent establishment principle that OECD and UN MCs exclusively attach taxation of profits from shipping, air transport and inland waterways transport to the place of effective management and exempt such profits from tax in the State where the activities were exercised, no matter whether or not the enterprise maintains a permanent establishment in that State." 39. This difficulty would arise particularly in cases of the first type and where the freight is not apportioned for each sectors. A l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the profits obtained by the enterprise from the carriage of passengers or cargo. With this definition, however, the provision would be unduly restrictive, in view of the development of shipping and air transport, and for practical considerations also. The provision therefore covers other classes of profits as well, i.e. those which by reason of their nature or their close relationship with the profits directly obtained from transport may all be placed in a single category. Some of these classes of profits are mentioned in the following paragraphs. 7. Shipping and air transport enterprises - particularly the latter - often engage in additional activities more or less closely connected with the direct operation of ships and aircraft. Although it would be out of the question to list here all the auxiliary activities which could properly be brought under the provision, nevertheless a few examples may usefully be given. 8. The provision applies, inter alia, to the following activities : (a) the sale of passage tickets on behalf of other enterprises ; (b) the operation of a bus service connecting a town with its airport ; (c) advertising and commercial propaganda ; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be regarded as the operator of a ship which has been chartered out by it on bareboat charter-cum-demise terms or on bareboat charter terms for a period exceeding three years." (emphasis supplied) He submitted that an assessee is therefore, regarded under our law as operating a ship even if it charters a part of the ship inter-alia by an arrangement of a slot charter. He submitted therefore, that though the Indo-U.K. DTAA does not define the phrase "from the operation of ships" in view of Article 3, the Court ought to ascribe to it the meaning it has under Indian law relating to taxes as taxation in the subject of the convention. Accordingly, the Court ought to ascribe to the phrase the meaning given to it in section 115VB. 45. Section 115VB falls under Chapter XII-G, which was inserted by Finance (No. 2) Act, 2004 with effect from 1.4.2005. The present appeal however, relates to the period prior thereto viz. AY 2001-2002. Mr. Kaka however, submitted that section 115VB is only a clarificatory provision and that slot charters were always included within the expression "engaged in the business of operation of ships". This, he submitted, was evident from the fact that income fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 115VI does not lead to the exclusion of slot charters from the ambit of the phrase "operation of ships" in Article 9 of the DTAA. Nor does section 115VB include them within the phrase in the DTAA. Chapter XII-G is of no assistance in this regard as the definitions therein appear to be for the purpose of the Chapter alone unless otherwise required. 49. Mr. Singh then relied upon section 172(1), which reads as under : "172. Shipping business of non-residents. (1) The provisions of this section shall, notwithstanding anything contained in the other provisions of this Act, apply for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India." He submitted that in view of section 172 (1), the income can fall within the ambit of the words operation of ships only if it relates to the ships owned or chartered by the assessee. 50. Section 172 (1) has no bearing upon the interpretation of Article 9 of DTAA. It only provides that the provisions of the section apply for the purpose of levying and recovering the tax in the case of ships belonging t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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