TMI Blog2008 (7) TMI 444X X X X Extracts X X X X X X X X Extracts X X X X ..... charges clearly differentiates it from handling or demurrage charges, which are of a different genus. We therefore, do not find any substance in this submission made on behalf of the assessee that IHC are covered u/s. 44B as these are equal to or part and parcel of the amount or account if carriage of goods shipped at any port in or outside India, and hence are automatically covered under art. 8. This contention is therefore, repelled. It would not be out of place to take stock of the overall activity of the assessee company. Its business is to collect the cargo from the station of the exporter then bring it to Mumbai port from where its vessels carry it to the destination station out of India. paper book copy of bill of lading for the combined transport of the cycle parts from Ludhiana to Nairobi. The assessee is carrying the Hero Cycles parts, etc., in its containers from Ludhiana, bringing the same to Mumbai and then shipping them to Nairobi. Insofar as the assessee's income from Mumbai to the Nairobi is concerned, the AO has accepted the applicability of art. 8 on it and held it to be not taxable in India. Whether such inland transportation charges can be brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transportation of goods from Mumbai to Nairobi, we do not find any difficulty in granting the benefit of art. 8 under this clause as well. To sum up, we hold that the IHC earned by the assessee are covered within the scope of 'income derived from the operation of ships in the international traffic' as per art. 8 of the DTAA between India and Belgium and hence cannot be subjected to tax in India in the present circumstances. The view taken by the learned CIT(A) on this count is, therefore, upheld. In the result, the appeal is dismissed. - K.C. Singhal, Vice President And R.S. Syal, A.M. For the Appellant : Smt. Malathi Sridharan. For the Respondent : Paresh Shaparia. ORDER PER BENCH: This appeal by the Revenue is directed against the order passed by the CIT(A) on 11th Feb., 2005 in relation to the asst. yr. 2001-02. Following ground has been raised in this appeal: On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that inland haulage charges are incidental and closely connected with direct operation of ships and hence not liable to tax in India in terms of art. 8 of the Indo-Belgium DTAA, witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th such transportation and the income derived from the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers). The AO did not accept the assessee's contention that IHC was covered within the Explanation to s. 44B. He opined that art. 8 dealt with income from operation of ships in international traffic and the activity of inland transportation could not be considered in the realm of 'international transport'. He, therefore, came to hold that the revenue earned on account of receipt of IHC in India was taxable in India as business profit since it was covered neither under s. 44B of the Act nor art. 8 and hence art. 7 would be considered for imposing tax on this income as the assessee had PE as per art. 5 of the treaty. Profit @ 7.5 per cent on the gross collection of IHC was calculated at Rs. 72,31,338 on which income-tax of Rs. 34,71,042 was computed. In the first appeal, the learned CIT(A) held that art. 8 was applicable on IHC and accordingly, the action of the AO was overturned. 4. Before us, the learned Departmental Representative contended that art. 8 of the DTAA was applicable only to the income de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cargo was brought to Mumbai in assessee's containers for which charge was levied in addition to the freight for shipping it, from Mumbai to the foreign destinations. He submitted that his case was covered within art. 8(2)(b)(ii) and also in cl. (2)(c) of the same article. He also relied on commentary by Klause Vogel to bring home the point that the IHCs were nothing but the income derived from the operation of ships and hence the benefit available to it under the treaty cannot be denied. 6. We have heard the rival submissions and perused the relevant material on record. First point raised by the learned Authorised Representative is that s. 44B includes IHC also and by implication, such income is covered under art. 8 and hence not taxable in India due to the tax residency certificate issued by Belgium. In order to appreciate this contention, it would be relevant to refer to the language of s. 44B. It is a special provision enshrined for computing the profits and gains of shipping business in the case of non-residents. Sub-s. (1) provides that notwithstanding anything to the contrary contained in ss. 28 to 43A, an assessee being a non-resident, engaged in the business of opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other amount of similar nature . So, any other amount has to be considered, which is similar to or closely resembles with the nature of demurrage or handling charges. Handling charges are the charges paid for loading/unloading/stacking, etc., of the containers and the demurrage charges are in nature of penalty for non-removal of the cargo in time. On the contrary, the IHC are towards transporting the goods from the exporter place to the port. The very nature of inland transportation charges clearly differentiates it from handling or demurrage charges, which are of a different genus. We therefore, do not find any substance in this submission made on behalf of the assessee that IHC are covered under s. 44B as these are equal to or part and parcel of the amount or account if carriage of goods shipped at any port in or outside India, and hence are automatically covered under art. 8. This contention is therefore, repelled. 9. Sec. 90(2) gives an option to an assessee to whom DTAA applies either to be governed by the regular provisions of the IT Act, 1961 or take resort to DTAA. The option is with the assessee to be ruled by either of the two which is more beneficial to it. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his article- (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 art. 11 shall not apply in relation to such interest; accordingly, there will be no withholding of tax on such income; (b) income derived from the operation of ships or aircraft in international traffic shall mean income derived by an enterprise described in para 1 from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft including- (i) the sale of tickets for such transportation on behalf of other enterprises; (ii) any other activity directly connected with such transportation; (iii) the leasing of ships or aircraft on charter fully equipped, manned and supplied, or on a bare boat 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 6, though mentioned that an airline company that operates a bus service connecting a town with its airport primarily to provide access to and from that airport to the passengers of its international flights shall be considered as directly connected with the operation of ships or aircraft in the international air traffic, but the reservation on art. 8 mentioned at p. 139 of the commentary clearly brought out that several countries including Canada, Greece, UK and USA have reserved their rights not to extend the scope of the article to cover inland transportation in bilateral conventions. She further invited our attention towards p. 485 of Klaus Vogel on Double Taxation Conventions to contend that the operation of a lorry depot, rather than constituting as a preparatory or auxiliary activity, was generally considered as a separate and independent activity. In this background of the facts, the learned Departmental Representative submitted that the assessee's income from IHC was not covered under art. 8(2)(b)(ii). 14. In the opposition, the learned counsel for the assessee referred to OECD Model Tax Convention, p. 134, para 7, in which it has been mentioned that the cargo pic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 his commentary on p. 480 that, if an enterprise engaged in international transport undertakes to see to it that in connection with such transport, goods are delivered directly to the consignee in the other Contracting State, such inland transportation is considered to fall within the scope of the international operation of ships or aircraft and, therefore, is covered by the provisions of this article . In para 8. certain activities have been listed to which this provision would apply. It, inter alia, includes transportation of goods by truck connecting a depot with a port or airport . On p. 486 of the commentary, it has been mentioned that transportation of the containers from the consignor to the ultimate consignee falls within the scope of operating ships or aircraft in international traffic . From the above discussion, it is vivid that any other activity directly connected with such transportation includes all such functions which facilitate the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argo 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 manner so as not to restrict itself only to the activities done at port or during the voyage only. This expression would extend to other activities beyond ports also if they are directly related to the main activity of transportation by ship. 16. Much stress has been laid by the learned Departmental Representative on the definition of the term international traffic in art. 3(1)(i) for bolstering her submission that the activity of ship operating solely in one Contracting State was not considered as the international traffic. We fail to appreciate as to how this definition is bringing the case of the Revenue any further. The scope of art. 8 is not restricted only to the income derived from the operation of ships in the international traffic as understood in the literal sense. It has elaborated the ambit of income derived from the operation of ships or aircrafts in the international traffic by also, inter alia including interest on funds directly co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details before the AO qua the rental of containers, etc., which could be considered for this purpose. Even otherwise, she stated that the rental of containers is a small part of the total transportation charges and hence the entire IHC cannot be brought within cl. (c). 18. Having heard the rival submissions on the point and perused the relevant material on record, we find that cl. (c) of art. 8(2). as extracted above, does not include only the income derived from the use, maintenance or rental of containers. The bracketed portion after the word containers in this clause encompasses the income derived from trailers and related equipments for the transport of containers . It is further succeeded by the words in connection with the transportation of goods or merchandise in international traffic . On a combined reading of this clause, it is found that not only the income derived from the use, maintenance or rental of containers but also the income derived from trailers and related equipment for the transport of containers would stand included within its ambit. The words related equipment for the transport of containers include not only the trailers but also trucks and other m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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