Loading judgment…
Facts
The assessee, a German tax resident engaged in international cargo transportation, claimed exemption for its freight income under the India-Germany DTAA. The Assessing Officer (AO) disputed this, treating the income as taxable under Section 44B of the Income Tax Act, 1961, and also held that the assessee had a Permanent Establishment (PE) in India.
Held
The Tribunal held that the assessee's freight income from feeder vessels is eligible for exemption under Article 8 of the India-Germany DTAA. It relied on previous decisions in the assessee's own case, upheld by the jurisdictional High Court, and directed the AO to grant credit for TDS.
Key Issues
Whether freight income earned from transportation of cargo through feeder vessels is eligible for exemption under Article 8 of the India-Germany DTAA, and whether the assessee has a Permanent Establishment in India.
Sections Cited
143(3), 144C(13), 142(1), 143(2), 44B, 234B, 234D, 244A, 270A, 5, 3(2), 24, 5(6)
AI-generated summary — verify with the full judgment below
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
Before: MS. PADMAVATHY S & SHRI RAJ KUMAR CHAUHAN
O R D E R PER RAJ KUMAR CHAUHAN (J.M.): 1. This appeal is filed by the appellant/assessee against the final assessment order dated 15.01.2025 passed u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 („the Act‟), in pursuant to the direction of Ld. Dispute Resolution Panel-1, Mumbai-2 (Ld. DRP) u/s 144C(5) of the Act for AY. 2022-23.
The brief facts as culled out from the order of lower authorities are that the assessee, a limited liability company, is incorporated and a tax resident of Germany. The assessee is engaged in the transportation of cargo to ports outside India and vice versa. It also transports cargo on vessels owned/chartered/pooled by it as well as on slot arrangement. For the year under consideration, the assessee filed its return of income on 01/11/2022 declaring a total income of Rs. 4,18,900/-. The assessee has claimed that its income is not chargeable to tax as per the provisions of the India-Germany DTAA. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, the assessee was asked to show cause as to how its income is exempt as per Article 8 of the India-Germany DTAA and as to why the same should not be treated as income in respect of freight from feeder vessels. In response thereto, the assessee stated that it is in the business of shipping and carries cargo between ports in India and ports outside India. The assessee stated that in the course of its shipping business, it transports cargo on vessels owned/leased/chartered/pooled by it. It was further stated that its vessels do not call at the Indian ports on account of various reasons, such as the size of the vessels being too large to enter the Indian ports which have shallow drafts or the depth of the Indian ports is not enough for the vessels to be anchored, etc. Therefore, the assessee books space/buy slots on feeder vessels and transports cargo through such vessels. The assessee further submitted that the companies engaged in the business of operation of ships generally transport cargo by availing the slot hire facility and the slot hire agreements are directly connected and interlinked with and are an integral part of the enterprise‟s business of operating ships. The assessee also stated that without availing slot hire/feeder facilities, the shipping enterprises would be unable to carry on the business of operating ships in international traffic at all in many cases. Thus, it was stated that if the DTAA is construed to include activities directly or indirectly connected to the operation of ships, it would include slot hire/feeder vessels. The assessee placed reliance upon the decision of the Hon‟ble jurisdictional High Court in CIT v/s Balaji Shipping (UK) Ltd., [2012] 24 taxmann.com 229 (Bom.) wherein the Hon‟ble High Court has held that income from slot /feeder income is income from operation of ships and is an integral part of the business of shipping companies. It is further stated that Hon'ble ITAT, Mumbai in the case of CMA CGM SA France [27 SOT 367 (Mum)] has also held that when income from slot arrangement is ancillary to the main business activity, the said income is covered under Article 9 of India-France Treaty. The assessee further stated that the Organization for Economic Co- operation and Development (OECD) commentary on Article 8 of Indo Germany DTAA in para 4.1 has concluded that the activity of transportation of goods on slot charter by HLAG is ancillary and incidental to the operation of ships in international traffic and is hence, eligible for relief under Article 8 of the India-Germany DTAA. The assessee also stated that the Hon‟ble Jurisdictional Mumbai Tribunal in assessee‟s own case for AY 2007-08 has decided an identical issue in favour of the assessee and the said order has been confirmed by the Hon‟ble High Court vide order dated 28th September 2016.
The Assessing Officer (“AO”) vide draft assessment order dated 20/03/2024 passed under section 144C(1) of the Act did not agree with the submissions of the assessee and held that the decision of the Hon‟ble jurisdictional High Court in Balaji Shipping (UK) Ltd (supra) is not applicable to the facts of the present case, as in that case the India-UK DTAA was involved, which specifically provides that the income from the operation of the ships includes the income derived from the rental on a bareboat basis of ships, if such a rental income is incidental to the income described in paragraph 1 of the Article. However, this is not the case of the assessee as no such provision existed in Article 8 of the India-Germany DTAA. The AO further held that the Revenue has not accepted the decision of the Hon‟ble jurisdictional High Court in Balaji Shipping (UK) Ltd (supra) and in assessee‟s own case and has filed Special Leave Petition before the Hon‟ble Supreme Court, which is pending consideration. The AO further placed reliance upon the assessment order passed in assessee‟s own case for the assessment year 2007-08. The AO further held that the assessee is carrying out its business of operation of ships in India through its agent M/s Hapag Lloyd India Ltd, which is concluding the contract of cargo transported by issuing the bill of lading, which is legally binding on the assessee. Accordingly, the AO concluded that M/s Hapag Lloyd India Ltd is a Permanent Establishment of the assessee in India as per Article 5 of the India-Germany DTAA. Without prejudice, the AO held that even otherwise since the assessee is earning income from the business of shipping and is not eligible for benefit under Article 8 of the India-Germany DTAA, therefore its income is taxable under section 44B of the Act. After analysing the breakup of freight charges earned by the assessee during the year, the AO noted that the freight earned from feeder to feeder vessels and freight earned from the entire journey of feeder vessels is Rs.1,12,40,95,94,954/- on which relief as per Article 8 of the India-Germany DTAA is not available. Accordingly, the AO proposed to tax the aforesaid freight charges under section 44B of the Act @7.5% and added the same to total income of the assessee as under:- Sr. Particulars Amount (Rs.) No.
Income declared by the assessee in ROI 4,18,900 2. Freight & other charges as per section 44B of the 1,67,41,69,408 Act on feeder vessels 3. Total income @ 7.5% u/s 44B 12,55,62,706 Total taxable income 12,59,81,606 Rounded off to 12,59,81,610
The assessee filed detailed objections before the learned DRP against the addition made by the AO. Vide directions dated 17/12/2024, issued under section 144C(5) of the Act, the learned DRP placing reliance on the findings of the learned DRP rendered in the assessment years 2016-17, 2017-18, 2018- 19 and 2020-21 on a similar issue, rejected the objections filed by the assessee on this issue, after noting that there is no substantial Page | 6 change in the material facts and circumstances and the submission of the assessee is also largely the same as in the preceding years. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order taxing the freight earned from feeder to feeder vessels and freight earned from the entire journey of feeder vessels amounting to Rs. 12,55,62,706/- under section 44B of the Act @7.5% and added the same total income of the assessee.
Being aggrieved, the assessee is in appeal before us and has raised the following grounds of appeal:-
Non-Grant of Relief under Article 8 of the India Germany Double Taxation Avoidance Agreement ['India - Germany DTAA']
1. On the facts and circumstances of the case and in law, the learned Assessing Officer ('AO') based on the directions of Dispute Resolution Panel ('DRP') erred in assessing total income at Rs. 12,59,81,610 as against total income of Rs. 4,18,900 as per return of income of the Appellant.
2. On the facts and circumstances of the case and in law, the learned AO based on the directions of DRP erred in holding that freight income of Rs. 167,41,69,408 from transportation of cargo through feeder vessels is not eligible for benefit under Article 8 of India Germany DTAA
3. On the facts and circumstances of the case and in law, the learned AO based on the directions of DRP erred in refusing to follow the binding decision of jurisdictional High Court of Bombay (Hon'ble HC') / Income Tax Appellate Tribunal (Hon'ble 'ITAT') in the Appellant's own case for AY 2005-06 to AY 2011-12, AY 2013-14 to AY 2018-19 and AY Page | 7 2021-22 wherein the Hon'ble HC / Hon'ble ITAT has consistently held that freight income of Appellant from transportation of cargo through feeder vessels is eligible for benefit under Article 8 of India-Germany DTAA.
The appellant prays that the learned AO be directed to allow relief of Rs. 167,41,69,408 under Article 8 of the India- Germany DTAA.
4. Without prejudice to the above, on the facts and circumstances of the case and in law, the learned AO based on the directions of DRP erred in holding that while income from feeder vessels would fall within the ambit of section 448 of the Act whereas the same shall not eligible for benefit under Article 8 of India-Germany DTAA.
The appellant prays that, where 'slot chartering' is covered under 'operation of ships' under the Act, the same ought to be covered under 'operation of ships' under the DTAA considering that any term covered under any definition in the Act ought to be covered under the DTAA as per provisions of Article 3(2) read with Article 24 of India-Germany DTAA.
Holding existence of a Permanent Establishment ('PE')
5. Without prejudice to Ground 1 to 4, on the facts and circumstances of the case and in law, the learned AO based on directions of DRP erred in holding that Hapag-Llyod Indía Private Limited ('HLIPL') constitutes an agency Permanent Establishment ('PE') of the Appellant in India.
6. Without prejudice to Ground 1 to 5, on the facts and circumstances of the case and in law, the learned AO based on the directions of DRP have failed to appreciate that HLIPL is an independent agent in terms of Article 5(6) of the DTAA and hence cannot be held to be a PE of the Appellant in India.
The Appellant prays that stand taken by the learned AO based on the directions of DRP in holding that the Appellant has a PE in India ought to be struck down.
7. Without prejudice to Ground 1 to 6, on the facts and circumstances of the case and in law, the learned AO based on the directions of DRP failed to appreciate that even if it Page | 8 held that HLIPL constitutes an agency PE of the appellant in India, no profits could be attributed to the agency PE in India since the appellant has remunerated HLIPL on an arm's length basis in terms of Article 5(6) of the DTAA.
Non-granting of Credit for Taxes Deducted at Source ('TDS') amounting to Rs. 2,61,739
8. On the facts and circumstances of the case and in law, the learned AO based on the directions of DRP has erred in not granting credit for TDS to the extent of Rs. 2,61,739.
9. Without prejudice to ground no. 9, on the facts and circumstances of the case and in law, the learned AO failed to appreciate that TDS of Rs. 1,66,359 is appearing in the Form 26AS of HLIPL, the same is claimed by the appellant since the corresponding income was offered and charged to tax in the hands of the appellant for AY 2022-23.
10. The learned AO failed to appreciate that the similar issue of grant of TDS appearing in the Form 26AS of HLIPL is covered by the order of Hon'ble 'ITAT in the Appellant's own case for AY 2016-17, AY 2017-18, AY 2018-19 and AY 2021-22.
The Appellant prays that the learned AO be directed to grant full credit for TDS and to re-compute its tax liability accordingly.
Levy of Interest
11. On the facts and circumstances of the case and in law, the learned AO erred in levying interest of Rs. 1,61,42,214 under section 234B of the Act.
12. On the facts and circumstances of the case and in law, the learned AO erred in levying interest of Rs. 9,31,763 under section 234D of the Act.
Grant of Interest under section 244A of the Act
13. On the facts and circumstances of the case and in law, the Learned AO be directed to grant proper interest under section 244A of the Act after granting relief in respect of grounds of appeal raised as above.
Initiation of Penalty proceedings under section 270A of the Act:
14. On the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 270A of the Act for under reporting of income.
The above grounds of appeal are mutually exclusive and without prejudice to one another.
The appellant craves leave to add to, amend, alter, vary, omit or substitute the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as it may be advised.
We have heard Ld. AR and Ld. DR and examined the record. At the outset, Ld. AR who appeared on behalf of the assessee submitted that this issue has already been decided in favour of the assessee by the decisions of the coordinate bench of the Tribunal in assessee‟s own case for preceding assessment years including AY 2007-08, which was upheld by the Hon‟ble Bombay High Court order dated 21st September 2016. The Ld. AR further submitted that it becomes apparent from the directions of Ld. DRP and the assessment order that the lower authorities has admitted that the facts for the year under consideration are similar to the facts of preceding assessment years where this issue has already been decided in favour of the assessee. It is further submitted by Ld. AR that the Hon‟ble Jurisdictional Tribunal in for AY 2021-22 dated 04.06.2024 has decided the issue in favour of the assessee, therefore the matter is covered by the said judgment.
Ld. DR on the other hand, put reliance on the order of the lower authorities stating that the Hon‟ble Bombay High Court confirmed the order of Coordinate Bench of ITAT in assessee‟s own case for AY 2007-08 which was challenged by the revenue before the Hon‟ble Supreme Court in Special Leave Petition and is currently pending before the Hon‟ble Apex Court, therefore this assessment year is being independent assessment, accordingly, the case of assessee decided by the Mumbai Tribunal and confirmed by the Hon‟ble Bombay High Court should not be considered for adjudication of the present case.
We have considered the rival submissions and examined the record. We have noticed that the Coordinate Bench of ITAT in assessee own case in (supra) has decided this issue in favour of the assessee. To appreciate the arguments of the parties, we are extracting, the operative portion of the order of Coordinate Bench of ITAT as under:-
We have considered the rival submissions and perused the material available on record. We find that the coordinate bench of the Tribunal in assessee’s own case in Hapag Lloyd AG v/s DCIT, in ITA No. 972/Mum./2021, for the assessment year 2017-18, vide order dated 31/01/2022 after considering the decision of the coordinate bench rendered in assessee’s own case for the assessment year 2007-08, which has been affirmed by the Hon’ble jurisdictional High Court, observed as under:-
“018. The above order of the coordinate bench was subject matter of challenge before the honourable Bombay High Court in Income Tax Appeal number 602 of 2014, (which is reproduced at paragraph number 5 of the order of the honourable High Court in Income Tax Appeal number 1362 of 2017 for assessment year 2009 – 10 which is decided on 6 January 2020, placed at paper book page number 4 – 6). The honourable High Court held that the impugned order of the coordinate bench has allowed the appeal of the assessee by following the decision of honourable High Court in Director Of Income Tax, International taxation versus Balaji shipping UK Ltd (2012) 211 taxman 535 and further the learned counsel appearing for the revenue in that case stated that the issue stands concluded in the favour of the respondent assessee by the decision of honourable Bombay High Court in Balaji shipping UK (supra). Based on this the honourable High Court held that no substantial question of law arises and the appeal of the revenue was dismissed.
Further as the fact shows that for assessment year 2009 – 10 also the honourable High Court following its own order for assessment year 2007 – 08 and also on the submission made by the learned counsel for the revenue that the issue stands covered, the appeal filed by the learned assessing officer was not admitted by order dated 7 January 2020.
Further the coordinate bench for assessment year 2006 – 07 to assessment year 2011 – 12 (except assessment year 2007 – 08) as per order dated 22/7/2016, following the order of the coordinate bench for assessment year 2007 – 08 dated 14/8/2013 allowed the claim of the assessee and dismissed appeals of the revenue. Further, for assessment year 2005 – 06 in ITA number 1776/2014 the coordinate bench wide order dated 21/9/2016 wherein the appeal was filed by the assessee was allowed as per paragraph number 7 holding that slot hire charges income is eligible for benefit as per article 8 of the treaty. Subsequently also for assessment year 2013 – 14 per order dated 31/10/2017, for assessment year 2014 – 15 per
order dated 28/6/2019, for assessment year 2015 – 16 per order Dated 16/12/2019 and for assessment year 2016 – 17 per order dated 31/1/2020, the claim of the assessee for the benefit to the slot hire income Under article 8 of the treaty was allowed.
As per chart submitted by the learned authorised representative the percentage of income from feeder vessels to the total freight income for the impugned assessment year is merely 0.69%. All the arguments raised before us by the learned departmental representative has been considered in the decision of the coordinate benches as well as in the decision of the honourable High Court holding in favour of the assessee. Therefore, respectfully following the decisions of the honourable High Court and coordinate benches in assessee‟s own case, we allow ground number 2 – 4 of the appeal holding that freight charges of ₹ 172,195,959/– earned by assessee from transportation of cargo through feeder vessels is also eligible for benefit of Article 8 of the Double Taxation Avoidance Treaty between India and Germany.
In view of our decision in ground number 2 – 4 of the appeal, no adjudication is required on ground number 5 – 7 and 12 – 14 of the appeal of the assessee, hence those grounds become infructuous and hence dismissed.”
10. We find that the Hon’ble jurisdictional High Court, following its decision rendered in assessee’s own case for the assessment year 2007-08 in of 2014, dismissed the appeal filed by the Revenue in the assessment years 2009-10 and 2011-12 vide orders dated 06/01/2020 and 07/01/2020 passed in of 2017 and 1376 of 2017, respectively. The learned DR could not show us any reason to deviate from the aforesaid decisions rendered in assessee’s own case and no change in facts and law was alleged in the relevant assessment year. The issue arising in the present appeal is recurring in nature and has been decided by the coordinate bench of the Tribunal and upheld by the Hon’ble jurisdictional High Court for the preceding assessment years. Thus, respectfully following the orders passed by the coordinate bench of the Tribunal as well as the decisions of the Hon’ble jurisdictional High Court in assessee’s own case cited supra, we are of the considered view that the freight charges of Rs.38,81,04,429 earned by the assessee from the transportation of cargo through feeder vessels is also eligible for the benefit under Article 8 of the India-Germany DTAA. As a result, grounds no.1.1 to 1.5 raised in assessee’s appeal are allowed. 9. Thus, it is evident from the above findings of the Jurisdictional Tribunal that the Hon‟ble Bombay High Court has dismissed the appeal filed by the revenue in the assessment year 2009-10 and 2011-12 vide orders dated 06.01.2020 and 07.01.2020 passed in of 2017 and 1376 of 2017, respectively. Nothing new argued on behalf of the revenue with respect to these binding precedents except that the revenue has challenged the order of the Hon‟ble Jurisdictional High Court before the Hon‟ble Supreme Court where SLP is pending for consideration. In view of the continuous finding of the Hon‟ble Jurisdictional High Court which has been duly followed and considered by the Mumbai Tribunal for AY 2021-22, therefore we do not agree with the contention of Ld. DR that the Jurisdictional High Court judgment relied by the assessee in his own case for previous assessment year should not be relied because the SLP is pending before the Hon‟ble Supreme Court.
Our view is also fortified by the decision of the Hon'ble Allahabad High Court, K. N. Agarwal Vs. Commissioner of Income Tax, order dated 11.01.1991, [1991] 189 ITR 769B (ALL) which says, “Indeed, the Page | 14 orders of the Tribunal and the High Court are binding upon the Assessing Officer and since he acts in a quasi-judicial capacity, the discipline of such functioning demands that he should follow the decision of the Tribunal or the High Court, as the case may be. He cannot ignore it merely on the ground that the Tribunal's order is the subject-matter of revision in the High Court or that the High Court's decision is under appeal before the Supreme Court. Permitting him to take such a view would introduce judicial indiscipline, which is not called for even in such cases.”
Thus, respectfully following the orders passed by the coordinate bench of the Tribunal as well as the decisions of the Hon‟ble jurisdictional High Court in assessee‟s own case cited supra, we are of the considered view that the freight charges of Rs.12,59,81,610/- earned by the assessee from the transportation of cargo through feeder vessels is also eligible for the benefit under Article 8 of the India-Germany DTAA. Resultantly, grounds no.1 to 4 raised by the assessee are allowed.
In view of our aforesaid findings, the decision on grounds no. 5 to 7 pales into insignificance having been rendered academic and hence requires no separate adjudication.
With respect to Ground no. 8 to 10, this issue is restored to the file of the jurisdictional AO with the direction to grant TDS credit, in accordance with the law, after conducting the necessary verification. Resultantly, grounds no. 8 to 10 raised by the assessee are allowed for statistical purposes.
Insofar as grounds no. 11 to 14 are concerned, the same relates to the charging of interest under section 234A and section 234B of the Act, which is consequential in nature. Therefore, grounds no 11 to 14 need no separate adjudication.
In the result, the appeal is accordingly allowed for statistical purposes in the above terms.