AVANA GLOBAL FZCO,MUMBAI vs. DY CIT (INTERNATIONAL TAXATION) CIRCLE-1(1)(2), MUMBAI

PER VIKAS AWASTHY, JM:

2. The brief facts of the case as emanating from records are : The assessee company is incorporated in UAE and is a tax resident of UAE. The assessee is engaged in operation of ships in international traffic. During the period relevant to assessment year under appeal, the assessee earned income of Rs.265,57,28,874/- from freight handling, terminal handling charges, inland haulage charges and detention charges in India. The assessee claimed that the aforesaid income earned is exempt under Article -8 of the India -UAE DTAA. The Assessing Officer rejected the contentions of assessee and held that since the assessee has a Permanent Establishment in India, the benefit of Article -8 of DTAA is not available to the assesseein respect of gross receipts of the shipping business. Hence, made addition by applying Rule-10 of the Income Tax Rules, 1962 [ herein after referred to ‘the Rules’] Aggrieved by the draft assessment order dated 03/12/2019 the assessee filed objections before the Dispute Resolution Panel (in short ‘DRP’). The DRP vide directions dated 25/03/2021 rejected the objections. The Assessing Officer passed the impugned assessment order in accordance with the direction of the DRP. . The Assessing Officer made addition of Rs.12,39,99,720/- i.e. 7.5% of gross receipts from shipping business. Further the Assessing Officer made addition of Rs.3,12,71,900/- on account of Inland Haulage Charges (in short ‘IHC’) received by the assessee. Hence, the present appeal by the assessee.

3. The assessee in appeal has raised nine grounds. In ground No.1 to 7 of appeal, the assessee has assailed the addition made by the Assessing Officer in respect of gross receipts from shipping business and receipts on account of ‘IHC’.

4. Shri Poras Kakaappearing on behalf of the assessee submitted at the outset that the only effective grounds in the grounds of appeal are ground No.2 & 5 only.

5. The ground No.2 of the appeal reads as under:

“ Ground No.2 – On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP has erred in denying the benefit of Article- 8 of the India and UAE Tax Treaty to theAppellant by holding it liable to tax in India under section 44B of the Income-tax Act, 1961 (IT Act) with respect to its shipping income of Rs.12,39,99,720/- (being 7.5% of total freight collections of Rs. 1,65,33,29,603) derived from operation of ships in international traffic.”

7. Shri Milind S. Chavan representing the Department vehemently defended the assessment order and the findings of the DRP on this issue. However, the ld. Departmental Representative fairly admitted that issue has been considered by the Tribunal in assessee’s own case in immediately preceding assessment year.

“5. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

6. The short question we are now required to adjudicate is whether benefit of article 8 can be declined in respect of freight collections earned from cargo/containers loaded on slot of other vessels that the OEL, FZCO was entitled to under the joint business/pooling arrangements.

receipts-irrespective of whether the earnings are relating to feeder] vessels or by the ships in international traffic. The assessee gets the relief accordingly. 8. Ground no 1 & 2 are thus allowed.” In the absence of any contrary material we see no reason to take a different view. Respectfully following the order of Co-ordinate Bench ground No.2 of the appeal is allowed.

“Ground 5 - On the facts and in the circumstances of the case and in law, the learned DCIT and Hon'ble DRP has erred in denying the benefit of Article 8 of the India - UAE Tax Treaty on Inland Haulage Charges amounting to Rs. 31,27,19,007 earned by the Appellant and taxing the same at 10% as per Rule 10 of the Income-tax, Rules 1962.”

10. The ld.Counsel for the assessee submitted that the assessee issues bill of lading from point to point and not from Port to Port. The bill of lading includes the leg of Inland transportation, therefore, cannot be segregated from the international voyage. The IHC are inextricably linked to the movement of cargo in the international traffic. Inland Haulage is not a separate business activity of the assessee and no separate agreement is entered between the assessee and its customers for the Inland Haulage services. A single/ consolidated Bill of Lading is issued by the assessee to its customer which is a contract for carriage of goods. In the Bill of Lading the place of receipt and the place of delivery are mentioned in addition to port of loading and port of discharge. The ld.Counsel for the assessee submitted that Inland Haulage services are covered by Article-8 of India-UAE DTAA. He further placed reliance on the decision of Hon'ble Bombay High Court in the case of DIT(International Taxation) vs. Safmarine Container Line NV reported as 367 ITR 209 and the decision of Tribunal in the case of DDIT vs. A.P.Moller Maersk A/S reported as 90 taxmann.com 326(Mum-Trib) to assert his contention that ‘IHC’ are part of income derived from operation of ships in international traffic and is covered by DTAA.

“ARTICLE 8 – Shipping – 1. Profits derived by an enterprise of a Contracting State from the operation by that enterprise of ships in international traffic shall be taxable only in that State.

“9. In view of the OECD commentarywe have considered the issue that internationally and by the Tribunal and Hon’ble High Court accepted that any activity directly connected with such transportation will always be included within the term "operations of ships". The Activities of the IHC are connected directly or an ancillary activity that provides minor contribution and should not be regarded as a separate business to the operations of ships. Further, the decision of Hon'ble Bombay High Court in the case of Balaji Shipping (UK) Ltd.(2012) 253 CTR 460 (Bom) the issue was whether receipts from slot chartering can be considered as shipping income eligible to the beneficial provision of the Tax Treaty between India and UK. The Hon'ble High Court observed that the slot hire agreements are at least indirectly, if not directly connected and interlinked with and is an integral part of the enterprise's business of operating ships. The High Court further observed that the slot hire agreements also have a nexus to the main business of the enterprise of operation of ships. They are ancillary to and complement the operations of ships by the enterprise. Accordingly, Hon'ble Bombay High Court upheld the view that the benefit of the Tax Treaty would even be extended to income from such activities. Noting the OECD commentary the High court held as follows:-

"35. Paragraph 4of the commentary indicates that Article applies to profits directly obtained from the transportation of passengers or cargo by ships owned, leased or otherwise at the disposal of a person as well as the profits from the activities which are not directly connected with the acquisition of the assessee's ships. In the latter case however, the activities must be ancillary to such operations viz. the operation of ships owned, leased or otherwise at the disposal of the assessee in international traffic. It indicates that the provision also applies to the activities that permit, facilitate or support the international traffic operations.

The Hon'ble High Court then concluded in para 42 as under:-

"42. Our views on the two types of cases involved in the present appeal are in consonance with the view of the Delhi High Court, the OECD commentary and the commentaries referred to above."

[Emphasized by us] The aforesaid observations of the Bench are dehors the terms of Article - 8(2)(c) of India -Belgium Tax Treaty and Article 9(4) of India Denmark Tax Treaty.