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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य, राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार/ PER RAJENDRA, AM- अनुसार Challenging the order dated 23/12/2015 of CIT(A)-57, Mumbai,the Assessing Officer (AO) has filed the present appeal.The assessee has lodged Cross Objection for the year under appeal.Assessee-company,engaged in running international shipping line,filed its return of income on 30/09/2011,declaring its total income at Rs.27.55 crores.The AO completed assessment,on 29/04/2014, u/s.143(3) r.w.s. 144C(3) of the Act,determining its income at Rs.9.80 crores,computing the income as per the provisions of section 44B of the Act.
2.Effective GOA is about applicability of Article 8 of the India –Malaysia DTAA.During the assessment proceedings,the AO held that benefit of Article 8 of tax treaty was not available to the portion of freight which was attributable to voyage performed on Feeder Vessels which were operated by third parties (and not by the assessee). He held that total freight earned by the assessee under the head Feeder Vessel income was taxable in India.
1389/M/16-C.O.291/17- MISC Berhard 3.The FAA ,in the appellate proceedings,reversed the order of the AO following the order of the Tribunal delivered for the AY.s 2004-05 – 2007-08 and AY. 2009-10. dated 16/7/14.
4.During the course of hearing before us,the Departmental Representative(DR) and the Authorised Representative(AR) agreed that issue raised by the AO,stands covered by the orders of the Tribunal for the earlier years(ITA.s/6499and 6500 & others/Mum/2012-AY.s 2004-05 to2007-08,dated.16/07/2014 and ITA/574/Mum/2015 AY.2008-09 dated 22/11/ 2017). We find that while deciding the appeal for the AY.2008-09 (supra)the Tribunal has dealt the issue as under : “We have heard the rival submissions, perused the orders of the authorities below and the Coordinate Bench decision. There is no dispute that the facts are identical in the Assessment Year under appeal before us and in the immediately preceding Assessment Years2004-05 to 2007- 08. The Coordinate Bench had decided the issue in Ground No. 1 in favour of the assessee observing as under: “23.We will now independently examine Article–8(1) and Article–8(2) of Indo– Malaysia DTAA. The crucial phrase or words which need to be analysed here are “operation of ships”, transportation by the “owner” or “lessees” or “charterers” of ships. First of all, the word “operation” is different from the word “operate” or “operator”. The word “operate” means to control the functioning of machine, process or system. Here, the person in control is important. The word “operator” means, a person who operates the equipment or a machine. Here for our purpose operator of ship. Whereas, the word “operation” connotes the fact or condition of functioning or being active i.e., some kind of activity. The operation of ships cannot be understood merely as an operator of ships or a person who operates the ships. The word “operation of ships” has to be understood in a broader sense of carrying out shipping activity. The carrying of shipping activity could be as an owner of a ship or as a lessee of a ship or as a charterer of a ship. Here, the word “owner” has to be inferred as a person who owns a ship and the word “lessee” as a person who owns the ship for a given lease period. The word “charterer” has to be understood as a person who charters or hires a ship for a voyage. The Law Lexicon (P. RamanathaAyier, 2nd Edn.), defines the word “charterer” as “one who, by contract acquired the right to use a vessel belonging to another. One who charters or hires or engages the whole or part of a ship under an agreement of Charter Party for a voyage”. Here, the word “charterer” does not mean the owner or lessee of a ship. The word “charter Party” has been defined in Law Lexicon as “an indenture of covenants and agreements made between merchants and mariners concerning their sea affairs. It is a contract by which a ship or some principal part thereof, is let to a merchant for conveyance of goods on a determined voyage to one or more places”. From this definition, it is amply evident that the word “charterer” means hiring of a ship for a voyage, either whole of the ship or a part of a ship. The word “charter” completely eludes the concept of ownership. A charterer of a ship cannot be the owner of a ship. Therefore, the contention of the learned Departmental Representative that the word “charterer” has to be understood in the context of owner or lessee that is having control of the ship is perhaps not the correct understanding of the word “charterer”. The principle of noscitur–a–sociis i.e., the meaning of doubtful word may be ascertained by reference to the meaning of the words associated with it will also not apply here. In other words, the meaning of the word “charterer” cannot be imported from or to be understood from the meaning of the word “owner” or “lessee”. The learned counsel, before us, has also filed various meaning of the term “charter” or “charterer”, which are as under: – 1389/M/16-C.O.291/17- MISC Berhard i) Dictionary of International Business terms (Financial World Publishing), defines the term “Charter” as under: – “To rent an aircraft or vessel, or a part of its cargo space, for a particular journey or a period of time.” ii) Black’s Law Dictionary (9th Edition) defines the term “charter” which includes the term “space charter” which is defined as under: – “A charter for a part of a vessel’s capacity, such as a specified hold or deck or a specified part of the vessel’s carrying capacity.” iii) K.J. Aiyar‟s Judicial Dictionary (12th Edition) defines the term “charter party” as under: – “An agreement in writing by which a ship – owner agrees to let an entire ship or part thereof, to a merchant, for the carriage of goods on a specified voyage, or during a specified period, for a sum of money which the merchant agrees to pay as freight for their carriage.” iv) Concise Law Dictionary by P. RamanathaAiyar (Year 2005), defines the term “charterer” as under: – “One who charters or hires or engages the whole or part of a ship under an agreement of charter party for a voyage.” v) Chamber’s 20th Century dictionary defines the term “charterer” as under: – “to establish by charter: to let or hire, as a ship, on contract. vi) Modern legal usage dictionary defines the term “charterer” as under: – “a person to whom a vessel is chartered in a charter party.” vii) Oxford dictionary defines the term “charterer” as under: – “A contract to hire an aircraft, ship, etc. for a special purpose.” viii) Maritime and Shipping Dictionary 2012, defines the term “charter” as under: “A voyage charter whereby the ship owner agrees to place a certain number of container slots (“TEU and/or FEU) at the charterer’s disposal.”
From the above definitions of the term “charter” or “charterer”, one thing is amply clear that it means hiring of vessels or a ship or a part of its space under an agreement for a voyage. Thus, even a part of a space in the vessels for a particular journey is also considered as “charter of ship” or “charterer”. In the decision of Balaji Shipping U.K. Ltd. (supra), while referring to the judgment of Tychy (supra), the High Court have noted that a “slot charter” and a “voyage charter” of a part of a ship are in a sense charterers of a space in a ship.
From the above discussion, the following inferences can be deduced: i) Firstly, the operation of a ship can be done as charterer which does not mean to own or control the ship either as an owner or as a lessee; ii) Secondly, charterer is a hirer of a ship under an agreement or arrangement to acquire the right to use a vessel or a ship for the transportation of a good on a determined voyage, either the whole of the ship or part of the ship or some space of the ship in a charter party agreement; and iii) Thirdly, the word “charterer” includes a voyage charter of a part of a ship or a slot, as it is also arrangement or agreement to hire a space in a ship owned and leased by other persons. Thus, in our opinion, the word “charterer” should not be confused from the word “owner” or “lessee” or having control of the ship or as an operator of the ship. The operation of ship can be done as a charterer, which includes part of a ship or particular space in a ship.
Under the Income Tax Act, 1961, there is a separate code of shipping, Chapter–XIIG, which contains special provision relating to income of shipping companies. Section 115VB, defines operating ships in the following manner: – 3 1389/M/16-C.O.291/17- MISC Berhard “Section 115VB: For the purposes of this Chapter, a company shall be regarded as operating a ship if it operates any ship whether owned or chartered by it and includes a case where even a part of the ship has been chartered in by it in an arrangement such as slot charter, space charter or joint charter : Provided that a company shall 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.”
27. Though the above definition of “operating of ships” is for the purpose of Chapter–XIIG, however, we are referring only for a limited inference for understanding the concept that “charterer of ships” includes even a part of the ship in an arrangement such as slot charter, space charterer or joint charter. The slot charterer or space charterer in a ship cannot be read in isolation or separate from the meaning of charterer. As held earlier by us, though the decision of the Hon'ble Jurisdictional High Court in Balaji Shipping U.K. Ltd. (supra), cannot be applied in a blanket manner in the present case, however, for the purpose of understanding the meaning of “charter” or “charterer” or “slot charterer”, the said decision gives in–depth analysis which can be adopted in the present case also only for the purpose of assigning the true meaning of the word “charterer”.
Another very important observation made by the High Court which is quite relevant to note is, how the slot charterer agreements or space charterer agreement are inextricably linked with the shipping business in the present day shipping business. The said observations are as under: – “26. An enterprise may not ply the ships owned or chartered or otherwise controlled or managed by it in respect of certain routes. It would however, on account of the business exigencies, be required to carry cargo on such routes. Business expediency could arise on account of a number of reasons and different situations such as obliging regular clients, or cultivating new ones. If it were not to do so, it may well loose clientele. Ships owned or chartered or otherwise controlled or managed by an enterprise may not be available on the particular route on a given day or for a particular period. The enterprise may already have entered into contracts or may even be required to enter into contracts for the carriage of goods on that route on that day or during that period. The trade would expect, the enterprise to perform its contracts and/or ensure there is no break in its services. This it can do by availing slot hire agreements. Their refusal or failure to do so, may well affect their business and reputation adversely.
By availing the facility of slot hire agreements, the enterprise does not arrange the shipment on behalf of the owner of the said vessel, but does so on its own account on a principal to principal basis with its clients. Such cases also have a nexus to the main business of the enterprise of the operation of ships. They are ancillary to and complement the operation of ships by the enterprise. 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.”
From the above observations, it can be understood that the facility of slot hire agreement with the feeder vessels to complete the voyage is not merely an auxiliary or incidental activity to the operation of ships, but inextricably linked. If the transportation 4 1389/M/16-C.O.291/17- MISC Berhard of cargo by feeder vessels belonging to other enterprise is only a part of main voyage by the mother ship i.e., owned or leased by the assessee enterprise, then it has to be taken as a part and parcel of the operation, which is inextricably linked with the completion of the entire voyage. The linkage between the transportation by feeder vessels, mother vessels of the ship owned by the assessee has to be established. In the present case, insofar as the issue of linkage between the voyage performed between the feeder vessels and mother vessels, the assessee has been able to establish before the A.O. which is evident from the observations of the A.O. in Para–7 & 8, wherein he held that the freight earned from carriage of goods in international traffic by operation of ships including feeder vessels operated by 3rd party operator, the assessee has furnished documentary proof to substantiate the linkage between the voyage performed on feeder vessels and mother vessels. The Assessing Officer’s case rests upon the premise that voyage carried on by the feeder vessels has to be segregated for the purpose of allowing benefit under Article–8, because chartering of some space i.e., slot chartering, feeder vessels cannot be equated with chartering of complete ship. By this, the Assessing Officer means that the assessee must have complete control of such ships even under the charter agreement. Thus, the view taken by the Assessing Officer for denying the benefit under the present Article–8 is not tenable as per our discussion in the forgoing paragraphs, that chartering of some space or slot charterer in a ship is actually a part and parcel of charter of a ship. Under the charterer agreement, there is no ownership or control of entire ship because the risk under the charter party agreement or arrangement is upon the owner of the ship who generally assumes an operational risk for transporting the cargo of the person who has hired the ship and the hirer agrees to pay for conveyance of goods on a determined voyage. The risk of the assessee is towards its customers from whom he has agreed to transport the cargo / goods from the destination port of booking to the final destination port. Thus, in our opinion, such a strict interpretation of the word “charterer” as adopted by the Department cannot be sustained.
Now coming to the decision of Cia–De–NavegacaoNorsul (supra), we find that in the said decision, the assessee had failed to link and establish the voyage wise transportation, whether the feeder vessels were actually loading the goods into the mother vessels, which the assessee had claimed that it was operating. This is evident from Para– 2 of the said Tribunal order. Further, as pointed out by the learned counsel, the plea of the assessee that there was a slot charter agreement with the feeder vessel orally was not supported by any material or evidence. It was in this context that this plea of slot charter agreement with the feeder vessel was rejected. Further, in view of the meaning of the concept of charter and slot charter as explained by the Hon'ble Jurisdictional High Court in Balaji Shipping U.K. Ltd. (supra), the said decision may not apply here in this case, particularly when in the said decision, the Tribunal has not discussed what is meant by “charterer” as explained later on by the Hon'ble Bombay High Court. Regarding other decisions relied upon by the learned Departmental Representative which are mainly based on the decision of the Federal Express Corporation (supra), we find that in this case also, the plea of the assessee that it had booked space on Air India’s aircraft and such booking of space amounted to charter of aircraft partly, was rejected on the ground that this was not raised by the assessee before the lower authorities. The Tribunal thus, set aside the issue to the file of the Assessing Officer to examine when a space is booked with other airlines, the question, whether transportation through such airlines can be said to be transportation by aircraft chartered by the assessee or not with reference to the first part of the definition of Article–8(2) with Indo–U.S. treaty. Similarly, the decision of M/s. Simatech Shipping Forwarding LLC, as relied upon by the learned Departmental Representative, will not apply because in this case also, the matter was set aside to the file of the Assessing Officer to decide the case in the light of the decision of the Federal Express Corp. (supra). Similar was the case in United Parcel Service (supra) also. In none of the 5 1389/M/16-C.O.291/17- MISC Berhard decisions, the true import or meaning of the word “charterer” has been taken into consideration as adopted by the subsequent decision of the Hon'ble Jurisdictional High Court.
Thus, in our conclusion, we hold that transportation of cargo in the container belonging to the assessee from Indian Port i.e., Port of booking to the Hub Port through feeder vessel by way of space charter / slot charter arrangement, falls within the ambit of the word “charterer” and, therefore, it cannot be segregated form the scope of “operation of ships” as defined in Article–8(2) of the Indo–Malaysian treaty. In the present case, the voyage between the Indian Port to the Hub Port through feeder vessel and from Hub Port to final destination port through mother vessel owned / leased by the assessee are inextricably linked and there is complete linkage of the voyage and, therefore, the entire profits derived from the transportation of goods carried on by the assessee is to be treated as profits from operation of ships and, therefore, the benefit of Article–8, cannot be denied to the assessee on the part of the freight from voyage by the feeder vessels. Thus, ground No.2, raised by the assessee in all the years under appeal is allowed. Facts and circumstances being identical, respectively following the said decision, we hold that the entire profits derived from the transportation of goods carried on by the assessee is to be treated as profits from operationof ships and therefore the benefit of Article-8 cannot be denied to the assessee on the part of the freight from voyage by the feeder vessels. ThusGround No.1raised by the assessee is allowed.” Respectfully following the above order,we decide the effective ground of appeal against the AO. C.O. No.291/Mum/17 The Representatives of both the sides agreed that in light of orders of the Tribunal for the earlier years (supra),the CO had become infructuous