APL CO. PTE LTD.,MUMBAI vs. ADIT (INT'L TAXATION)-1(1), MUMBAI

The aforesaid appeal has been filed by assessee against impugned order dated 28.3.2013, passed by Ld. CIT(Appeals)- 10, Mumbai for the quantum of assessment passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short „the Act‟) for the Assessment Year 2008-09.In the grounds of appeal, assessee has raised the following grounds:-

“1. On the facts and in the peculiar circumstances of the case and in law, the Hon'ble Commissioner of Income-tax (Appeals) [„CIT (A)‟] erred in making an addition by denying the benefit of Article 8 of India-Singapore Double Taxation Avoidance Agreement ('Tax Treaty') to freight of Rs. 98.66 crores collected by the appellant from 101 vessels which sailed out of India.

2. On the facts and in the peculiar circumstances of the case and in law, the Hon'ble CIT (A) erred in making an addition by denying the benefit of the Tax Treaty to the entire freight of Rs. 1106.89 crores earned by the appellant from its India operations by invoking provisions of Article 24 (limitation of relief) of the Tax Treaty.

3. On the facts and in the peculiar circumstances of the case and in law, the Hon'ble CIT(A) erred in holding that the appellant had failed to comply with the condition of remittance prescribed under Article 24 of the Tax Treaty without appreciating that:

 adjustment of cross claims and settlement on account of set-off tantamount to an actual/constructive receipt in Singapore  money was ultimately remitted to Singapore as certified by the appellant's bankers 4 On the facts and in the peculiar circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the learned Assessing Officer ('AO') in holding APL India Pvt. Ltd. ('APL India") as an agency permanent establishment ('PE') of the appellant in India under Article 5(8) of the Tax Treaty.

5. Without prejudice to the above, the Hon'ble CIT (A) erred in not appreciating that no income of the appellant could be brought to tax in India as the arm's length commission paid to APL India (and accepted by the tax department), which is taxable in India in the hands of APL India, fully

extinguishes the tax liability of the appellant in India.

Notwithstanding the above and:

6. Further to Ground No. 1, the Hon'ble CIT(A) erred in denying the benefit of Article 8 of the Tax Treaty with respect to the following freight collected by the appellant:

 Rs. 63.93 crores from goods transported on 81 vessels (for which connecting carrier agreements were furnished) without appreciating that the appellant was responsible to carry cargo for the entire journey from the port of origin to the port of ultimate destination.

 Rs. 33.37 crores from goods transported on 16 vessels (for which joint service agreement and ship validation certificates were furnished) without appreciating that the appellant was responsible to carry cargo for the entire journey from the port of origin to the port of ultimate destination and, in any event of the matter, these vessels were covered under a pool / joint business arrangement entered into by the appellant within the meaning of Article 8(2) of the Tax Treaty.

 Rs. 1.37 crores from goods transported on 4 vessels (for which documents to the satisfaction of the AO were not furnished) without appreciating that the appellant being in the business of operation of ships in international traffic is entitled to the benefit of Article 8 of the Tax Treaty with respect to its entire freight income.

7. Further to Ground No. 1, the Hon'ble CIT(A) erred in not treating the freight of Rs. 98.67 crores from containers loaded on 101 vessels as income from use / maintenance / rental of containers in connection with transportation within the meaning of Article 8(4)(c) of the Tax Treaty and thereby erred in denying the benefit of Article 8 of the Tax Treaty to the appellant.

8. Further to Ground No. 2, the Hon'ble CIT(A) erred in:

 Not appreciating that Article 24 of the Tax Treaty does not apply to the appellant as the appellant's freight income is taxable in Singapore on accrual basis and not remittance basis i.e. entire freight income is taxable in Singapore irrespective of remittance of freight to Singapore.

 Rejecting the clarification dated 21 February 2013 issued by the Singapore Revenue Authorities as sufficient evidence in support of the accrual basis of taxation of appellant's income in Singapore under the Singapore tax laws as well as the non-applicability of Article 24 of the Tax Treaty to the appellant.

 Wrongly interpreting the provisions of a foreign tax law (i.e. Singapore Income Tax Act and Circulars issued there under) by holding that the freight income cannot be regarded as Singapore sourced income under the provisions of Singapore Income Tax Act and further disregarding the clarification issued by the Singapore Revenue Authorities on the subject.

 Holding that the appellant has filed incorrect tax returns in Singapore although these were duly accepted by the Singapore revenue authorities.

9. On the facts and in the peculiar circumstances of the case and in law, the Hon'ble CIT(A) erred in enhancing the assessment under section 251 of the Income-tax Act, 1961 although she had no powers to do so.

10. On the facts and in the peculiar circumstances of the case and in law, the Hon'ble CIT(A) erred in not adjudicating Ground No. 1.6 and 2.6 raised before her to the effect that the appellant is not liable to interest under section 234B of the IT Act since the appellant was not liable to pay any advance tax on the basis of (a) Double Income Tax Relief Certificate issued by the Tax Department itself and (b) the fact that freight income of the appellant was tax deductible at source having regard to the specific provisions of section 209(1)(d) of IT Act.”

Sr. No. Name of the Gross Receipt Detention Charges ship Rs. Rs. 1 Conti Germany 84,80,169 - 2 Howrah Bridge 3,00,696 85,467 3 Rajiv Gandhi 1,17,967 - 4 SathaBhum 47,04,892 - 5 TS Nagoya 30,41,420 - 6 Ninos 24,66,622 89,607 7 San Isidro 3,01,568 8 IthaBhum 33,36,428 63,896 2,27,49,762 2,38,970

Gross receipt and detention Rs.11,04,58,63,611/- charges from shipping business excluding the receipt on which DTAA relief is not granted 7.5% of the above as per Rs.82,84,39,711/- Sec. 44-B of the Act Tax payable @ 40% on the Rs.33,13,75,908/- income Relief under DTAA Rs.33,13,75,908/- Income estimated as per Rs.22,98,873/ Rule 10 in respect of 8 ships on which benefit of DTAA not granted Total income Rs.22,98,873/ Rounded off to Rs.22,98,870/

4. Against the said order, assessee preferred an appeal before the ld. CIT(A) whereby the ld. CIT(A) has enhanced the income, firstly, by holding that benefit of Article 8 cannot be given in respect of total freight of Rs.98.67 crores on the ground that there is no linkage between the feeder vessel and mother vessel for transportation of cargo as they have been transported through third party under Charter Party agreement and; secondly, she proceeded to denythe entire exemption/benefit of Article 8 by holding that the entire freight of Rs.1106.89 crores is to be assessed in India by invoking the limitation clause of Article 24 of India-Singapore DTAA. Now, against the first appellate order assessee has raised various grounds and also various contentions which we shall discuss hereinafter.

5. To put it succinctly, out of total freight receipts of Rs.1106.89 crores from 136 ships, the Assessing Officer has given the benefit of Article 8 in respect of 128 ships for total freight of Rs.1104.58 crores and held that the same is not taxable in India. For the balance 8 ships, for total freight of Rs.2.29 crores, AO denied the benefit of Article 8. Fromthe first appellate stage, the ld. CIT(A) first denies the benefit of Article 8 quathe freight receipts aggregatingRs.98.67 crores and thereafter, the entire freight of Rs.1106.89 crores has been held to be assessable in India by invoking Article 24.

6. Since the ld. CIT (A) has denied the entire benefit of Article 8 by invoking the provision of Article 24 of India-Singapore DTAA and has taxed the entire freight receipt in India, therefore, we are taking up at the first,the issue of Article 24 for adjudication. The relevant observations and findings on this aspect by the ld. CIT (A) appears from pages 20 to 56 of the impugned order, wherein she has elaborately dealt and discussed the issue. In sum and substance, her relevant findings and key observations are summarized in the following manner:-

i) On applicability of Article 24:-

• Freight income is earned from export of goods from India, i.e., source of freight income is located in India. The freight income accrues in or is derived from India and it cannot be said to accrue in or derived from Singapore.

• Under section 10(1) of the „Singapore Income Tax Act‟ (SITA), tax is levied on income that accrues in or is derived from Singapore and also on income, that is, received in Singapore from outside Singapore. Freight income from India does not accrue in Singapore so it can be taxed in Singapore only if it is received in/ remitted to Singapore. ii) On nexus between remittance of freight collected in India and finally remitted to Singapore:-

• No nexus / direct link between freight collected from India and amount finally remitted to Singapore by group entity.

• The freight collected from India is initially merged with freight remittances from other countries in the central bank account of the assessee maintained in New York.

• Thereafter the funds are remitted from the assessee's New York bank account to APL Bermuda's New York bank. Here again the funds get merged with the other funds of APL Bermuda which are maintained in its New York bank account. Hence, there is no basis to conclude that any remittance made by APL Bermuda from its New York bank account to its Singapore bank account is out of Indian freight.

• Due to the semi- territorial system of taxation adopted by Singapore, it has similar limitation of relief clause in its tax treaties with many countries. The assessee must establish a direct link between Indian freight and receipt in Singapore.

• It may be also possible that funds remitted from APL Bermuda's New York bank account to its Singapore bank account pertains to freight collected from various countries and not India. iii) On constructive receipt of Indian freight by assessee, whether in Singapore or in New York:-

• Concept of constructive receipt can be used only to decide whether an item of income has been received or not. However, the concept has no relevance in deciding place of receipt.

• Even if it is presumed that Indian freight was used to discharge liabilities of the assessee, the said discharge has taken place in New York and not in Singapore. iv) On deemed receipt of Indian freight in Singapore as per SITA - Indian freight cannot be deemed to be received in Singapore:-

• As per Article 3(2) of the Tax Treaty, terms not defined in the Tax Treaty have to be interpreted by referring to the definition contained in the domestic law of the country applying the DTAA (i.e. India). Therefore, there is no basis for referring to the provisions (i.e. Section 10(25)) contained in SITA for interpreting a term received / remitted contained in Article 24 of the DTAA.

• Even if clause (b) of Section 10(25) of SITA is assumed to be applicable, it requires that income should be applied towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore. In case of the assessee, the assessee carries on business partly in Singapore and partly outside Singapore and any debt (charter hire charges payable to APL Bermuda for charter of ships) incurred cannot be presumed to relate only to Singapore business. Ships chartered by the assessee from APL Bermuda are used not only for Singapore activity but for entire global operations. Charter hire charges are attributable to the global operations of the assessee.

• Hence, discharge of debt does not amount to discharge of debt incurred in respect of a trade or business carried on in Singapore. v) On applicability of Article 24 to income covered by Article 8

• The Assessee's contention that Article 24 applies only to incomes which are 'exempt from tax' and not to incomes which are 'taxable only in one state', by making a distinction between the wordings used in Article 24 and Article 8 of the DTAA, is rejected holding that Art.24 applies only to income which accrues outside Singapore and is not remitted to Singapore.

• Reliance placed by the assessee on the decision of Mumbai Tribunal in case of Set Satellite Singapore (Pte) Ltd is distinguishable, albeit the Assessee's case is covered by the decision of the Mumbai Tribunal in case of Thoresen Chartering Singapore Pte Ltd. vi) On accrual of (Indian) freight income in Singapore and taxability on accrual basis and not on remittance basis in Singapore, Ld. CIT(A) held that - Freight income accrues in India.

• Argument of the Assessee that the freight income from India has accrued in Singapore because income accrues where control and management is exercised, is totally contrary to the settled position of law in India regarding interpretation of the term 'accrual'.

• The Assessee is essentially rendering a service of transportation. In the case of provision of services, the income accrues at the place where the services are rendered.

• It cannot be said that transportation of goods which start from Indian ports and passes through the international waters to the destination port, is performed in Singapore. vii) On certificate issued by IRASingapore, she held that it does not have any persuasive value as it does not have independent reasoning:-

• The letter issued by the IRAS confirming that freight income of the assessee from its Indian operations has accrued in or derived from a business carried on in Singapore cannot be relied upon since:

 It is not clear under which provision of Singapore law such letter was issued.  It is not a circular issued by the IRAS.  It can be regarded just as an opinion not backed by any statutory authority.  It cannot be treated as conclusive evidence [para 95, page 49]

• Their opinion is based on the assumption / reasoning that if a business is partly carried on in Singapore and partly outside Singapore, the entire income of the business will still accrue only in Singapore because the control and management of the business is situated there.

• This assumption is wrong as the place of accrual of income depends on the nature of the transaction generating the income and not the place of control and management.

• If the reasoning based on control and management is accepted as correct then in all cases of a Singapore resident company, their global income will accrue in Singapore and hence Article 24 will not apply to any Singapore company. viii) On application filed by Appellant for obtaining tax residency certificate and Circular issued by IRAS - Appellant has stated nature of income as "freight derived from India":-

• Singapore has prescribed a standard form for applying for TRC. In this form, the assessee has specified the nature of income for which TRC is sought as 'freight derived from India'.

• Singapore has issued a public circular dated 30th May 1998 which was revised on 15th March 2005 and again on 2nd May 2006 on the subject of TRC. At Paras 6-10, the circular explains that TRC will be issued only when assessee has received the amount in Singapore for which Tax Treaty relief is asked for. ix) On tax return filed in Singapore - Freight income claimed as exempt in Singapore, no liability incurred by (wrongly) including freight income in the Singapore tax return:-

• From the Singapore Return, it is seen that the entire income has been claimed as exempt and no tax is really payable in Singapore based on the Return. Hence the assessee incurs no liability by wrongly including the freight income from India in the return of Singapore. Similarly, the lRAS cannot tax the shipping income in any event and their acceptance of a Nil return does not establish that income has accrued in Singapore. x) Conclusion on Article 24 – summary:-

• The language of Article 24 is categorical and it provides in clear terms that income for which relief is claimed under the DTAA in India has to be received in or remitted to Singapore. Thus nexus has to be established which the assessee has not shown in this ease.

• The requirement of nexus between the Indian Freight and the remittance in Singapore is all the more important because Singapore has similar limitation on relief clause in its DTAA with various other countries.

• The onus is on the assessee to produce proper evidence to show that the income has been received in Singapore. The evidence produced must be clear and unambiguous, leaving no room for doubt. If the evidence is in the form of a certificate, it must not be couched in vague and guarded language such that interpretation of the certificate becomes an issue.

• Receipt in Singapore must be by the assessee only because the language of article 24 is precise and receipt by or behalf of the assessee is not covered by it.

• Further even if the principle of constructive receipt is applied it cannot waive the requirement of receipt of income in Singapore. A payment to a creditor of the assessee can be regarded as receipt by the assessee, only when before payment, the income is remitted to Singapore. However APL Bermuda (creditor of the assessee) has been paid off in New York and not in Singapore. Hence condition of receipt in Singapore is not fulfilled in this case.

• The freight income accrues in India in accordance with the Law laid down by Supreme Court in India. The accrual is in India even in accordance with the source rule contained in Singapore Tax Laws.

• The letter issued by the Singapore tax authorities does not have any persuasive value as it does not have independent reasoning.

• When freight is not remitted to Singapore the assessee is not liable to tax on the said freight in Singapore

• A wrong inclusion in the return of income in Singapore of income on which the assessee is not liable to tax in Singapore does not bar the Indian authorities from concluding that the assessee was not liable to tax in Singapore on that income. More so when such Income is thereafter exempt in Singapore.

• India Singapore DTAA has been held to be a 'subject to tax" DTAA in the case of Thomsen Chartering (supra) by the ITAT to the extent that DTAA benefits are extended only if the funds are remitted to Singapore and the assessee is subjected to tax in Singapore. Therefore, when the funds are not remitted to Singapore the assessee is neither liable to tax in Singapore nor can he be subjected to tax there.

• When a person is not liable to tax and hence cannot be subjected to tax in Singapore the benefit of DTAA has to he denied as per Article. 24. Mistaken inclusion of such income in a return and thereafter exempting the same is of no relevance.

• The assessee has relied on the decision of the SC in the case of AzadiBachaoAndolan to submit that DTAA benefit should be extended to it. The said decision is not applicable because it considers Article 4 of India Mauritius DTAA which provides that a person is a resident of a contracting state if he is liable to unlimited taxation his global income there. Since Singapore does not tax overseas income of its residents unless remitted to Singapore, article 4 of India Singapore DTAA is differently worded, and has to read with article 24. In this case DTAA benefit is not being denied because assessee is not considered as a resident of Singapore but rather in terms of article 24 of the DTAA. It was particularly noted by the SC in AzadiBachaoAndolan that there was no Limitation of Benefit provision in India- Mauritius DTAA.

“Article 24: Limitation of relief – 1. Where this Agreement provides (with or without other conditions) that income from sources in a Contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State.

2. However, this limitation does not apply to income derived by the Government of a Contracting State or any person approved by the competent authority of that State for the purpose of this paragraph. The term "Government" includes its agencies and statutory bodies."

The aforesaid Article provides a limitation on relief provision related to remittance basis of taxation which is applied in few countries like Singapore and United Kingdom. Under the remittance basis of taxation, income arising outside the country is taxable not when the income is earned or arises or is derived, but only when that income is remitted to and received in the resident country. In Singapore, the resident companies are generally taxed on income accruing in or derived from Singapore on accrual basis, however, income accruing or derived from outside Singapore is taxed on remittance basis. This is the consequence of Sec. 10(1) of Singapore Income Tax Act, which reads as under:-

“Charge of income tax: 10 – (1) Income tax shall, subject to the provisions of this Act, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore in respect of-

(a) gains or profits from any trade, business, profession or vocation, for whatever period of time such trade, business, profession or vocation may have been carried on or exercised” (Emphasis added is ours)

If we analyse the relevant phrases used in Article 24, it is quite apparent that two conditions have been envisaged that needs to be fulfilled; firstly, income earned from the source state (here in this case, India) is exempt from tax or is taxed at a reduced rate in the source state (India) as per the DTAA; and secondly, under the laws in force of the resident state (Singapore), such income is subject to tax by reference to the amount thereof which is remitted to or received in the resident state and not by reference to the full amount thereof. If both the conditions are satisfied, then only the exemption is allowed or the reduced rate of tax is levied on the amount so remitted. The key phrases which need to be borne in mind while understanding Article 24 is “under the laws in force in other contracting state” (Singapore). Here, in this case, the income of assessee-company from shipping operations is not taxable on remittance basis under the laws of Singapore, albeit is liable to be taxed in-principle on accrual basis by virtue of the fact that this income under the income tax laws of Singapore is regarded as “accruing in or derived from Singapore”. The shipping income from overseas is not treated as foreign income because it is accrued in and derived from Singapore. From the plain reading of Sec. 10(1) of Singapore Income Tax Act it can be inferred that firstly, the tax is on income accruing in or derived from Singapore and it is completely irrelevant whether the income is received in Singapore or not and; secondly, where the income is accrued or is derived from outside Singapore, the liability to tax arises on such foreign income only if the foreign income is received in Singapore. It has already been brought on record and also it is an undisputed fact that the Singapore Income Tax Act requires that the shipping enterprises should file their statement of each year of assessment for the amount of income derived from its operations of Singapore or foreign ships in Singapore. The entire income is to be disclosed in the return of income and the statement is issued when the Comptroller of Income-tax is satisfied that a company has correctly reported its income accrued in or derived from Singapore from its business carried on in Singapore. We have already perused the copy of the return of income along with the computation filed with the IRAS for the year ending on 31.12.2008, relevant for Assessment Year 2008- 09, copy of which is appearing from pages 23 to 30 of the paper book. In the said return, the column mentioning the foreign income received in Singapore has been reported to be „NIL‟, whereas income accruing in or derived from Singapore has been shown at SGD 2,207,928. A confirmation/Certificate has also been obtained from IRAS, the content of which is reproduced hereunder:-

“Dear Sir/Madam

APL Co. Pte Ltd. (“the company”) FREIGHT INCOME YEARS OF ASSESSMENT (“YAs”) 2008 & 2009

1. We refer to our discussions on the subject.

2. You have stated that the company is primarily engaged in shipping and related businesses and it receives freight payments for its services. During calendar years 2007 and 2008, the company derived freight income

from third parties including freight income from Indian operations, that is, income from the carriage of goods/cargo to and from Indian ports. The company has reported the freight income in its Singapore tax returns for the YAs 2008 and 2009.

3. You wish to seek our clarification to the effect that Article 24(1) of the India-Singapore double taxation agreement (DTA) is not applicable to the freight income derived from Indian operations.

4. The freight income derived by the company from Indian operations was accrued in or derived from a business carried on in Singapore. As such, it was regarded as Singapore sourced income and assessed to tax in Singapore on accrual basis (i.e. not remittance basis) in the YAs 2008 and 2009.

Yours faithfully

LAU KIAT PENG (MS) SENIOR TAX OFFICER CORPORATE TAX DIVISION for COMPTROLLER OF INCOME TAX”

[Emphasis added is ours] From the aforesaid Certificate/Confirmation given by IRAS, it is ostensibly clear that the freight income derived by the assessee- company from the Indian operations was accrued in or derived from business carried on in Singapore. As such, it is regarded as Singapore sourced income and assessed to tax in Singapore on accrual basis and not on remittance basis. In light of this Certificate, there cannot remain any iota of doubt that the freight income derived by assessee-company from Indian operations in terms of Singapore Income Tax Act is to be reckoned as accrued in or derived from business carried in Singapore and not some kind of foreign income which is to be taxed on remittance basis. The authenticity of the aforesaid Certificate had come up for consideration before the Hon'ble Gujarat High Court in the case of India-Singapore DTAA and that too, in the case of a shipping company, M.T. Maersk Mikage vs. DIT (IT) (supra).The relevant observations of Hon‟ble Court are reproduced hereunder:-

“15. This brings us to the core issue strenuously debated by both sides viz. that of applicability of Article 8 vis-a-vis Article 24 of DTAA. We may quickly refresh the facts. ST Shipping is a company based in Singapore. Through the shipping business carried out at Indian ports, ST Shipping earned income, on which, it claims immunity from Indian income tax. The Revenue contends that the remittance of such accrued income not having taken place at Singapore, Article 24 will apply and consequently Article 8 providing for avoidance of table taxation would not apply.

certificate and this declaration is that the income would be charged at Singapore considering it as an income accruing or derived from business carried on in Singapore. In other words, the full income would be assessable to tax on the basis of accrual and not on the basis of remittance. This certificate was before the Commissioner while he passed the impugned order. The contents of this certificate were not doubted. If that be so, what emerges from the record is that the income in question would be assessable to tax at Singapore on the basis of accrual and not remittance. This would knock out the very basis of the Assessing Officer and Commissioner for invoking clause-1 of Article 24 of DTAA. Both the authorities considered the question of remittance of income as the sole requirement for invoking Article 24.1 of DTAA an interpretation which according to us does not flow from the language used. As noted the essence of Article 24.1 is that in case certain income is taxed by a contracting State not on the basis of accrual, but on the basis of remittance, applicability of Article 8 would be ousted to the extent such income is not remitted. This clause does not provide that in every case of non- remittance of income to the contracting state, Article 8 would not apply irrespective of tax treatment such income is given. When in the present case, we hold that the income in question was not taxable at Singapore on the basis of remittance but on the basis of accrual, the very basis for applying clause-1 of Article 24 would not survive. The contention of Shri Mehta for revenue that the certificate of the Singapore revenue authorities is opposed to provisions of section 10 of the Singapore Income Tax Act also cannot be accepted. The Revenue does not question genuineness of the certificate. It cannot dispute the contention on the ground that the same are opposed to the statutoryprovision.

19. By way of a reference, we may notice that the Tribunal also in case of this very assessee in case of Alabra Shipping Pte Ltd. v. Income-tax Officer - International Taxation, Gandhidham, reported in 62

Taxmann.com 185 has taken a somewhat similar view by observing as under:

"6. As a plain reading of Article 24(1) would show, this LOB clauses comes into play when (i) income sourced in a contracting state is exempt from tax in that source state or is subject to tax at a reduced rate in that source state, (ii) the said income (i.e. income sourced in the contracting state) is subject to tax by reference to the amount remitted to, or received in, the other contracting state, rather than with reference to full amount of such income; and (iii) in such a situation, the treaty protection will be restricted to the amount which is taxed in that other contracting state. In simple words, the benefit of treaty protection is restricted to the amount of income which is eventually subject matter of taxation in the source country. This is all the more relevant for the reason that in a situation in which territorial method of taxation is followed by a tax jurisdiction and the taxability for income from activities carried out outside the home jurisdiction is restricted to the income repatriated to such tax jurisdiction, as in the case of Singapore, the treaty protection must remain confined to the amount which is actually subjected to tax. Any other approach could result in a situation in which an income, which is not subject matter of taxation in the residence jurisdiction, will anyway be available for treaty protection in the source country. It is in this background that the scope of LOB provision in Article 24 needs to be appreciated."

desired to impose tax in India. In this context, the petitioner has relied on the decision of Delhi High Court in case of Emirates Shipping Line, FZE (supra), in which it was held that the assessee, a UAE based shipping company, whose income from such business was exempt from tax in such country, would still not be liable to pay tax in India by virtue of Article 8 of the DTAA between the said two countries. It was held that a person does not have to actually pay taxes in other country to be entitled to benefit of DTAA. We may notice that a somewhat similar issue came up before this Court in case of Director of Income- Tax (International Taxation) v. Venkatesh Karrier Ltd. reported in 349 ITR 124,-inwhich the Court observed as under:

"10. After taking into consideration the above circulars issued by the Board and also the provisions contained in Article 8 of the DTAA, we find that both the Tribunal below and the CIT [Appeals] rightly held that in such a situation, the owner of the ship being admittedly a resident of UAE, there was no scope of taxing the income of the ship in any of the ports in India. The agreement between the two countries has ousted the jurisdiction of the taxing officers in India to tax the profits derived by the enterprise once it is found that the ship belongs to a resident of the other contracting country and such position has also been clarified by the Circulars issued by the Board as indicated above."

The aforesaid judgment of Hon'ble Gujarat High Court clearly clinches the issue in favour of the assessee, wherein the Hon‟ble High Court has categorically held that the shipping income is not taxable in Singapore on the basis of remittance, but on accrual basis and, therefore, para 1 of Article 24 would not be applicable. Here, in this case also, the Hon‟ble Court has heavily relied upon the confirmation letter/Certificate issued by IRAS which confirmed the taxability of global shipping income in Singapore on accrual basis. Their Lordships have also referred to the Rajkot Bench of the Tribunal in the case of Alabra Shipping Pte Ltd., (supra), which also lays down the same proposition. Thus, the conclusion and finding of ld. CIT (A) stands negated by these decisions and same is rejected. Further in light of the Hon‟ble High Court judgment, the reliance on the decision in DIT (IT) vs. Thoresen Chartering Singapore (Pte.) Ltd. (supra) as heavily relied upon by ld. CIT (A) and Ld CIT DR, no longer holds good.

i) DDIT vs. Cia de NavegacaoNorsul Brazil, [2009] 121 ITD 113 (Mum); ii) ACIT vs. Federal Express Corporation, [2010] 125 ITD 1 (Mum); iii) Jt. DIT vs. ANL Container Line Pte. Ltd.; and iv) Delta Airlines vs. ADIT, [2010] 124 ITD 114. After referring to these decisions, she observed that the following principles emerge while interpreting the provisions of Article 8 in India-Singapore DTAA:-

“(i) If the term „operation of ship‟ is not defined at all in the DTAA, a broad interpretation of the Article can be made in those cases. The India-UK DTAA is an example of such a case.

(ii) Where the term „operation of ship‟ is defined as transportation of goods in vessels owned, leased or chartered by the enterprise, the benefit of article 8 can be extended only if the transportation is done by the enterprise by operation of ships that are owned, leased or chartered by it.

(iii) Where the term „operation of ship‟ also covers “any other activity directly connected with such transportation”, the freight booked through feeder vessels will be eligible for DTAA benefit only when the goods transported through feeder vessels are further trans-shipped through mother vessels operated by the assessee. The assessee has to link the goods in the feeder vessels with mother vessels operated by it, to claim benefit.”

She further observed that 81 vessels were under the „connecting carrier arrangement‟ which are generally termed as feeder vessels where only space is given to the assessee on adhoc basis by the feeder operator and such transportation of goods through feeder vessel do not fulfil the requirements of Article 8 because these feeder vessels are not owned, leased or operated by the assessee. Regarding the other 16 ships, she observed that though these ships were claimed to be under Joint Service agreement, however, the assessee had produced Ship Validation Certificate, which are only of feeder operators. It does not refer to any Joint Service agreement. Hence, solely based on such Ship Validation Certificate, DTAA benefit cannot be extended to the assessee. She further noted that the assessee had explained that in all 211 mother vessels were used to transport the goods from 97 feeder vessels. However, the assessee was able to show that only 60 vessels out of the 211 mother vessels used it to further transport the goods were operated by it. In respect of this freight the assessee is eligible for DTAA benefit in terms of clause (d) of para 4 of Article 8 of the DTAA. Based on her observation, she denied the benefit of Article 8 of on the freight receipts of Rs.97,29,89,746/- in the following manner :-

Sr. Name of Agreement/ No of Collections Collections Freight + No. Vessel name ship (Mother Vessel (Mother Vessel Detention s Documents Documents not submitted) submitted) I Non-Exclusive 81 136,51,47,435 63,93,43,868 200,44,91,303 Connecting Carrier Agreement (Includes 4 ships for which addition made by AO) II Ship Validation 16 30,84,44,733 33,36,45,878 64,20,90,611 Certificate TOTAL 97 167,35,92,168 97,29,89,746 2,64,65,81,914 III No Documents 04 1,36,89,191 1,36,89,191 (Addition made by AO) TOTAL 101 167,35,92,168 98,66,78,937 2,66,02,71,105

16. From the facts and observations made by ld. CIT(A) as discussed above, it is seen that the main ground for denying the benefit of Article 8 in respect of certain ships by her is that firstly, the entire leg of journey has not been done through a vessel which is owned, leased or chartered by the assessee, i.e., it has been done through feeder vessels and; secondly, in respect of certain ships there was only Joint Service agreement with the feeder vessel, i.e., there was no use of any mother vessel owned by the assessee. She has mainly relied upon the definition of Article 8 as given in India-Singapore DTAA to come to the conclusion that operation of the ships in international traffic should be carried on by the owners or lessees or charterers of the ships. In the case of journey, part or full journey by feeder vessels under slot charter arrangement does not fall within the scope of good carried by the owners, lessee or charterer of ships, therefore, benefit of Article 8 cannot be given and for this proposition she had relied upon certain coordinate bench decisions. Again this aspect of the issue she has inferred from para 4 of Article 8. For the sake of ready reference the relevant provision of Article 8 under India-Singapore DTAA reads as under:-

“Article 8: Shipping and air transport

2. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency engaged in the operation of ships or aircraft.

3. Interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 shall not apply in relation to such interest.

The key phrases on which heavy reliance has been placed are “operation of ships, transportation by sea or air carried on by the owners or lessees or charterers of the ships”. This precise matter of the issue had come up for consideration before this Bench in the case of MISC Berhad (supra), wherein on interpretation of Article 8 of Malaysia India-DTAA, which contains a similar phraseology, it was observed and opined 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. Ramanatha Ayier, 2ndEdn.), 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:– 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. Ramanatha Aiyar (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.”

25. 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.”

From the above analysis of these phrases, the Tribunal had come to the conclusion that the definition of “operation of ships” also alludes to the concept of charterer of ships, which even includes part of ship in an arrangement such as slot charter, space charter or joint charter. The slot charter and space charter of a ship cannot be segregated or read in isolation from the meaning of „charterer‟ as appearing in para 4 of Article 8. The Hon'ble Jurisdictional High Court in the case of Balaji Shipping U.K Ltd. (supra) has clearly explained the concept of slot charter. The relevant observations of the Hon'ble Court reads as under:- “24. Slot hire agreements have been and remain a regular feature of the shipping industry for decades. Whether they constitute a charter of a portion of a ship or not is a different matter. In a case of the first type, 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.

“12. Before referring to the provisions of the Act and the DTAA, it is necessary to understand the nature of connecting carrier Agreements which provides for the hire of container slot spaces. In Maritime Law (6th Edition) the author Christopher Hill states:–

SLOT CHARTER PARTIES

This has reference to the carriage of containers, or to use current jargon, TEUs (20 foot equivalent units). The ship owner or operator “rents out” or hires a “piece” of space (a percentage of the total space available on the vessel) for carrying TEUs in return for which he receives hire calculated in accordance with the number of slots

(accommodation for each TEU) payable whether or not those slots or spaces are actually used.

In his judgment in the Tychy (1999) 2 Lloyd‟s Rep.21) Clarke L J said “...... there is no distinction in principle between a slot charter and a voyage charter of a part of a ship. They are both in sense charterers of a space in a ship. A slot charter is simply an example of a voyage charter of part of a 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.” [Emphasis added] The observations of the Hon‟ble High Court may be general but is universally applicable wherever interpretation of „operation of ships‟ is required, because their Lordships have explained the concept of „operation of ships‟ qua slot/space charter arrangements with third party, especially as explained in para 26 & 27 of the judgment (as reproduced above). Once the word „Charter of a ship‟ is reckoned or understood as slot/space charter arrangement or joint service arrangement with third party, then it would be too myopic to restrict the meaning of „operation of ships‟ only to the journey undertaken as owner or lessee or charterer of a ship either for whole leg of journey or part of journey. There is no stipulation under Article 8 that wherever passengers or cargos etc. are transported under charter arrangement with third party which includes slot or space charter, then, one leg of journey should be on vessel owned or leased by the shipping or Aircraft Company. As mentioned above, the word “Charterer” will include third party/joint service arrangement of slot or space in a ship and hence the transportation under such arrangement will be reckoned as profit from operation of ships. Thus, we agree with the contentions of the ld. Senior Counsel that even if the entire leg of journey is undertaken by a shipping company through and through charter arrangement or joint service arrangement, the benefit of Article 8 cannot be denied, because it will still fall within the ambit and scope of „operation of ships‟ under Article 8 (even under India- Singapore DTAA).

17. So far as the issue of establishing linkage between transportation by feeder vessel and mother vessel of the ship owned or leased by the assessee, as discussed in the decision of MISC Berhad (supra), which has been heavily relied upon by the ld. CIT-DR, we find that in that case the benefit of Article 8 was denied to part of the shipping journey which was carried through feeder vessels under slot charter arrangement with third party despite the fact that Assessing Officer himself has given a finding that there was a linkage between the transportation cargo by feeder vessel belonging to other enterprise to the main voyage carried out by the mother ship owned by the assessee. The assessee in that case had established that there is a linkage between the transportation right from the Indian port to hub port by the feeder vessel and from hub port to mother vessel and then to the final destination port. The only controversy involved there was, whether part of the journey from Indian port to hub port through feeder vessel was eligible for benefit of Article 8 or not, to which the Tribunal has decided the matter in favour of the assessee as discussed above. It was in this context the Tribunal has observed that the linkage between transportation by feeder vessel and mother vessel was established and therefore, benefit of Article 8 cannot be denied. The decision as relied by the ld. CIT(A) has also been discussed and distinguished by the Tribunal in the case of MISC Berhad (supra). Therefore, we are not adjudicating the applicability of said decisions separately because, now in the wake of decision of Hon'ble Jurisdictional High Court in the case of Balaji Shipping U.K Ltd. (supra), these judgments are no longer applicable. Once it is held that chartering includes slot charter, space charter and it falls within the ambit of „operation of ships‟, then the benefit of Article 8 cannot be denied simple on the ground that the transportation has been done either partly or fully through slot charter arrangement or joint charter arrangement, etc. Thus, in view of our discussion above, we hold that so far as denial of benefit of Article 8 in respect of 97 ships for sums aggregating to Rs.97,29,89,746/- is not justified and we direct the Assessing Officer to give the benefit of Article 8 in respect of 97 ships, which has been denied by the CIT(A).

18. So far as the freight receipt of Rs.1,36,89,191/- in respect of 4 ships is concerned, it is an admitted fact that no evidence whatsoever or documents could be furnished by the assessee either before the Assessing Officer or the CIT(A) or even before us and, therefore, we hold that to the extent of freight receipt of Rs.1,36,89,191/-, the benefit of Article 8 will not be available to the assessee and same is directed to be taxed in India under the relevant statutory provisions. Thus, the issue relating to benefit of Article 8 is decided partly in favour of the assessee.

20. As regards the issue raised with regard to allowability of interest u/s 234B of the Act, it is admitted by both the parties that the issue is covered in favour of the assessee by the decision of the Jurisdictional High Court in the case of NGC Network Asia LLC, 313 ITR 187 (Bom.). Accordingly, in view of the admitted position, we hold that the assessee is not liable for levy of interest u/s 234B of the Act.

Order pronounced in the open court on 16th February, 2017.