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Income Tax Appellate Tribunal, MUMBAI BENCH “L”, MUMBAI
Before: SHRI G.S.PANNU & SHRI AMARJIT SINGH
ORDER PER G.S.PANNU,A.M:
The captioned appeal filed by the assessee pertaining to assessment year 2010-11 is directed against the order of the Asstt. Director of Income Tax (International Taxation)-1(2), Mumbai (in short the Assessing Officer ) passed under section 144C(13) r.w.s. 143(3) of the Income Tax Act, 1961 ( in short the Act) dated 31/01/2014 , which is in conformity with the direction of the Dispute Resolution Pannel-1, Mumbai dated 02/12/2013.
In this appeal, assessee has raised the following Grounds of appeal:-
“1. On the facts and in the circumstances of the case and in law, the Learned Assessing Officer ('ld. AO'), based on the directions of Dispute Resolution Panel - III (‘DRP'), grossly erred in denying the exemption under Article 8 of the India-China DTM in respect of freight income of Rs. 25,09,369/- arising to the Appellant from operation of ships in the international traffic in the cases where part of the operations are carried out through feeder vessels.
2. On the facts and in the circumstances of the case and in law, the Ld. AO, based on directions of DRP, grossly erred in holding that Appellant need to establish the cargo- wise linkage between feeder vessel and mother vessel (owned / leased / chartered by Appellant) to be eligible for exemption under Article 8 of the India-China DTAA in the cases where part of the operations are carried out through feeder vessels.
3. On the facts and in the circumstances of the case and in law, the ld. AO, based on directions of DRP, grossly erred in applying the provisions of Rule 10 of the Income-tax Rules, 1962 to the Appellant's case and presumptively determining Appellant's profit to be 10 percent of gross freight and incidental receipts and thereby completely ignoring the provisions of section 44B of the ITA.
4. On the facts and in the circumstances of the case and in law, the Ld. AO, based on directions of DRP, grossly erred in treating M/s Cosco (I) Shipping Pvt. Ltd as a Permanent Establishment of the Appellant as per Article 5 of the India-China DTAA.”
Although multiple Grounds of appeal have been raised, but the dispute is essentially relating to the denial of exemption claimed by the assessee in terms of Article -8 of the India-China Double Taxation Avoidance Agreement (DTAA) in respect of a freight income of Rs.25,09.369/- arising from operation of ships in the international traffic in the cases where part of the operations are carried out through feeder vessels.
3.1 In order to appreciate the background of the dispute, the following discussion is relevant. The appellant before us is a tax resident of China and is engaged in the business of operation of ships in international traffic. For the assessment year under consideration, assessee company filed a return of income declaring total income of Rs.7,82,24,132/-, which was claimed as fully exempt on the strength of Article-8 of the Indo-China DTAA. In principle, there is no dispute between the assessee and the Revenue that income earned by the assessee from carrying on shipping business is not liable to be taxed in India on the strength of the provisions of Article-8 of the DTAA between India and China and such position were accepted in past assessment years also. The dispute in this appeal is confined to one segment of freight earnings of the assessee of Rs.25,09,369/-, on which the exemption has been denied by the income-tax authorities on the ground that there was no evidence to establish the linkages between feeder vessel and mother vessel in respect of such freight earnings. In order to understand the rival stands on this aspect, we may bring out the factual matrix, albeit, more elaborately in the following words.
3.2 As noted earlier, assessee is engaged in the business of operation of ships in international traffic. The vessels owned or chartered or leased or under the pooling arrangement of the assessee undertake carriage of goods from/to the Indian ports. The assessee company earned freight and other incidental incomes such as detention charges, terminal handing charges, etc. in respect of the cargo exported from India as well as from the cargo imported into India while carrying out the business of operation of ships. On certain occasions, the cargo is transported from the Indian port to the hub port in third party feeder vessels and from the hub port to the port of final destination in mother vessels which are owned or chartered or leased or under pooling arrangement with the assessee. Similar arrangement also exists in vice-versa cases. At the stage of passing of draft assessment order under section 144C r.w.s. 143(3) of the Act dated 28/03/2016, the Assessing Officer proposed to deny the exemption claimed under Article-8 of the DTAA between India and China on two aspects. Firstly, in relation to the freight earnings from Chennai and Kolkotta ports amounting to Rs.1,84,20,955/-, the Assessing Officer contended that assessee had failed to establish linkage between feeder vessels and mother vessels i.e. vessels which are owned or leased or chartered by the assessee. Secondly, in case of freight earnings from Mumbai port amounting to Rs.64,11,75,833/-, the Assessing Officer denied the exemption on the ground that assessee could not furnish the requisite details. In this manner, in the draft assessment order the Assessing Officer computed Rs.6,59,59,479/- as taxable income by treating assessee’s company’s Indian agent as Permanent Establishment (PE) and attributing profits to such PE @ 10% of such receipts considered to be taxable in India (i.e. Rs.65,95,96,788/-). The assessee company had carried the matter before the DRP, who vide its order dated 02/12/2013 gave certain directions to the Assessing Officer for finalizing the assessment, which read as under:-
“2.5.2 It is seen that the benefit of Article 8 has been denied by the Assessing Officer to the assessee either on account of non production of details or non-verification thereof. For the allowability for such benefit under the treaty, the Ld.ARs before us contended that such details and documents being very voluminous were not submitted before the Assessing Officer and submission of documents and details were on sample basis only. However, had the AO asked for submission/production of all the details/documents to establish cargo wise connectivity between feeder vessel and mother vessel, the same could have been produced in all cases. 2.5.3 Before the DRP the Ld. ARs of the assessee stated that they are in complete readiness to produce details for any verification. It was noted that the Ld. ARs of the assessee had come with voluminous primary documents for their submission/verification. Accordingly, we deem it fit to direct the AO to verify such details/ documents in respect of Mumbai Port and in respect of Feeder Vessel – Mother vessel connectivity towards the cargo in whatsoever manner he demands passing the final assessment order. If the AO is satisfied in respect of the details that he wished to verify regarding Mumbai Port in respect of Feeder vessel – Mother vessel connectivity, then the benefit of Article 8 of India – China DTAA should be granted to the assessee. In case of non satisfaction and on arriving at the factual conclusion regarding such non-satisfaction, denial of benefit of Article 8 of the India-China treaty, could be restored and no otherwise. We direct accordingly.”
3.3 Following the aforesaid directions, the Assessing Officer carried out the necessary verification exercise based on the material furnished by the assessee. At the time of hearing before us, the Ld. Representative for the assessee explained that the following documents were produced before the Assessing Officer to establish and evidence the linkages between the mother vessel and feeder vessel in all cases where feeder vessels were used:-
(i) Cargo Tracking Report of each cargo giving details of feeder vessels and corresponding mother vessels involved in carriage of given cargo from port of loading till destination, including the hub port involved.
(ii) Ownership document/pooling agreement/charter party agreement/ similar other document- establishing ownership of mother vessels.
(iii) Bills of lading showing the details of vessels involved, port of loading, port of discharge, shipment number, etc.
3.4 On the basis of the aforesaid, the plea of the assessee was that the cargo tracking report gives the details of the feeder vessel used for transporting cargo from loading port to the hub port, the mother vessel used to transport cargo from hub port to the destination port, including the date of departure and arrival of the feeder vessel and the mother vessel. The Ld. Representative for the assessee had explained at the time of hearing that apart from the aforesaid documents submitted by the assessee, the Assessing Officer required the assessee to produce further third party documents like correspondence from the hub port agent to establish the linkage. It has been explained that the hub port agent is appointed by the assessee company to co- ordinate and manage the transit of the shipments from the mother vessel to the feeder vessel and vice-versa at the hub port. The hub port agent makes arrangement for unloading of the cargo at the hub port from the mother vessel, segregating cargo based on destination and loading it in the feeder vessel for further transportation and vice-versa. In the process of transit of shipments, the hub port agent sends emails to respective country agents the information of movement of the shipment from feeder vessel to mother vessel and vice-versa. The said correspondence was produced by the assessee in respect of entire freight earnings except in respect of freight earnings of Rs.25,09,369/-. The Assessing Officer, while passing final assessment order u/s. 144C(13) r.w.s. 143(3)of the Act dated 31/01/2014, denied the exemption under Article-8 of the Indo-China DTAA in relation to the said freight earnings. As a consequence, the Assessing Officer worked out the taxable income at Rs.2,50,940/-, which was 10% of the non-exempt freight earnings of Rs.25,09,369/-. Not being satisfied with the said action of the Assessing Officer, assessee is in appeal before the Tribunal.
Before us, the Ld. Representative for the assessee has vehemently pointed out that the documents of cargo tracking report, documents of ownership of the vessels, bills of lading, etc. produced by the assessee were enough to establish the linkages and, therefore, the exemption ought to have been allowed by the Assessing Officer with respect to the entire freight earnings. The Ld. Representative for the assessee pointed out that in any case, the hub port agent’s correspondence , which was insisted by the Assessing Officer was also produced in respect of 99.62% of freight earnings and that it was only in relation to a small amount of Rs.25,09,369/- out of total freight earnings of Rs.65,95,96,788/- that the assessee could not produce the correspondence. It was pointed out that the Assessing Officer not having found any infirmity with respect to the 99.62% of cases, in the balance of the cases, the non-production of the correspondence of the hub port agents would not justify the denial of exemption. The Ld. Representative for the assessee vehemently argued that no such addition has been made either in the earlier or even subsequent years under identical situation and, therefore, the approach of the Assessing Officer in the instant year is not at all justified.
On the other hand, the Ld. Departmental Representative appearing for the Revenue has defended the stand of the Assessing Officer by pointing out that the verification exercise carried out revealed that in relation to the freight earnings of Rs.25,09,368/-, the linkage could not be established from the mother vessel to feeder vessel or vice-versa, and, therefore, the denial of exemption under Article-8 of Indo-China DTAA was justified.
We have carefully considered the rival submissions. Factually speaking, there is no dispute between assessee and the Revenue in so far as the eligibility of the assessee for the benefits of Article-8 of Indo-China DTAA is concerned. The limited dispute before us is related to exemption with respect to the freight earnings of Rs.25,09, 369/-. As per the Revenue the said freight earnings do not qualify for exemption as the requisite material does not establish the linkages between feeder vessel and mother vessel or vice-versa. In this context, we find that for balance of the freight earnings the exemption has been allowed by the Assessing Officer considering the material furnished by the assessee. We have already adverted to such material in the earlier paras. With respect to the impugned earnings of Rs.25,09,369/-, the only difference is that assessee could not produce the correspondence from the hub port agent in support to establish the linkage. In our considered opinion, the correspondence of the hub port agent, is not crucial to establish the linkage between feeder vessel and mother vessel and vice-versa. The primary evidence in this context is namely, the following; i.e. cargo tracking report of each cargo, which establishes linkage and movement of cargo from port of loading to final destination incorporating the details of feeder vessel and corresponding mother vessel involved in transportation of cargo from port of loading till the final destination including the hub port. Further, the ownership document or pooling arrangement or charter party agreement, etc. establish the ownership of the relevant mother vessel. Thirdly, the bills of lading show the details of the vessels involved, port of loading , port of discharge, shipment number, etc. Such primary evidence was available to the Assessing Officer in respect of all the freight earnings. The evidence by way of correspondence/emails of the hub port agent can at best be in support of the aforesaid primary evidence, but the absence of such correspondence would not distract from the inferential value of the primary evidence in the form of the aforesaid three documents. Therefore, the action of the Assessing Officer to deny the benefit in relation to Rs.25,09,369/- merely in the absence of copies of correspondence by the hub agent is not justified especially considering the fact that the primary evidences lead by the assessee showing linkages namely, tracking reports from real time cargo tracking system, etc. have not been found to be untrue. At the time of hearing, the Ld. Representative for the assessee had explained that in the present case, the only hub port involved is Singapore and cargo reports available with the Assessing Officer clearly show the movement of cargo including details and names of feeder vessel and mother vessel through which the given cargo was moved from port of loading till the final port of discharge, the date and time of departure and arrival of vessels at loading port, hub port and port of discharge, etc. In our considered opinion, having regard to the material before the Assessing Officer, there was no justification to infer that the requisite linkages between mother vessel and feeder vessels could not be established with respect to the freight earnings of Rs.25,09,369/-. In coming to such conclusion, we are also conscious of the uncontroverted assertion made by the Ld. Representative for the assessee, at the time of hearing, that in the earlier and subsequent years, on identical facts, the Assessing Officer had allowed the benefit of Article-8 of the Indo-China DTAA on such freight earnings.
6.1 For all the above reasons, we therefore, direct the Assessing Officer to allow the claim of assessee for exemption under Article-8 of Indo-China DTAA even with respect to the freight earnings of Rs.25,09,369/- arising to the assessee from operation of ships in the international traffic in cases where part of the operations are carried-out through feeder vessels. Accordingly, assessee succeeds on this aspect.
Resultantly, appeal of the assessee is allowed.
Order pronounced in the open court on 29/12/2016