APL CO PTE. LIMITED vs. DEPUTY DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)

Transcription

1 APL CO PTE. LIMITED vs. DEPUTY DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) ITAT MUMBAI BENCH "L" R. S. SYAL, AM & VIVEK VARMA, JM. ITA No. 1587/Mum/2008, 832/Mum/2010, 833/Mum/2010, 1702/Mum/2010 & 1703/Mum/ th March, 2013 (2013) 35 CCH 255 MumTrib (2013) 24 ITR (Trib) 498 (Mumbai) Section 21(4), 44B {ASST. YEAR}Asst. Year Decision in favour of: Assessee Counsel appeared Aarti Vissanji for the Appellant.: Mahesh Kumar for the Respondent VIVEK VARMA, JM. In the instant year, five appeals are filed and impugned before us. Three appeals have been filed by the assessee and two appeals have been filed by the department. ITA no. 1702/Mum/2010; 832/Mum/2010 and 1587/Mum/2008 pertain to the common issue on the applicability of Article 8 of India Singapore DTAA on the revenue generated by the assessee company. Before we take up the impugned issue, it is necessary to clear the scope of appeals before us. In the year under consideration, the AO sought clarifications with regard to the claim of applicability of Article 8 of DTAA with regard to 125 ships/vessels. At that time, the assessee was able to submit registration certificates/charter certificates with regard to 27 ships/vessels, which the AO allowed and disallowed the claim on 98 ships/vessels. The assessee took this disallowance of 98 ships before the CIT(A), who allowed 25, disallowed one vessel for which there were no evidence and gave direction to the AO for allowance on the remaining, after verification. The AO, in the appeal effect order, allowed 59 vessels, after verifying all the relevant documents. 1 of 1

2 In effect, the factual position is: Allowed by AO in the assessment order 27 By way of present appeals, the department in ITA no. 1702/Mum/2010 is disputing the allowance of claim of 25 vessels under article 8 of India Singapore DTAA and assessee is disputing the disallowance of claim of 1 vessel and 13 other vessels out of which, the assessee has submitted evidence before the ITAT as additional evidence with regard to 6 vessels and 7 vessels are still without any evidence. The facts emanating from the assessment order are that the assessee, APL & Company Pte. Ltd. is a tax resident of Singapore and is in the business of ship operations for carrying of cargo in international traffic throughout the world. The assessee owns ships operate them for cargo movement on international waters. Since the assessee was liable to tax in Singapore on accrual basis under the Singapore Tax Laws, provisions of Article 24 as regards relief limitations are not applicable and as a result thereof the entire profits/income of assessee was claimed for the relief under Article 8. At the time of hearing before us, the DR initiated his arguments with regard to the 25 ships, on which the CIT(A) had given relief and the DR took us through the impugned order of the CIT(A). Before going into the facts of the 25 ships, it is essential for us to examine Article 8 of India Singapore DTAA Treaty. Article 8 of the Treaty reads as under, "ARTICLE 8: SHIPPING AND AIR TRANSPORT 1. Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State. and clause 4 of the Treaty reads as under, 4. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean profits derived from the transportation by sea or air of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of the ships or aircraft, including profits from: (a) the sale of tickets for such transportation on behalf of other enterprises; (b) the incidental lease of ships or aircraft used in such transportation; (c) the use, maintenance or rental or containers (including trailers and related equipment for the transport of containers) in connection with such transportation; and (d) any other activity directly connected with such transportation." What is gathered from the reading of the relevant portions are that, "an enterprise of a contracting state", "from the operation of ships or air craft" in "international traffic" shall be taxed only in that state. The DR strengthening his case by arguing that the facts emerging from the documents submitted till date point to the direction, that the assessee is neither the owner, nor the charter but only a slot charterer. The DR submitted that by slot chartering, what the assessee is doing is, that from its feeder vessel it takes the cargo to its hub, where the cargo is loaded to the mother vessel, as per the slot area booked, to be taken to its final destination. The DR to prove his point of distinction referred to the Wikipedia meaning, as down loaded from internet and the Glossary of maritime definitions wherein the meanings of charter, lease, slot charter & Bare boat charter had been given, according to the DR slot 1 of 2

3 charter can be only a part of the charter of the ship, but it can never be the charterer of the ship/vessel, wherein the control is with the charterer. The DR to demonstrate the meaning of charter of a vessel, explained the distinctions of owner, lessee, charter and slot charter. The distinctions drawn by the DR on the words, the DR referred to the agreements entered into by the assessee, wherein, the DR referred to the APB wherein there was a ship validation, according to which risks and rewards were retained by the owner of the vessel. According to the DR, unless the risks and rewards are not taken by the hirer or charterer, which the assessee is not, assessee could never be said to be the owner or the charterer, even, for at that part of the voyage. The DR referred to the slot swap agreement, which proved that the assessee being only slot charter and not the owner, could easily swap the slots it had hired at the time of voyage or at the time of loading being done at the hub with the mother vessel. The DR submitted that the assessee has never been able to establish or even demonstrate, that what exactly or how exactly the feeder vessels, which the assessee was operating, were connected with the mother vessel. The DR further pointed out that either all the agreements entered into by the assessee company with the liners and ship validation certificates were verbatim with each other, i.e. there were no difference at all in any agreements. Nor did they pertain to the current year and therefore, the agreements which were relied upon by the CIT(A), to allowing relief to the assessee, were incorrect, technically as well. The DR, therefore, referred to the case of DIT(IT) vs CIE DE Navegacao Norsul, reported in 121 ITD 113 (Mum), wherein a similar circumstance was in issue, i.e. transportation of cargo in international traffic by sea from Indian port to Durban and from there to Brazil. The feeder ship was owned by Brazil and the company claimed relief under Article 8 of India Brazil Treaty. The DR referred to the relevant portions of the order of the coordinate Bench, which is extracted as, "Briefly stated, the facts are that the assessee company is a non- resident, which was engaged in the business of transportation of cargo in the international traffic by sea. It declared gross receipt of Rs. 4,27,55,706 in respect of the cargo transported from Indian port to the ultimate destination in the subcontinent of South America against which income of Rs. 32,06,568 was declared applying profit rate at 7.5 per cent. However, the exemption from tax was claimed in respect of such income in view of the provisions of art. 8 of the DTAA between India and Brazil. In the course of assessment proceedings, the AO asked the assessee to file copies of the ship registration certificates and the charter party agreements of all the ships operated by it from India. Despite various opportunities given the assessee could not file the same. However, the assessee vide letter dt. 17th Feb., 2004 stated (1) that none of the ships owned/chartered it called at Indian ports, and (2) that all the vessels shown in the freight statement were feeder vessels, which were owned by other shipping lines with whom the assessee had slot arrangements. In view of the above reply, the AO asked the assessee to link the feeder vessels with the mother vessels in respect of the voyages to establish that the particular feeder vessel was linked with particular mother vessel. The assessee was also asked to file copies of the ship registration certificate and charter party agreements of all the mother vessels. In response to the same, a list of feeder vessels and 1 of 3

4 mother vessels was furnished before the AO. It was noted by the AO that the assessee had shown 73 voyages from Mumbai port but it had not filed the ship registration certificates in respect of any vessel which it claimed to have operated. Accordingly, it was held by him that the assessee had failed to link and establish the voyage-wise that its feeder vessels were actually loading the goods into mother vessels which the assessee had claimed that it was operating. The claim of the assessee under art. 8 was, therefore, rejected. In view of the above finding, the AO was also of the view that the income arising from such freights was to be treated as business profits. Since the assessee had its agent, viz., Barwil Forbes Shipping Services Ltd., in India, it was also held by him that business place of such agent was to be treated as PE and consequently the assessee was liable to pay income-tax under the provisions of s. 44B of the IT Act, 1961 ( the Act ). As a result thereof, the AO estimated the profit at 10 per cent in view of r. 10 of the IT Rules, 1962". In this case, the coordinate Bench was of the view that even if a part of transportation is covered by the definition, assessee would be entitled to relief in respect of profits attributable to the voyage covered by the ships owned/leased/chartered by the assessee. This fact was disputed by the revenue that the assessee could not link the goods sent through feeder vessels and mother vessel. On this basis, the coordinate Bench modified the order of the CIT(A) and directed the AO to get the verification with regard to cargo sent from Indian port to Durban and onward journey to Brazil/sub continent of South America, if the assessee is able to prove that goods were transported through mother vessels, owned/leased/chartered by the members of the consortium (Para 21). The DR argued that the facts of the assessee are identical with that of the case cited by him, and therefore, the allowance as per Article 8 cannot be enjoined by the assessee. The DR further referred to the case of ADIT(IT) vs Federal Express Corp. reported in 125 ITD 1, wherein the coordinate Bench was dealing with a case wherein the issue was under India US DTAA Treaty, the coordinate Bench observed, "A comparative study of the above provisions clearly indicates that art. 9 of Indo- UK treaty uses the expression "profits from operation of ships" but such expression has not been defined. On the other hand, in the Indo-US treaty, the expression "profits from operation of ships or aircrafts in the international traffic" has been defined in para 2 of art. 8. Since the expression "profits from operation of ships" was not defined in Indo-UK treaty, this Bench in the case of Balaji Shipping (UK) Ltd. (supra), following the judgment of the Hon ble Supreme Court in the case of Union of India & Anr. vs. Azadi Bachao Andolan & Anr. (2003) 184 CTR (SC) 450 (2003) 263 ITR 706 (SC) and the decision of the Tribunal in the case of Metchem Canada Inc. vs. Dy. CIT (2006) 99 TTJ (Mumbai) 702 (2006) 100 ITD 251 (Mumbai), held that such expression should be construed in the manner in which the contracting parties understood at the time of execution of the treaty, i.e., in the light of the commentaries of international law available at the time of execution of the agreement. On the other hand, the Tribunal while disposing the appeal of Delta Airlines Inc. (supra), following the decision of the Supreme Court in the case of CIT vs. P.V.A.L. Kulandagan Chettiar (supra), held that the expression "profits from 1 of 4

5 operation of ships or aircrafts in the international traffic" must be understood in the sense in which it has been defined in para 2 of art. 8. Thus, in our opinion, there is no conflict between these two decisions. Therefore, following the decision of the Bench in the case of Delta Airlines Inc. (supra), it is to be held that benefit of art. 8 would be available to the assessee to the extent the activity carried on by the assessee falls within the parameter of the definition given in art. 8(2) of the Indo-US treaty. 32. The contention of the learned counsel for the assessee that the ratio laid down by the Bench in the case of Delta Airlines Inc. (supra) is not in accordance with the decision of the Hon ble Supreme Court in the case of P.V.A.L. Kulandagan Chettiar (supra), in our opinion, is without force. In that case two questions were raised by the Hon ble Supreme Court which, inter alia, included a question "whether the capital gains should be taxable only in the country in which the assets are situated". As per the facts narrated in the judgment, the assessee had sold certain immovable properties situated at Malaysia which resulted in short-term capital gains of Rs. 18,130. This income was taxed in India by the AO. However, the CIT(A), the Tribunal as well as Hon ble High Court held that in view of the treaty between India and Malaysia, such capital gains could not be taxed in India. Thus, the matter reached before the Supreme Court. It is in this context, the Attorney General of India appearing for the Revenue raised the following contention appearing at p. 660 of 267 ITR; "He further urged that tax on capital gains is a different kind of tax though brought within the fold of IT law in this country; that under the principles of international law the fiscal jurisdiction of a State to tax any form of income generally arises from either the location of the source of income within its territory or by virtue of the residence of the assessee within its territory. However, in contrast to the State where income is source, the country of which the assessee is a resident is entitled to tax the assessee on its global income and in other words, the assessee is subject to unlimited fiscal liability in the State of residence. Similar view has been taken by Karnataka High Court in CIT vs. R.M. Muthaiah (1993) 110 CTR (Kar) 153 : (1993) 202 ITR 508 (Kar). Thus, the State of which the assessee is a resident has inherent jurisdiction to tax the assessee s income from property situated in another State. However since it is generally recognized that the State of source in respect of immovable property has a closer economic connection with the income from that property, the treaties generally provide that tax may be imposed by the State of source in respect of such property and shall be allowed as a credit in the State of residence; that it needs to be emphasised that there is no bar under the international law for the State of residence to impose tax on income from property situated in another State and whether there is such a bar under the treaty depends upon the correct interpretation of its provisions." The crux of the above observations is that wherever any expression is not defined in the /treaty then the expression defined in the domestic law could be applied. This means that meaning of such expression can be ascertained with reference to the other materials which may be by way of domestic law or the commentaries available at the time of execution of the agreement by the contracting parties as held by the apex Court in the case c. Azadi Bachao Andolan (supra). Impliedly, it means that where any expression or 1 of 5

6 term is defined then it would be unnecessary to refer to the commentaries or decisions of foreign jurisdiction as held by the apex Court in the case of P.V.A.L. Kulandagan Chettiar (supra). Therefore, the decision of the Bench in the case of Delta Airlines Inc. (supra) to the effect that commentaries on international law need not be looked into where the expression has been defined in the treaty itself is in accordance with the ratio laid down in the above decision. The contention of the assessee s counsel that the decision in the case of Delta Airlines Inc. (supra) is contrary to the earlier decision of the Tribunal in the case of Safmarine Container Lines (supra) is also without force. Para 10 of the order in the case of Safmarlne Container Lines (supra) reads as under: "Now, we will examine the amount in dispute in the context of DTAA. Both the sides have taken shelter of commentary on art. 8 by OECD and Klause Vogel. At this juncture, it would be relevant to note that the DTAA is the main document and has to be considered for examining the taxability or otherwise of an item of income in the respective States. If the language of DTAA is clear and does not admit of any doubt, there is no need for referring to the OECD Model and commentaries etc. The Hon ble Supreme Court in CIT vs. P.V.A.L. Kulandagan Chettiar (Dead) Through LRs (2004) 189 CTR (SC) 193 : (2004) 267 ITR 654 (SC) has held in penultimate para that taxation policy is within the power of the Government and s. 90 of the IT Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the IT Act. It would be unnecessary to refer to the terms addressed in the OECD or in any of the decisions of foreign jurisdiction or in any other agreement. The review petition filed against this judgment also stands dismissed in CIT vs. P.V.A.L. Kulandagan Chettiar (2008) 300 ITR 5 (SC). tinder these circumstances, we are of the considered opinion that the commentary on the model convention can be taken assistance of only i1 the language of the treaty is drafted loosely or in an inclusive way or it does not unearth the intention of the Contracting States in a lucid manner. 36. Further, the contention of the learned counsel for the assessee that the decision of this Bench in the case of Delta Airlines Inc. (supra) is contrary to various decisions of the Supreme Court mentioned in para 18 of this order is also without force. Those judgments are authorities for the proposition that the principles of international taxation can be considered while adjudicating the issue with reference to the domestic law. But nowhere it is said by the apex court that such course of action can be adopted even where any term or expression has been specifically defined in the domestic law. Reference can be made to the judgment of the Hon ble Supreme Court in the case People s Union for Civil Liberties vs. Union of India (supra) wherein it has been held that international treaties and instructions have been relied upon by the Supreme Court for statutory interpretation where the terms of any legislation are not clear or are reasonably capable of more than one meaning. It was also observed that in the absence of any law to the contrary, there is prima facie presumption that Parliament did not intend to act in breach of international law including the State treaty obligations. Similarly, in the case of T.N. Godavarman Thirumalpad (supra) it was observed that in the absence of any inconsistency regard must be had to, even in construing the domestic law. Therefore, these decisions do not support 1 of 6

7 the contention of the learned counsel for the assessee that commentaries should be looked into even where the expression or term has been specifically defined in the treaty." The DR further quoted the case of ADIT(IT) vs Delta Airlines Inc., reported in 124 ITD 114, which was also the case under India US DTAA Treaty, wherein it was held, "profits from the operation of ships or aircraft in the international traffic described in para 1 of art. 8 has been defined in para 2. According to this definition, the profits from the operation of aircraft not only includes transportation of passengers in the international traffic by air but also includes various other activities which, inter alia, include an activity directly connected with such transportation. It is the settled legal position that if an expression is defined in an enactment or an agreement, then such expression should be understood as per the definition and consequently, literal meaning of the expression cannot be applied in deciding the issue. The acceptance of stand of the Revenue would amount to declaring the provisions of para 2 of art. 2 as redundant which is not permissible in law. Accordingly, the stand of the Revenue that profits derived by an enterprise of a Contracting State from the operation of aircraft in international traffic is restricted to transportation of passengers in the international traffic only cannot be accepted. The stand of the Revenue that the commentaries on international taxation can /never be looked into while interpreting the provisions of an article of treaty between two countries is not sustainable. However, it is clarified that if the contracting parties have opted to define the scope of exemption then the claim of exemption can be made/allowed only in accordance with such definition and cannot be extended beyond that. However, the provisions of art. 8 of Indo-US treaty are not in pari materia either with the provisions of OECD Model Convention or US Model Convention. Indo-US treaty specifically defines the scope of the expression "profits from operation of ships or aircraft, in international traffic" in para 2 of art. 8. Thus, it is seen that the Contracting States had deviated from the standard models. Since the scope of para 1 has been defined itself in para 2 of art. 8 of the treaty, the exemption has to be allowed only in accordance with provisions of para 2 of art. 8 and, therefore, cannot be extended beyond the scope of such definition unless the case of the assessee falls under the provisions of paras 3 to 6 of art. 8. Hence, neither the OECD Commentary nor the US Technical Explanation can be looked into while considering the scope of para 2 of art. 8 of the Indo-US treaty Furniss Withy & Co. vs. MNR (1968) CTC 35". The DR also placed reliance on the case of DDIT(IT) vs United Parcel Service Co., ITAs no & 2809/Mum/2006 and 3611/Mum/2005. The DR finally referred to the case of DIT(IT) vs Balaji Shipping UK Ltd. in ITA no & 3215 of 2009, wherein the Hon ble Bombay High Court were seized with: "The question whether the income attributable to a voyage undertaken from India by availing the slot hire facilities is liable to be taxed in India must, in this case, be addressed qua these two situations referred to. Firstly, where the goods are transported by an enterprise by availing of the slot hire facility obtained by it on the ship of another from a port in India upto a hub port abroad and from there transporting the goods further to their final destination upon a ship owned or chartered or otherwise controlled by it. (We will refer to this as a case of first type). Secondly, where the goods are transported by the assessee from a port in India directly to their final destination to a port abroad by availing a slot hire facility obtained by it on the 1 of 7

8 ship of another. (We will refer to this as a case of the second type." wherein, their Lordships were examining the ratio laid down by the Hon ble Delhi High Court in the case of DIT vs KLM Royal Dutch Airlines, reported in 178 Taxman 291, it was observed, "Air Transport: 1. Profits from the operation of aircraft in international traffic shall be taxable only in the State in which the place of effective management of the enterprise is situated." Article 8(1) is similar to Article 9(1). In that case the assessee had obtained a licence in respect of premises at Mumbai from the Airport Authority of India. This licence was for the purpose of cargo handling only. The assessee entered into an agreement with CSC (P) Ltd. for cargo handling at Mumbai on its behalf. The agreement provided for payment by the assessee to CSC (P) Ltd. for cargo handling at Mumbai. The payment made by the assessee to CSC was after the adjustment of the licence fee/rent paid by the assessee to the Airport Authority of India. The adjustment was considered by the department as the income of the assessee chargeable to tax under Article 6 of the lndo-u.k. DTAA. The Division Bench upheld the decision of the Tribunal to the effect that the adjustment was directly and inextricably linked to the cargo handling business of the assessee and was not in the course of a separate business of renting out the premises. As the assessee established a link between the renting of the premises and the business of operating an airline in international traffic, it was held that Article 8 would apply. We are, in respectful agreement with the judgment. In the present case, even assuming that the slot hire agreements are not covered by Article 9(1) of Indo-U.K. DTAA per se, the respondent would still be entitled to the benefit of the provisions for in any event such slot hire agreements are an integral part of the shipping operations of the respondent, who admittedly had also chartered two ships. A view to the contrary would affect the business of such parties merely because the ships chartered by them do not ply on certain routes such as India. It is necessary to preface a reference to the commentaries with a qualification. The reference to the commentaries is only to the extent that they consider as included within the expression "operation of ships" activities that are connected therewith. Whether a particular activity is to be included or not would depend upon the terms of the convention in question and based on the facts and circumstances of the case." By quoting these case laws, the DR emphasized that the treatment meted to the assessee by the CIT(A) could only be possible if and only if there was a connection between the feeder vessel, which the assessee owned with that of the mother vessel. The DR also emphasized that when the wordings of the Treaty in specifically there, there cannot be a reason for adopting the meanings from any other source, as has been held in the case of Delta Articles (supra). The DR, therefore, submitted, that slot charter cannot be equated to the charter as such. Since the fact that the term charter has not been defined in the Treaty, then in that case, the meaning must be adopted from the glossary or the maritime dictionary, as has been mentioned and cited earlier. Since the fact that charter and slot hire does not come into the terms of Article 8 and hence the concession made available to the assessee by the CIT(A) must be withdrawn. 1 of 8

9 The AR on the other hand referred to the India Singapore DTAA Treaty and referred to the clause (4) and pointed out that in the case relied upon by the DR, that of CLE DE Navegacao Norsul (supra), is based on India Brazil treaty. The AR submitted that in so far as India Brazil DTAA was concerned it referred to "the operation of ships or aircrafts shall mean business of transportation of persons, mail, livestocks or goods carried on by the owners or lessee or charters of the ships or aircraft, including the sale of tickets for such transpiration on behalf of other enterprises". On the other hand, India Singapore DATA Treaty specifies, "shall mean profits derived from the transportation by sea or air of passengers...and sub-clause (d) any other activity directly connected with such transportation". The AR submitted that it is essential that when the terms are defined within the Treaty, import of interpretation of other treaties is not required. 24. The AR then referred to Maritime and Shipping Dictionary 2012 to explain the various expressions, which had been explained by the DR, through reference to wikipedia. The AR referring to the Maritime & shipping Dictionary explained the expressions: Charterparty bill or A bill of lading issued under a charterparty. It is not acceptable by banks bill of lading under letters of credit unless so authorised in the credit. A bill of lading that indicates that it is subject to a charter. Charterparty bills of lading, e.g. Congenbill, characteristically contain for fewer detailed terms on their reverse than do other bills of lading, for the very reason that most of their detailed terms are set out in the material charter. Charterparty bya contract by which the lessor (shipowner) places a ship in the hands of demise Or Demise the lessee (the demise charterer) who assumes possession and control. Charterparty The consideration paid by the charterer is "hire" which is payable at specified intervals during the term of the charter. A bareboat charter is a demise charter whereby the owner names the Master and sometimes the crew, who are nevertheless paid by the charter and they are under the control of the charterer. Demise Charter A contract whereby the shipowner leases his vessel to the charterer for a period of time during which the whole use and management of the vessel passes to the charterer, which involves that the charterer is to pay all expenses for the operation and maintenance of the vessel. Officers and crew will become servants of the charterer. A demise charter whereby the charterer has the right to place his own Master and crew on board of the vessel is also called bareboat charter. Demise A charterparty under which the charterer puts own stores, fuel etc. on Charterparty board and hires the crew. This type of charterparty is also known as a bareboat charterparty. Slot charter A voyage charter whereby the shipowner agrees to place a certain number of container slots (TEU and/or FEU) at the charterer s disposal. 25. The AR on reference to the Maritime & Shipping Dictionary 2012, submitted that the assessee was a charter and since the expression is not defined in the treaty, the meaning extracted from the relevant dictionary need be taken. The AR also admits that the assessee entered into slot Charter Agreements for the conduct of its business. The AR submits that in the case of Balaji Shipping (supra) by the DR makes reference to the judgment of the Tychy (1999) 2 Lloyd Law Report, wherein the question was, "What was meant by "the charter of the ship" in s. 21(4) of the Supreme Court Act, 1981? In particular (a) was the expression confined to a demise charter or (b) could the expression include a slot charter? (ii) In the light of the answer to (i) were POL the charters of the 1 of 9

10 particular vessel within the meaning of the section? (iii) If the answer to (ii) was yes were POL the charterers when each cause of action arose. Section 21(4) of the 1981 Act provided inter alia: In the case of any such claim as is mentioned in s. 20(2)(e) to (r) where (a) the claim arises in connection with a ship; and (b) the person who would be liable on the claim in an action in personam ("the relevant person") was when the cause of action arose, the owner or charter of, or in possession or in control of the ship an action in rem may... or the charter of it by demise or (ii) any other ship of which at the time when the action is brought the relevant person is the beneficial owner..." "(7) the expression "the charter of a ship" could include a slot charter and slot charter could properly be described as the charter of the ship." The British Court, after considering and examining the arguments, concluded, What then is a slot charter? Slot charterers are now common. As the Judge pointed out, in the third edition of their book, Limitation of Liability for Maritime Claims, Griggs and Williams define slot charterer as:...a party who has the right to use a specified part [but not the whole] of the cargo carrying capacity of a vessel on a particular voyage and who often issues his own bills of lading. Such a party is described in common parlance as a "charterer". I accept that as an accurate definition. It can thus be seen that there is no distinction in principle between a slot charter and a voyage charter of a part of a ship. They are both in a sense charterers of space in a ship. A slot charter is simply an example of a voyage charter of part of a ship. It follows that the reasoning which leads to the conclusion that the voyage charterer of part of a ship is a charterer within s. 21(4) also leads to the conclusion that the slot charterer is such a charterer. In all the circumstances I have reached the clear conclusion that a slot charterer can properly be described as a Charterer, but can he be described as "the charterer" of the ship? Mr. Young submits that the answer is "no", because if the section is approached as it was by Sir David Cairns and Lord Justice Stephenson, by giving it a literal or natural interpretation, the charterer of part of a ship cannot fairly be described as "the charterer" of the ship ". I see the force of Mr. Young s submission but on balance I have reached the conclusion that it should not be accepted. The special circumstances referred to by Sir David Cairns were simply that in the vast majority of cases the person liable in personam will be the owner of the ship in connection with which the claim arises, but not the time charterer or the voyage charterer. It is accepted by Mr. Young that there can be more than one charterer at any one time who can properly be described as "the charterer" of this ship. For example, it is common to have a string of charter-parties. There might be a demise charterer, a time charterer, a sub- time charterer, a subsub time charterer, a voyage charter and even a sub voyage charter. There is no difficulty in describing each of the charterers under each of those contracts as the charterer of the ship In all these circumstances, I do not see any difficulty in describing each of the two charterers of a ship as the charterer of the ship. Equally, for the reasons I have given, I do not see any difficulty in describing the charterer of part of a ship as the charterer of the ship. 1 of 10

11 In all these circumstances I would hold that the expression "the charterer of the ship" can include a slot charterer and that a slot charterer can properly be described as the charterer of the ship". 26. The AR, therefore, placing reliance of the decision of Tychy submitted that the assessee was a charter and pointed out that in so far as the non exclusive connecting carrier Agreement, the Scope has been defined, to mean, "This agreement covers and is restricted to the transportation by the Feeder Carrier of laden and / or empty 20 and 40 and 45 general containers, refrigerated containers, open top containers, including hicubes, flat racks cargos between ports as may be agreed between the parties from time to time". The AR also pointed that the agreement talks about Feeder Carrier s Responsibility. The AR clarified that the agreements does not mention about any financials, because, the maritime rates are volatile and change by the day, therefore, no rates can be fixed in advance. The AR also clarified that the original agreements entered into the assessee and its customer had been extended by way of Addendum, wherein it had been mentioned : "ADDENDUM NUMBER 1 MEMORANDUM OF UNDERSTANDING APL/MOL WAX CO-OPERATION DATED : APRIL 2003 TO MARCR.2004 It is mutually agreed between APL Co. Pte. Ltd. of 456 Alexandra Road NOL Building, Singapore and Mitsui O.S.K. Lines Ltd. This Memorandum of Understanding (MOU) is extended in direct continuation of the original with effect from April 2003 to March 2004 and beyond, and shall subject to Clause 3 of Part-I, remain in full force and effect All other terms, conditions and exceptions of the present MOU dated 16th April 2002 are to remain the same. We also hereby certified that AP L Co. Pte. Ltd, had operated or had exchanged slots with Mitsui O.S.K. Lines, Ltd., on the below list of ships within the stipulated period of the April 2003 to March 2004, MOL Maas APU Ningbo (ex MOL Loire) APL Chiwan (ex MOL Tyne) APL Dubai (ex MOL Rhine), APL Qingtao / (ex MOL Mosel) The AR further submitted that the arguments of the DR that the assessee through its feeder vessels were making the voyage in the Indian waters was also not logical because the assessee had entered the Joint Service Agreement with Bengal Tiger lines for using Madras Service Route, which was Singapore Chennai Route, which is specified in the clause "Routing", which says Singapore Madras. The AR, reiterated that the assessee s operation of feeder vessels from India were either to Singapore or Sri Lanka hubs, which in any case would sail in the International waters, leaving Indian waters. Having placed the arguments, the AR submitted that the expression charter/slot charter not having been defined in the Treaty, recourse must be taken from outside, as held by the Hon ble Bombay High Court in the case of Balaji Shipping (supra). Taking that cue, the AR submits that the case of Tychy must be considered and applied to the case in hand 1 of 11

12 to give a definite meaning to the expression. Concluding her arguments, the AR pleaded that in case, the decision is to be taken against the assessee, an alternative plea may be considered, wherein, the assessee would be pleased with the decision of application of section 44B of the Income Tax Act, 1961, may be considered and applied and placed reliance on the decision of A.P. Moller, Maersk Agency India P. Ltd. vs DCIT, reported in 89 ITD 563, wherein it has been accepted that if DTAA is silent over taxing the profits of shipping co. derived otherwise then from the operation of ships. In such eventuality, profits could be taxed in India as per the provisions of the Act. The DR in the rejoinder specifically states that application of Article 8 of the Indian Singapore DTAA would be redundant when the feeder vessel is moving in the Indian water only and that the application if at all is to be allowed or may only be allowed where there are agreements/evidence. In any case, no concession is to be provided in the seven cases/voyages, where there are no agreements. The DR reiterated that slot hire cannot be accepted to be covered by Article 8 of India Singapore DTAA and that too when there is no connection between the feeder vessel to the mother vessel. We have heard both the parties at length and the basic issues which germane are whether terms of one treaty be loaded to another for getting one specific interpretation and whether slot charter agreements entered into by the assessee company would get any benefit in the Treaty under Article 8. One basic rule of interpretation is to find the meaning to the expression from within the relevant statue or as in the present case from the existing treaty. In the present set of circumstances, we find that the assessee is in the business of sea faring cargo business having base, and tax base at Singapore. The assessee operates its ships/vessels round the world. In so far as business of the assessee with India is concerned, it operates its vessels in Singapore Chennai Sector, which is known as Madras Service Route in maritime parlance. As per the submissions of the AR, the assessee entered into Joint Service Agreement with vessel operators for slot allocation in the feeder vessels for carrying the cargo to its hub either at Singapore or Sri Lanka, from where the cargo is loaded into the mother vessel for its destination port. The objection raised by the department with regard to 39 vessels (25 vessels + 14 vessels) is that the assessee is neither the owner or the lessee or charterer of the vessel and being a slot charterer would not make the assessee eligible for claiming any advantage under Article 8 of the Treaty. To prove its case, the department referred to a number of case laws, which according to their Treaty base, specific nomenclature were decided. The DR referred to the case of CIE DE Navegacao Norsul (supra), which were seized with the similar business and the coordinate Bench concluded that "cargo transported to Durban by feeder vessels neither owned nor leased nor chartered by the assessee would not make the assessee eligible for relief under Article 8 for relief under that Article, as the assessee must be owner or lessee or charter of the ships employed in international traffic". This 1 of 12

13 decision was based on India Brazil DTAA Treaty, whereas, we are seized with India Singapore DTAA Treaty. When we compare the two Treaties, we find that the relevant Treaty Clause, i.e. Article 8 is worded differently and on comparison of Clause (4) of Article 8, India Brazil Treaty talks of business as such but India Singapore Treaty talks of "profits from the operation". Another difference is that India Singapore DTAA Treaty extends its arms to embrace, "any other activity directly connected with such transportation", which is not extended in the India Brazil Treaty. Taking note of this major difference in the Treaty language and taking into consideration the ratio laid down in the case of UOI vs. Azadi Bachao Andolon, reported in 263 ITR 706, wherein the Hon ble Apex Court held that "the provisions of the Treaty have to be applied and interpreted in a liberal manner so that the benefit contemplated for avoiding double taxation of the same income can be appropriately granted to the party", we cannot place reliance on the Norul (supra) case. We also referred to the decisions of Federal express Corp. (supra), Delta Airlines (supra) and United Parcel Service (supra), all these cases rested their base on India US DTAA Treaty, which in form is the same, as that of India Singapore DTAA, i.e. Income from business of international transport, but in core context are different, because the above cases basically on the import of interpretations either from OECD commentaries and/or commentaries by Klause Vagel, because the language of Treaty would not give a very definite meaning. On this we take notice of the decision of United Parcel Service Co. (supra), wherein the coordinate Bench referred to the case of Hon ble Supreme Court of India in the case of CIT vs PVAL Kulandagar Chettrai, reported in 300 ITR 5 (SC), wherein it was held, "Model Convention can be taken assistance of only if the language of the treaty is drafted loosely or in an inclusive way or it does not unearth the intention of the contracting States in a candid manner". On going through this extract, nowhere do we find that the Treaty, which we are concerned which is loosely drafted or the intention of the contracting states is not coming out as it wants to be. In fact, if we once again look into the Treaty Articles 8.4(d), it is very clear, "any other activity directly connected with such transportation". We have take into consideration that the idea to include such clauses is the economy of the contracting state, i.e. Singapore, which is based primarily on tourism and cargo traffic. In fact, when we read such clauses (b) & (c) as well in unison with sub clause (d), as referred to by the AR, we find that the wording of the Article 8 in India Singapore DTAA Treaty is not only differently worded then the other DTAA Treaties with contracting states, but it is profit specific, that is earned by the enterprises, because, every word used is as per maritime parlance. When we compare with the definitions of the maritime expressions, we find that the DR used Glossary of legal definitions & Wikipedia, as downloaded from the internet, but the AR has used Maritime & Shipping Dictionary 2012 for the definitions of the same words/expressions. It is important to refer this comparison to understand that Wikipedia and legal definitions differ from actual maritime and shipping definitions. Taking into consideration the decision of Hon ble Bombay High Court in the case of Balaji Shipping (supra) and more importantly the decision of HL in the case of Tychy, we find that slot charter have been held to be charter per se. Even if we have to dilute our observation that slot charter is different from charter, then the ratio of Azadi Bacho Andolan (supra), i.e., "expressions should be construed in the manner in which the contracting partners understood at the 1 of 13

14 time of execution of treaty", prompts us to hold that slot charter is charter. This has been held so in the case of A.P. Muller (supra), as well. This lends force to our observation made in earlier para that the inclusion of sub clauses (b), (c) and (d) to Article 8.4 is profit specified, generated from the operation of ships, aircrafts in international traffic by owner, lessess a charter... which is directly connected with such transportation. It is important to take note of the difference of the use of expression "business" used in India Brazil Treaty and the use of expression "transportation" in India Singapore Treaty, because as observed earlier, the business or economy of Singapore being contracting state is founded on tourism and cargo hub connecting the entire world. We, must refer to the definition of the expression "operation of ship or aircraft in international traffic". This expression has been defined in Article 3, i.e. "General Definitions". From the definition clause of the treaty, we find that "international traffic" means "any transport by a ship or aircraft operated solely between places in the other contracting state". From the agreements, the two contracting states are India and Singapore. According to the agreements, we the operations of the feeder vessel is on "Madras Service Route", i.e. the cargo is lifted by the feeder vessel from Chennai (Madras) or an Indian port, to be taken to its mother feeder hub, either at Singapore or Srilanka, from where it is taken to its onward and final destination. On these basic facts, emerging from the agreements perused by us, apparently the claim of the assessee comes within the precinct of Article 8 of India Singapore DTAA Treaty. In the light of our detailed observations, we direct the AO to examine the evidence produced by the assessee in the light of Article 8.4 along with definition of operation of ship or aircraft in international traffic, as per Article 3.1(h) in respect of voyages impugned before us. We further direct the AO to apply the provisions of section 44B in the case of voyages for which there are no supporting documents, taking into consideration the ratio laid down in the case of A.P. Muller, Maersk P. Ltd. vs DCIT, reported in 89 ITD 563. In the result all the appeals filed before us, both by the assessee and the department are allowed for statistical purposes. 1 of 14