SAFMARINE CONTAINER LINES N.V, MUMBAI v. M/s. DDIT (I.T) - 2(1), MUMBAI

ITA 415/MUM/2009 | 2005-2006
Pronouncement Date: 21-05-2010 | Result: Partly Allowed

Appeal Details

RSA Number 41519914 RSA 2009
Assessee PAN AACCS0472A
Bench Mumbai
Appeal Number ITA 415/MUM/2009
Duration Of Justice 1 year(s) 4 month(s) 2 day(s)
Appellant SAFMARINE CONTAINER LINES N.V, MUMBAI
Respondent M/s. DDIT (I.T) - 2(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 21-05-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted L
Tribunal Order Date 21-05-2010
Date Of Final Hearing 07-04-2010
Next Hearing Date 07-04-2010
Assessment Year 2005-2006
Appeal Filed On 19-01-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL 'L' BENCH MUMBAI BEFORE SHRI N.V. VASUDEVAN JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO. 415/MUM/2009 (ASSESSMENT YEAR: 2005-06) M/S. SAFMARINE CONTAINERS LINES N.V. DDIT (INTERNTA IONAL TAXATION) 2(1) C/O MAERSK INDIA PVT. LTD. ROOM NO. 120 SCINDIA BO USE CG HOUSE 11TH FLOOR AB ROAD VS. BALLARD ESTATE N.M. ROAD WORLI MUMBAI 400030 MUMBAI 400038 PAN - AACCS 0472 A APPELLANT RESPONDENT ITA NO. 728/MUM/2009 (ASSESSMENT YEAR: 2005-06) ADIT (INTERNTAIONAL TAXATION) 2(1) M/S. SAFMARINE C ONTAINERS LINES N.V. ROOM NO. 120 SCINDIA BOUSE C/O MAERSK INDIA PVT. L TD. BALLARD ESTATE N.M. ROAD VS. CG HOUSE 11TH FLOOR AB ROAD MUMBAI 400038 WORLI MUMBAI 400030 PAN - AACCS 0472 A APPELLANT RESPONDENT ASSESSEE BY: SHRI PARESH SHAPARIA REVENUE BY: SHRI NARENDER SINGH O R D E R PER B. RAMAKOTAIAH A.M. THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE REV ENUE AGAINST THE ORDER OF THE CIT(A) XXXI MUMBAI DATED 26.11.2008. THESE ARE DISPOSED OFF BY THIS COMMON ORDER. ITA NO. 728/MUM/2009 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) ERRED IN HOLDING THAT INCOME FROM INLAND HAU LAGE CHARGES IS INCIDENTAL AND CLOSELY CONNECTED WITH DIRECT OPERAT ION OF SHIPS AND ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 2 HENCE NOT LIABLE TO TAX IN INDIA IN TERMS OF ARTICL E-8 OF THE INDO- BELGIUM DTAA WITHOUT APPRECIATING THE FACT THAT- I) THE ACTIVITY OF INLAND TRANSPORTATION CANNOT BE C ONSIDERED AS INTERNATIONAL TRANSPORT AND BY VIRTUE OF THAT I T SHOULD BE TAXED IN THE SOURCE COUNTRY II) THE INLAND HAULAGE CHARGES IS TAXABLE IN INDIA AS BUSINESS PROFITS AS IT IS NOT COVERED BY SECTION 44B OF THE ACT. 2. THE APPELLANT PRAYS THAT THE ORDER OF THE LD. CI T(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFI CER RESTORED. 3. AT THE OUTSET BOTH THE COUNSELS AGREED THAT THE ISS UE IS COVERED AGAINST THE REVENUE BY THE ORDER OF THE ITAT IN ITA NO. 5460/MUM/2006 FOR A.Y. 2003-04 ON IDENTICAL FACTS. 4. THE ASSESSEE IS A NON-RESIDENT. IT IS A TAX RESIDE NT OF BELGIUM. IT IS A COMPANY ENGAGED IN THE BUSINESS OF OPERATION OF SHI PS. THE STATEMENT OF COMPUTATION OF INCOME FOR A.Y. 2005-06 OF THE ASSES SEE WAS AS UNDER :- BUSINESS INCOME AS PER SECTION 44B R.W.S. 172 : FREIGHT COLLECTION INCLUDING ANCILLARY CHARGES 4 9 04 845 111 (AS PER ANNEXURE 1&2) LESS : FEEDER FRIGHT COLLECTED BY ASSESSEE ON BEHALF OF OTHER SHIPPING COMPANIES AND PAID TO OTHER SHIPPING COMPANIES THEREFORE NOT INCOME OF THE ASSESSEE (2 66 794 27 4) 4 638 051 437 INCOME UNDER SECTION 44B OF THE ACT @ 7.5% 347 8 53 858 UNDER SEC.44B OF THE ACT THERE IS A SPECIAL PROVIS IONS FOR COMPUTING PROFITS OF SHIPPING BUSINESS IN THE CASE OF NON-RESIDENTS A ND A PRESUMPTIVE SUM EQUAL TO 7.5% OF THE AMOUNT PAID OR PAYABLE TO THE ASSESSEE FOR CARRYING PASSENGERS LIVESTOCK MAIL OR GOODS SHIPPED AT ANY PORT IN INDIA AND AMOUNT RECEIVED OR DEEMED TO BE RECEIVED IN INDIA B Y OR ON BEHALF OF THE ASSESSEE FOR CARRYING PASSENGERS LIVESTOCK MAIL O R GOODS SHIPPED AT ANY PORT OUTSIDE INDIA. THE ABOVE PROVISIONS ARE SUBJE CT TO THE PROVISIONS OF DOUBLE TAXATION AVOIDANCE AGREEMENT WHICH ARE ENTER ED INTO BETWEEN INDIA ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 3 AND THE STATE OF WHICH THE NON-RESIDENT ASSESSEE IS RESIDENT. THE ASSESSEE GAVE A NOTE TO THE COMPUTATION OF INCOME CLAIMING T HAT ACCORDING TO ARTICLE 8(1) OF THE AGREEMENT FOR AVOIDANCE OF DOUBLE TAXAT ION BETWEEN INDIA AND BELGIUM PROFITS DERIVED FROM THE OPERATION OF SHIP S IN INTERNATIONAL TRAFFIC BY THE ENTERPRISE RESIDENT OF BELGIUM ARE TAXABLE O NLY IN BELGIUM THUS NOT TAXABLE IN INDIA. ARTICLE 8 OF DTAA BETWEEN INDIA A ND BELGIUM IS AS FOLLOWS :- INCOME DERIVED FROM THE OPERATION OF SHIPS OR AIRC RAFT IN INTERNATIONAL TRAFFIC BY AN ENTERPRISE OF THE CONTRACTING STATE S HALL NOT BE TAXED IN THE OTHER CONTRACTING STATE : FOR THE PURPOSES OF THIS ARTICLE :- (A) INTEREST ON FUNDS DIRECTLY CONNECTED WITH THE OPERA TION OF SHIPS OR AIRCRAFT IN INTERNATIONAL TRAFFIC SHALL BE REGARDED AS INCOME FROM THE OPERATION OF SUCH SHIPS OR AIRCRAFT AND THE PRO VISIONS OF ARTICLE 11 SHALL NOT APPLY IN RELATION TO SUCH INTEREST; AC CORDINGLY THERE WILL BE NO WITHHOLDING TAX ON SUCH INCOME. (B) INCOME DERIVED FROM THE OPERATION OF SHIPS OR AIRCR AFT IN INTERNATIONAL TRAFFIC SHALL MEAN INCOME DERIVED BY AN ENTERPRISE DESCRIBED IN PARAGRAPH I FROM THE TRANSPORTATION BY SEA OR AIR RESPECTIVELY OF PASSENGERS MAIL LIVESTOCK OR GOOD S CARRIED ON BY THE OWNERS OR LESSEES OR CHARACTERS OF SHIPS OR AIR CRAFT INCLUDING:- (I) THE SALE OF TICKETS FOR SUCH TRANSPORTATION ON BEHA LF OF OTHER ENTERPRISES ; (II) ANY OTHER ACTIVITY DIRECTLY CONNECTED WITH SUCH TRANSPORTATION; (III) THE LEASING OF SHIPS OR AIRCRAFT ON CHARTER FULLY E QUIPPED MANNED AND SUPPLIED OR ON A BARE BOAT CHARTER BASI S WHERE THE LEASING IS INCIDENTAL TO ANY ACTIVITY DIR ECTLY CONNECTED WITH SUCH TRANSPORTATION; (C) INCOME DERIVED FROM THE OPERATION OF SHIPS IN I NTERNATIONAL TRAFFIC INCLUDES INCOME DERIVED FROM THE USE MAINTENANCE O R RENTAL OF CONTAINERS (INCLUDING TRAILERS AND RELATED EQUIPMEN T FOR THE TRANSPORT OF CONTAINERS) IN CONNECTION WITH THE TRANSPORTATION O F GOODS OR MERCHANDISE IN INTERNATIONAL TRAFFIC WHERE THE INC OME IS DERIVED FROM AN ACTIVITY WHICH IS INCIDENTAL TO ANY ACTIVITY DIRECTLY CONNECTED WITH SUCH TRANSPORTATION. 5. THE ASSESSEE THEREFORE CLAIMED THAT THERE WAS NO IN COME FROM OPERATION OF SHIPS THAT CAN BE BROUGHT TO TAX IN IN DIA. DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND ON THE BASIS OF DETAILS FILED BY THE ASSESSEE THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD REC EIVED RS. 57 39 61 908/- AS INLAND HAULAGE CHARGES(IHC). ENTERPRISES WHICH O PERATE SHIPS IN ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 4 INTERNATIONAL TRAFFIC ALSO UNDERTAKE TO TRANSPORT C ONTAINERS INLAND BY ARRANGING SUCH TRANSPORTATION THROUGH SERVICE PROVI DERS RECOVERING THE COSTS FOR DOING SO FROM THE EXPORTERS. THIS IS CALL ED INLAND HAULAGE CHARGES (IHC). THE ASSESSING OFFICER CALLED UPON THE ASSESS EE TO EXPLAIN AS TO WHY THE IHC SHOULD NOT BE TAXED AS PER THE INCOME TAX A CT SINCE THESE AMOUNTS ARE NOT COVERED BY THE DTAA (ARTICLE 8) BETWEEN IND IA AND BELGIUM. THE ASSESSEE EXPLAINED BEFORE THE ASSESSING OFFICER THA T : (I) THE FIGURE OF IHC MENTIONED IN THE RETURN OF I NCOME ARE GROSS RECEIPTS AND THERE ARE EXPENSES INCURRED FOR THE AB OVE RECEIPTS IN THE FORM OF LOADING AND UNLOADING CHARGES TRANSPOR TATION AND MOVEMENT OF CONTAINERS FROM INLAND LOCATION PORT AN D VICE VERSA. THUS THE COLLECTION OF IHC IS MAINLY TO RECOVER TH E ACTUAL COST INCURRED. IN MANY CASES THERE WOULD BE LOSS. THUS THERE IS EITHER NO PROFIT OR VERY MINIMAL SURPLUS FROM IHC. (II) THE FRIGHT RECEIPT ALONG WITH IHC PART OF PRO FITS DERIVED FROM OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC AND ARE ALREADY TAXED IN BELGIUM. THUS THERE WOULD BE DOUBLE TAXATION OF TH E SAME INCOME. (III) THERE WOULD BE NUMBER OF INSTANCES WHERE IHC FOR LO CAL TRANSPORTATION OUTSIDE INDIA (SAY FOR E.G. IHC ACTI VITIES IN UK) BUT BILLED ON BILL OF LANDING IN INDIA WHERE THE SERVI CES ARE NOT RENDERED IN INDIA AND DOES NOT PERTAIN TO INDIAN AC TIVITIES. THE SAID IHC WOULD BE CONSIDERED BY THE ASSESSING OFFIC ER AS FREIGHT INCOME DERIVED NOT FROM INTERNATIONAL SHIPPING ACTI VITY AND TAXED IN INDIA. DOING SO IS ILLOGICAL AND NOT WARRANTED. 6. ACCORDING TO THE ASSESSING OFFICER AS PER ARTICLE 8 ONLY INCOME FROM OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC IS EX EMPTED. THE ACTIVITY OF INLAND TRANSPORTATION BY DEFINITION CANNOT BE CON SIDERED INTERNATIONAL TRANSPORT AND BY VIRTUE OF THAT THE FISCAL OR TAX POWER SHOULD BE ATTRIBUTED EXCLUSIVELY TO THE SOURCE COUNTRY IN WHICH THE ACTI VITIES ARE CARRIED OUT. ACCORDING TO THE ASSESSING OFFICER IT IS NOT AN AC TIVITY WHICH IS DIRECTLY CONNECTED WITH THE TRANSPORTATION OF GOODS OR MERCH ANDISE IN THE INTERNATIONAL TRAFFIC. ACCORDING TO THE ASSESSING O FFICER THE REVENUES EARNED BY THE ASSESSEE ON ACCOUNT OF RECEIPT OF IHC IN IND IA IS TAXABLE IN INDIA AS BUSINESS PROFITS AND THE SAME IS NOT COVERED BY SEC TION 44B OF THE ACT OR ARTICLE 8 OF THE DTAA BETWEEN INDIA AND BELGIUM. UN DER THE TREATY THE SAME WOULD BE TAXABLE UNDER ARTICLE 7 AS BUSINESS I NCOME. SINCE THE ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 5 ASSESSEE HAS AN EXCLUSIVE AGENT IN INDIA THROUGH WH OM SUCH BUSINESS WAS CARRIED OUT THE ASSESSEE HAS AN AGENCY PE AS PER A RTICLE 5 OF THE TREATY. THEREFORE THE ENTIRE AMOUNT OF IHC OF RS. 34 31 259 /- WAS TAXED AS THE BUSINESS PROFITS OF THE ASSESSEE DEEMED TO ACCRUE O R ARISE IN INDIA AS PER SECTION 9(1)(I) OF THE ACT. THE ASSESSING OFFICER C ALLED UPON THE ASSESSEE TO GIVE DETAILS OF VARIOUS EXPENSES INCURRED ON ACCOUN T OF INLAND TRANSPORTATION. THE ASSESSEE SUBMITTED THAT THERE W ERE VARIOUS EXPENSES INCURRED AND THAT COLLECTION OF IHC IS MAINLY TO RE COVER THE ACTUAL COST INCURRED. THE ASSESSEE COULD NOT FILE THE DETAILS IN THIS REGARD. IN THE CIRCUMSTANCES THE ASSESSING OFFICER ESTIMATED THE INCOME OF THE ASSESSEE BY TAKING A VIEW THAT ALTHOUGH THE INLAND TRANSPOR TATION REFUNDS AND FEEDER FREIGHT IS NOT COVERED U/S. 44B OF THE AC T BUT STILL FOR THE PURPOSE OF ESTIMATION OF PROFIT THE RATE IS TAKEN @ 7.5% O F THE GROSS COLLECTION OF THESE THREE ITEMS. ON THIS BASIS THE ASSESSING OFF ICER ESTIMATED THE INCOME OF THE ASSESSEE AT @ 7.5% OF THE TOTAL OF THE RECEI PT OF IHC. 7. ON APPEAL BY THE ASSESSEE LEARNED CIT(A) HELD THAT INCOME DERIVED FROM IHC ARE ONLY INCIDENTAL AND CLOSELY WITH THE D IRECT OPERATION OF SHIPS AND HENCE IT IS COVERED BY ARTICLE 8 OF THE DTAA B ETWEEN INDIA AND BELGIUM. LEARNED CIT(A) FOLLOWED THE ORDER OF LEARNED CIT(A) FOR A.Y. 2001-02 IN ASSESSEES OWN CASE WHEREIN SIMILAR VIEW HAD BEEN E XPRESSED. AGGRIEVED BY THE ORDER OF LEARNED CIT(A) THE REVENUE HAS PREFER RED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 8. IT IS NOT IN DISPUTE BEFORE US THAT THE ITAT CONSID ERED THE ISSUE IN ASSESSEES OWN CASE IN A.Y. 2001-02. IN A.Y. 2001-0 2 THE TRIBUNAL AT THE OUTSET NOTICED THAT SECTION 90(2) GIVES AN OPTION T O AN ASSESSEE TO WHOM DTAA APPLIED EITHER TO BE GOVERNED BY THE REGULAR P ROVISIONS OF THE I.T. ACT 1961 OR TAKE RESORT TO DTAA. THE OPTION WAS WITH TH E ASSESSEE AND HE HAD A RIGHT TO BE GOVERNED BY THE IT ACT 1961 OR THE TRE ATY WHICHEVER IS MORE BENEFICIAL TO IT. THE TRIBUNAL NOTED THAT THE ASSES SEE HAD OPTED TO BE GOVERNED BY THE PROVISIONS OF DTAA AND HAS ALSO CLA IMED THAT NO TAX IS PAYABLE ON ITS GROSS RECEIPTS. THE TRIBUNAL NOTED T HAT EVEN THE ASSESSING OFFICER HAS ACCEPTED THE ASSESSEES POINT OF VIEW F OR THE APPLICABILITY OR ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 6 ARTICLE 8 ON THE GROSS RECEIPTS AND HAS ONLY PUT TO TAX THE REMAINING AMOUNT WHICH REPRESENTS IHC BY ESTIMATING THE PROFIT @ 7.5 %. THE TRIBUNAL THEREFORE HELD THAT THE ASSESSEE HAS OPTED TO GO BY THE DTAA AND THE ASSESSING OFFICER HAS ALSO ACCEPTED THE SAME. THE F ACTS ARE SIMILAR IN THIS YEAR ALSO. 9. WITH REGARD TO THE APPLICABILITY OF ARTICLE 8 OF DT AA TO IHC THE TRIBUNAL AFTER REFERRING TO ARTICLE 8 OF DTAA HELD AS FOLLOWS :- FROM THE LANGUAGE OF ARTICLE 8 IT CLEARLY EMERGES THAT THE INCOME DERIVED FROM THE OPERATION OF SHIPS IN INTERNATIONA L TRAFFIC SHALL ALSO INCLUDE INCOME FROM ANY OTHER ACTIVITY DIRECTLY CO NNECTED WITH SUCH TRANSPORTATION. THIS EXPRESSION HAS NOT BEEN FURT HER ELABORATED IN THE DTAA IN AS MUCH AS SUCH OTHER ACTIVITIES HAVE NOT B EEN EXHAUSTIVELY SPELT OUT. UNDER THESE CIRCUMSTANCES IT IS IMPERAT IVE TO GO BY THE COMMENTARIES FOR ASCERTAINING THE TRUE PURPORT OF T HIS EXPRESSION. AT THIS STAGE IT WOULD NOT BE OUT OF PLACE TO TAKE STOCK O F THE OVERALL ACTIVITY OF THE ASSESSEE-COMPANY. ITS BUSINESS IS TO COLLECT T HE CARGO FROM THE STATION OF THE EXPORTER THEN BRING IT TO MUMBAI PO RT FROM WHERE ITS VESSELS CARRY IT TO THE DESTINATION STATION OUT OF INDIA. PAGE 7 OF THE PAPER BOOK IS A COPY OF BILL OF LADING FOR THE COMB INED TRANSPORT OF THE CYCLE PARTS FROM LUDHIANA TO NAIROBI. THE ASSESSEE IS CARRYING THE HERO CYCLES PARTS ETC. IN ITS CONTAINERS FROM LUDHIANA BRINGING THE SAME TO MUMBAI AND THEN SHIPPING THEM TO NAIROBI. IN SO FAR AS THE ASSESSEES INCOME FROM MUMBAI TO THE NAIROBI IS CONCERNED THE ASSESSING OFFICER HAS ACCEPTED THE APPLICABILITY OF ARTICLE 8 ON IT A ND HELD IT TO BE NOT TAXABLE IN INDIA. THE DISPUTE CENTERS AROUND THE TR ANSPORTATION CHARGES RECEIVED BY IT FOR CARRYING THE CARGO FROM LUDHIANA TO MUMBAI. NOW WE HAVE TO DETERMINE AS TO WHETHER SUCH INLAND TRANSPO RTATION CHARGES CAN BE BROUGHT WITHIN THE AMBIT OF AN ACTIVITY DIRECTL Y CONNECTED WITH SUCH TRANSPORTATION. OECD COMMITTEE ON FISCAL AFFAIRS H AS DISCUSSED THIS ASPECT IN PARA 7 PAGE 134. ACCORDING TO IT AN ENTE RPRISE THAT TRANSPORTS PASSENGERS OR CARGO BY SHIPS OR AIRCRAFTS OPERATING IN INTERNATIONAL TRAFFIC WHICH UNDERTAKES TO HAVE THOSE PASSENGERS O R CARGO PICKED UP IN THE COUNTRY WHERE THE TRANSPORT ORIGINATES OR TRANS PORTED OR DELIVERED IN THE COUNTRY OF DESTINATION BY ANY MODE OF INLAND TR ANSPORTATION OPERATED BY OTHER ENTERPRISE SHALL BE CONSIDERED AS AN EXAMP LE OF THE ACTIVITIES DIRECTLY CONNECTED WITH THE OPERATION OF SHIPS OR A IRCRAFTS IN THE INTERNATIONAL TRAFFIC. KLAUS VOGEL ON DOUBLE TAXATI ON CONVENTIONS HAS REMARKED IN HIS COMMENTARY ON PAGE 480 THAT IF AN ENTERPRISE ENGAGED IN INTERNATIONAL TRANSPORT UNDERTAKES TO SEE TO IT THAT IN CONNECTION WITH SUCH TRANSPORT GOODS ARE DELIVERED DIRECTLY TO THE CONSIGNEE IN THE OTHER CONTRACTING STATE SUCH INLAND TRANSPORTATION IS CO NSIDERED TO FALL WITHIN THE SCOPE OF THE INTERNATIONAL OPERATION OF SHIPS O R AIRCRAFT AND THEREFORE IS COVERED BY THE PROVISIONS OF THIS ART ICLE. IN PARA 8 CERTAIN ACTIVITIES HAVE BEEN LISTED TO WHICH THIS PROVISION WOULD APPLY. IT INTER ALIA INCLUDES TRANSPORTATION OF GOODS BY TRUCK CON NECTING A DEPOT WITH A ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 7 PORT OR AIRPORT. ON PAGE 486 OF THE COMMENTARY IT HAS BEEN MENTIONED THAT TRANSPORTATION OF THE CONTAINERS FROM THE CON SIGNER TO THE ULTIMATE CONSIGNEE FALLS WITHIN THE SCOPE OF OPERATING SHIPS OR AIRCRAFT IN INTERNATIONAL TRAFFIC. FROM THE ABOVE DISCUSSION IT IS VIVID THAT `ANY OTHER ACTIVITY DIRECTLY CONNECTED WITH SUCH TRANSPO RTATION INCLUDES ALL SUCH FUNCTIONS WHICH FACILITATE THE CARRYING OF CAR GO FROM THE PLACE OF ORIGIN TO THE PLACE OF DESTINATION IN UNISON. IT WO ULD NOT ONLY INCLUDE THE ACTUAL TRANSPORTATION BY SEA FROM MUMBAI PORT IN T HE PRESENT CASE TO NAIROBI BUT ALSO CARRYING THE GOODS FROM LUDHIANA T O MUMBAI PORT AS WELL. IT IS ONE COMPOSITE ACTIVITY WHICH HAS BEEN B IFURCATED FOR CONVENIENCE INTO TWO PARTS. IT HAS BEEN INFORMED BY THE LEARNED A.R. THAT THE STUFFING OF THE CARGO INTO THE CONTAINERS IS DO NE AT LUDHIANA AND THE GOODS ARE SEALED BY THE CUSTOM AUTHORITIES AFTER VE RIFICATION THERE ONLY. THIS SUBMISSION HAS NOT BEEN CONTROVERTED BY THE LE ARNED D.R. IT IS FURTHER NOTED THAT THE BILL OF LADING ISSUED BY THE ASSESSEE IS FOR COMBINED TRANSPORT FROM LUDHIANA TO NAIROBI. UNLESS THE GOODS ARE CARRIED UP TO THE MUMBAI PORT THEY CANNOT BE SHIPP ED TO NAIROBI. HENCE THE ACTIVITY OF BRINGING THE GOODS FROM LUDHIANA IS AN ACTIVITY WHICH IS DIRECTLY CONNECTED WITH THE TRANSPORTATION OF GOODS FROM MUMBAI TO NAIROBI. IT IS WHOLLY UNREALISTIC TO SEGREGATE THIS COMPOSITE ACTIVITY INTO TWO PARTS AND CONTEND THAT THE TRANSPORTATION UP TO MUMBAI PORT IS A DISTINCT ACTIVITY DE HORS THE FURTHER TRANSPORTATIO N BY SHIP FROM MUMBAI TO NAIROBI OR OTHER COUNTRIES. THE SITUATION WOULD HAVE BEEN OTHERWISE IF THE ASSESSEE HAD ONLY COLLECTED CARGO FROM LUDHIANA AND DROPPED IT AT MUMBAI WITHOUT ANY FURTHER OBLIGATION OF SHIPPING I T FROM MUMBAI TO NAIROBI. IN SUCH AN EVENTUALITY THE INLAND TRANSP ORTATION CHARGES WOULD OBVIOUSLY HAVE BEEN OUTSIDE THE PURVIEW OF `ANY OTH ER ACTIVITY DIRECTLY CONNECTED WITH SUCH TRANSPORTATION. SINCE THE ASSE SSEE IN THE PRESENT CASE IS ITSELF TRANS-SHIPPING THE GOODS TO OTHER DE STINATION COUNTRIES THIS SMALL PORTION OF ITS TOTAL RECEIPTS WHICH HARDLY A CCOUNTS FOR 5% CANNOT BE DETACHED FROM THE MAIN ACTIVITY OF TRANSPORTATIO N BY THE OPERATION OF SHIPS IN THE INTERNATIONAL TRAFFIC. IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE EARNED FREIGHT FOR CARRYING THE GOODS OF OTHER PARTIES ALSO UP TO MUMBAI PORT FOR SHIPMENT BY SOME THIRD PARTY. IT THEREFORE SHOWS THAT ALL THE INLAND TRANSPORTATION CHARGES RECEIVED BY THE ASSESSEE ARE IN CONNECTION WITH THE GOODS WHICH ARE FINALLY LOADED ON ITS OWN SHIPS AT MUMBAI FOR SHIPPING TO THE OTHER COUNTRIES. THE LEA RNED D.R. HAS EMPHASIZED ON THE WORDS CONNECTED WITH SUCH TRANSP ORTATION FOR UNDERSTANDING IT TO MEAN ONLY THE LOADING AND UNLOA DING OF THE CARGO AT THE PORT ITSELF. WE ARE NOT CONVINCED WITH THIS VIE W CANVASSED BY HER FOR THE REASON THAT THE PRECEDING WORDS ANY OTHER ACTI VITY DIRECTLY JOINED BY CONNECTED WITH SUCH TRANSPORTATION HAVE TO BE INTERPRETED IN A LOGICAL MANNER SO AS NOT TO RESTRICT ITSELF ONLY TO THE ACTIVITIES DONE AT PORT OR DURING THE VOYAGE ONLY. THIS EXPRESSION WOULD EX TEND TO OTHER ACTIVITIES BEYOND PORTS ALSO IF THEY ARE DIRECTLY R ELATED TO THE MAIN ACTIVITY OF TRANSPORTATION BY SHIP. ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 8 10. ON THE EXPRESSION INTERNATIONAL TRAFFIC AS FOUND IN ARTICLE 8 OF THE DTAA THE BENCH OBSERVED AS FOLLOWS :- THE SCOPE OF ARTICLE 8 IS NOT RESTRICTED ONLY TO T HE INCOME DERIVED FROM THE OPERATION OF SHIPS IN THE INTERNATIONAL TRAFFIC AS UNDERSTOOD IN THE LITERAL SENSE. IT HAS ELABORATED THE AMBIT OF INC OME DERIVED FROM THE OPERATION OF SHIPS OR AIRCRAFTS IN THE INTERNATIONA L TRAFFIC BY ALSO INTER ALIA INCLUDING INTEREST ON FUNDS DIRECTLY CONNECTED WITH THE OPERATION OF SHIPS OR AIRCRAFTS IN THE INTERNATIONAL TRAFFIC SA LE OF TICKETS FOR TRANSPORTATION ON BEHALF OF OTHER ENTERPRISES AND I NCOME DERIVED FROM THE USE MAINTAINING RENTAL OF CONTAINERS ETC. T HIS DEMONSTRATES THE INTENTION OF THE CONTRACTING STATES IN GIVING A WID ER MEANING TO THE ABOVE EXPRESSION. 11. THE BENCH FINALLY CONCLUDED AS FOLLOWS :- WE HOLD THAT THE INLAND HAULAGE CHARGES EARNED BY T HE ASSESSEE ARE COVERED WITHIN THE SCOPE OF `INCOME DERIVED FROM TH E OPERATION OF SHIPS IN THE INTERNATIONAL TRAFFIC AS PER ARTICLE 8 OF T HE DTAA BETWEEN INDIA AND BELGIUM AND HENCE CANNOT BE SUBJECTED TO TAX IN INDIA IN THE PRESENT CIRCUMSTANCES. THE VIEW TAKEN BY THE LD. CIT(A) ON THIS COUNT IS THEREFORE UPHELD. 12. THE FACTS AND CIRCUMSTANCES AND THE BASIS FOR MAKIN G THE ADDITION BY THE ASSESSING OFFICER ARE IDENTICAL IN THIS YEAR. RESPE CTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL WE UPHOLD THE ORDER OF LEARNED CIT (A) AND DISMISS THIS APPEAL BY THE REVENUE. ITA NO. 415/MUM/2009 13. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: - I. ADDITION AS INCOME ON ACCOUNT OF INTEREST ON IN COME TAX REFUND OF RS.13 61 226:- 1. THE LEARNED CIT(A) ERRED IN CONFIRMING ADDITION OF SUM OF RS.13 61 226 AS INCOME IN RESPECT OF INTEREST RECEI VED ON INCOME TAX REFUND AS TAXABLE UNDER ARTICLE 11 OF THE DTAA. 2. THE LEARNED CIT(A) FAILED TO APPRECIATE THE FAC T THAT: I) THE INTEREST EARNED FORMS PART OF FUNDS DIRECT LY CONNECTED WITH OPERATIONS OF SHIP IN INTERNATIONAL TRAFFIC. II) THE ARTICLE 8(2)(A) OF DTAA IS SQUARELY APPLI CABLE AND THEREBY THE INTEREST INCOME IS NOT TAXABLE IN INDIA . ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 9 III) THE INCOME TAX DEPARTMENT HAD NOT DEDUCTED W ITHHOLDING TAX ON THE INTEREST GRANTED WITH REFUND. 3. THE LEARNED CIT(A) OUGHT NOT TO HAVE CONFIRMED THE ADDITION OF RS.1 36 226 AS TAXABLE INCOME. II. WRONG CHARGING OF TAX RATE ON INTEREST INCOME: 1. THE LEARNED CIT(A) ERRED IN NOT ADJUDICATING TH E ISSUE OF RATE OF TAX TO BE CHARGED ON THE INTEREST INCOME 2. THE LEARNED CIT(A) OUGHT TO HAVE ADJUSTED THE I SSUE OF RATE OF TAX TO BE CHARGED ON THE INTEREST INCOME. 14. BRIEFLY STATED THE ASSESSEE HAS RECEIVED INTEREST ON REFUND OF TAX BY THE REVENUE FOR AY 1990-91. ASSESSEE SUCCEEDED IN G ETTING RELIEF IN THAT ASSESSMENT YEAR AND SINCE TAXES WERE COLLECTED THEY WERE REFUNDED WITH INTEREST OF RS.13 61 226/- VIDE ORDER DATED 25.03.2 005. THE TAXABILITY OF INTEREST IS THE DISPUTED ISSUE IN GROUND NO. 1. ACC ORDING TO THE ASSESSEE INTEREST EARNED IS FORMING PART OF ARTICLE 8(2)(A) OF THE INDO-BELGIUM TREATY AS THE FUND ARE DIRECTLY CONNECTED WITH THE OPERAT ION OF SHIPS OR AIRCRAFTS AND SHALL BE REGARDED AS INCOME FROM OPERATION OF S UCH SHIPS AND PROVISIONS OF ARTICLE 11 SHALL NOT BE APPLIED IN RE LATION TO SUCH INTEREST. AS THE ASSESSEE HAD NO ACTIVITIES IN INDIA THAN OPERAT ION OF SHIPS IN INTERNATIONAL TRAFFIC AND THE TAXES WERE COLLECTED AS PART OF ITS BUSINESS ACTIVITY IN INDIA THE RECEIPT OF INTEREST ON THE I NCOME TAX REFUND IS DIRECTLY RELATED TO OPERATIONS OF SHIPS IN THE INTERNATIONAL TRAFFIC. ACCORDINGLY THE ASSESSEE CONTENDS THAT SUCH INTEREST RECEIVED ON IN COME TAX REFUND IS TO BE TREATED AS NON-TAXABLE AS PER ARTICLE 8(2)(A) OF TH E AGREEMENT UNDER DTAA BETWEEN INDIA AND BELGIUM. THE A.O. DID NOT AGREE O N THE PLEA THAT ASSESSEE IS COVERED UNDER ARTICLE 8(2)(A) ONLY ON INTEREST O N FUND DIRECTLY CONNECTED WITH THE OPERATIONS OF SHIP WHEREAS THE INTEREST ON INCOME TAX REFUND CANNOT BE CONSIDERED AS FUNDS DEPLOYED IN THE COURS E OF BUSINESS ACTIVITY AND HAS NO DIRECT CONNECTION. THESE ARE THE PROFITS TAXED SUBSEQUENT TO THE BUSINESS ACTIVITY ON WHICH INTEREST HAS BEEN GRANTE D BY THE GOVERNMENT ORDER. SINCE IT IS NOT DERIVED FROM THE ACTIVITY OF INTERNATIONAL TRAFFIC ARTICLE 8(2)(A) DOES NOT APPLY AND IS COVERED BY ARTICLE 11 . THE LEARNED CIT(A) CONFIRMED THE VIEW OF THE A.O. BY HOLDING THE ASSES SING OFFICERS CONTENTION AND FURTHER RELYING ON THE DECISION IN THE CASE OF PANDIAN CHEMICAL 262 ITR ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 10 278 (SC) AND THE WORD DERIVED FROM AND ON THE ANA LOGY THAT THE INTEREST EARNED ON INCOME TAX REFUND WAS HELD NOT DIRECTLY E ARNED FROM THE ACTIVITY OF OPERATION OF SHIP IN INTERNATIONAL TRAFFIC. FURT HER RELYING ON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF SMT. S . SESHAMMA 199 ITR 314 THE INTEREST RECEIVED IS TREATED AS ASSESSABLE UNDER THE HEAD OTHER SOURCES AND NOT CONNECTED WITH BUSINESS ACTIVITY. HE ALSO RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF SHREE KRISHNA POLYESTER LTD. 274 ITR 21 WHERE IT WAS HELD THAT IN TEREST ON SHORT TERM DEPOSITS IS TAXABLE AS INCOME FROM OTHER SOURCES. 15. DRAWING OUR ATTENTION TO THE PAPER BOOK FILED IN TH IS REGARD MORE PARTICULARLY TO ARTICLE 8 OF INDO-BELGIUM TREATY T HE LEARNED COUNSEL SUBMITTED THAT THE ASSESSEES ACTIVITY BEING EXCLUS IVE TO INTERNATIONAL TRAFFIC THE INTEREST EARNED SHOULD BE TREATED AS DEPLOYMENT OF FUNDS DIRECTLY CONNECTED WITH THE INTERNATIONAL TRAFFIC. IT IS ALS O SUBMITTED THAT ASSESSEE HAD NO PERMANENT ESTABLISHMENT IN INDIA NO BANK AC COUNT AND WAS REGULARLY SUBMITTING STATEMENTS TO THE RBI AND AUTH ORITIES WITH REFERENCE TO ITS ACTIVITIES. IT IS SUBMITTED THAT ALL THE FUNDS DEPLOYED IN THE BUSINESS OF INTERNATIONAL TRAFFIC ARE TO BE CONSIDERED AS USED IN THE COURSE OF BUSINESS AND INTEREST EARNED THEREON IS COVERED BY ARTICLE 8 (2)(A). HE ALSO REFERRED TO THE NOTE OF THE OECD PARA 14 OF THE COMMENTARY OF ARTICLE 8 TO SUBMIT THAT THE ASSESSEE HAS NOT DEPLOYED FUNDS IN THE TREASURY NOR PURCHASED ANY BOND BUT HAS DISCHARGED ITS TAX LIABILITY CONSEQUEN T TO THE PROFIT DETERMINED ON THE BUSINESS BY THE REVENUE AUTHORITIES AND SO T HE INTEREST EARNED SHOULD BE CONSIDERED AS EARNED OUT OF FUNDS DIRECTL Y CONNECTED TO OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC. ACCORDINGLY THE INTEREST IS EXEMPT FROM TAXATION. HE FURTHER RELIED ON THE FACT THAT THE DE PARTMENT HAS NOT MADE ANY WITHHOLDING TAX ON SUCH INCOME WHICH ALSO INDIC ATE THAT ARTICLE 8(2)(A) HAS BEEN ACCEPTED AT THE TIME OF GRANTING OF INTERE ST. 16. THE LEARNED D.R. IN REPLY SUBMITTED THAT THE IMMEDI ATE SOURCE OF INTEREST IS THE GOVERNMENT POLICY OF PAYING INTERES T AS AND WHEN THE TAXES COLLECTED WERE REFUNDED AND THIS INTEREST WAS EARNE D NOT BECAUSE OF ACTIVITY OF SHIPPING BUT BECAUSE OF PAYMENT OF TAXES EARNED OUT OF THE BUSINESS ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 11 INCOME. RELYING ON THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF STERLING FOODS 237 ITR 579 AND ALSO THE RECENT DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ASI AN STAR CO. LTD. ITA 200 OF 2009 IT WAS THE CONTENTION OF THE LEARNE D D.R. THAT THE INTEREST INCOME CANNOT BE CONSIDERED AS PART OF BUS INESS ACTIVITY OF INTERNATIONAL TRAFFIC. HE FURTHER REFERRED TO ARTIC LE 8(2)(A) TO SUBMIT THAT THE WORDS USED IN THE DTAA IS FUNDS DIRECTLY CONNECTED. IN THIS CASE THERE IS ONLY APPLICATION OF FUNDS NO LON GER RELATABLE TO THE BUSINESS ACTIVITY AND THESE FUNDS ARE PARTED WI TH AS PART OF PAYMENT OF TAXES. IF THE TAXES COLLECTED WERE UPHEL D THE FUNDS WOULD HAVE BECOME PART OF GOVERNMENT MONEY AND IN N O CASE WOULD HAVE BEEN REFUNDED BUT SINCE THE ORDERS OF THE JUDI CIAL AUTHORITIES RESULTED IN REFUNDING THE FUNDS PAID AS TAXES THE I NTEREST THEREON CANNOT BE TREATED AS FUNDS DIRECTLY CONNECTED WITH THE OPERATION OF SHIPS. IT WAS SUBMITTED THAT FUNDS TO THAT EXTENT A RE NOT USED IN THE BUSINESS AND WHEN THE REFUND AROSE THE FUNDS AG AIN MAY BECOME PART OF BUSINESS FUNDS BUT THAT IS SUBSEQUEN T TO THE REFUND OF THE MONEY BUT NOT WHEN THE TAXES ARE WITH THE DE PARTMENT. SINCE THE PAYMENT OF TAXES HAS NO CONNECTION WITH T HE SHIPPING OPERATION AND THE REFUND AROSE IN THE COURSE OF JUD ICIAL PROCEEDINGS ON PAYMENT OF TAXES/TAX LIABILITY THE INTEREST EARN ED AT THE TIME OF REFUND CANNOT BE TREATED AS FUNDS DIRECTLY CONNECTE D WITH THE OPERATION OF SHIPS. ACCORDINGLY HE WAS OF THE OPINI ON THAT ARTICLE 8(2)(A) DOES NOT APPLY AND IT HAS TO BE TAXED UNDER ARTICLE XI. 17. WE HAVE CONSIDERED THE ISSUE. THE FACTS OF THE CAS E AS STATED ARE THAT THE ASSESSEE IS IN THE BUSINESS OF OPERATION OF SHIPS IN THE INTERNATIONAL TRAFFIC AND IS A RESIDENT OF B ELGIUM. IT HAS NO PERMANENT ESTABLISHMENT (PE) IN INDIA. ACCORDINGLY PROVISIONS OF DTAA BETWEEN INDIA AND BELGIUM ARE APPLICABLE. THE ASSESSEE DURING THE FINANCIAL YEAR RELEVANT TO THIS ASSESSME NT YEAR RECEIVED INTEREST AND THE REFUND PERTAINING TO THE TAXES PAI D IN ASSESSMENT YEAR 1990-91 WHICH BECAME DUE CONSEQUENT TO VARIOU S ORDERS IN THAT YEAR. THE ASSESSING OFFICER TREATED THE INTER EST AS COVERED BY ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 12 ARTICLE 11 AND DECIDED TO LEVY TAX ON INTEREST @ 15 % OF THE GROSS AMOUNT AS PER ARTICLE 11(2). HOWEVER WHILE LEVYI NG THE TAX HE LEVIED THE NORMAL RATE OF 40% IN THE ORDER WHICH W AS CONTESTED IN THE NEXT GROUND. IT WAS THE ASSESSEES CONTENTION THAT THE ASSESSEES EARNING OF INTEREST IS COVERED BY ARTICL E 8 PARTICULARLY ARTICLE 8(2)(A). ACCORDINGLY HE CLAIMED THE EXEMP TION TREATING THE INTEREST AS BUSINESS INCOME UNDER THE DTAA. IN OR DER TO APPRECIATE THE INTRICACIES OF THE ISSUE IT IS NECE SSARY TO EXTRACT ARTICLE 8 PARTICULARLY THE RELEVANT PORTION: A. INTEREST ON FUNDS DIRECTLY CONNECTED WITH THE OPERATION OF SHIPS OR AIRCRAFT IN INTERNATIONAL TRAFFIC SHALL BE REGARDED AS INCOME FROM THE OPERATION OF SUCH SHIPS OR AIRCRAFT AND THE PROVISIONS OF ARTICLE 11 SHALL NOT APPLY IN RELATION TO SUCH INTEREST; ACCORDINGLY THERE WILL BE NO WITHHOLDING TAX ON SUCH INCOME. 17.2 IT WAS THE ASSESSEES CONTENTION THAT THE TAXE S ARE PAID OUT OF FUNDS DIRECTLY CONNECTED WITH THE OPERATION OF SHIP S IN INTERNATIONAL TRAFFIC AND ACCORDINGLY THE INTEREST ON SUCH FUNDS SHOULD BE REGARDED AS INCOME FROM OPERATION OF SUCH SHIPS AND PROVISIONS OF ARTICLE 11 SHALL NOT APPLY IN RELATIO N TO SUCH INTEREST. IT WAS ALSO THE CONTENTION THAT THERE WILL BE NO WI THHOLDING OF TAXES ON SUCH INCOME AND SINCE THE ASSESSING OFFICER HAS NOT MADE ANY WITHHOLDING OF TAX THE SAME CAN BE INTERPRETED TO M EAN THAT ASSESSING OFFICER INVOKED / ACCEPTED ARTICLE 8 AT T HE TIME PAYMENT OF INTEREST TO THE ASSESSEE. THE REVENUE RELIES ON ARTICLE 11 WHICH IS AS UNDER: 1. INTEREST ARISING IN A CONTRACTING STATE AND PAI D TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXE D IN THAT OTHER STATE. 2. HOWEVER SUCH INTEREST MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH IT ARISES AND ACCORDING TO THE LAWS OF THAT STATE BUT IF THE BENEFICIAL OWNER OF THE INTEREST IS A RE SIDENT OF THE OTHER CONTRACTING STATE THE TAX SO CHARGED SHALL NO T EXCEED: ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 13 (A) 10 PER CENT OF THE GROSS AMOUNT OF INTEREST IF SUCH INTEREST IS PAID ON ANY LOAN OF WHATEVER KIND GRANT ED BY A BANK; AND (B) 15 PER CENT OF THE GROSS AMOUNT OF THE INTEREST IN ALL OTHER CASES. 3. THE TERM INTEREST AS USED IN THIS ARTICLE MEANS INCOME FROM DEBT-CLAIMS OF EVERY KIND WHETHER OR NOT SECU RED BY MORTGAGE AND WHETHER OR NOT CARRYING A RIGHT TO PARTICIPATE IN THE DEBTORS PROFITS AND IN PARTICULAR INCOME FROM GOVERNMENT SECURITIES AND INCOME FROM BONDS OR DEBENTURES INC LUDING PREMIUMS AND PRIZES ATTACHING TO SUCH SECURITIES B ONDS OR DEBENTURES HOWEVER THE TERM INTEREST SHALL NOT IN CLUDE FOR THE PURPOSE OF THIS ARTICLE INTEREST REGARDED AS DIVIDE NDS UNDER THE SECOND SENTENCE OF PARAGRAPH 3 OF ARTICLE 10. 4. THE PROVISIONS OF PARAGRAPHS 1 AND 2 SHALL NOT A PPLY IF THE BENEFICIAL OWNER OF THE INTEREST BEING A RESIDENT OF A CONTRACTING STATE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE IN WHICH THE INTEREST ARISES THROUGH A PERMA NENT ESTABLISHMENT SITUATED THEREIN OR PERFORMS IN THAT OTHER STATE INDEPENDENT PERSONAL SERVICES FROM A FIXED BASE SIT UATED THEREIN AND THE DEBT-CLAIM IN RESPECT OF WHICH THE INTEREST IS PAID IS EFFECTIVELY CONNECTED WITH SUCH PERMANENT ESTABLISHMENT OR FIXED BASE. IN SUCH CASE THE PRO VISIONS OF ARTICLE 7 OR ARTICLE 14 AS THE CASE MAY BE SHALL APPLY. 5. INTEREST SHALL BE DEEMED TO ARISE IN A CONTRACTI NG STATE WHEN THE PAYER IS THAT STATE ITSELF A POLITICAL SUB-DIV ISION A LOCAL AUTHORITY OR A RESIDENT OF THAT STATE. WHERE HOWE VER THE PERSON PAYING THE INTEREST WHETHER HE IS A RESIDEN T OF A CONTRACTING STATE OR NOT HAS IN A CONTRACTING STAT E A PERMANENT ESTABLISHMENT OR A FIXED BASE IN CONNECTI ON WITH WHICH THE INDEBTEDNESS ON WHICH THE INTEREST IS PAI D WAS INCURRED AND SUCH INTEREST IS BORNE BY SUCH PERMAN ENT ESTABLISHMENT OR FIXED BASE THEN SUCH INTEREST SHA LL BE DEEMED TO ARISE IN THE STATE IN WHICH THE PERMANENT ESTABL ISHMENT OR FIXED BASE IS SITUATED. 6. WHERE BY REASON OF A SPECIAL RELATIONSHIP BETWE EN THE PAYER AND THE BENEFICIAL OWNER OR BETWEEN BOTH OF THEM AN D SOME OTHER PERSON THE AMOUNT OF THE INTEREST HAVING REG ARD TO THE DEBT-CLAIM FOR WHICH IT IS PAID EXCEEDS THE AMOUNT WHICH WOULD HAVE BEEN AGREED UPON BY THE PAYER AND THE BE NEFICIAL OWNER IN THE ABSENCE OF SUCH RELATIONSHIP THE PROV ISIONS OF THIS ARTICLE SHALL APPLY ONLY TO THE LAST-MENTIONED AMOU NT. IN SUCH CASE THE EXCESS PART OF THE PAYMENTS SHALL REMAIN TAXABLE ACCORDING TO THE LAWS OF EACH CONTRACTING STATE. ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 14 17.3 AS CAN BE SEEN FROM THE ABOVE ARTICLE 11(3) DE FINES THE TERMS INTEREST MEANS INCOME FROM DEBT CLAIMS OF EVERY K IND. ARTICLE 11(4) HOWEVER DOES NOT APPLY IN THE ASSESSEES CA SE AS ASSESSEE HAS NO PERMANENT ESTABLISHMENT IN INDIA AND DEBT CL AIM IN RESPECT OF WHICH INTEREST IS PAID IS NOT CONNECTED WITH SUC H PERMANENT ESTABLISHMENT OF TAXES BASE IN WHICH CASE PROVISION S OF ARTICLE 7 AND 14 SHALL APPLY. IT IS ARTICLE 8 WHICH GIVES E XEMPTION ON INTEREST ON FUNDS USED IN THE BUSINESS FROM ARTICLE 11. THE ONLY ISSUE IS TO BE SEEN WHETHER THE INTEREST WAS EARNED ON FUNDS USED IN THE BUSINESS OF OPERATION OF SHIPS COVERED BY AR TICLE 8. AS RIGHTLY CONSIDERED BY THE REVENUE THE FUNDS TO THE EXTENT PAID AS TAXES TO THE REVENUE ARE NOT DEPLOYED IN THE BUSINESS OPERAT IONS OF SHIPS. THERE IS NO DIRECT RELATION BETWEEN DEPLOYMENT OF F UNDS AND OPERATION OF SHIPS. INCOME EARNED IN OPERATION OF SHIPS WAS HOWEVER SUBJECTED TO TAXES BUT THE TAXES PAID CAN NOT BE CONSIDERED AS FUNDS DEPLOYED BY THE BUSINESS ACTIVI TY AND CANNOT BE CONSIDERED AS FUNDS DIRECTLY CONNECTED WITH THE OPERATIONS OF SHIPS. THE LEARNED COUNSEL VEHEMENTLY ARGUED THAT THE PAYMENTS OF TAXES ARE DIRECTLY CONNECTED WITH THE OPERATIONS OF SHIPS. WE ARE AFRAID THAT THIS LOGIC CANNOT BE ACCEPTED AS THE F UNDS ARE NOT DIRECTLY CONNECTED WITH THE OPERATION OF SHIPS MAY BE THEY ARE INDIRECTLY CONNECTED WITH THE INCOME EARNED ON OPER ATION OF SHIPS. THERE IS NO DISPUTE THAT IN THE INSTANT CASE THE I NTEREST INCOME WAS ARISING IN INDIA ON THE DELAY IN REFUND OF TAXE S BY THE IT DEPARTMENT IN INDIA. THE CLAIM ON THE DEPARTMENT T OWARDS REFUND OF TAXES CAN BE CONSIDERED AS A DEBT CLAIM UNDER AR TICLE 11(3) WHICH INCLUDES INTEREST INCOME FROM DEBT CLAIMS OF EVERY KIND. THE INTEREST AMOUNT IN DISPUTE HAS NOT ARISEN OUT OF AN Y BUSINESS OPERATION IN INDIA IT IS A STATUTORY INTEREST GRAN TED ON DELAYED REFUND AS PER THE PROVISIONS OF IT ACT. REFUNDED D UE PAYABLE TO THE ASSESSEE IS A DEBT OWING AND PAYABLE. FOR DELAY IN PAYMENT OF THIS DEBT INTEREST WILL HAVE TO BE PAID BY VIRTUE OF TH E PROVISIONS OF SECTION 243 AND 244 244A ETC. OF THE INCOME-TAX AC T. THE DEBT ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 15 CLAIM IS NOT CONNECTED IN ANY WAY WITH ANY ACTIVITY OF THE PERMANENT ESTABLISHMENT OR BASE IN INDIA NOR THE TA XES CAN BE CONSIDERED AS FUNDS DIRECTLY CONNECTED WITH THE OPE RATIONS OF SHIPS. RIGHT TO GET INTEREST AROSE BECAUSE OF DELAY IN MAK ING THE REFUND OF EXCESSIVE COLLECTION OF TAX. THIS IS CLEARLY A CAS E OF FALL UNDER ARTICLE 11 PARTICULARLY UNDER THE ARTICLE 8(2)(A). THEREFORE THE EXEMPTION PROVIDED IN ARTICLE 8(2)(A) WITH REFERENC E TO NON- APPLICATION OF ARTICLE 11 DOES NOT ARISE TO THE FAC TS OF THE CASE. WE ARE OF THE OPINION THAT THE ORDERS OF THE ASSESSING OFFICER AND THE CIT (A) ARE CORRECT AND THE INTEREST INCOME IS LIAB LE TO BE TAXED UNDER ARTICLE 11. ACCORDINGLY THE ASSESSEES GROU ND IS REJECTED. 18. GROUND NO. 2 IN ASSESSEES APPEAL IS WITH REFERENCE TO RATE OF TAX TO BE CHARGED ON THE INTEREST INCOME. THE A.O. HAS GIVEN A FINDING THAT THE INTEREST WILL BE TAXED AT 15% AS P ER ARTICLE 11 OF DTAA BETWEEN INDIA AND BELGIUM. HOWEVER HE CALCULA TED TAX AT 40% ON THE ABOVE INCOME IGNORING HIS OWN FINDINGS I N THE BODY OF THE ORDER. ASSESSEE CONTESTED THE SAME BEFORE THE C IT (A) AND ALSO FILED PETITION UNDER SECTION 154 TO THE A.O. SINCE THE ABOVE WAS CONTESTED BEFORE THE CIT (A) THE A.O. DID NOT CARR Y OUT ANY RECTIFICATION. THE CIT (A) SEEMS TO HAVE NOT ADJUDI CATED THIS ISSUE. 19. AT THE OUTSET IT IS SUBMITTED THAT IF GROUND NO. 1 IS ALLOWED GROUND NO. 2 BECOMES ACADEMIC IN NATURE AS THE ENTI RE INCOME WOULD BE EXEMPTED OTHERWISE THE RATE AT WHICH TAX IS TO BE LEVIED ON INTEREST INCOME IS TO BE DECIDED. THE LEARNED D. R. ACCEPTED THAT THE A.O. HAS GIVEN A FACTUAL FINDING THAT TAX RATE TO BE ACCEPTED AT 15%. ACCORDINGLY HE HAS NO OBJECTION IF THE GROUND IS DECIDED BY THE BENCH OR REMITTED IT BACK TO THE CIT (A). SIN CE THE GROUND NO.1 IS HELD AGAINST THE ASSESSEE AND INTEREST INCOME IS HE LD LIABLE TO BE TAXED UNDER ARTICLE 11 AS PROVIDED IN ARTICLE 11(2) THE TAX ON SAME CAN BE CHARGED AT 15% OF THE GROSS AMOUNT. THE ASSESSING OFFICER HAS ALSO GIVEN A FACTUAL FINDING AND TAX RATE IS AT 15%. IN VIEW OF THIS A SSESSING OFFICER IS DIRECTED ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 16 TO LEVY THE TAX AT 15% OF THE GROSS AMOUNT AND NOT AT 40% AS WAS DONE BY HIM IN THE ORDER. TO THAT EXTENT GROUND NO.2 IS A LLOWED. 20. IN THE RESULT REVENUE APPEAL IS DISMISSED AND ASSE SSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21ST MAY 201 0. SD/- SD/- (N.V. VASUDEVAN) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED: 21ST MAY 2010 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXXI MUMBAI 4. THE DIT (INTERNATIONAL TAXATION) MUMBAI 5. THE DR L BENCH ITAT MUMBAI BY ORDER / / TRUE COPY / / ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI N.P. *CHAVAN ITA NO. 415 & 728/MUM/2009 M/S. SAFMARINE CONTAINERS LINES N.V. 17 S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 07.03.10/ 10.5.10 SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 08.03.10/ 11.5.10 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR. PS/PS 6 KEPT FOR PRONOUNCEMENT ON SR. PS/PS 7 FILE SENT TO THE BENCH CLERK SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER