Inland Haulage Charges Received By Shipping Companies Not Taxable As Business Profit: ITAT Mumbai

The Bench, consisting of Vikas Awasthy (Judicial Member) and Gagan Goyal (Accountant Member), held that since the activity of Inland Haulage was directly connected with the transportation of goods in international traffic, and since it was an integral part of operation of ships; hence, the Inland Haulage Charges cannot be disintegrated from profits derived from shipping business, as envisaged under Article 8 of the DTAA.

The assessee company - Avana Global FZCO, is incorporated in UAE and is a tax resident of UAE. The assessee is engaged in operation of ships in international traffic.

The assessee claimed that the income earned by it from freight handling, terminal handling charges, inland haulage charges and detention charges in India was exempt from tax under Article 8 of the India-UAE DTAA. The Assessing Officer (AO) rejected the contentions of the assessee and held that since the assessee had a Permanent Establishment (PE) in India, the benefit of Article 8 of the DTAA was not available to the assessee in respect of the gross receipts of the shipping business. The AO passed an assessment order making certain additions to the assessee's income. The AO made additions to the extent of 7.5% of the gross receipts earned by the assessee from the shipping business. The AO further made additions on account of Inland Haulage Charges received by the assessee. Against the assessment order passed by the AO, the assessee filed an appeal before the ITAT, challenging the additions made by the AO in respect of the gross receipts from shipping business and the Inland Haulage Charges received by the assessee.

The assessee Avana Global FZCO submitted before the ITAT that in view of the judgment of the Bombay High Court in the case of DIT versus Balaji Shipping (UK) Ltd. (2012), the benefit of Article 8 of the DTAA was attracted to the freight collections earned by the assessee from the use of feeder vessels.

The ITAT observed that a Co-ordinate Bench of ITAT Mumbai in the case of Avana Global FZCO versus DCIT (2021) had held that the benefit of Article 8 of the DTAA was available with respect to the freight collections earned by the assessee from cargo or containers loaded on slots of other vessels, which the assessee was entitled to use under a joint business or pooling arrangement. The Co-ordinate Bench of ITAT had ruled that, in view of the decision of the Bombay High Court in the case of Balaji Shipping (UK) Ltd. (2012), the benefit of Article 8 must be extended to entire freight receipts collected by the assessee, irrespective of whether the earnings were related to feeder vessels or by the ships in the international traffic.

The ITAT, thus allowed the appeal of the assessee and held that the additions made on account of gross receipts of the shipping business could not be sustained, in view of Article 8 of the DTAA.

Challenging the additions made on account of Inland Haulage Charges received by the assessee, the assessee submitted before the ITAT that a single and consolidated Bill of Lading was issued by the assessee to its customers, which is a contract for carriage of goods.

The assessee contented that the Bill of Lading issued by it included the leg of Inland transportation, which cannot be segregated from the international voyage. The assessee added that the Inland Haulage Charges were inextricably linked to the movement of cargo in the international traffic and that the Inland Haulage is not a separate business activity of the assessee. The assessee averred that no separate agreement was entered into between the assessee and its customers for the Inland Haulage services. Hence, the assessee contended that the Inland Haulage Charges were a part of the income derived from operation of ships in international traffic and thus, they were covered by Article 8 of the India-UAE DTAA.

The revenue department averred that Article 8 of the DTAA only refers to the shipping business in international traffic and that the Inland Haulage services are not covered by Article 8.

Article 8 of the India-UAE DTAA provides that profits derived by an enterprise of a Contracting State from the operation of ships in the international traffic by that enterprise, shall be taxable only in that State. As per Article 8(2), profits from the operation of ships in international traffic shall mean profits derived by an enterprise from the transportation by sea of passengers, mail, livestock or goods; which, as per clause (b) of Article 8(2), shall include the rental of containers and related equipments used in connection with the operation of ships in international traffic.

The ITAT observed that the leg of transportation of containers from Inland to Port for further transportation in international traffic is a composite activity for which a single Bill of Lading was issued by the assessee. The ITAT held that in view of the nature of activity and the services provided by the assessee to its customers vide a composite Bill of Lading, it could be inferred that the activity of Inland Haulage was directly connected with the transportation of goods in international traffic.

The ITAT noted that a Co-ordinate Bench of ITAT Mumbai in the case of A.P. Moller Maersk A/S, Mumbai versus DCIT (2019) had held that any activity directly connected with the transportation by sea would always be included within the term "operations of ships". The Co-ordinate Bench had ruled that activities of the Inland Haulage Charges are connected directly, or are an ancillary activity that provides minor contribution, and thus, they should not be regarded as a separate business from the operations of ships.

The ITAT further observed that the Coordinate Bench in A.P. Moller Maersk (2019) had held that, in view of the decision of the Delhi High Court in the case of DIT versus KLM Royal Dutch Airlines (2008), activities which are linked or connected to each other such that one cannot be conducted efficiently without the other and which have a nexus to the main business of the assessee of operations of ships, should be considered as an integral part of the income from shipping operations.

Thus, the ITAT ruled that the Inland Haulage Charges earned by the assessee were inextricably linked to the shipping business in international traffic. The ITAT added that the activity of shipping the container from inland to the Port for further shipping it to international traffic was an integral part of operation of ships. Hence, the ITAT ruled that the Inland Haulage Charges cannot be disintegrated from profits derived from shipping business, as envisaged under Article 8 of the India-UAE DTAA.

Hence, the ITAT allowed the appeal of the assessee by holding that the Inland Haulage Charges were not taxable as business profit in India.

The ITAT, thus quashed the additions made by the AO on account of the gross receipts from shipping business and the Inland Haulage Charges received by the assessee.

Case Title: Avana Global FZCO versus Deputy Commissioner of Income Tax

Dated: 16.06.2022 (ITAT Mumbai)

Representative for the Appellant/Assessee: Mr. Poras Kaka, Sr. Advocate with Mr. Divesh Chawla, Advocate

Representative for the Respondent: Mr. Milind S. Chavan

Click Here To Read/Download Order