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Shipping firms to gain from ‘slot chartering’ ruling - 2012-09-05

A recent directive on tax treatment of ‘slot chartering’ income of shipping companies has implications for similar cases pending in the State. This ruling will bring some relief for the shipping industry as a whole, says Sherry Samuel Oommen, founder and senior partner, GyanMagnus Associates, Kochi.

The Bombay High Court ruled in the case of Balaji Shipping UK Ltd that income derived from slot chartering would form part of the income from operation of ships. Consequently, it is exempt from tax in India under Article 9 of the India-UK Double Taxation Avoidance Agreement (DTAA). The assessee, an entity incorporated in the UK, was engaged in the business of international transportation of goods by sea. Cargo was transported from Indian ports to hub ports outside India under slot hire arrangements (SHA) with third-party owners. The hub ports would later ship it to destination ports outside India on owned/chartered vessel.

In certain cases, the assessee also transported cargo from Indian ports to final destination ports outside India, under a SHA. Under the Indian Income-Tax Act, 1961, income earned by a non-resident from the operation of ships is taxed on a presumptive basis. However, under Article 9 of the DTAA, income earned by a UK-based enterprise from operation of ships in international traffic is taxable only in that country. While applying the beneficial provisions of the DTAA, the assessee claimed that the income was not chargeable to tax in India. However, revenue authorities here were of the view that income from SHAs could not be regarded as income from ‘operation of ships.’

This should be restricted only to ships owned by the taxpayer and, accordingly, the benefits of the DTAA were not available. But the court held that the provision of Article 9 does not mandate that the ship should be owned by the tax payer. It merely requires the income to be ‘from the operation of ships in international traffic’. Accordingly, Article 9 of the DTAA includes within its ambit income from operation of ships ‘chartered’ or otherwise ‘controlled and managed’ by taxpayers. 

The Bombay High Court held that the provisions of Article 9 of the India-UK Double Taxation Avoidance Agreement (DTAA) should not be construed in narrow sense to cover taxpayers, who own vessels. The court noted that slot hire agreements have a nexus to the main business of operation of ships and they are ancillary and compliment the main operations. The ruling lays down key guidelines regarding taxability of incomes from SHA, subject matter of prolonged litigation in India, Sherry Samuel Oommen of Kochi-based GyanMagnus Associates, said. “But it may be noted that the principles laid down here would apply only in a situation where incomes from SHA are ancillary to the business of operation of ships in international traffic,” Oommen said. They will not apply in a scenario of shipping companies operating primarily through such arrangements, he added.

Source : Hindu Business Line