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Treaty between India and United Kingdom – Indian decision that slot hire agreements fall within the ambit of operation of ships for treaty purposes

The High Court issued a decision on 6 August 2012 in the case of DIT v. Balaji Shipping UK Ltd. [TS-635-HC-2012 (Bom)] that slot hire agreements are integral to the operation of ships and therefore fall within the ambit of article 9 of the India - United Kingdom Income Tax Treaty (1993) (the Treaty).
(a) Facts. The Taxpayer (i.e. Balaji Shipping UK Ltd.) was a company incorporated in the United Kingdom (UK) and engaged in the international transportation of goods by sea. The vessels chartered by the Taxpayer did not ply within Indian territorial waters. Therefore, the Taxpayer entered into slot hire agreements with other shipping companies (third party) whereby those companies provided container slot spaces to the Taxpayer on their ships on an "as and when required" basis. On utilizing the slot hire facility, the Taxpayer arranged for the transportation of the goods from ports in India to their final destinations which were international ports or hubs outside India, from where the vessels chartered by the Taxpayer carried the cargo onwards to the final destination. The Taxpayer filed its tax return in India claiming the beneficial provision of article 9 of the Treaty. The tax authorities held that the Taxpayer was not entitled to the benefit of the Treaty with respect to the income earned by utilizing slot hire agreements. On appeal, the Income Tax Appellate Tribunal (ITAT) ruled in favour of the Taxpayer. The tax authorities appealed to the High Court.
(b) Issue. The issue before the High Court was whether the income of the Taxpayer by way of slot hire agreements would form a part of income from operations of ships and thereby exempt from tax in India under article 9 of the Treaty?
(c) Decision. The High Court held in favour of the Taxpayer concluding that income from slot hire agreements falls within the ambit of "shipping operations" under article 9 of the Treaty. Article 9 does not require the ship to be "owned" by the Taxpayer but merely requires the income to be "from the operation of ships in international traffic". Having control of the ship's management/operation would be sufficient to fall within the ambit of article 9. Article 9 would apply in respect of an enterprise that carries on the business of operation of ships in international traffic but for a valid reason, is required to transport the cargo by availing entirely a slot hire facility obtained by it on a ship of another company. Such cases also have a nexus to the main business of the enterprise of the operation of ships. They are ancillary to and complement the operation of ships by the enterprise. However, the High Court clarified that this decision would not apply to a taxpayer who carries on business of shipping cargo only by availing slot hire facilities (i.e. as opposed to the present case, where the Taxpayer's income from slot charter was only a part of its total income).

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