Income Tax: Freight Income Earned by Foreign Taxpayer From Transportation of Cargo Eligible for DTAA Benefit

The appellant/assessee, Hapag-Llyod Aktiengesellschaft, is a tax resident of Germany, which transports cargo to ports outside India and vice versa. The assessee filed its Income Tax Return (ITR) on 01.11.2022, declaring a total income of Rs. 4,18,900. As per the assessee, its income is not subject to tax as per the provisions of the India-Germany DTAA. The Income Tax Department selected the ITR of the assessee for scrutiny and issued statutory notices under section 143(2) as well as section 142(1) to the assessee.

The Assessing Officer (AO) did not agree with the assessee regarding the tax exemption of its income and observed that the breakup of freight earned from the feeder to feeder vessels and freight earned from the whole journey of the feeder vessel is Rs 1,12,40,95,94,954, on which relief as per Article 8 of the India-Germany DTAA is not available. The AO taxed the feeder vessel income under Section 44B of the Income Tax Act, adding Rs 12.55 crore to the company’s total income.

The assessee also filed detailed objections before the DRP, saying that the AI has wrongly made this addition. However, the DRP also rejected the objection filed by the assessee.

Petitioner’s Argument

The petitioner submitted that:

• The feeder vessels are part of the company’s regular international shipping business.
• The company uses a slot hire facility, and slot hire agreements are directly connected and interlinked and are an important part when operating ships.
• They also pointed to Organisation for Economic Cooperation and Development (OECD) commentary on Article 8 of Indo Germany DTAA in para 4.1 has concluded that the activity of transportation of goods on slot charter by HLAG is ancillary and incidental to the operation of ships in international traffic and is hence, eligible for relief under Article 8 of the India-Germany DTAA.
• In the assessee’s own case for AY 2007-08, the Jurisdictional Mumbai Tribunal had ruled in favour of the assessee, and the same was confirmed by the High Court in an order dated 28th September 2016.

ITAT Decision

The ITAT Mumbai Bench, after reviewing arguments and past rulings, ruled in favour of Hapag-Lloyd after it observed that freight income from feeder vessels is part of the integral shipping activity. The ITAT held that the freight charges of Rs 12,59,81,610, earned by the assessee from the transport of cargo via feeder, are eligible for the benefit under Article 8 of the India-Germany DTAA.

Accordingly, the addition of Rs 12.55 crore to the company’s income was set aside, and relief under Article 8 of the DTAA was granted.