The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that Inland Haulage Charges (IHC) earned as part of an integrated international shipping operation are exempt from tax in India under Article 8 of the India–China Double Taxation Avoidance Agreement (DTAA).
The bench of Saktijit Dey (Vice President) and Bijayananda Pruseth (Accountant Member) has upheld the deletion of an addition of ₹10.86 crore, ruling that inland transportation forming part of a composite international shipment cannot be segregated from shipping profits merely because the India–China DTAA does not expressly refer to ancillary transportation activities.
The appellant/assessee, COSCO Container Lines, is a tax resident of China engaged in the business of international shipping. During the Assessment Year 2020-21, it carried on transportation activities in India through its Indian agent, Cosco Shipping Agencies (India) Pvt. Ltd. It filed its income tax return declaring a total income of ₹46.20 crore.
Buy Now: Think Before You Pay Cash: 50+ Landmark Rulings on Section 40A(3) Of The Income Tax Act, 1961
During assessment proceedings, the Assessing Officer noticed that the company had received Inland Haulage Charges (IHC) amounting to ₹52.68 crore, against which it incurred inland haulage expenses of ₹41.81 crore, leaving a net amount of ₹10.86 crore claimed as exempt under Article 8(1) of the India–China DTAA.
The assessee argued that these charges represented an integral component of transporting cargo in international traffic and therefore formed part of shipping income taxable only in China.
The department rejected the claim, contending that Article 8 of the India–China DTAA grants exemption only to profits derived from the operation of ships in international traffic and does not expressly include ancillary inland transportation.
According to the Department Inland Haulage Charges constituted a separate inland transportation activity in India. Such income should instead be taxed as business profits under Article 7 read with Article 5 of the DTAA. Cosco Shipping Agencies (India) Pvt. Ltd. constituted a Dependent Agent Permanent Establishment (DAPE)in India, making the profits attributable to the Indian PE taxable in India.
Accordingly, the Assessing Officer treated the ₹10.86 crore as profits attributable to the alleged Indian Permanent Establishment.
The Commissioner of Income Tax (Appeals) deleted the addition, holding that Inland Haulage Charges were not an independent business activity but merely one component of the overall international transportation undertaken by the shipping company.
The appellate authority relied upon earlier Tribunal rulings involving similar treaty provisions, particularly CMA CGM SA, and held that the absence of an express ancillary-activity clause in the India–China DTAA did not alter the legal position where the inland movement formed part of one composite international transport contract.
The Tribunal observed that Inland Haulage Charges represent amounts recovered from customers for moving cargo from the customer’s premises to the port or from the port to the consignee’s destination.
It emphasised that the shipping company issued a single Bill of Lading covering transportation from the place of origin to the final destination, demonstrating that the inland movement and sea voyage formed one integrated transportation service rather than separate businesses.
Although Article 8 of the India–China DTAA does not contain wording similar to certain other treaties, such as the India–Belgium DTAA, which expressly covers “activities directly connected with transportation,” the Tribunal held that this distinction was not decisive.
The Tribunal referred to the OECD Commentary on Article 8, which recognises that where an international transport operator arranges inland transportation as part of a single transport contract, profits from such arrangements continue to fall within international shipping income.
The OECD Commentary specifically notes that profits earned from arranging inland transportation connected with international shipping remain covered under Article 8 even if the inland transport itself is performed by another enterprise.
The Tribunal relied extensively on earlier decisions, including CMA CGM SA, Delmas SAS, A.P. Moller Maersk A/S, Safmarine Container Lines NV, and Balaji Shipping (UK) Ltd.
These authorities consistently recognised that activities such as inland haulage, slot charter arrangements and other ancillary services directly connected with international shipping constitute part of the overall shipping business rather than separate taxable business activities.
The Tribunal observed that international shipping today necessarily involves several supporting functions and these cannot be artificially dissected for taxation purposes where they are intrinsically linked to the international voyage.
Since the Tribunal concluded that the Inland Haulage Charges themselves were exempt under Article 8 of the DTAA, it held that the Department’s argument regarding the existence of an Indian Permanent Establishment had become purely academic.
Accordingly, it declined to adjudicate that issue and left it open without expressing any opinion.
Dismissing the department’s appeal, the ITAT upheld the order of the Commissioner (Appeals) and held that inland Haulage Charges formed an integral part of the assessee’s international shipping operations. Such income qualified for exemption under Article 8 of the India–China DTAA. The ₹10.86 crore addition made by the Assessing Officer was correctly deleted. The Permanent Establishment issue did not require adjudication after the primary issue was decided in favour of the assessee.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
