Tax tribunal rules in favour of foreign shipping companies
August, 25th 2008
Foreign shipping companies have won the second round in their battle with Indias income-tax department. In a decision that could determine how these companies are taxed, an appellate tribunal has agreed that a Belgian shipping firm doesnt have to pay taxes in India on inland haulage charges. The Mumbai income-tax appellate tribunal last week dismissed an appeal by the income tax department, demanding taxes from Safmarine Container Lines N.V. on revenue earned by moving cargo by road and rail within the country. Mint reviewed a copy of the decision. A dozen other cases of similar nature are lined up for hearing in the tribunal.
The tribunal upheld a ruling by the commissioner of income taxes (appeals) that inland haulage charges earned by Safmarine, part of Denmark-based shipping company A.P. Moller-Maersk AS, are within the scope of income derived from the operation of ships in international traffic.
Under the tax treaties entered by India with most countries, income earned by foreign shipping companies from operating ships in international waters is taxed in the country of residence, said Samir Kanabar, a tax and regulatory services partner at Ernst and Young.
But, according to Indian tax laws, 7.5% of certain collections of foreign shipping firms are deemed taxable here. Apart from sea freight income, earnings of foreign shipping companies in the form of demurrage, handling and other similar charges can be taxed under the presumptive basis.
However, the Indian tax law does not explicitly provide whether the inland haulage charges are covered under the presumptive basis of taxation. This lack of clarity has resulted in a debate between Indian tax authorities and foreign shipping companies on the taxability of inland charges, said Kanabar, who advises companies about issues on infrastructure, real estate and the government.
This is not the end of the road, said a person familiar with the litigation who didnt want to be identified. The income-tax department may approach the (Bombay) high court on this issue. The department can take up to three months to file its case before the court, this person added.
The chief financial officer at a European shipping line said this case would help set the base for tax calculations. The inland haulage is very much part of a composite contract, though it is discharged in a different way, the executive said asking not to be named. The inland haulage charges may constitute only 5-8% of the total revenues, but when you consider the volume it has huge financial implications.
Safmarine had received Rs9.64 crore as inland haulage charges out of a total Rs184.94 crore, for the assessment year 2001-02, according to submissions to the tribunal.
I cannot put a figure to the total revenue earned from inland haulage charges, though it will run into crores of rupees with more foreign shipping companies setting up shop in India, said another executive with a foreign shipping line. But if the Indian government decides to tax that portion, it will dampen the spirit of overseas companies to offer integrated logistics solutions.
Shipping companies such as AP Moller-Maersk, APL Ltd, CMA CGM group, Mitsui OSK Lines Ltd, Hapag-Lloyd AG, Mediterranean Shipping Co. SA and Kawasaki Kisen Kaisha Ltd of Japan have already set up own offices in the country. A section of the local trade is opposed to any tax exemption for the foreign firms. The same shipping lines arguing for exemption of tax on inland haulage charges are not ready to include stevedoring charges and terminal handling charges as a part of ocean freight, said an executive with a Mumbai-based freight forwarding firm who also didnt want to be named because of the sensitive nature of the issue.