The Income Tax Appellate Tribunal, Mumbai, has clarified that Inland Haulage Charges (IHC) received by non-resident shipping enterprises are exempt from Indian taxation under Article 8 of the India-China Double Taxation Avoidance Agreement (DTAA), as they form an integral part of international shipping operations. This ruling reinforces the principle that ancillary activities directly connected to international transport qualify for treaty benefits, even in the absence of explicit textual inclusion.
Background & Facts
The Dispute
The dispute centers on whether Inland Haulage Charges (IHC) received by COSCO Container Lines, a Chinese resident enterprise engaged in international shipping, are taxable in India. The Assessing Officer (AO) added Rs. 10,86,70,566 as business income, treating IHC as a separate inland activity not covered under Article 8(1) of the India-China DTAA. The assessee contended that IHC is an inseparable component of its international shipping operations and thus qualifies for exemption.
Key Facts
- The assessee, COSCO Container Lines, is a tax resident of China and operates vessels in international traffic.
- During Assessment Year 2020-21, the assessee received IHC amounting to Rs. 52,68,17,043 and incurred expenses of Rs. 41,81,46,477, resulting in a net IHC profit of Rs. 10,86,70,566.
- The assessee filed its return on 09.01.2021, claiming exemption for the IHC under Article 8(1) of the India-China DTAA.
- The AO rejected this claim, asserting that Article 8(1) applies only to profits from the direct operation of ships in international traffic, and IHC constitutes a separate inland activity.
- The AO further concluded that Cosco Shipping Agencies (India) Pvt. Ltd. constituted a Dependent Agency Permanent Establishment (DAPE) under Article 5(4) of the DTAA, attributing the IHC profit to this PE.
- The assessee relied on judicial precedents from treaties with Belgium, France, Denmark, and the Netherlands, as well as OECD Commentary, to support its position.
- The bill of lading issued by the assessee covers the entire journey - from origin to final destination - demonstrating the integrated nature of the service.
Procedural History
- 09.01.2021: Assessee filed return for AY 2020-21, claiming exemption for IHC under Article 8(1) of India-China DTAA.
- Assessment Proceedings (2021-22): AO issued notice and completed assessment, disallowing exemption and adding Rs. 10,86,70,566 as income attributable to DAPE.
- 28.10.2025: Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal, holding IHC covered under Article 8(1), relying on CMA CGM SA v. DCIT and OECD Commentary.
- 17.06.2026: Hearing before ITAT Mumbai.
- 30.06.2026: ITAT Mumbai delivered judgment dismissing the Department’s appeal.
The Parties' Positions
For the Department (Appellant):
- Argued that Article 8(1) of the India-China DTAA is narrowly worded and applies only to profits from the direct operation of ships.
- Contended that IHC is a distinct inland activity performed in India and thus falls under Article 7 (Business Profits), read with Article 5 (Permanent Establishment).
- Relied on the absence of the phrase "any other activity directly connected with such transportation" in Article 8(2) of the India-China DTAA, unlike the India-Belgium DTAA.
- Asserted that judicial precedents from treaties with materially different language (e.g., India-Belgium, France, Denmark) are not applicable.
For the Assessee (Respondent):
- Argued that IHC is not a separate business but an integral part of the end-to-end transportation service.
- Cited the OECD Commentary (2017 Edition) to show that activities directly connected with or ancillary to international transport are covered under Article 8.
- Relied on binding precedents: CMA CGM SA v. DCIT (ITAT Mumbai), DIT v. A.P. Moller Maersk A/S (Bombay HC), DIT v. Balaji Shipping (UK) Ltd. (Bombay HC), and DIT v. KLM Royal Dutch Airlines (Delhi HC).
- Emphasized that the bill of lading reflects a single, unified transport contract from origin to destination.
- Submitted that the DAPE issue is academic if IHC is exempt under Article 8.
Relief Sought
The Department sought to restore the addition of Rs. 10,86,70,566 as taxable income under Article 7, read with Article 5, and to uphold the finding of a DAPE. The assessee sought confirmation that IHC is exempt under Article 8(1) and that the DAPE issue be rendered academic.
The Legal Issue
The central question was whether Inland Haulage Charges (IHC) received by a non-resident shipping enterprise, as part of an integrated international transport service, qualify for exemption under Article 8(1) of the India-China DTAA, despite the absence of an explicit clause covering ancillary activities.
Arguments Presented
For the Appellant
The Department contended that Article 8(1) of the India-China DTAA is strictly limited to profits from the operation of ships in international traffic. It argued that IHC, being a land-based logistics activity performed within India, constitutes a separate business activity and cannot be subsumed under shipping profits. The Department relied on the textual omission of the phrase "any other activity directly connected with such transportation" - present in treaties like India-Belgium - to assert that the India-China DTAA does not extend to ancillary services. It further cited CIT v. M/s. Safmarine Container Lines NV to argue that treaty interpretation must be strictly confined to the language of the specific agreement.
For the Respondent
The assessee argued that the nature of modern international shipping requires integrated logistics, including inland haulage, to fulfill the contractual obligation of door-to-door delivery. It submitted that IHC is not a standalone service but an inseparable component of the shipping operation, as evidenced by the single bill of lading. The assessee relied on the OECD Commentary, which explicitly states that profits from activities directly connected with or ancillary to international transport are covered under Article 8. It cited multiple binding precedents from the Bombay High Court and ITAT Mumbai, including A.P. Moller Maersk A/S and Balaji Shipping, which held that such ancillary activities are integral to the shipping business and thus exempt under DTAA provisions even without explicit textual inclusion.
The Court's Analysis
The Tribunal conducted a detailed analysis of Article 8(1) of the India-China DTAA, juxtaposing it with comparable provisions in other treaties and the OECD Commentary. It observed that while the India-China DTAA lacks the explicit language of "any other activity directly connected with such transportation," the absence of such wording does not preclude coverage of ancillary activities.
"The profits covered consist in the first place of the profits directly obtained by the enterprise from the transportation of passengers or cargo by ships or aircraft... However, as international transport has evolved, shipping and air transport enterprises invariably carry on a large variety of activities to permit, facilitate or support their international traffic operations. The paragraph also covers profits from activities directly connected with such operations..."
The Tribunal emphasized that the OECD Commentary, which forms an authoritative interpretative guide under Article 25(5) of the DTAA, supports the view that activities directly connected with international transport - even if performed by third parties - are included within the scope of Article 8. It noted that the Bombay High Court in DIT v. A.P. Moller Maersk A/S and DIT v. Balaji Shipping (UK) Ltd. had consistently held that slot hire agreements and inland haulage are not separate businesses but integral to the shipping operation.
The Tribunal further held that the bill of lading, which covers the entire journey from origin to destination, demonstrates the composite nature of the service. The assessee does not operate IHC as a separate business; it is a logistical necessity to fulfill its core shipping contract. The Tribunal distinguished the India-Belgium DTAA precedent, noting that the presence of an explicit clause in one treaty does not negate the applicability of the OECD principles to treaties without such language.
It also rejected the Department’s argument that the DAPE issue must be decided, observing that if IHC is exempt under Article 8, the question of attribution to a PE becomes academic. The Tribunal affirmed the CIT(A)’s reasoning and followed its own coordinate bench decisions in CMA CGM SA v. DCIT and DCIT v. A.P. Moller Maersk AS.
The Verdict
The appeal by the Department was dismissed. The Tribunal upheld the CIT(A)’s order, holding that the Inland Haulage Charges of Rs. 10,86,70,566 received by the assessee are exempt from taxation in India under Article 8(1) of the India-China DTAA as they form an integral part of international shipping operations. The issue of whether Cosco Shipping Agencies (India) Pvt. Ltd. constitutes a Dependent Agency Permanent Establishment was rendered academic and kept open.
What This Means For Similar Cases
Ancillary Activities Are Covered Even Without Explicit Language
- Practitioners can now confidently argue that activities like inland haulage, port handling, and logistics coordination are exempt under DTAA Article 8 if they are directly connected to international transport, regardless of whether the treaty includes an explicit ancillary clause.
- The OECD Commentary is now firmly established as a binding interpretative tool under Indian DTAA jurisprudence.
- The single bill of lading remains a critical documentary proof of integrated service delivery.
DAPE Claims Must Be Tied to Non-Exempt Income
- If a non-resident’s income is exempt under a DTAA provision (e.g., Article 8), the existence of a PE cannot be used to tax that exempt income.
- Tax authorities must first establish that the income in question is not covered by a treaty exemption before invoking PE attribution under Article 7.
- Future assessments must distinguish between exempt shipping profits and taxable non-shipping activities.
Precedents from Other Treaties Are Persuasive
- Judicial decisions under treaties with similar language (e.g., India-Denmark, France, Netherlands) are directly applicable to India-China DTAA cases.
- The Bombay High Court’s interpretation of "operation of ships" as encompassing integrated logistics is now binding precedent for all Indian tribunals.
- Tax advisors should routinely cite A.P. Moller Maersk A/S, Balaji Shipping, and CMA CGM SA in DTAA exemption claims involving ancillary services.
