Profits arising from CDC, CSC, THC connected to operations of ships in international traffic: SC

ISLAMABAD: The Supreme Court held that profits arising from container detention charges (CDC), container service charges (CSC), and terminal handling charges (THC) are connected with and ancillary to the operation of ships in international traffic.

“Consequently, these profits squarely fall within the purview of the expression “profits from the operation of ships in international traffic”. Therefore, CDC, CSC, and THC collected by the respondents are part of the revenue earned in shipping in international traffic and are to be dealt with in accordance with the provisions of the Pakistan-Denmark Double Taxation Convention and the Pakistan-Belgium Double Taxation Convention, as the case may be,” it added.

A three-judge bench, headed by Justice Syed Mansoor Ali Shah, and comprising Justice Jamal Khan Mandokhail and Justice Athar Minallah, decided the matter on an appeal of Commissioner Inland Revenue Zone-IV, Karachi.

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The question before the Court was whether income arising from CDC, CSC, and THC falls within the category of “profits from the operation of ships in international traffic” in the context of double taxation conventions concluded between Pakistan and Denmark, as well as, between Pakistan and Belgium.

The judgment noted that the Commentary on Article 8 of the Organisation for Economic Cooperation and Development (OECD) Model Convention provides guidance about qualifying activities and related profits with respect to income falling under the head of “profits from the operation of ships in international traffic”.

It provides that 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 that it operates in international traffic such as any activity carried on primarily in connection with the transportation, by the enterprise, of passengers or cargo by ships that it operates in international traffic.

It is then recognised that with the evolution of international transport, shipping enterprises invariably carry on a large variety of activities to permit, facilitate or support their international traffic operations.

The expression “profits from the operation of ships in international traffic”, therefore, also covers profits from activities directly connected with such operations, as well as, profits from activities that are not directly connected with the operation of the enterprise’s ship in international traffic as long as they are ancillary to such operation – activities that the enterprise does not need to carry on for the purposes of its own operation of ships in international traffic but which make a minor contribution relative to such operation and are so closely related to such operation that they should not be regarded as a separate business or source of income of the enterprise should be considered to be ancillary to the operation of ships in international traffic. We also note that since 2017, the UN MC Commentary fully reproduces the OECD guidance.

The objective scope of Article 8 of the OECD MC and the UN MC with its reference to “profits from the operation of ships in international traffic” covers not only profits directly obtained by the enterprise from the transportation of passengers or cargo by ships that it operates in international traffic, but also, profits from activities directly connected with such operations, as well as, profits from activities which are not directly connected with the operation of the enterprise’s ships in international traffic as long as they are ancillary to such operation.

The activities are to be considered ancillary to the operation of ships in international traffic if (i) the enterprise does not need to undertake them for the purposes of its own operation of ships in international traffic but which otherwise, (ii) make a minor contribution relative to such operation, and (iii) are so closely related to such operation that they should not be regarded as a separate business or source of income.

Article 8 OECD and UN MC; therefore, applies not only to profits directly obtained in international traffic, e.g., transport of passengers or cargo, sales of tickets of the enterprise, leasing of ships, but also to profits directly connected with international traffic and to profits ancillary to international traffic e.g. inland transport, interest, code sharing and slot chartering, haulage services and catering services, provision of goods and services to other enterprises, sales of tickets on behalf of other enterprises, advertising on behalf of other enterprises, letting of immovable property, rental of containers.

The Court noted that CDC and CSC involve charges imposed for services related to containers, whereas, the THC pertains to charges associated with terminal services for cargo handling. In the context of such income sources, Vogel, a recognised authority, emphasises the widespread use of containers in international transport.

Profits arising from short-term storage of containers or from detention charges for the late return of containers, according to Vogel, are covered within the purview of “profits from the operation of ships in international traffic”.

Further, special remuneration for services ancillary to container operations are covered within the ambit of shipping income from international traffic. Income derived from services provided for cargo handling is also considered part of shipping income from international traffic when directly connected or ancillary to the operation of ships in international traffic.

Copyright Business Recorder, 2024