Tax on Shipping Charges and Double Taxation Conventions

The Supreme Court of Pakistan addressed the appeals filed by the Commissioner Inland Revenue Zone-IV, Karachi against M/s A.P. Moller Maersk and M/s Safmarine Container Line. The primary issue was whether income derived from Container Detention Charges (CDC), Container Service Charges (CSC), and Terminal Handling Charges (THC) falls under "profits from the operation of ships in international traffic" within the context of the Double Taxation Conventions (DTCs) between Pakistan and Denmark, and Pakistan and Belgium.

Key Issues:

Scope of Article 8 of DTCs: The respondents, non-resident companies incorporated in Denmark and Belgium, argued that their income from CDC, CSC, and THC should be eligible for tax benefits under Article 8 of the respective DTCs, which deals with "profits from the operation of ships in international traffic.

Tax Authorities' Stance: The Deputy Commissioner Inland Revenue contended that these charges were not explicitly covered under Article 8 of the DTCs, and thus, should not benefit from the favorable tax provisions applicable to shipping profits.

High Court's Judgment: The High Court of Sindh had previously ruled in favor of the respondents, determining that CDC, CSC, and THC fall within the scope of "profits from the operation of ships in international traffic," thus qualifying for beneficial taxation under the DTCs.

Court's Analysis:

The Supreme Court examined the nature of CDC, CSC, and THC, and their relationship to international shipping operations. Referring to international tax principles and the OECD Model Tax Convention, the Court emphasized the need for a broad, purposive interpretation of tax treaties, distinct from domestic tax laws.

Case Law: The Court reiterated the need for a unique interpretative approach to international tax treaties, as highlighted in the Snamprogetti case titled "Snamprogetti Engineering B.V. v Commissioner of Inland Revenue (2023 SCMR 1055)".

OECD and UN Model Conventions: Both models provide that profits from international shipping include various ancillary activities necessary to support the primary transportation function. This includes container-related charges and terminal services.

Court's Conclusion: The Supreme Court concluded that CDC, CSC, and THC are ancillary to the operation of ships in international traffic. Therefore, these charges are encompassed within "profits from the operation of ships in international traffic" under Article 8 of the Pakistan-Denmark and Pakistan-Belgium DTCs. The Court upheld the High Court's judgment, dismissing the appeals filed by the tax authorities.

This ruling clarifies the tax treatment of ancillary shipping charges under international tax conventions, providing significant relief to shipping companies operating under similar circumstances.

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