1990 (11) TMI 9 - HC - Income Tax

High Court rules Greek companies residents for tax purposes under India-Greece Double Taxation Agreement; de facto control key

The High Court ruled in favor of the assessee-companies, determining them as residents of Greece under the Agreement for Avoidance of Double Taxation ... Double Taxation Relief Issues Involved:1. Entitlement to deduction under the Agreement for Avoidance of Double Taxation between India and Greece.2. Determination of the residence of the assessee-companies.Issue-Wise Detailed Analysis:1. Entitlement to Deduction under the Agreement for Avoidance of Double Taxation between India and Greece:The primary question was whether the assessee was entitled to a deduction of 50% of the tax charged in India on its shipping business, as provided in Article VI of the Agreement for Avoidance of Double Taxation between India and Greece. The relevant clause, Article 11(1)(f), defines a 'resident of Greece' as a person who is resident in Greece for Greek tax purposes and not resident in India for Indian tax purposes. A company is regarded as resident in Greece if it is incorporated in Greece or if its business is wholly managed and controlled in Greece.The Tribunal initially held that the assessee-companies could not be treated as residents of Greece because the de facto control and management of their business had not been transferred to Hellenic Lines Ltd. However, the High Court found this view erroneous. The agreement between the assessee-companies and Hellenic Lines Ltd. clearly stated that Hellenic Lines Ltd. was appointed to control and manage the entire shipping business of the assessee-companies, including appointing and dismissing staff, collecting and disbursing money, and entering into negotiations and contracts.The High Court emphasized that the control and management of the business, as per the agreement, were indeed vested in Hellenic Lines Ltd., and thus, the business of the assessee-companies was wholly managed and controlled in Greece. Therefore, the assessee-companies were entitled to the tax deduction as per Article VI of the Agreement for Avoidance of Double Taxation.2. Determination of the Residence of the Assessee-Companies:The Tribunal's determination of the residence of the assessee-companies was based on the location of the directors' meetings, which it considered as the place where the company's affairs were controlled and managed. However, the High Court found this approach incorrect. The High Court referred to several judgments, including CIT v. Bank of China, CIT v. Chitra Palayakat Co., Erin Estate v. CIT, and CIT v. Nandlal Gandalal, which established that 'control and management' means de facto control and not merely the right or power to control.The High Court noted that the agreement between the assessee-companies and Hellenic Lines Ltd. transferred the de facto control and management of the business to Hellenic Lines Ltd. The Tribunal's reliance on the place of directors' meetings was misplaced, as the agreement and the factual control exercised by Hellenic Lines Ltd. clearly indicated that the business was wholly managed and controlled in Greece.The High Court concluded that the assessee-companies were indeed residents of Greece under Article 11(1)(f) of the Agreement for Avoidance of Double Taxation. Consequently, they were entitled to the tax benefits provided under Article VI of the agreement, which included a reduction of 50% of the tax charged in India.Conclusion:The High Court answered the question in the affirmative and in favor of the assessee-companies. The assessee-companies were entitled to the deduction of 50% of the tax charged in India on their shipping business as per the Agreement for Avoidance of Double Taxation between India and Greece. The Tribunal's approach was found to be erroneous, and the High Court clarified that the correct test for determining the residence of a company under the agreement was whether the business was wholly managed and controlled in Greece. The High Court's decision was based on the de facto control and management exercised by Hellenic Lines Ltd. as per the agreement.