TaxTMI 
TaxTMI 
2017 (12) TMI 520
X X X X Extracts X X X X
X X X X Extracts X X X X
....hile ignored the nationality of directors & share holders company are out of UAE like wise AGM of the company are also hold outside UAE. The Ld.CIT(A) erred in law and on facts of bard Circular No.1/2003 dated 10.02.2003. The Ld CIT(A) erred in law and facts on determining effective control and management of the principal- M/s Martrade Gulf Logistics FZCO -UAE The Ld CIT(A) erred in law and facts on reliance is placed in the case of Mohsinally Alimohammed Rafik v CIT [1995] 79 Taxman 75 (AAR - New Delhi) the strict interpretation of article 4 of DTA only persons who are actually subjected to tax in UAE can be treated as resident of UAE. The Ld CIT(A) erred in law and facts on TRC issued by the Ministry of Finance-UAE with direction to "issued in Dubai without any responsibility whatsoever on the Ministry of Finance". On the facts and in the circumstances of the case the Ld. CIT(A) ought to have upheld the order of the Assessing Officer." 3. The grounds of appeal so taken are primarily arguments in support of Assessing Officer's basic grievance that the assessee company did not deserve the treaty protection under Indo-UAE Double Taxation Avoidance Agreement ([(1995)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the provisions of Article 29 did not come into play on the facts of the present case. The Assessing Officer was, however, not impressed by these arguments. The Assessing Officer was of the view that the assesseecompany is not entitled to Indo-UAE Tax Treaty benefits for the reason "that the said company has got just registration for doing their business in UAE and company employees are carrying day-to-day affairs through the directors and shareholders of company are other nationals". The Assessing Officer was also of the view that Article 29 come into play in the present case as the assessee would not have been entitled to the treaty benefits such as Indo-UAE Tax Treaty but for registration of assessee-company in UAE. The Assessing Officer further held that since the Tax Residency Certificate issued by the Ministry of Finance of UAE clearly mentions that "issued in Dubai on Sunday, the 14.12.2008 without any responsibility whatsoever on the Ministry of Finance", he concluded that said company was merely registered in UAE to get double taxation benefit and its place of effective control and management was situated outside UAE. The Assessing Officer was of the view that, merely b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ere the company is incorporated. Further shareholders do not have say or direct interference in the management of company therefore in my view the Assessing Officer's stand in this regard is not correct to say that effective control and management is not situated in UAE just because shareholders are not resident of UAE or just because AGM was not held in UAE. Also Assessing officer seems to be wrongly considering nationality of director as factor to decide the residential status of the company. Appellant has been able to prove that MD of the company is residing at UAE and has permanent residential visa of UAE. Further as per DTAA Article 4 residential status of the company is to be determined as: ARTICLE 4 - Resident - 1. For the purposes of this Agreement the term 'resident of a Contracting State' means: (b] in the case of the United Arab Emirates:......... a company which is incorporated in the UAE and which is managed and controlled wholly in UAE. Based on Indian Embassy certified documents submitted such as Incorporation Certificate, Trading license, Valid Tax Residency Certificate, Memorandum and Articles of Association etc submitted, the company is inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tances, I hold that the profits arising out of operations of ship in question in international water, by the appellant is not subject to taxation in India due to applicability of Article 8 read with Article 4 of Indo-UAE DTAA." 5. The Assessing Officer is aggrieved and is in appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. We find that, so far as the entitlement to treaty protection by an entity based on UAE is concerned, the issue is settled by a series of orders of this Tribunal starting with ADIT vs. Green Emirate Shipping and Travels, (2006) 100 ITD 203 (Mum), wherein speaking through one of us, i.e. Accountant Member, this very combination of members constituting Mumbai 'C' bench observed as follows:- "4. The impugned order passed by the CIT(A) takes a rather superficial view of the matter and has conveniently ducked the core issue really required to be adjudicated upon. It has simply brushed aside the real objection raised by the AO which was that in order to avail benefits of the India-UAE DTAA, a person need not only be resident of one of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uthority, we are not persuaded." (emphasis, italicised in print, supplied by us now). The judgments of Hon'ble Supreme Court are binding on us under Art. 141 of the Constitution of India; the rulings of Authority for Advance Rulings, whatever be their persuasive value, are not. The words of Hon'ble Supreme Court are clear, categorical and unambiguous. Once Hon'ble Supreme Court declines to be persuaded by the ruling given by the Authority for Advance Rulings in Cyril Eugene Pereira's case (supra), it cannot be open to us to follow the said ruling. In the case of Asstt. Collector of Central Excise vs. Dunlop India Ltd. (1985) 154 ITR 172 (SC) at p. 180, Hon'ble Supreme Court has, inter alia, observed as follows : "We desire to add and as was said in the Cassell & Co. Ltd. vs. Broome (1972) AC 1027 (HL), we hope it will never be necessary to say so again that 'in the hierarchical system of Courts' which exists in our country, 'it is necessary for each lower tier' .. 'to accept loyally the decisions of the higher tiers', 'it is inevitable in a hierarchical system of Courts that there are decisions of the supreme Tribunal which do not attract unanimous approval of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1920s by the League of Nations describe this method of classification of items and their assignments to the Contracting States. While the English lawyers called it 'classification and assignment rules', the German jurists called it 'the distributive rules' (Verteilungsnormi). To the extent that an exemption is agreed to, its effect is in principle independent of both whether the other Contracting State imposes a tax in the situation to which the exemption applies, and irrespective of whether the State actually levies the tax. Commenting particularly on the German Double Taxation Convention with the United States, Vogel comments: "Thus, it is said that the treaty prevents not only 'current' but also merely 'potential' double taxation". Further, according to Vogel, "only in exceptional cases, and only when expressly agreed to by the parties, is exemption in one of the Contracting States dependent upon whether the income or capital is taxable in the other Contracting State, or upon whether it is actually taxed there." It is, therefore, not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can aris....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ental Representative's contention is that as non-corporate entities are not taxable entities under the UAE Tax Decree 1969, such non-corporate entities, even though based in UAE, cannot be treated as 'resident' for the purposes of the India-UAE DTAA. Our attention is also invited to the learned AO's observations to the effect that "the provisions of the DTAA do not apply to any case which the same income is not liable to be taxed twice by the existing laws of both the Contracting States" and that "since the assessee has failed to prove that it is paying taxes in UAE, the DIT relief sought by the assessee is rejected"; but it is the very proposition underlying these observations which was rejected by the Hon'ble Supreme Court holding that "it is... not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States". As we have noted earlier also, the Revenue is on record to have opposed the very argument that the Revenue has taken in the present case, as evident from the Hon'ble Supreme Court's following observation : "The appellants (i.e., Union ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n and assignment rule', the German jurists called it 'the distributive rule' (Verteilungsnormi). To the extent that an exemption is agreed to, its effect is in principle independent of both whether the Contracting State imposes a tax, in the situation to which the exemption applies, and irrespective of whether the State actually levies the tax. Commenting particularly on the German Double Taxation Convention with the United States, Vogel comments: "Thus, it is said that the treaty prevents not only 'current' but also merely 'potential' double taxation". It is thus clear that a tax treaty not only prevents current' but also potential' double taxation. Therefore, irrespective of whether or not the UAE actually levies taxes on non-corporate entities, once the right to tax UAE residents in specified circumstances vests only with the Government of UAE, that right, whether exercised or not, continues to remain exclusive right of the Government of UAE. As noted above, the exemption agreed to under the 'assignment' or 'distributive' rule, is independent of 'whether the Contracting State imposes a tax in the situation to which exemption implies'. In the case of Jo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e person should actually be liable to tax in that Contracting State by virtue of an existing legal provision but would also cover the cases where that other Contracting State has the right to tax such persons irrespective of whether or not such a right is exercised by the Contracting State. In our humble understanding, this is the legal position emerging out of Hon'ble Supreme Courts judgment in Azadi Bachao Andolan's case (supra). The plea taken by the Revenue that the assessee was not 'liable to tax', which was anyway not taken by the AO or before the CIT(A), is also not sustainable in law either. 9. For the reasons set out above, and even though we do not approve the reasoning adopted by the CIT(A), we approve the conclusion arrived at by the CIT(A). His having arrived at right conclusion may have been fortuitous but what is material is that he reached the right conclusion. We approve his conclusion and decline to interfere in the matter." 8. In view of the legal position so set out, with which we are in considered agreement, all that is necessary for the purpose of being treated as resident of a Contracting States under Indo-UAE Tax Treaty is that the person should be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ne two issues- first, that there is no evidence to suggest that the assessee actually paid any taxes in UAE; and -second, that it was a fit case to invoke Article 29 of the Indo UAE tax treaty as the assessee could not rebut the facts brought on record by the Assessing Officer. 7. It is in this backdrop that we need to take a look at article 29 of India UAE tax treaty which has been invoked by the Assessing Officer to decline treaty benefits to the assessee. This article provides as follows: "An entity which is a resident of a Contracting State shall not be entitled to the benefits of this Agreement if the main purpose or one of the main purposes of the creation of such entity was to obtain the benefits of this Agreement that would not be otherwise available. The cases of legal entities not having bonafide business activities shall be covered by this article." 8. The above article was introduced in the Indo UAE tax treaty by the virtue of a protocol dated 26th March 2007 [Notification No. 282 of 2007; 213 CTR (Statute) 64]. It may be recalled that under the original treaty provisions, resident of a contracting state was defined as "any person who, under the laws of that St....
X X X X Extracts X X X X
X X X X Extracts X X X X
....quickly resolving disputes on such a fundamental aspect of a tax treaty as to who will be eligible for the benefits of that tax treaty. We hope that the Government will resolve this matter once for all and would not allow this uncertainty to last for long. We leave it at that. 9. It is heartening to note that within less than one and a half year from the above observations having been made by the Tribunal, the tax administration did indeed resolve the issue. Vide protocol dated 26th March 2007 (supra), the definition of expression 'resident' was revised as follows: 1. For the purposes of this Agreement the term "resident of a Contracting State" means: (a) in the case of India: any person who, under the laws of India, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. This term, however, does not include any person who is liable to tax in India in respect only of income from sources in India; and (b) in the case of the United Arab Emirates: an individual who is present in the UAE for a period or periods totaling in the aggregate at least 183 days in the calendar year concerned, and a company whic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and - second, that the assessee company is owned by shareholders in Switzerland, and since the income from operations of ships of the Switzerland based entities in international traffic is not covered by Article 8 of India Switzerland DTAA, if both the Swiss shareholders, which wholly own capital of the assessee company, were to carry on business directly, the treaty protection would not have been available 12. None of these reasons, in our considered view, are sustainable in law. 13. We find that though the merchant vessel in question is indeed owned by a Marshall Islands based entity, it is an undisputed position that the vessel is given to the assessee under a long term time charter arrangement, and that, under article 8, ownership of the vessel is not a sine qua non for availing treaty protection of shipping income. Article 8(1) provides that "profits derived by an enterprise of a Contracting State from the operation by that enterprise of ships in international traffic shall be taxable only in that State" and essentially profits from operation of ships in international traffic will also cover the situations in which the profits are earned from operating the ships irrespec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Indian sourced income from operations of ships in international traffic, the income is not taxable in India- in the former case because of the provisions of Article 22(1) of Indo Swiss tax treaty, and in the later case of because of the provisions of Section 8 of India UAE tax treaty. 16. As a corollary to this legal position, the condition precedent for invoking Article 29 of Indo UAE tax treaty, i.e. main purpose, or one of the main purposes of the creation of the assessee entity being to obtain benefit or benefits of Indo UAE tax treaty which would otherwise not be available, is not fulfilled. When treaty protection in respect of income of such a nature was anyway available, though under a different kind of provision of the Indo Swiss tax treaty, the assessee entity cannot be said to have been created for the purpose of availing Indo UAE tax treaty benefits. The action of the Assessing Officer in invoking the provisions of Article 29 is vitiated in law on this count as well. 17. In view of the reasons set out above, the Assessing Officer was clearly in error in invoking the provisions of Article 29 on the facts of this case. The conditions precedent for invoking this pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the treaty entitlements on the basis of, what the Assessing Officer perceives as, shortcomings in the tax residency certificate. An issue is then raised by the Assessing Officer about the limited three year period of commercial licence issued by the Government of UAE but it is difficult to even understand, much less approve, this objection. Whether the assessee is given a perpetual licence to carry on business in the UAE or whether the licence is renewed every year, does not, in our considered view, affect the fact that the assessee was carrying on business in the relevant previous year. The approach of the Assessing Officer is too pedantic and is anyway swayed by the considerations which are not really relevant in the present context. 19. Given these facts, in our considered view, the apprehensions raised by the Assessing Officer are devoid of any legally sustainable basis and are not supported by any cogent material. The LOB clause, as set out in article 29 of the India UAE treaty, as see have seen earlier in this order, could not have been invoked on the facts of this case either. In such a situation, once there is reasonable evidence to suggest that the affairs of the compa....