TaxTMI 
TaxTMI 
2004 (2) TMI 278
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....nd Mauritius ('DTAA'), the place of effective management may be a State other than India or Mauritius. (c) On the facts and in the circumstances of the case, the Learned CIT(A) has legally erred in holding that the place of effective management of the Appellant is not in Mauritius and consequently denying the benefit of Article 8 of the DTAA. 2. (a) Without prejudice to ground No. 1 above and on the facts and in the circumstances of the case, the Learned CIT(A) has legally erred in holding that the Appellant had a Permanent Establishment ('PE') in India in the form of Agents and thereby has erred in charging to tax the Business Profits of the Appellant in India under Article 7 of the DTAA. (b) Without prejudice to ground No. 1 above and on the facts and in the circumstances of the case, the Learned CIT(A) has legally erred in holding that the Agent's do not fall within the category of exclusions as referred to in Article 5(5) of the DTAA. He further erred in law in not considering the fact that the activities of the agents were not exclusively or almost exclusively for the Appellant, and erred in holding that they are dependent Agents ....
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....ove the existence of 'Effective Management' in Mauritius then the profits in India will be computed as per Article 7 of DTAC. In reply, the contention of the assessee are summarized as follows:- (1) The issue of 'Effective Management" has relevance only vis-a-vis India and Mauritius, i.e., between the Contracting States and situation of 'Effective Management' in a third country has no relevance to determine the applicability of Article 8 of DTAC. For this purpose, reliance was placed on the following two decisions:- (i) Advance Ruling No. P.9 of 1995, In re [1996] 220 ITR 377 (AAR) (ii) DLJMB Mauritius Investment Co. v. CIT [1997] 228 ITR 268 (AAR). (2) The mind and brain of the organization of the assessee company are situated in Mauritius as the meeting Board of the Directors took place in Mauritius, where policy decisions were taken. Therefore, the 'Effective Management' is situated in Mauritius. 4. The Assessing Officer did not accept such contentions. He found that the assessee has two shareholders namely, (i) Mr. Ibrahim Sayad M. Hussain Sharaf and (ii) Sharafuddin Al Sayad M. Hussain Sharaf. Both of them are ....
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....e and stated the following: (i) That they are the Agents of M/s. ICFS, Dubai from 1993. Previously, they were handling even Mumbai as well as Kandla but right now, they are their agents only for Kandla during the previous year relevant to assessment year 1997-98. (ii) He has further stated that previously the agreement was entered into with ICFS, Dubai but later on the company was shifted to Mauritius. Their agreement remained from Dubai only and no fresh agreement was entered into with Mauritius company. (iii) That the correspondence with this company is only from Dubai as the owners are from Dubai. They never corresponded with Mauritius in the corresponding year and till 1993 onwards till 2001. The copy of relevant correspondence is filed along with the letter. (iv) When shown the details vessel wise Freight income filed with the return of income, he confirmed that all the Kandla vessels during the year were handled by them. (v) He has stated that all the correspondence including the copy of account as well as operating instructions are received from Dubai only. The place of management of the company is in Dubai as all the staff, offic....
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....ective control and management is not in Mauritius which is evident from the following facts:- (1) The ultimate control and management of the company rests in Dubai from where de facto controls over the company's affairs are exercised. (2) During the assessment proceeding, the minutes of board meeting were examined. On examination of these minutes, it is found that only few board meetings are held in Mauritius. In the minutes of board meetings claimed to be held in Mauritius, it is observed that no significant decision regarding policy is taken. This clearly shows that the facade of board meetings in Mauritius is created with the full purpose to fulfil the requirement of Mauritius, law to keep the certificate of incorporation alive and to create an impression that the real control of the company lies in Mauritius. The facade of one or two board meetings in a year in Mauritius do not support the assessee's case in any way. In the case of Unit Construction Company v. Bullock [1961] 42 ITR 340 (HL)" "IA Kenyan subsidiary was held to be resident in England because, though its Board meetings were always held in Kenya, it was managed, in breach ....
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....on part of its business through a fixed place of business, viz. through Freight the assessee falls within the definition of permanent establishment under paragraph 1 of Article 5. (11) It may also be pertinent to mention that paragraph 2 of Article 5 provide certain places to include in the definition of permanent establishment. As per paragraph 2(h), premises used as a sales outlet is also included in the definition of permanent establishment. It may also be pertinent to mention that paragraph 4 of Article 5 gives certain exclusions from the definition of permanent establishment. The assessee does not fall within the category of excluded persons/places referred to in paragraph 4 of Article 5. Paragraph 5 of Article 5 provides that where a person-other than an agent of an independent status to whom paragraph 6 applies is acting in one of the States on behalf of an enterprise of the other State, that enterprise shall be deemed to have a permanent establishment in the other State. Paragraph 6 excludes such agents from the operation of paragraph 5 who are of independent status acting in ordinary course of their business. However, paragraph 6 is not applicable in such....
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.... Board Meetings/Policy decisions are in fact held/taken in UAE and not in Mauritius. Therefore, it was argued that the "effective management": is situated only in Mauritius. (iii) It was argued that Assessing Officer erred in holding that the assessee had a permanent establishment in India in the form of agent and thus, the income has wrongly been assessed as business profit under article 7 of DTAC. It was argued that the agents were independent. According to Article 5 of DTAC such independent agents did not constitute permanent establishment in India. It was argued that the independence of agents or otherwise must be examined on the basis of fact that whether the agent's activities are in ordinary course of business. It was pleaded that only a small portion of total receipts of shipping agents represents amount received from assessee and the agents were also working for many other shipping companies. Therefore, no income could be assessed in India. (iv) Alternatively, it was argued that the profit of the assessee should not be computed under section 44B of the Income-tax Act, 1961. According to Article 7(1) of DTAC, the amount which could be taxed was actual ....
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....may not be material. The third and most important reason is that what paragraph 3 of the article 4 contemplates is not the location of a place of effective management generally but the location of the place of effective management as between the two Contracting States entering into the Double Taxation Avoidance Agreement. Looked at from this point of view, the applicants do not have any place of management at all in India while they do have one in Mauritius. On a proper construction of article 4 of the Double Taxation Avoidance Agreement, therefore, the applicant companies, have to be treated as residents of Mauritius for the purposes of the Double Taxation Avoidance Agreement" 9. He further contended that the Assessing Officer himself has held that effective management is not situated in India, therefore, effective management between the Contracting States can be said to be situated in Mauritius only. The brain and mind of assessee company are situated in Mauritius where all policy decisions are taken. Due to the fact that assessee is resident of Mauritius and its place of effective management is in Mauritius, the assessee has been assessed in Mauritius. For this purpose refere....
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....ritius- even if the 'effective place of management' renders it a resident of such third country also-but in such a situation the assessee cannot be denied the benefit of the convention with Mauritius." Reference was also made to the various Board resolutions passed in Board meetings which are placed at pages 25 to 28 of the paper book to contend that the mind and brain of the assessee company are situated in Mauritius. It was further pleaded that there is a difference between management and ownership, Management takes major policy decisions and ownership is entitled to rewards. What is situated in Dubai can be said only to be ownership and not management. 10. It was further argued that shipping agents appointed by assessee in India are agents of independent status. It was pointed out that various shipping agents received only a small portion of their gross receipts from assessee company. It was further pointed out that the shipping agents are working for many other shipping companies. Thus they were not dependent agents who will constitute Permanent Establishment of assessee in India in terms of Article 5 of the DTAC. Therefore, the assessee did not have any permanent....
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....ding Board Meetings by phone is permitted in law therefore it is irrelevant that the shareholders attended the meeting through phone. The decision taken at Board Meetings are fundamental, therefore, it can be said that mind and control of the enterprise are in Mauritius. The assessee has no relation with the shipping agents through which the shipping activities were carried on in India. The shipping agents were carrying on the similar activities for many other shipping companies. The payment made by assessee to them constitutes a small portion of their gross receipts. For this purpose he relied on the figures given in respect of Samrat Shipping Private Limited. The commission paid by the assessee to them constituted only to 2.24 per cent of the total commission earned by the said concern. Similarly, he pointed out that in respect of M/s. Parekh Marine Agencies Pvt. Ltd., such commission was only to the extent of 5.6 per cent of the gross receipts earned by them. A reference in this regard made to page 66 of the paper book. Referring to the agreement of assessee with Shipping Agents, he contended that the clause regarding "governing law" is not relevant for the purpose of determinat....
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....sections are-reproduced below:- [Special provision for computing profits and gains of shipping business in the case of non-residents. 44B. (1) Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts specified in sub-section (2) shall be, deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession". (2) The amounts referred to in sub-section (1) shall be the following, namely:- (i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and (ii) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India.] [Explanation.- For the purposes of this sub-section, the amount referred to in clause (i) or clause (ii) s....
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....e only in the Contracting State in which the place of effective management of the enterprise is situated. (2) If the place of effective management of a shipping enterprise is aboard a ship, then it shall be deemed to be situated in the Contracting State in which the home harbour of the ship is situated, or, if there is no such home harbour, in the Contracting State of which the operator of the ship is a resident. (3) The provisions of paragraph 1 of this Article shall also apply to profits from the participation in a pool, a joint business or an international operating agency, (4) For the purposes of paragraph 1, interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits from the operation of such ships or aircraft, and the provisions of Article 11 shall not apply in relation to such interest. (5) The term "operation of ships or aircraft" shall mean business of transportation of persons, mail, livestock or goods, carried on by the owners or lessees or charterers of the ships or aircraft, including the sale of tickets for such transportation on behalf of other enterprises, the incident....
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....nt of Contracting State. Similarly, Article 11 determines the taxability of interest income on the basis of residence of a resident of Contracting State. Thus it is clear that to determine the taxability or otherwise of a particular source of income in one of the Contracting States, respective article has set a criteria. If according to the said criteria, the income cannot be assessed as per DTAC, the provisions of Income-tax Act of a Contracting State in which such income is earned would be attracted. In this view of the legal position, we have to determine the acceptability of the claim of the assessee that as per article 8, its income from operation of ships in international traffic is assessable in Mauritius. Article 8 has been reproduced above. Under Article 8 the criteria to determine the taxability as per DTAC is the "place of effective management of an enterprise". The term "place of effective management" has neither been defined in DTAC nor defined in IT Act, 1961. Therefore, the said term should be understood in its natural meaning. It is plausible to say that the words 'place of effective management' refer to a place from where factually and effectively the day-t....
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....l that benefit of Article 8 is not available to assessee. If the income of the assessee is not assessable under Article 8 of DTAC, the natural consequence thereof will be that the income earned by assessee from operations of Ships in India has to be taxed according to the provisions of Income-tax Act, 1961. 18. During the course of hearing, much reliance was placed by assessee on the Tax Residency Certificate given by Mauritius Income Tax authorities on the basis of which, it was claimed that conclusiveness of such Certificate should not be disturbed in the light of Circular No. 789 dated 13th April, 2000 issued by CBDT and the decision of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan. Reference was also made to the petition filed by Government of India before Apex Court in the case of Azadi Bachao Andolan. We have already mentioned that residence of an assessee is not the criteria under Article 8 to determine the taxability or otherwise of income earned by a resident in either of the Contracting State from the activities of operating Ships in international traffic. The only criteria is place of 'effective management'. Therefore these documents have n....
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....is ample material collected by Assessing Officer on the basis of which, the conclusion was drawn that effective management of the enterprise of the assessee was not situated in Mauritius. Here, the argument of the assessee that the conclusiveness of Certificate given by Mauritius Income Tax authority should be upheld in view of the aforementioned Circular of CBDT is also not acceptable for the reason that nowhere Circular prescribed that such Certificate given by Mauritius Income Tax authorities in respect of the place of "effective management" should be considered as conclusive evidence. It is not that each and every Certificate given by Mauritius Income Tax authority will be conclusive in pursuance of the above-mentioned Circular. The scope of the Circular is always limited to the issue to which it relates. If we carefully peruse the said Circular, it prescribes the specific positions where Certificate of Residence should be considered as sufficient evidence for accepting the status of residence. This is only in respect of dividend income and capital gain. This is apparent from the last para of the Circular where it has been mentioned that "the test of residence mentioned above w....