TMI Blog2006 (8) TMI 440X X X X Extracts X X X X X X X X Extracts X X X X ..... shment in India, as such no part of assessee s income was taxable in India, in view of the provisions of Article 7(1) of the Double Taxation Avoidance Agreement. 4. Facts leading to the dispute, briefly, is as under: Assessee-company filed the return on 7-8-1998 declaring income at Rs. 1,25,57,700. Assessee had gross receipts under freight to the extent of Rs. 16,74,36,024 and applying the provisions of section 44B, the income has been adopted @ 7.5% of the receipts. The tax on the same was worked out @ 48% at Rs. 60,27,696. Assessee, a shipping company incorporated in Mauritius, claimed 100% DIT relief as per Indo Mauritius Double Taxation Avoidance Agreement ( DTAA for short). Tax Residency Certificate issued by the tax authorities of Mauritius was filed in support of the claim, according to which the assessee is a resident of Mauritius for tax purpose. 5. Assessing Officer formed the opinion that the claim of the benefit of Article 8 of DTAA entered into between India and Mauritius cannot be extended in the case of the assessee. According to the Assessing Officer, as per Article 8 of the DTAA, profits from the operation of ships in international traffic is taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprise itself into the territory of taxing State in a substantial and enduring form. PE postulates the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country, which can be attributed to a fixed place of business in that country. Assessing Officer held, in the instant case of the assessee, the assessee established to have carried part of its business through a fixed place of business, i.e. , through CCS. The assessee falls within the definition of Permanent Establishment under Article 5.1. This is particularly so, he held, because clause 7 of the agreement states that the agent shall provide suitable office space for one principal s representative free of charge to the principal. He further noted that as per clause6 of the agreement, CCS must not accept the agency of other lines trading in the sphere of principal s services without the consent of the principal. Further, CCS was not to engage in any canvassing activity for any shipping line, which compete with the principal s liner services. Assessing Officer adopted the impugned amount as income of the assessee at page5 of his order, observing as under : "It may als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b )hold Board Meetings at Mauritius; ( c )local bank account through which funds flow; ( d )local qualified Company Secretary; and ( e )local auditor. It was the case of the assessee that the Assessing Officer rejected assessee s claim for the benefit of Article 8 of Indo-Mauritius Treaty and applied Article 7, treating CCS as PE, not considering the entire facts. It was submitted that the Assessing Officer has not taken into consideration that the assessee is registered in Mauritius and has Registration Number issued by the Registrar of Companies. Assessee was considered to have carried the business through its agent, CCS. It was further submitted that the Assessing Officer has not considered Article 5.5 of DTAA, which provides that an enterprise shall not be deemed to have a PE in other Contracting State merely because it carries on the business in other State through a broker, general commission agent or through some other agents of independent status, where such agents are acting in the ordinary course of business. In the case of the assessee, CCS was carrying on the business of acting as agent of the assessee. But CCS is an independent entity and it has independent st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is also a possibility of effective management being in a third State other than the two Contracting States. The Assessing Officer has specifically written in his assessment order that when the assessee was asked to substantiate that its place of effective management is in Mauritius, no further details were filed by the assessee to substantiate the same. In my opinion, the place of effective management is the place where the key and commercial decisions that are necessary for the business are taken. In substance the place of effective management will originally be a place where the most senior person or a group of persons sit and make its decisions, the place where the action to be taken for the entity as a whole is determined. In view of the above facts, I too, feel that the effective management of the appellant is neither in Mauritius nor in India. 2.4 Mr. Klaus Vogel in his book of International Taxation, who is an eminent authority of International Taxation, has stated that if the effective management of an enterprise is not in one of the Contracting States but is situated in the third State, the benefit of the Article 8 cannot be extended. The same is reproduced as below : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sphere of the principal s services without the consult of the principal. The agent also undertakes not to engage in any canvassing activity in favour of any Line which might compete with the principal s liner services. 2.5 In the course of appellate proceedings, the AR has tried to rebut the Assessing Officer s contention by saying that the restriction in clause 6 of the Agreement does not mean that the Indian agent cannot carry on any business. The Indian agent is not supposed to carry on business of acting as agent of any other non-resident shipping company which is carrying on similar business in the same sector. However, if the Indian agent carries on business of canvassing cargo to a sector which does not compete with the service of the principal s liner service such agent cannot be treated as exclusive agent and provisions of Article 5.4 does not apply and the provisions of Article 5.5 apply. 2.6 I have considered the aforesaid contention of the AR as well as the assessment order. The moot point for consideration is whether in view of the factual position in this case can it be said that there exist a PE of the appellant company in India. The term PE has been defined in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .9 The above stated factual position brings out that the appellant s case falls under Article 5(1) of the DTAA when the business of the appellant is carried out through a fixed place through the agents in India wherein the agent was to maintain the office for the principal s representative. Further, I also do not agree with the contention of the AR on not constituting a PE in this case through agent. It is an admitted position in this case that all the work of the appellant in India is carried out by its agents namely M/s Consolidated Cargo Services. The Hon ble Mumbai D Bench of ITAT had an occasion to deal with a similar situation in the case of ACIT v. DHL Operations B. V. Netherlands (ITA Nos. 7987 and 7988/Bom./92) where the Hon ble ITAT has discussed the concept of Agency PE threadbare. The relevant portion of the said order is quoted hereunder : It is well-settled principle of law that the words in a statute or document take its colour from the context. When we keep in mind that the enquiry to be made is relating to the activities of the non-resident vis-a-vis the activities of the agent of independent status, it is not difficult to appreciate that the enquiry to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases in which the Indo-Mauritius Double Tax Avoidance Convention of 1983 applied. In this case the Hon ble High Court accepted the contention that the Circular is ultra vires the provisions of sections 90 and 119 of the Income-tax Act, 1961 also otherwise bad and illegal. The order of the Hon ble High Court was set aside by the Hon ble Supreme Court and held that the Circular is valid learned counsel further submitted that the Circular referred to above clarified certain points regarding taxation of income from dividends, etc. 10. In the Circular mentioned above it is clarified that wherever Certificate of Residence is issued by Mauritius authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership of the shares. This was challenged. Learned counsel submitted, coming to the instant case of the assessee, the assessee had produced Tax Residency Certificate after compliance of the conditions, which have been mentioned vide para 7 hereinabove. Hence, learned counsel submitted that the issue is to be decided in assessee s favour. 11. On the other hand, the learned Departmental Representative supporte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent status was rejected by the Assessing Officer and confirmed by the CIT(A) mainly relying upon article 8(1) of DTAA between the Contracting States (India and Mauritius), wherein it speaks of the place of effective management Assessing Officer held and CIT(A) confirmed that since only two Directors are of Mauritius and all other management are for name sake, in reality the benefit goes to a third country, which is not acceptable in view of article 8(1) of DTAA. Taking the benefit by a third country has been discussed by the Hon ble Supreme Court in the case of Azadi Bachao Andolan ( supra ) at pages 746 and 747, briefly, as under : "Treaty shopping" is a graphic expression used to describe the act of a resident of a third country taking advantage of a fiscal treaty between two Contracting States. According to Lord McNair, "provided that any necessary implementation by municipal law has been carried out, there is nothing to prevent the nationals of third States , in the absence of any expressed or implied provision to the contrary, from claiming the right or becoming subject to the obligation created by a treaty" (Lord McNair, The Law of Treaties, page 336 [Oxford, at the C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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