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2015 (10) TMI 2374 - ITAT RAJKOT

2015 (10) TMI 2374 - ITAT RAJKOT - TMI - Taxability of profits from operation of ships in international traffic - benefits of India UAE Double Tax Avoidance Agreement - Held that:- 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 provision, i.e. creation of the assessee entity wholly or mainly, to obtain the benefits of the India UAE tax treaty which “would not be otherwise available”, could not .....

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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 company are conducted from UAE, as is the case before us, and there is no material to controvert the same or to establish that the company is controlled or managed from outside UAE, learned CIT(A) was indeed quite justified in reversing the actio .....

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Kumar : 1, By way of this appeal, the appellant Assessing Officer has challenged correctness of the order dated 30th August 2013, passed by the CIT(A) in the matter of assessment under section 172(4) of the Income Tax Act, 1961, in respect of sailing by M V Eleni T Voy I relatable to the assessment year 2009-10. Grievance of the Assessing Officer, in substance, is that on the facts and in the circumstances of the case, the learned CIT(A) erred in granting benefits of India UAE Double Tax Avoidan .....

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it for the beneficiary of M/s MUR Shipping DMC Co UAE and that the assessee has submitted letter of commercial licence and tax residence certificate . The Assessing Officer, however, proceed to reject this claim of treaty protection by observing that the tax residency certificate was issued by Dubai had clearly mentioned that Issued in Dubai, on Thursday the 15/011/2009 without any responsibility whatsoever on Ministry of Finance and, therefore, the matter is crystal clear that your company has .....

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e and, in this backdrop, proceeded to examine whether it is a case in which Article 29 can be invoked to decline treaty benefits to the assessee. The Assessing Officer requisitioned the information regarding the shareholders, the annual general meetings held by the company, the directors and the freight beneficiary and the evidences of actual taxes paid by the assessee company. Upon collecting the requisitioned information and upon analyzing the same, the Assessing Officer concluded as follows: .....

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years (i.e. 3 years from 08.10.2006 to 07.10.2009) nothing more that. The said license also issued in favour of Manager Mr. Karsten Ambak his nationality also shown Danish, vide No.80043. 3) Copies of companies AGM not submitted. The said AGM should be taken in to General Assembly of UAE, it also meant that the said not situated in UAE and its effective control and management is also out of UAE. 4) Memorandum of Association of Mur Shipping FZCo, the Directors of the company are not 100% UAE resi .....

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nt in respect of operation of ship. Particular of share holder is as follows :- Sr. No. Name of the share holders Nationality Value (AED) No. of shares 1 M/s Mur Shipping AG, Aegeristrasse 48, PO Box No.352, 6301 Zug, Switzerland Switzerland 4,00,000 4 2. M/s Mur Investment AG, Aegeristrasse 48, PO Box No.352, 6301 Zug, Switzerland Switzerland 1,00,000 1 Total 5,00,000 5 6) The owner of the vessel is EMGITI MARITIME LTD of Marshall Islands in which Government of India did not have DTAA agreement .....

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fits 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 be otherwise available. The case of legal entities not having bona fide business activities shall be covered by this Article. Over and above, the company s effective control and management is not situated in UAE or in other words the company is not managed and controlled wholly in UAE. The said company is not resident of UAE as per Article .....

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reight beneficiary is not entitled to claim the DTAA benefit. This action of the Agent has itself proved the mala fide intention and the wrong claim of benefit of DTAA. Under this fact and circumstance of the case the DTAA benefit already claimed in the provisional return for the aforesaid vessel is hereby withdrawn. 3. Aggrieved, assessee carried the matter in appeal before the learned CIT(A). Learned CIT(A), while reversing the stand so taken by the Assessing Officer, observed as follows: 5. T .....

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ssing Officer is not correct in his logic to say that DTAA (India-U.A.E.) claimed by the company in provisional & final return are to be withdrawn based on Company s AGM is held outside UAE, Directors of the Company are not UAE resident (Citizens), Shareholders of the Company are not resident of UAE, and Mur Shipping DMC has only registered office in UAE and therefore its effective control and management are out of UAE. Detailed observations are as under: Delhi High Court in case of Ravi Raj .....

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management of the company is in the hand of its Board of Directors who are responsible for the operations and growth of the company. The entire decision making though reviewed by the shareholders is done by the Board of Directors in Board Meetings, which are held in UAE. The case of Radha Rani Holdings (P) Ltd. Vs. Asst. DIT (Delhi) (2007) 16 SOT 4955 supports this viewpoint where it was stated: The board of directors subject to, the overall supervision of shareholders, actually controls and ma .....

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ainly managing the affairs is resident of Dubai and having permanent residential status. Place of holding of AGM and residential status of share holders are not relevant factor for determining residential status of the company. The place of holding AGM is governed by law of the country where 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 t .....

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n proved that at least two other directors, Mr. Dean and Mr. Robert Michael Muirhead have 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 cer .....

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isclaimer clause seems to be general and restricting UAE government liability and has nothing exceptional for this Company as these wordings are commonly found in all TRC issued at UAE. In any case, these wordings cannot be basis for denial of DTAA benefits. Mur has not only registered office in UAE and presence of senior employees but also its effective control and management is in UAE in my considered view based on facts. The number of senior resident employees and organisational chart submitt .....

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ere such executive directors or officers of the company perform their function, since all the board meetings have been regularly conducted in UAE affirms the facts that Control and Management lies in UAE. Evidences produced automatically reject the applicability of Limitation of Benefit clause and I hold that M/s. MUR Shipping DMC CO is a resident under India-UAE tax treaty in terms of Article 4. The Assessing Officer has nothing against applicability of DTAA between India and UAE in the case of .....

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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 India-UAE DTAA. 4. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 5. 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. 6. We find that, as learned Departmental Re .....

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of the Assessing Officer in denying the treaty protection. The matter, however, does not end there. Even if the issue before us is not covered by the judgment of Hon ble jurisdictional High Court, the matter is to be adjudicated on merits anyway. On merits, learned Departmental Representative s thrust of arguments is one 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 U .....

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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, unde .....

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UAE law. The UAE, as a tax jurisdiction, had right to tax these residents but the rights were not exercised by introducing law to tax them. While dealing with the issue as to whether or not, in such a situation, the UAE tax residents will be eligible for treaty protection in respect of their income sourced in India, a coordinate bench of this Tribunal, in the case of ADIT Vs Green Emirate Travels [(2006) 100 ITD 203 (Bom)], observed that, ..... as long as a person has such locality-related atta .....

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ld 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 . However, uncomfortable with the fact that the judicial bodies were called upon to adjudicate on such a fundamental aspect as the eligibility for treaty benefits, and with the wholly avoidable ambiguity prevailing on this issue due to inertia of the tax administration, the coordinate bench further observed as follows: 10. .....

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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 .....

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d or periods totaling in the aggregate at least 183 days in the calendar year concerned, and a company which is incorporated in the UAE and which is managed and controlled wholly in UAE. 10. The requirement of actual liability to tax for the residents in UAE was thus consciously removed from the definition of resident of a contracting state . As noted by Hon ble Delhi High Court, in the case of Emirates Shipping Line FZE Vs ADIT [(2012) 349 ITR 493 @519 (Del)], in the context of this amended def .....

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in error and we reject his stand on this issue. 11. The amendment of treaty definition for resident in a contracting state , however, did come with a built in check to ensure that this provision is not abused by incorporating special purpose vehicles in UAE only to seek undue benefits in India. As a plain reading of the Article 29 shows, this article seeks to decline the treaty benefits in a case in which main purpose, or one of the main purposes of the creation of an entity is to obtain benefi .....

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le. In other words, as long as such entities have bonafide business activities, the provisions of article 29 cannot be pressed into service at all by a tax jurisdiction. However, for the reasons we will set out in a short while, it is not really necessary to go into that aspect of the matter at all. We have noted that the Assessing Officer has given two reasons for invoking Article 29- first, that the vessel is owned by an entity based in Marshall Islands which has no tax treaty with India; and .....

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hough 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 .....

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ut then since nothing really turns on the situs of ownership of the ships so far as treaty benefits, on the facts of this case, are concerned, the fact of the ships being owned by an entity in Marshall Islands is wholly irrelevant for invoking Article 29. 14. Coming to the second ground on which the Assessing Officer had invoked Article 29, it has been stated that the income from operations of ships of the Switzerland based entities in international traffic is not covered by Article 8 of India S .....

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gives residuary taxation rights to the residence jurisdiction. While it is indeed correct that Article 8 of Indo Swiss tax treaty does not cover income from operation of ships in international traffic and restricts itself to income operation of aircraft in international traffic, Article 22(1), inserted with effect from 1st April 2001, provides that items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable o .....

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ons of ships in international traffic in India or whether a UAE tax resident earns 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 purpos .....

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king 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 provision, i.e. creation of the assessee entity wholly or mainly, to obtain the benefits of the India UAE tax treaty which would not be otherwise available , could not have been fulfilled on the facts of this case as the assesse .....

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lly in UAE . We find that there is no dispute that the assessee is incorporated in the UAE. As regards the stand of the Assessing Officer that the directors of the assessee company are not UAE nationals, this is wholly irrelevant as the directors are residents of the UAE and nationality of the directors, dehors their place of residence and business activity, is not decisive of the fact as to whether or not the company is managed and controlled in the UAE. We also find that the directors of the a .....

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essing Officer on the wording of the tax residency certificate issued by the Ministry of Finance, and the disclaimer given thereon, we find it wholly devoid of any legally sustainable merits so far as eligibility for treaty benefits are concerned. Such hedging in the official certifications by the statutory authorities is too common a situation, and a part of the standard operating practices, to be reason enough to draw an adverse inference. In any case, nothing turns on this certificate per se .....

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