TMI Blog2004 (2) TMI 278X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 and constitute PE of the Appellant in India. (c) 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 business of the Appellant is carried out through a fixed place through the Agents i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffective 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 residents of UAE. The letters of authority, application for port clearance certificate, clarification response to queries etc. are signed by Mr. Ibrahim Sayad M. Hussain Sharaf, who generally attended the Board meetings by phone. Therefore, the Assessing Officer to verify the claim of the assessee regarding situation of 'effective management' in Mauritius made enquiries from shipping agents appoin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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, officers, captains are sitting in Dubai. (5) Summons under section 131 were also issued to M/s. Parekh Marine Agencies Pvt. Ltd., another agents of the assessee. Shri Amit Dhruv, Accountant from M/s. Parekh Marine Agencies Pvt. Ltd., attended and furnished details called for. Perusal of the same indicates that M/s. Parekh Marine Agencies Pvt. Ltd., has communicated to the assessee at its address at Dubai. The assessee has also sent communications, messages, etc., to M/s. Parekh Marine Agencies Pvt. Ltd., whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 of its article, but its U.K. parent company. The OECD commentaries clarifies that place of management does not necessarily mean office and can be said to be the control and co-ordinating centre where all significant decisions relating to the management of an enterprise as a whole are taken. In view of this principle, the assessee's claim that the effective management of the assessee is in Mauritius and the assessee should be given benefit of the Article 8 of the DTAA is not accepted for the reason that the control and co-ordinating centre lies in the hands of the shareholders who are resident of Dubai and where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cases where the activities of the agent of an independent status are devoted wholly or almost wholly on behalf of the foreign enterprise. From the above, it is clear that the assessee has a PE in India within the meaning of Article 5 of the DTAA and hence, the assessee's income is taxable under Article 7 of the Indo-Mauritius DTAA." 5. Thus, the Assessing Officer computed the income of the assessee as per receipts shown in the return under section 44B of Income-tax Act, 1961 and levied tax accordingly. 6. The appeal was filed before CIT(A).The submissions before CIT(A) in short are as under: (i) the assessee has its corporate seat at Mauritius, Upon fulfilling certain fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 profits earned by the assessee during the year under consideration. According to audited balance sheet, the assessee had earned only US $ 18745. Thus to that extent the profits could be assessed by Assessing Officer and (hat to the extent attributable to Indian territorial waters. Reference in this regard was made to CBDT Circular No. 786, dated 7-2-2000. 7. The Learned CIT(A) after considering the submissions held that the "effective management" of the assessee was not situated in Mauritius. The "effective management" was neither in Mauritius nor in India, therefore, assessee was not entitled for the benefit of Article 8 of DTAC. The agents of assessee appointed to carry on the work in India, constituted the permanent es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mself 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 reference was made to the copy of return of income filed in Mauritius for assessment year 1998-99 and receipts for payment of self-assessment tax paid in Mauritius placed at pages 29 to 32 of the paper book. Thus he pleaded that assessee has already been assessed in Mauritius and there is no scope for taxing the same income again in India by virtue of Article 8 of DTAC. It was vehemently argued that the tax residency certificate given by Mauritius tax authority has to be considered as a conclusive evidence to establish the tax residency status of the company on the basis of Circular No. 789, dated 13-4-2000. Though the said circular is in respect of article 10 which deals with dividend income, yet the principal adopted therein should be ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious 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 establishments in India and Assessing Officer and CIT(A) were wrong in holding that the assessee was having permanent establishment in India and is therefore assessable in India as per article 7 of DTAC. 11. It was further argued that the income of the assessee could not be assessed under the provisions of section 44B of the Income-tax Act, 1961 (for short 'Act'). The assessee is maintaining regular books of account. According to such books of account, the profit was only to the extent of US $ 18745, therefore, income, if any, could be assessed should be limited to that extent only. 12. On the other hand, the Learned Departmental Representative referred to the assessment order. He pointed out that effective management was not situated in Mauritius. The assessee company has two shareholders, who are r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 determination of existence of "effective management". It is usual feature that in international laws the agreements generally refer to the applicability of laws of third country. He further contended that the decision of Authority of Advance Ruling certainly has persuasive value. Article 8 is a complete code, therefore, once assessee is taxed in Mauritius being place of "effective management", no tax can be levied in India in respect of the said income. Referring to Article 7, he contended that the agents appointed by assessee in India were independent agents, therefore, no permanent establishment can be said to be existed in India. In the alternative, he submitted that if it is held that the assessee had permanent establishment, the profit attributable to permanent establishment only should be assessed and not the entire inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - (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) shall include the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature.] Section 5(2) subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1.- Income accruing or arising outside India shall not be deemed to be received in India within the meaning o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded 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 incidental lease of ships or aircraft and any other activity directly connected with such transportation." 16. Briefly stating, Article 1 provides the scope of convention. According to Article 1, the convention shall apply to persons who are residents of one or both of the Contracting States. According to Article 2, in the case of India, it covers Income-tax Act, 1961 and Companies Profit Surtax Act, 1964. In the case of Mauritius, it covers Mauritius Income Tax. It is also applicable for other similar taxes. According to article 3, general functions have been given. Article 4 determines the factor of residence. Article 5 determines the factor 'permanent establishment'. Thereafter, in Chapter 3, Articles 6 to 22 cover taxation of income under various heads. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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-today affairs of the company are managed and controlled and not to the place in which may reside the ultimate control of the company. It refers to a place where ships are put into service. It is undisputed that no business activity is carried on by the assessee in Mauritius. To maintain its corporate status, and to obtain Tax Residency Certificate, the assessee has observed/adopted some necessary formalities in Mauritius. To obtain/preserve its such status, the assessee is required to observe certain formalities which have been described in paragraph 2.2 of the CIT(A)'s order. One of such formalities is that the company will hold Directors' Meetings in Mauritius. To fulfil the said condition, the assessee has held the Directors' Meeting in Mauritius. To determine the claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 no bearing on the issue arising in this appeal. 19. During the hearing, the assessee vide letter dated January 2,2004 has sought to produce before us a Certificate also given by Commissioner of Income Tax, Mauritius which reads as under:- "My Ref.: 25-002396/ap/147 TO WHOM IT MAY CONCERN This is to certify that the Tax Residence Certificate issued on the third of August, one thousand nine hundred and ninety four to the effect that Integrated Container Feeder Service is a company resident in Mauritius for income tax purposes is still valid. It is also certified that the company has satisfied all requirements of the Income Tax Office and that the effective place of control and management of Integrated Container Feeder Service is in Mauritius. Sd/ J. KELLY for Commissioner of Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 would also apply in respect of income from capital gain on sale of shares. Had it been the intention of CBDT to apply this test for the purposes of Article 8 as well, it should have also mentioned about Article 8. Thus, we find no merits in the claim of assessee that such Certificate should be treated as sufficient evidence for accepting the factum of place of effective management. We also find no force in the contention of Learned Authorised Representative of the assessee that "Place of Effective Management" to be determined vis-a-vis Contracting State, for which reliance has been placed on the decision of AAR in Advance Ruling No. P.9 of 1995 case. The relevant observations in the said authority are regarding a situation as envisaged in Article 4 of DTAC where a concerned party is resident in both the Contracting States. Here in the present case "A" is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Authorised Representative of the assessee that the income of assessee should be computed according to income as per accounts of the assessee. Section 44B of the Act is a special provision for computing profits and gain of shipping business in case of non-residents. It start with the non obstante clause with respect to sections 28 to 43A of the Act. Thus the income of assessee cannot be computed according to general provisions of the Act which prescribe the mode of computation of business income. The provision of section 44B being special provision will have precedence over general provisions and income as envisaged in section 44B has to be computed according to section 44B itself. It is not disputed that any part of gross receipt of the assessee shown in the return of income filed in India does not comprise of the amounts mentioned in section 44B(2) of the Act. In this view of the situation the deemed profits and gains of the assessee in respect of gross receipts shown by the assessee cannot be less than 7.5 per cent thereof. Thus we hold that there being no doubt with regard to gross quantum of receipts as prescribed under section 44B(2), the deemed profits and gains of as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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