Income Tax Appellate Tribunal - Mumbai
Integrated Container Feeder Service vs Jcit, (Intl. Tax._4) on 26 February, 2004
Equivalent citations: [2005]278ITR182(MUM), (2005)98TTJ(MUM)69
ORDER
I.P. Bansal, Judicial Member
1. This is an appeal filed by the assessee and is directed against the order of CIT(A) dated 7.3.2003 for the assessment year 1998-99.
2. Grounds of appeal read as under:
"1. a) On the facts and in the circumstances of the case, the Learned Commissioner of Income-tax (Appeals) ['CIT(A)1 has legally erred in holding that the appellant has income chargeable to tax in India. The Learned CIT(A) ought to have held that no part of the Appellant's income is chargeable to tax in India.
b) On the facts and in the circumstances of the case, the Learned CIT(A) has legally erred in holding that under Article 8 of the Double Taxation Avoidance Agreement between India and 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 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 in India and, therefore, erred in holding that they are a PE of the Appellant within the meaning of Article 5( 1) of the DT AA.
3. a) Without prejudice to ground Nos. 1 and 2 above, and on the facts and in the circumstances of the case, the Learned CIT(A) has legally erred in computing the profits of the Appellant under Section 44B of the Income-tax Act, 1961 ('IT Act').
b) Without prejudice to ground Nos. 1 and 2 above and on the facts and in the circumstances of the case, the Learned CIT(A) has legally erred in applying the provisions of Section 44B of the IT Act, instead of taxing the profits attributable to the activities performed in the Indian territorial waters
c) Without prejudice to the fact that the appellant does not have a PE in India, the Learned CIT(A) erred in not applying the provision of Article 7(2) of the DTAA and Circular No. 23, dated 23 July 1969 issued by Central Board of Direct Taxes in order to determine Appellant's profits attributable to Indian operations.
3. The assessee is a non-resident company incorporated in Mauritius. During the year under consideration, it carried on activity of operating ships in international traffic from India. The gross receipts of assessee for such activity are US$ 9,073,480.80. According to return of income filed in this regard, the assessee claimed exemption on the basis of Article 8 of "Convention between the Government of the Republic of India and the Government of Mauritius for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains". (hereinafter referred to as DTAC). According to Article 8, such income can be taxed only in the Contracting State where the 'Effective Management' of the enterprise is situated. Under these facts, the Assessing Officer issued show cause notice to the assessee on 19.3.2001. The Assessing Officer in the said notice required the assessee to substantiate the existence of 'Effective Management' in Mauritius. The Assessing Officer also informed the assessee that in case the assessee is unable to prove 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) 220 ITR 377 (AAR) (Netwest's case)
ii) DLJMB Mauritius Investment Co. v. CIT, 228 ITR 268 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 share holders namely, (i) Mr. Ibrahim Sayad M. Hussain Sharaf & (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 appointed by assessee in India. In this process, he made enquiries from the following concerns: -
1) M/s. Samarat Shipping Co. Pvt. Ltd.,
2) M/s. Parekh Marine Agencies Pvt. Ltd., From queries made from the above mentioned two concerns and from perusal of documents produced by them, the Assessing Officer came to the conclusion that effective management of the assessee is not situated in Mauritius but it is in Dubai. The relevant portion of the assessment order is reproduced below:-
"Perusal of the minutes of the Board Meeting indicates that the decisions are predominantly routine in nature. The assessee has two shareholders namely Ibrahim Sayad M. Hussain Sharaf and Sharafuddin AI Sayad M. Hussain Sharaf, both residents of UAE. The letters of authority issued by the assessee, application for port clearance certificate, clarification response to queries claimed by the Income Tax Department etc, are signed by Mr. Ibrahim Sayad M. Hussain Sharaf who is the resident of UAE. The Board Meetings are generally attended by Mr. Ibrahim Sayad M. Hussain Sharaf by phone..
During the course of assessment proceedings, summons Under Section 131 of the I.T. Act, 1961 were issued and served to M/s. Samrat Shipping Co. Pvt. Ltd., asking for the details which are reproduced below: -
1) Please furnish the copies of the correspondence for the F.Y. 1.4.1997 to 31.3.1998 with M/s. Integrated Container Feeder Service, Mauritius.
2) Where the detail of principal's Alc. instructions for operation of vessels in India are being received by you.
3) When are you appointed agents of ICFC Mauritius and for which reason.
4. During the course of the assessment proceedings, summons were issued to M/s. Samrat Shipping Co. Pvt. Ltd., an agents of assessee. In response to the summons Under Section 131, Shri Jayant Wanjia, authorised representative of M/s. Samrat Shipping Co. Pvt. Ltd., attended on behalf of the assessee 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 A.. 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, 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., which emanated in Dubai.
6. On going through the Shipping Agency Agreement between the assessee and M/s. Parekh Marine Agencies Pvt. Ltd, entered into on 1st day of August, 1994, which was submitted at the time of claiming 100% relief, it was found that clause 18 of this agreement talks of the Governing Law, the same is reproduced as under:
"GOVERNING LAW:
This Agreement shall be governed by the and construed in accordance with the laws of UAE, unless in conflict with the laws of the country of vessel registry. "
7. It is a normal business practice that the Governing Law in any agreement would be with relation to the place of control and management of the principal. In the instant case, the Governing Law has been agreed upon as that of UAE and not of Mauritius. There is no good reason for deviation from the normal practice except in a situation where the control and management is not in the country of incorporation of the company. This amply proves that the control and management of the assessee is in UAE and not in Mauritius as claimed by the assessee.
8. Perusal of the correspondences of the assessee with the agents viz. M/s. Parekh Marine Agencies Pvt. Ltd., and M/s. Samrat Shipping Co. Pvt. Ltd., indicate that the place of decision making of the assessee rests in Dubai and the decisions being taken at Dubai indicates that the effective management of the assessee company is situated not in Mauritius but in Dubai. Though it may be claimed that the Board meetings are held in Mauritius, the decisions taken therein are routine and the final decision making is left to UAE.
In the case of Narotam & Pareira Ltd. v. CIT , the Hon'ble High Court., Mumbai has held that -
"De facto control and management will decide residency"
Even the assessee's effective 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 fulfill 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 (hHL) "
"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 coordinating center 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 center lies in the hands of the share holders who are resident of Dubai and where all significant decisions relating to management are taken.
10. In view of the above, it is established beyond doubt that the real control of the assessee company lies in the hands of the shareholders who are resident of UAE. The Assessing Officer further observed of the principal.
Clause 5 of the agreement states that the agents undertake to provide and maintain at its own cost proper offices all duly equipped with mark and emblem of the principal, quite visibility displayed at entrance.
From the definition of permanent establishment under Article 5.1, it is clear that permanent establishment means a fixed place of business through which the business of the enterprise is wholly or partly carried on. The Andhra Pradesh High court in the case of Vishakapathanam Port Trust, 144 ITR 146 had the occasion to consider the meaning of permanent establishment, Their lordships held that permanent establishment connotes a projection of the foreign enterprise itself into the territory of the taxing state in a substantial and enduring form. The work permanent establishment 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. It was further held that when there is a virtual projection of the foreign enterprise of one country into the soil of another country, the foreign enterprise would be considered to have a permanent establishment in the other country.
As per Article 5.1 of DTAA, 'permanent establishment' means a fixed place of business through which the business of the enterprise is wholly or partly carried on. Since the assessee is established to have carried 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 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 formalities a tax residency certificate has been issued by the Mauritius, Tax Authorities. The assessee is also a resident of India according to Art 4(1) of DTAC as the term "any other criteria of similar nature" appeared in article 4(1) makes the assessee tax resident of India as well. In this view of the matter, according to article 4(3) the only criteria to determine the place where the income could be taxed is the country in which the place of "effective management" is situated. Thus, it was argued that to determine the place of "effective management", it has to be seen in respect of Contracting States only and its scope can not be extended to a third country. It was argued that Assessing Officer has mentioned that there is no place of "effective management" in India, in this view of the situation, the ''effective management" could only be in Mauritius, therefore, the assessee was assessable in respect of its income in Mauritius. The assessee has been assessee in Mauritius. Therefore, no tax could be levied in India in terms of article 8 of the DTAC.
ii) The "effective management", if any, was situated only in Mauritius, as the mind and brain of an organization are situated in Mauritius where board of directors meet and take decision with regard to operation of an enterprises. The meeting of Board Directors are regularly held in Mauritius A reference was made of Board Meetings held on 28.8.1997, 6.11.1997, 17.2.1998 and 20th May 1998. It was argued that Assessing Officer was wrong in holding that the control and management lies in the hands of shareholders who are resident of Dubai. For this purpose no evidence has been brought on record to show that 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 assessee 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 that 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 establishment. Section 44B was applicable to compute assessable income of assessee with respect to activities carried on by the shipping agents in India. The circular referred to by assessee is not applicable. The Assessing Officer has correctly assessed the income of assessee under Section 44B of the Income Tax Act, 1961. Against these findings of CIT(A), the assessee is aggrieved hence is in appeal before us.
8. After narrating the above mentioned facts, the Learned Authorised Representative of the assessee pleaded that the assessee is resident of Mauritius. A tax residency certificate is given by Mauritius Tax Authorities which is placed at page 18 of the paper book.. He contended that for determining the "place of effective management" of an enterprise, the reference to third country i.e. UAE is irrelevant and unwarranted. So either of the Contracting State of DTAC should be considered for determining the place of "effective management" For this purpose specific reference was made to the following observations Authority of Advance Ruling in the case of XYZ* In re 220 ITR 377 (AAR):
"This conclusion will not, however, be correct for three reasons. The first is that it is equally plausible to say that the word "place of effective management" refers to the place from where, factually and effectively, the day today affairs of the companies are carried on and not to the place in which may reside the ultimate control of the company. Secondly, it has been stated in the papers filed here that the general meetings of the company are also held in Mauritius and, if this is, correct, the fact that the holding bank is in Britain 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"
(emphasis by us)
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 assesses 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 adopted for other purposes as well. It was pointed out that the Hon'ble Supreme Court has upheld the validity of such circular in the case of Union of India v. Azadi Bachao Andolan, 132 Taxman 373 (SC) A further reference was made to page 98 of the Special Leave Petition filed by Union of India before Hon'ble Supreme Court in the case of Azadi Bachao (supra) "(J) Because the Hon'ble High Court failed to appreciate that an investigation into whether or not the assessee is resident of a "third " country is not relevant for determining 'residence' for the purposes of the convention between India and Mauritius. The assessing authority has only to ascertain whether the assessee is a resident of either or both the "Contracting States". It is submitted that the fact that an assessee is also a resident of a 'third' State would not impinge upon the issue of its residence in either of the Contracting States and the assessing authority cannot embark upon his inquiry. Thus there is no question of the impugned circular having taken away this power of investigation as has been held by the Hon'ble High Court. It is further submitted that the Hon'ble High Court did not appreciate the import of the words 'by reasons of his domicile, residence, place of management or any other criterion of similar nature..." in Article 4(1) of the Convention. In other words 'residence' may arise because of any of these factors and once such criterion is fulfilled, then merely because the place of management of the company is in a 'third' country, the company does not cease to be a resident of Mauritius - 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 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 Art 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 resident of UAE. The day to day control and management of shipping activities was done from Dubai. The Assessing Officer had made inquiries from shipping agents. The shipping agents have furnished the evidence which clearly shows that the day to day activities were being controlled and managed only from Dubai. Therefore, he contended that effective management was not situated in Mauritius. Referring to the resolution passed in Board Meetings, the Learned Departmental Representative contended that those were not sufficient to prove the existence of "effective management" in Mauritius. He pointed out that the shareholder directors always attended the meetings by phone. Therefore, he contended that the Assessing Officer has rightly concluded that effective management was not in Mauritius. No evidence has been brought on record by assessee to show that any of the shipping activity was effectively managed from Mauritius. The assessee conducted the Board Meetings only to fulfill the requirements of Mauritius laws and to retain tax residential status in Mauritius. The Learned Departmental Representative also referred to the agreement made by the assessee with shipping agents. He mentioned that various clauses of agreement also indicate that assessee does not have its "effective management in Mauritius but it was in Dubai only. In short the Learned Departmental Representative relied on the orders of Assessing Officer and CIT(A)
13. In reply, the Learned Authorised Representative of the assessee reiterated the earlier submissions. He contended that attending 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% 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 percent 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 income of the assessee.
14. We have carefully considered the rival submissions in the light of material placed before us. The appellant is non-resident in India within the meaning of Section 2(30) of IT Act 1961. This position is clear even as per return of Income filed by the assessee in India , which for the sake of convenience is reproduced below :-
"NAME OF THE ASSESSEE : Integrated Container Feeder Service
ADDRESS : 5, Duke of Edinburgh Avenue
Port Louis, Mauritius
STATUS : Foreign Company
RESIDENTIAL STATUS : Non-Resident
P.A. NO. (NEW) : Applied for
TRADING YEAR ENDED : 31.03.98
ASSESSMENT YEAR : 1998-99
GROSS EXPORT FREIGHT EARNINGS/IMPORT FREIGHT
COLLECTIONS
STATEMENT OF TOTAL INCOME
USD
Total slot hire earnings (Gross) 9,0 73,480.80
(As per Annexure 'A')
Deemed Income @ 7.5% Under Section 44B on
USD 90, 73,480.80 680,511.06
ROUNDED OFF TO 680,510.00
Income Tax on Business income tax NIL
(As per Article 8 of the Double Taxation
Avoidance Agreement signed between India
and Mauritius, the profits derived by a
Mauritius resident company from the operations
of ships in International Traffic are liable to tax
only in Mauritius and exempt from income tax in
India.) "
The business activity which is carried on in India by the assessee is operation of Ships in international traffic. Such income of assessee is ordinarily assessable in India in terms of Section 44B read with Section 5(2) of the Act. For the sake of convenience both these 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) 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 of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India."
15. However, the Section 5(2) is subject to the provisions of this Act which include Section 90 of the Act. According to Section 90, the Central Government is empowered to enter into an agreement with the Government of any country outside India. Where any such agreement is made, the provisions of the said agreement would prevail over the general provisions of the Act. Accordingly, it is the claim of the assessee that pursuance to such agreement of Government of India with the Government of Mauritius, the assessee is not liable to tax on all income earned by it from operation of Ships in international traffic as per Article 8 of the said agreement (DTAC). Thus, it is the case of the assessee that it being a company incorporated in Mauritius, its effective management being placed in Mauritius, therefore, the liability to tax such income is per Mauritius Income Tax Law. Its income has been assessed in Mauritius, therefore, as per Article 8, no tax could be levied on such income in India. For the sake of convenience, Article 8 of the DTAC is being reproduced as follows:_ "Article 8 : Shipping and air transport
1. Profits from the operation of ships or aircraft in international traffic shall be taxable 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 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. These are as under :-
Article 6 - Income from immovable property Article 7 - Business profit Article 8 - Shipping and air transport Article 9 - Associated enterprises Article 10 - Dividend Article 11 - Interest Article 12 - Royalty Article 13 - Capital gain Article 14 - Independent personal services Article 15 - Dependent personal services Article 16 - Directors' fees Article 17 - Artistes and athletes Article 18 - Governmental functions Article 19 - Non-government pensions and annuities Article 20 - Students and apprentices Article 21 - Professors, teachers and research scholars Article 22 - Other income
17. Thus, each article, is given to a separate source of income. Each article describes the taxability of income in one particular Contracting State on the basis of criteria mentioned in the said article. For example, article 6 determines the taxability of income earned from immovable property in the Contracting State in which such property is situated. Similarly, article 7 determines the taxability of business income in the State in which it carries on business unless the enterprise carries on business in other Contracting State, through a permanent establishment situated therein. The business carried on through permanent establishment is taxable in the country of permanent establishment to the extent it is attributable to permanent establishment. Article 10 determines the taxability of dividend income on the basis of residence of a resident 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 Art 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-to-day 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 fulfill the said condition, the assessee has held the Directors' Meeting in Mauritius. To determine the claim of assessee regarding effective management being situated in Mauritius, the A.O has made intensive enquiries from the Shipping Agents through which the shipping operational activities are carried on by the assessee in India. The result of such enquiry has been reproduced in the earlier part of this order. M/s. Samrat Shipping Co. Pvt. Ltd, one of the Shipping Agents, clearly stated that the entire correspondence was made by them to Dubai as the owners are from Dubai. No correspondence whatsoever was made by them with Mauritius from the year 1993 till 2001. The copy of relevant correspondence was also produced. It was further stated that operating instructions were also being received only from Dubai. The place of management of company is in Dubai as all the Staff, Officers and Captains are sitting in Dubai. Similarly, M/s. Parekh Marine Agencies Pvt. Ltd also stated that they have been corresponding at Dubai only. No material has been brought on record by the assessee to controvert these findings. No material has been brought on record by the assessee to show that any activity in regard to operation of ships was carried on in Mauritius except holding Board Meetings. This clearly shows that assessee has nothing to say regarding the results of enquiries made by A.O with regard to the effective management being not situated in Mauritius. Therefore, we are in agreement with the findings given by A.O as well as CIT(A) that the place of effective management of the assessee is not in Mauritius. Once we reach this conclusion, it is consequential 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 Union of India v. Azadi Bachav Andolan (Supra). Reference was also made to the petition filed by Government of India before Apex Court in the case of Azadi Bachav Andoian(supra). 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 2nd, 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/T47 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 INTEGRA TED CONTAINER FEEDER SERVICE is in Mauritius.
Sd/-
J KELLY for Commissioner of Income Tax 12 November 2003"
20. In our opinion, such Certificate does not clinch the issue for more than one reason. Firstly, it is an additional evidence which was never produced before A.O or CIT(A) and no reason has been explained that why the assessee was not in a position to produce such certificate before A.O or First Appellate authority. Rule 29 of Appellate Tribunal Rules 1963 provide the procedure regarding production of additional evidence before the Tribunal. The said rule is not intended to allow the parties to patch up the weak particulars or to fill up omissions. This is purely within the discretion of the Appellate Tribunal to permit additional evidence to be adduced before it to enable it to pass the order, or orders, if in its opinion there is substantial cause of receiving such additional evidence. According to the decision of Hon'ble Andhra Pradesh High Court in the case of A.K. Babukhan v. CWT, 102 ITR 575, the said discretion should be exercised sparingly or cautiously and only when any point is required to be cleared up in the interests of justice. Various opportunities were given to assessee by A.O when this Certificate was not produced. Secondly, to determine the existence of Effective Management of a particular place is a question of fact which has to be determined according to facts of a particular case. There is no material available on record to support the situation of effective place of management in Mauritius. On the other hand, there is ample material collected by A.O 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 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 Netwest's case, 220 ITR 377. 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 resident of Mauritius only.
21. Keeping in view the above mentioned discussion regarding factual as well as legal position, we are of the opinion that once Article 8 is held inapplicable on the facts of the present case, the consequence will be that income of the assessee earned in India from operation of Ships in international traffic has to be taxed as per provisions of Indian income Tax Act. As already pointed out that the income of the assessee is taxable as per Indian Income Tax Act, as per Section 44B read with Section 5(2) of the Act. Therefore, there is no question of quantification of the assessable income as per the other provisions of DTAC. Thus, we find no merit in the claim of the assessee that if Article 8 is held inapplicable, then the income of the assessee should be computed in accordance with various other Articles of the DTAC.
22. In the light of above discussions it is concluded that assessee's claim of exemption from exemption of tax in India by virtue of the provisions of Art 8 of DTAC is found to be not acceptable. As discussed and pointed out in the earlier part of the order that each article of DTAA set out a criteria to tax the income specified therein, therefore, reference to other articles of DTAC by the assessee is irrelevant and unwarranted. The income of assessee in the present case is income arising out of operation of ships in international traffic, therefore, it cannot be held to be covered by any other article of DTAC. It also does not mean that the income which is received, accrues or arises or deemed to be received, to accrue or arise in India as per provisions of Section 5(2) of Income Tax Act, 1961 cannot at all be taxed in India. DTAC does not debar such taxability at all as there is no provision in DTAC to exempt such income. In that case the only consequence will be that assessment has to be made in normal course in accordance with the provisions of Section 44B read with Section 5(2) of the Income Tax Act, 1961. Thus, articles 4,5,7 of DTAC have no application and relevance under the facts of the present case. The discussion of these articles is academic and does not affect the assessability of such income as per normal provisions of Income Tax Act, 1961: The income of assessee is assessable under Income Tax Act, 1961.
23. Now coming to the quantum of income assessable; there is no force in the contention 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 nonresidents. 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% 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 assessee have rightly been computed by Assessing Officer under Section 44B of the Act.
24. In the result, the appeal filed by the assessee is dismissed.