Income Tax Appellate Tribunal - Panji
The Ito, (International Taxation), ... vs M/S Samsara Shipping Pvt Ltd, ... on 28 November, 2017
ITA Nos. 7 to 9/Rjt/2011
ITO vs. Martrade Gulf Logistics FZCO-UAE
Assessment year: 2008-09
Page 1 of 18
IN THE INCOME TAX APPELLATE TRIBUNAL
RAJKOT BENCH, RAJKOT
[Coram: Pramod Kumar AM and Rajpal Yadav JM]
ITA Nos. 7 to 9/Rjt/2011
Assessment year: 2008-09
Income-tax Officer (International Taxation) ...........................Appellant
Gandhidham
Vs.
Martrade Gulf Logistics FZCO-UAE ....................Respondent
[M/s. Samsara Shipping Pvt. Ltd.- As agents]
Unit No.102, 1st Floor,
Plot No. 348, Wd. No. 12/B,
Gandhidham-370 201 [PAN: AAACS 9285 Q]
Appearances by:
CS Anjaria for the appellant
Kalpesh Doshi for the respondent
Dates of hearing of this appeal : November 2, 2017
Date of pronouncing the order : November 28, 2017
O R D E R
Per Pramod Kumar, AM:
1. These three appeals, which pertain to the same assessee and involve a common issue, are directed against the consolidated order dated 02.11.2010 passed by the CIT(A), Gandhinagar, Ahmedabad and were heard together as a matter of convenience. Therefore, all these three appeals are disposed of by way of this common order.
2. Grievances raised by the Assessing Officer, which are common in all the appeals, are as follows:
"The Ld. CIT(A) erred in law and on facts while granting DTAA benefit for principal of UAE.
The Ld. CIT(A) erred in law and on facts by ignoring comprehensive DTAA agreement with UAE an Artirle-4(4) resident, Article-8 Shipping and Article-29 (Limitation of Benefits).
ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 2 of 18 The Ld. CIT(A) erred in law and on facts considering Residential status of principal while ignored the nationality of directors & share holders company are out of UAE like wise AGM of the company are also hold outside UAE.
The Ld.CIT(A) erred in law and on facts of bard Circular No.1/2003 dated 10.02.2003.
The Ld CIT(A) erred in law and facts on determining effective control and management of the principal- M/s Martrade Gulf Logistics FZCO -UAE The Ld CIT(A) erred in law and facts on reliance is placed in the case of Mohsinally Alimohammed Rafik v CIT [1995] 79 Taxman 75 (AAR - New Delhi) the strict interpretation of article 4 of DTA only persons who are actually subjected to tax in UAE can be treated as resident of UAE.
The Ld CIT(A) erred in law and facts on TRC issued by the Ministry of Finance-UAE with direction to "issued in Dubai without any responsibility whatsoever on the Ministry of Finance".
On the facts and in the circumstances of the case the Ld. CIT(A) ought to have upheld the order of the Assessing Officer."
3. The grounds of appeal so taken are primarily arguments in support of Assessing Officer's basic grievance that the assessee company did not deserve the treaty protection under Indo-UAE Double Taxation Avoidance Agreement ([(1995) 205 ITR Stat 49; Indo-UAE tax treaty, in short) as "(i) the effective control and management of the assessee was situated out of UAE, (ii) the assessee was not an assessee subjected to tax in UAE, the assessee cannot be treated as resident of UAE and (iii) the case of the assessee was hit by Article 29 of the Indo-UAE Tax Treaty.
4. Briefly stated, the relevant material facts are like this. During the course of scrutiny of return filed under section 172(4) of the Act, the Assessing Officer invited attention of the assessee to the fact that, as evident from the list of directors of the assessee-company, the directors of the assessee-company being different nationalities other than UAE i.e. Indian, German and Portuguese nationalities and therefore, assessee-company was required to show-cause as to why the treaty protection should not be declined to the assessee. The attention of the assessee was also invited to Article 29 of the Indo-UAE Tax Treaty, wherein it is, inter alia, provided that an entity which is a resident of a Contracting State shall not be entitled to the benefits of Indo-UAE Tax Treaty if the main purpose or one of the main purposes of the creation of such entity was to obtain the benefits of Indo-UAE Tax Treaty which would not have been otherwise available. The Assessing Officer was also required the assessee to show-cause as to why Article 29 not being invoked in the facts of the present case. It was also pointed out by the Assessing Officer that when a resident of the Contracting State can be said to be resident of both the Contracting States under Indo-UAE Tax Treaty under Article 4(4), then it shall be deemed to be a resident of the State in which its place of effective management is ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 3 of 18 situated. It appears that on the basis of this provision the Assessing Officer sought to deny the status of the assessee-company being treated as a resident of UAE on the ground that the place of effective management is not situated in UAE. In response to these observations made by the Assessing Officer, elaborate submissions were made by the assessee before the Assessing Officer in support of the proposition that the assessee-company is managed and controlled wholly from UAE, that even though the shareholders and directors of the UAE company are non- UAE residents, since the business is carried on from the UAE that aspect of the matter is not relevant and that the provisions of Article 29 did not come into play on the facts of the present case. The Assessing Officer was, however, not impressed by these arguments. The Assessing Officer was of the view that the assessee- company is not entitled to Indo-UAE Tax Treaty benefits for the reason "that the said company has got just registration for doing their business in UAE and company employees are carrying day-to-day affairs through the directors and shareholders of company are other nationals". The Assessing Officer was also of the view that Article 29 come into play in the present case as the assessee would not have been entitled to the treaty benefits such as Indo-UAE Tax Treaty but for registration of assessee-company in UAE. The Assessing Officer further held that since the Tax Residency Certificate issued by the Ministry of Finance of UAE clearly mentions that "issued in Dubai on Sunday, the 14.12.2008 without any responsibility whatsoever on the Ministry of Finance", he concluded that said company was merely registered in UAE to get double taxation benefit and its place of effective control and management was situated outside UAE. The Assessing Officer was of the view that, merely because some employees of the company are working in UAE does not mean that it they are UAE residents since the place of effective management is outside UAE. It was also noted that the company was "not liable to tax in UAE" and for this reason also the protection of Indo-UAE Tax Treaty was not available. Aggrieved by the stands so taken, the assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A) reverses the action of the Assessing Officer on the basis of his categorical findings that the place of effective management of the assessee-company was UAE and, that, in view of the Residency Certificate, Incorporation Certificate, Trading License and other documents, it is clear in principle that the assessee was a resident of Dubai and accordingly eligible for treaty protection. While holding so, the CIT(A), inter alia, observed as follows:
"2.5 The matter has been has been considered, .keeping in view the arguments of both sides. The additional evidence is accepted because the assessee working as agent was prevented because of reasonable reason that information was required to be collected from principals at UAE which could not be collected fully in the limited time given during assessment proceedings. The issue at hand is about the applicability of LOB clause, effective control and management of the company and about granting of DTAA benefits under India - UAE Tax Treaty. In my considered opinion the company Martrade is eligible for DTAA benefits under India UAE Treaty as:
I hold that the Assessing Officer is not correct in his logic to say that DTAA (India-U.A.E) claimed by Martrade Gulf Logistic FZCO in provisional & final return are to be withdrawn based on Company's AGM is held outside ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 4 of 18 UAE, Directors of the Company are not UAE resident (Citizens), Shareholders of the Company are not resident of UAE, and Martrade has only registered office in UAE with some senior employees and therefore its effective control and management are out of UAE. Detailed observations are as under:
The Board meetings and important decision are taken at Dubai, senior staff including MD 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 that effective control and management is not situated in UAE just because shareholders are not resident of UAE or just because AGM was not held in UAE. Also Assessing officer seems to be wrongly considering nationality of director as factor to decide the residential status of the company. Appellant has been able to prove that MD of the company is residing at UAE and has 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 certified documents submitted such as Incorporation Certificate, Trading license, Valid Tax Residency Certificate, Memorandum and Articles of Association etc submitted, the company is incorporated in UAE and Based on details of board meeting held and other details such as MD's residential status submitted showed that the company is controlled and Managed from UAE.
Further as regards Assessing officer's stand on issue of Tax Residency Certificate on Sunday with general disclaimer, I have also considered the views both sides, in my opinion, as fact remains that in UAE Friday is the weekly off and Sunday is a working day.
Further the disclaimer 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.
ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 5 of 18 Martrade 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 substantiated and increasing expenditure on staff reinforce my view. As per explanation under Section 115VC of Income Tax Act, 1961 defining the place of effective management of ship operating company, where it is specifically stated that in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the effective management lies in the place where such executive directors or officers of the company perform their functions, since all the board meetings have been regularly conducted in UAE affirms the facts that Control and Management lies in UAE.
The financial statements and other evidence like operating presence and not merely investment presence (bank operations) copy of passport of employees proves that company has full fledge operations in UAE and not just registered office. Evidences produced automatically reject the applicability of Limitation Of Benefit clause and make M/s. Martrade a resident under India-UAE tax treaty in terms of Article 4.
2.6 Otherwise the Assessing officer has nothing about applicability of DTAA between India and UAE in the case of the Assessee. The appellant has filed residency certificate, incorporation certificate, Trading License and other documents to prove that it is resident of Dubai. It has also support of decisions referred in submission.
2.7 Therefore, considering all the facts and circumstances, I hold that the profits 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 Indo-UAE DTAA."
5. The Assessing Officer is aggrieved and is in appeal before us.
6. 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.
7. We find that, so far as the entitlement to treaty protection by an entity based on UAE is concerned, the issue is settled by a series of orders of this Tribunal starting with ADIT vs. Green Emirate Shipping and Travels, (2006) 100 ITD 203 (Mum), wherein speaking through one of us, i.e. Accountant Member, this very combination of members constituting Mumbai 'C' bench observed as follows:-
"4. The impugned order passed by the CIT(A) takes a rather superficial view of the matter and has conveniently ducked the core issue really required to be adjudicated upon. It has simply brushed aside the real objection raised by the AO which was that in order to avail benefits of the India-UAE DTAA, a person need not only be resident of one of the Contracting State but should also be 'liable to tax' therein. Then, there is next question about the connotations of ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 6 of 18 the expression 'liable to tax'. Does it mean liability at present or does it also cover a potential future liability? A residency certificate, by itself, does not decide the matter one way or the other because what, according to the AO, is important is whether the assessee was liable to tax in UAE or not. Therefore, whether the assessee was resident in UAE or not would not have really mattered from the point of view of the AO. For this reason, we are unable to approve the reasoning and stand of the CIT(A). Having held so, the next question that we are required to address ourselves to is whether or not the AO was justified in raising the objection that he did. Is it really the liability to pay tax in UAE which is sine qua non to avail the benefits of the India-UAE DTAA or a fiscal domicile or residency in UAE per se will be sufficient for an assessee to claim the benefits of the India-UAE DTAA ? Is it taxation liability at present which is material for this purpose or is it even prospect of future tax liability which is sought to be prevented by the said DTAA ?
5. As for the AO's reliance on ruling given by the Authority for Advance Ruling in Cyril Eugene Pereiria's case (supra), we deem it necessary to reproduce the following extracts from the judgment of Hon'ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 :
(2003) 263 ITR 706 (SC), at p. 742 wherein Their Lordships of Hon'ble Supreme Court had an occasion to deal with the said AAR ruling :
"The respondents placed great reliance on the decision by the Authority for Advance Rulings constituted under s. 245-O of the IT Act, 1961, in Cyril Eugene Pereira's case (1999) 154 CTR (AAR) 281 : (1999) 239 ITR 650 (AAR). Sec. 245S of the Act provides that the Advance Ruling pronounced by the Authority under s. 245R shall be binding only :
'(a) on the applicant who had sought it;
(b) in respect to the transaction in relation to which the ruling had been sought; and
(c) on the CIT, and the IT authorities subordinate to him, in respect to the applicant and the said transaction.' It is, therefore, obvious that, apart from whatever its persuasive value, it would be of no help to us. Having perused the order of the Advance Ruling Authority, we are not persuaded." (emphasis, italicised in print, supplied by us now).
The judgments of Hon'ble Supreme Court are binding on us under Art. 141 of the Constitution of India; the rulings of Authority for Advance Rulings, whatever be their persuasive value, are not. The words of Hon'ble Supreme Court are clear, categorical and unambiguous. Once Hon'ble Supreme Court declines to be persuaded by the ruling given by the Authority for Advance Rulings in Cyril Eugene Pereira's case (supra), it cannot be open to us to follow the said ruling. In the case of Asstt. Collector of Central Excise vs. Dunlop India Ltd. (1985) 154 ITR 172 (SC) at p. 180, Hon'ble Supreme Court has, inter alia, observed as follows :
ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 7 of 18 "We desire to add and as was said in the Cassell & Co. Ltd. vs. Broome (1972) AC 1027 (HL), we hope it will never be necessary to say so again that 'in the hierarchical system of Courts' which exists in our country, 'it is necessary for each lower tier' .. 'to accept loyally the decisions of the higher tiers', 'it is inevitable in a hierarchical system of Courts that there are decisions of the supreme Tribunal which do not attract unanimous approval of all the members of the judiciary.. But judicial system works only if someone is allowed to have the last word and that last word, once spoken is loyally accepted'. (See observations of Lord Hallsham and Lord Diplock in Broome vs. Cassell ). The wisdom of the Court below has to yield to the higher wisdom of the Court above."
We respectfully follow the higher wisdom of the Courts above and decline to approve AO's reliance upon the ruling given by the Authority for Advance Rulings in Cyril Eugene Pereira's case (supra).
6. Undoubtedly, in Cyril Eugene Pereira's case (supra), Hon'ble Authority for Advance Rulings, deviating from the stand taken by it in the earlier rulings including ruling in Mohsinally Alimohammed Rafik, In re (1995) 126 CTR (AAR) 311 : (1995) 213 ITR 317 (AAR), concluded that, "an individual who is not liable to pay tax under the UAE law cannot claim any relief from the only tax on income which is payable in India under the agreement" and that "the provisions of the Double Taxation Avoidance Agreement do not apply to any case where the same income is not liable to be taxed twice by the existing laws on both the Contracting States". However, in Azadi Bachao Andolan's case (supra), Their lordships of Hon'ble Supreme Court, after referring to the said ruling and after elaborate discussions on the various aspects of this issue, concluded that "It is ... not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States". The reasoning given by Their Lordships included the following :
"According to Klaus Vogel, 'Double Taxation Convention establishes an independent mechanism to avoid double taxation through restriction of tax claims in areas where overlapping tax claims are expected, or at least theoretically possible. In other words, Contracting States mutually bind themselves not to levy taxes or to tax only to a limited extent in cases when the treaty reserves taxation for the other Contracting State either entirely or in part, Contracting States are said to 'waive' tax claims or more illustratively, to divide 'tax sources', 'taxable objects', amongst themselves'. Double taxation avoidance treaties were in vogue even from the time of the League of Nations. The experts appointed in the early 1920s by the League of Nations describe this method of classification of items and their assignments to the Contracting States. While the English lawyers called it 'classification and assignment rules', the German jurists called it 'the distributive rules' (Verteilungsnormi). To the extent that an exemption is agreed to, its effect is in principle independent of both whether the other Contracting State imposes ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 8 of 18 a tax in the situation to which the exemption applies, and irrespective of whether the State actually levies the tax. Commenting particularly on the German Double Taxation Convention with the United States, Vogel comments: "Thus, it is said that the treaty prevents not only 'current' but also merely 'potential' double taxation". Further, according to Vogel, "only in exceptional cases, and only when expressly agreed to by the parties, is exemption in one of the Contracting States dependent upon whether the income or capital is taxable in the other Contracting State, or upon whether it is actually taxed there."
It is, therefore, not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States.
Clearly, therefore, there is no meeting ground between the ruling given by the Authority for Advance Rulings in Cyril Eugene Pereira's case (supra) and the judgment delivered by the Hon'ble Supreme Court in Azadi Bachao Andolan's case (supra). The choice, however, poses no difficulty in the light of the elementary legal position that the judgments of Hon'ble Supreme Court have binding force on all of us. Much as we respect the Hon'ble Authority for Advance Rulings, we regret our inability to follow the ruling which, in our humble understanding, has been clearly disapproved by the Hon'ble Supreme Court. It is not even open to us, even in a case in which our understanding of the issue on merits concurs with that of the Hon'ble Authority for Advance Rulings in Cyril Eugene Pereira's case, to follow that school of thought.
7. Learned Departmental Representative has invited our attention to the ruling given by the Authority for Advance Rulings in the case of Abdul Razak A. Meman, In re (2005) 195 CTR (AAR) 534 : (2005) 276 ITR 306 (AAR) which supports the case of the Revenue and is said to be on exactly the same material facts. We are, however, unable to accept this plea and we decline to treat this as a sort of, to use the phraseology employed in legal parlance, a covered matter. As Hon'ble Supreme Court has duly taken (note) of in Azadi Bachao Andolan's case (supra), a ruling given by the Authority for Advance Rulings is not even binding on the CIT, and authorities subordinate thereto, in any case except in the case of that very assessee in which such a ruling is given and even in such a case it is binding in respect of transaction in respect of which the ruling is given. Whatever be the respect and deference judicial authorities indeed have for the rulings given by the Authority, the Authority for Advance Rulings, not being a part of the judicial hierarchy, cannot lay down a binding precedent for anyone--the Revenue, the assessees or the appellate authorities. By no stretch of logic, therefore, a ruling given by the Hon'ble Authority of Advance Rulings, has any precedence value in general. Therefore, learned Departmental Representative's reliance on the ruling given in Abdul Razak A. Meman's case (supra) by itself is not sufficient to decide the matter one way or the other. Learned Departmental Representative's contention is that as non-corporate entities are not taxable entities under the UAE Tax Decree 1969, such non-corporate entities, even though based in ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 9 of 18 UAE, cannot be treated as 'resident' for the purposes of the India-UAE DTAA. Our attention is also invited to the learned AO's observations to the effect that "the provisions of the DTAA do not apply to any case which the same income is not liable to be taxed twice by the existing laws of both the Contracting States" and that "since the assessee has failed to prove that it is paying taxes in UAE, the DIT relief sought by the assessee is rejected"; but it is the very proposition underlying these observations which was rejected by the Hon'ble Supreme Court holding that "it is... not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States". As we have noted earlier also, the Revenue is on record to have opposed the very argument that the Revenue has taken in the present case, as evident from the Hon'ble Supreme Court's following observation :
"The appellants (i.e., Union of India) contended that, acceptance of the respondent's submission that double taxation avoidance is not permissible unless the tax is paid in both the countries is contrary to the intendment of s.
90. It is urged that cl. (b) of sub-s. (1) of s. 90 applies to a situation where income-tax has been paid in both the countries, but cl. (b) deals with the situation of avoidance of double taxation of income, inasmuch as Parliament has distinguished between the two situations, it is not open to a Court of law to interpret cl. (b) of s. 90, sub-s. (1) as if it were the same as situations contemplated under cl. (a)."
The very contention which has been raised by the Revenue in this case was successfully challenged by the Union of India before the Hon'ble Supreme Court. It cannot be open to us to take any other view of the matter than the view so taken by the Hon'ble Supreme Court.
8. Although the AO's objection to applicability of India-UAE tax treaty was only on the ground that the provisions of DTAAs do not come into play unless it is established that the assessee is paying tax in both the countries in respect of the same income, in the grounds of appeal before us it is also contended that the assessee-company failed to produce any evidence to the effect that it was 'liable to pay taxes' in UAE. The question then arises whether an existing liability to pay taxes in UAE is a sine qua non to avail the benefit of India-UAE tax treaty in India. On this issue also, we find guidance from the judgment of Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra). Referring to the Klaus Vogel's Commentary on Double Taxation Conventions. Their Lordships, inter alia, observed as follows :
"In other words, Contracting States mutually bind themselves not to levy taxes or to tax only to a limited extent in cases when the treaty reserves taxation for the other Contracting State either entirely or in part. Contracting States are said to waive 'tax claims' or more illustratively to divide 'tax sources', 'taxable objects', amongst themselves". Double taxation avoidance treaties were in vogue even from the time of the League of Nations. The experts appointed in the early 1920s by the League of Nations describe this method of ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 10 of 18 classification of items and their assignments to the Contracting States. While the English lawyers called it 'classification and assignment rule', the German jurists called it 'the distributive rule' (Verteilungsnormi). To the extent that an exemption is agreed to, its effect is in principle independent of both whether the Contracting State imposes a tax, in the situation to which the exemption applies, and irrespective of whether the State actually levies the tax. Commenting particularly on the German Double Taxation Convention with the United States, Vogel comments: "Thus, it is said that the treaty prevents not only 'current' but also merely 'potential' double taxation".
It is thus clear that a tax treaty not only prevents current' but also potential' double taxation. Therefore, irrespective of whether or not the UAE actually levies taxes on non-corporate entities, once the right to tax UAE residents in specified circumstances vests only with the Government of UAE, that right, whether exercised or not, continues to remain exclusive right of the Government of UAE. As noted above, the exemption agreed to under the 'assignment' or 'distributive' rule, is independent of 'whether the Contracting State imposes a tax in the situation to which exemption implies'. In the case of John N. Gladden vs. Her Majesty the Queen 85 Tax Cases 5188, which was quoted with approval by the Hon'ble Supreme Court in Azadi Bachao Andolan's case (supra), Federal Court of Canada has observed that the non- resident can benefit from the exemption (under the treaty) regardless of whether or not he is taxable on that capital gain in his own country. If Canada or the US were to abolish the capital gains tax completely, while the other country did not, a resident of the country which has abolished the capital gains would still be exempt from capital gains in that other country". It is thus clear that taxability in one country is not sine qua non for availing relief under the treaty from taxability in the other country. All that is necessary for this purpose is that the person should be 'liable to tax in the Contracting State by reason of domicile, residence, place of management, place of incorporation or any other criterion of similar nature' which essentially refers to the fiscal domicile of such a person. In other words, if fiscal domicile of a person is in a Contracting State, irrespective of whether or not that person is actually liable to pay tax in that country, he is to be treated as resident of that Contracting State. The expression 'liable to tax' is not to read in isolation but in conjunction with the words immediately following it, i.e., 'by reason of domicile, residence, place of management, place of incorporation or any other criterion of similar nature'. That would mean that merely a person living in a Contracting State should not be sufficient, that person should also have fiscal domicile in that country. These tests of fiscal domicile which are given by way of examples following the expression 'liable to tax by reason of', i.e., domicile, residence, place of management, place of incorporation, etc., are no more than examples of locality-related attachments that attract residence type taxation. Therefore, as long as a person has such locality-related attachments which attract residence type taxation, that 'person' is to be treated as resident and this status of being a 'resident' of the Contracting State is independent of the actual levy of tax on that person. Viewed in this perspective, we are of the considered opinion that being 'liable to tax' in the Contracting State does not ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 11 of 18 necessarily imply that the person should actually be liable to tax in that Contracting State by virtue of an existing legal provision but would 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. In our humble understanding, this is the legal position emerging out of Hon'ble Supreme Courts judgment in Azadi Bachao Andolan's case (supra). The plea taken by the Revenue that the assessee was not 'liable to tax', which was anyway not taken by the AO or before the CIT(A), is also not sustainable in law either.
9. For the reasons set out above, and even though we do not approve the reasoning adopted by the CIT(A), we approve the conclusion arrived at by the CIT(A). His having arrived at right conclusion may have been fortuitous but what is material is that he reached the right conclusion. We approve his conclusion and decline to interfere in the matter."
8. In view of the legal position so set out, with which we are in considered agreement, all that is necessary for the purpose of being treated as resident of a Contracting States under Indo-UAE Tax Treaty is that the person should be liable to tax in that Contracting State by the reason of domicile, residence, place of management, place of incorporation etc. Clearly, the assessee company was incorporated in UAE and, therefore, the assessee company had this locality related attachment which led to residence type taxation. It is not at all necessary to be treated as "liable to be taxed in UAE", for the purposes of this treaty, that the assessee should actually pay tax in UAE. To this extent, grievance of the Assessing Officer clearly ill conceived. It is also important to note the trite rule with respect to residential status of the assessee company comes into play when the assessee is resident of both the Contracting States, i.e. India and UAE, in this case. It is not even the case of the Assessing Officer that the assessee could be treated as a resident of India. Therefore, the tie breaker rule set out in Rule 4(4), to which so much of emphasis is placed by the Assessing Officer, is wholly irrelevant in the present context. We have also noted that the learned CIT(A) has given very reasoned and elaborate findings that the place of effective management of the assessee company was from UAE. We find no reasons to disturb these findings of the learned CIT(A) nor any specific defect therein has been pointed out by the revenue authorities. Finally, so far as Article 29 of the Indo-UAE Tax Treaty is concerned, we may refer to the observations made by us in the case of ITO vs. MUR shipping DMC Co., in ITA No. 405/RJT/2013, which are as follows:
"6. We find that, as learned Departmental Representative rightly contends and so far as the judgment dated 4 th July 2012 passed by Hon'ble jurisdictional High Court in Tax Appeal No. 12 of 2012 is concerned, the issue before Their Lordships was with respect to the evidences in support of "place of effective management" under the ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 12 of 18 India Netherlands Double Taxation Avoidance Agreement. The conclusions arrived in this context, in our considered view, would not be decisive on the issue as to whether or not the CIT(A) rightly reversed the action 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 UAE tax treaty as the assessee could not rebut the facts brought on record by the Assessing Officer.
7. It is in this backdrop that we need to take a look at article 29 of India UAE tax treaty which has been invoked by the Assessing Officer to decline treaty benefits to the assessee. This article provides as follows:
"An entity which is a resident of a Contracting State shall not be entitled to the benefits 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 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 26 th 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, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature" and there was considerable controversy on whether, under this provision, the actual taxability of income in the UAE was a condition precedent for availing the treaty benefits in India. This issue was particularly relevant as not all the residents, whether individual or corporate, were necessarily taxable entities under the 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 attachments which attract residence type taxation, that 'person' is to be treated as resident and this status of being a 'resident' of the Contracting State is independent of the actual levy of tax on that person" and concluded that "Viewed in this perspective, we are of the ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 13 of 18 considered opinion that being 'liable to tax' in the Contracting State does not necessarily imply that the person should actually be liable to tax in that Contracting State by virtue of an existing legal provision but would 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. Before parting with the matter, we may add that instead of allowing such matters, as is the dispute before us, to be subjected to confusing signals resulting in uncertainty and prolonged litigation, it is certainly more desirable for the Government to take a clear-cut stand on the issue or let the matter be resolved at the level of Governments of the Contracting States. That perhaps is a better solution for quickly resolving disputes on such a fundamental aspect of a tax treaty as to who will be 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 26 th March 2007 (supra), the definition of expression 'resident' was revised as follows:
1. For the purposes of this Agreement the term "resident of a Contracting State" means:
(a) in the case of India: any person who, under the laws of India, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. This term, however, does not include any person who is liable to tax in India in respect only of income from sources in India; and
(b) in the case of the United Arab Emirates: an individual who is present in the UAE for a period 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 ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 14 of 18 Emirates Shipping Line FZE Vs ADIT [(2012) 349 ITR 493 @519 (Del)], in the context of this amended definition of "resident of a contracting state" so far as a UAE tax resident is concerned, "Under the amended article, the requirement of liability to tax has been done away with". It cannot, therefore, be any longer open to the Assessing Officer to decline the treaty protection to a UAE tax resident , in respect of India sourced income, on the ground that the UAE tax resident has not actually been taxed in respect of his income in UAE. To that extent, learned Departmental Representative is completely 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 benefits of that benefits of this agreement which would otherwise not be available. In other words, only when creation of an entity is part of manoeuvring, wholly or mainly, to obtain the benefits of the India UAE tax treaty which "would not be otherwise available", the benefits of India UAE tax treaty are to be declined under article 29. Even this limitation of benefit clause is subject to the rider that the cases of legal entities not having bonafide business activities shall be covered by this article. 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 - second, that the assessee company is owned by shareholders in Switzerland, and since the income from operations of ships of the Switzerland based entities in international traffic is not covered by Article 8 of India Switzerland DTAA, if both the Swiss shareholders, which wholly own capital of the assessee company, were to carry on business directly, the treaty protection would not have been available
12. None of these reasons, in our considered view, are sustainable in law.
13. We find that though 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 ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 15 of 18 State from the operation by that enterprise of ships in international traffic shall be taxable only in that State" and essentially profits from operation of ships in international traffic will also cover the situations in which the profits are earned from operating the ships irrespective of whether or not such ships are owned by the enterprise claiming the treaty protection. Article 29 can be pressed into service only when main purpose, or one of the main purposes of the creation of an entity was to obtain benefits of that benefits of this agreement which would otherwise not be available but 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 Switzerland DTAA [(1995) 214 ITR (Statute) 223; Indo Swiss tax treaty, in short] and therefore if both the Swiss shareholders, which wholly own capital of the assessee company, were to carry on business directly, the treaty protection would not have been available.
15. This line of reasoning is clearly fallacious inasmuch as the assessment year before us is post the amendment vide protocol dated 16 th February 2000 [Notification no. 35 of 2001, dated 7 th February 2001; 165 CTR (Statute) 47] which 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 1 st 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 only in that State". There is no dispute, and as a matter of fact it has been the case of the Assessing Officer, that income of operation of ships in international traffic is not specifically dealt with in the Indo Swiss DTAA. While on this aspect of the matter, a useful reference may also be made to the decision of this Tribunal in the case of ADIT Vs Mediterranean Shipping Co SA [(2013) 56 SOT 278 (Mum)]. In effect, therefore, whether a Swiss tax resident earns India sourced income from operations 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.
ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 16 of 18
16. As a corollary to this legal position, the condition precedent for invoking Article 29 of Indo UAE tax treaty, i.e. main purpose, or one of the main purposes of the creation of the assessee entity being to obtain benefit or benefits of Indo UAE tax treaty which would otherwise not be available, is not fulfilled. When treaty protection in respect of income of such a nature was anyway available, though under a different kind of provision of the Indo Swiss tax treaty, the assessee entity cannot be said to have been created for the purpose of availing Indo UAE tax treaty benefits. The action of the Assessing Officer in invoking 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 assessee was anyway liable for treaty protection of its India sourced income from operations of ships in international traffic whether the business was carried out from Switzerland or from UAE and irrespective of the fact whether owner of the vessel was in Marshall Islands or anywhere else.
18. Coming to the question as to whether the assessee qualified to be a resident of UAE under article 4(1), all that is required is that the company is "incorporated in the UAE and which is managed and controlled wholly 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 assessee company are residents of UAE and the board, as also shareholders, meetings have taken place in the UAE. Copies of the minutes of these meetings have also been placed before us, and no defects have been pointed out in the same. We have also noted, as evident from the annual accounts and the list of employees filed before us, that the assessee company is not merely a paper company and has actually carried out material business operations from the UAE. As regards the issue raised by the Assessing 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 and in a ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 17 of 18 situation like the one that we are seized of, i.e. when all the corroborative facts, in support of the certification, are on record, there is no reason to reject the treaty entitlements on the basis of, what the Assessing Officer perceives as, shortcomings in the tax residency certificate. An issue is then raised by the Assessing Officer about the limited three year period of commercial licence issued by the Government of UAE but it is difficult to even understand, much less approve, this objection. Whether the assessee is given a perpetual licence to carry on business in the UAE or whether the licence is renewed every year, does not, in our considered view, affect the fact that the assessee was carrying on business in the relevant previous year. The approach of the Assessing Officer is too pedantic and is anyway swayed by the considerations which are not really relevant in the present context.
19. Given these facts, in our considered view, the apprehensions raised by the Assessing Officer are devoid of any legally sustainable basis and are not supported by any cogent material. The 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 action of the Assessing Officer and in granting the benefits of India UAE tax treaty.
20. In view of the detailed reasons set out above, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter."
9. As evident from the above observations, in order to invoke Article 29, what is to be established is that if the assessee company was not to be formed in the UAE, the assessee would not have been entitled for such benefits. We have noted that the entire share capital of the assessee company is held by German entities by the name of Martrade Shipping + Transport GMBH and C.R. Consulting & Holding GMBH, but then, in the Indo-German DTAA also similar treaty protection with regard to taxability of shipping profits only in the state of residents are available. Therefore, whether the company was to be formed in UAE or in Germany, it would not have any material difference so far as non-taxability of said income in India is concerned. As corollary to this legal position, merely because the company is set up in UAE and not in the country to which the capital belongs, the assessee does not get any benefits of the Indo-UAE agreement which would have been otherwise available. The requirement necessary for invoking Article 29 is thus not fulfilled in the present case. In view of the matter and respectfully following the co-ordinate bench decision in the ITA Nos. 7 to 9/Rjt/2011 ITO vs. Martrade Gulf Logistics FZCO-UAE Assessment year: 2008-09 Page 18 of 18 case of MUR Shipping DMC Co. (supra), we reject the grievances of the Assessing Officer on this count also. As regards the wordings of the Tax Residency Certificate, based on which the Assessing Officer has concluded that the company was formed only for the purpose of availing Indo-UAE tax treaty benefits, we may mention that neither the inference of the Assessing Officer is based on any legally sustainable material or even common sense, nor this Tax Residency Certificate is relevant in any way. There is no dispute that the assessee was liable to tax in UAE by the virtue of incorporation in UAE and therefore, the assessee was covered by definition of "resident of Contracting State" under Article 4(1) of the Indo-UAE Tax Treaty.
10. In view of the above discussions, and bearing in mind entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.
11. In the result, all the three appeals are dismissed. Pronounced in the open court today on the 28th day of November, 2017.
Sd/- Sd/-
Rajpal Yadav Pramod Kumar
(Judicial Member) (Accountant Member)
Dated: 28th day of November, 2017
**am**bt
Copies to: (1) The appellant (2) The respondent
(3) Commissioner (4) CIT(A)
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By order
TRUE COPY
Assistant Registrar
Income Tax Appellate Tribunal
Rajkot bench, Rajkot
1. Date of dictation: ..28.11.2017- 6 pages dictation pad attached -...... ...
2. Date on which the typed draft is placed before the Dictating Member: ....28.11.2017.......
3. Date on which the approved draft comes to the Sr. P.S./P.S.: ...28.11.2017....... .
4. Date on which the fair order is placed before the Dictating Member for Pronouncement: 28.11.2017.....
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