By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
[2017] 88 taxmann.com 102 (Rajkot – Trib.)
ITO vs. Martrade Gulf Logistics FZCO-UAE
A.Y. 2008-09, Date of Order: 28th
November, 2017
Facts
The Taxpayer was a company incorporated in
UAE engaged in the business of shipping. It had filed return u/s. 172(4) of the
Act. The Taxpayer was held by German shareholders. The Taxpayer claimed that
the income earned out of the operations of ships in international waters was
not taxable in India by virtue of India-UAE DTAA.
The AO noted that: (i) the meeting of its
shareholders was held outside UAE; (ii) its directors were not residents of
UAE; (iii) its shareholders were not residents of UAE; (iv) the Taxpayer was
not liable to tax in UAE; and (v) the Taxpayer only had its registered office
in UAE with some senior employees. Hence, the AO concluded that effective
control and management of the Taxpayer was not situated in UAE and denied
India-UAE DTAA benefit. Further, the AO contended that the Taxpayer was merely
registered in UAE for doing the business of the German entities. Thus, owing to
Article 29 of India-UAE DTAA, benefit of Article 8 cannot be granted to the
Taxpayer.
However, the Taxpayer contended that despite
the fact that its shareholders and directors are non-UAE residents, it was managed
and controlled wholly from UAE, and the business was also carried on from UAE.
Hence, it was eligible for India-UAE DTAA benefits.
On appeal, the CIT(A) observed that the
place of effective management of the Taxpayer was UAE. Further, UAE had also issued
Residency Certificate, Incorporation Certificate, Trading License and other
documents. Hence, the CIT(A) concluded that the Taxpayer was a resident of UAE
and consequently, eligible for treaty benefit.
The CIT(A) further referred to explanation
u/s. 115VC of the Act which defines the place of effective management in case
of a ship operating company and stated that since all the board meetings were
regularly conducted in UAE, the control and management was situated in UAE.
Accordingly, he held that the AO had wrongly determined the residential status
of the Taxpayer by considering the nationality of the directors. Therefore,
having regard to Article 8, read with Article 4, of India-UAE DTAA, profits
from operations of ship in international waters was not taxable in India.
Held
? On account of its incorporation in UAE, the
Taxpayer was liable to tax in UAE. Therefore, it was “resident of Contracting
State” under Article 4(1) of the India-UAE DTAA.
? Tribunal further relied on its earlier
decision in ITO vs. MUR shipping DMC Co. (ITA No. 405/RJT/2013) and
observed that:
• All that is necessary for
the purpose of being treated as resident of a Contracting States under
India-UAE DTAA is that the person should be liable to tax in that Contracting
State by reason of domicile, residence, place of management, place of
incorporation. Reliance in this regard was placed on the decision of ADIT
vs. Green Emirate Shipping and Travels, (2006) 100 ITD 203 (Mum).
• 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.
• Since the Taxpayer was not
a resident of India, the question of applying the POEM test under the
tie-breaker rule in Article 4(4), which the AO had emphasised, was irrelevant.
• For invoking Article 29,
it should be established that if the Taxpayer was not to be incorporated in
UAE, it would not have been entitled for such benefits. However, India-Germany
DTAA also provided such benefit. Hence, even if the Taxpayer was incorporated
in UAE but its entire share capital was held by German entities shall not
affect the taxability of shipping income. This is for the reason that similar benefit with regard to taxability of
shipping profits is available even under India-Germany treaty. Therefore, the
requisite condition for invoking Article 29 was not fulfilled.
