“Effective management” of one-man shipping Company is situated in Cyprus as it is registered and headquartered in Cyprus; shipping income from transportation of cargo is not taxable in India as per India-Cyprus DTAA.
Facts:
Article 8 of the Cyprus DTAA governs taxation of income from shipping business and it provides that profits derived by an enterprise, registered and having headquarters (i.e., effective management) in Cyprus, from the operation of ships in international traffic shall be taxable only in Cyprus.
Place of effective management has been defined by OECD Model convention as the place where key management and commercial decisions that are necessary for the conduct of entity’s business as a whole are in substance made.
Ship Co, a company registered in and a tax resident of Cyprus, was engaged in the shipping business. Ship Co was a one-member company having no employees or a big office establishment as most of its work was outsourced to other entities. Ship Co was contracted by a client in the United Arab Emirates (UAE) to transport cargo from India to UAE. Ship Co chartered a ship from another company (Charter Co) for this purpose.
Ship Co engaged the Taxpayer, an Indian company (ICO), as its agent for handling, loading and other operations, obtaining necessary clearances from the court, customs, income tax, immigration etc., in India. It was argued on behalf of the taxpayer that as a business practice, Ship Co carried out its major business activities through outsourcing. Hence, the factor that there were no employees in India should not be given undue importance.
ICo, in the capacity of agent, filed the return of income (ROI) of Ship Co in India and declared NIL income relying upon Article 8 of the Cyprus DTAA which provides taxation right only to Cyprus.
The Tax Authority did not accept the above claim and contended that Ship Co was merely interposed as a charterer to conduct business on behalf of Charter Co and to take benefit of the Cyprus DTAA and the Tax Residency Certificate (TRC) furnished by Ship Co alone cannot be sufficient to conclude that the place of effective management was in Cyprus.
The First Appellate Authority also ruled against Ship Co and accordingly filed an appeal before the Tribunal.
Held:
All the documents indicate that Ship Co played a definite role in transporting cargo from India to the UAE.
• The UAE client has made a contract with Ship Co to transport cargo.
• The bill of lading is in the name of Ship Co and recognises it as the ship charterer.
• Ship Co’s annual report records all profits/revenues from the shipping business.
The Tax Authority has attempted to rewrite contracts, which is not permissible. It cannot be said that Ship Co was merely a “paper company” and did not play any role in transporting cargo.
If the Tax Authority’s contention is accepted that Ship Co is merely interposed to take benefit of the Cyprus DTAA by Charter Co, then, the freight income should be taxable in the hands of Charter Co and such income cannot be taxed in the hands of ICo who is the agent of Ship Co.
Ship Co did not have any establishment outside of Cyprus and, hence, its “effective management” is situated in Cyprus only.
Accordingly, Ship Co is entitled to benefits of the Cyprus DTAA and income of Ship Co from transportation of cargo is not taxable in India under the Cyprus DTAA .
