2006 (8) TMI 440 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Article 8 of the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius.
2. Determination of the place of effective management.
3. Existence of a Permanent Establishment (PE) in India under Article 5 of the DTAA.
4. Tax Residency Certificate and its validity in determining tax benefits.

Issue-wise Detailed Analysis:

1. Applicability of Article 8 of the DTAA between India and Mauritius:
The primary issue revolves around whether Article 8 of the DTAA, which pertains to the taxation of profits from the operation of ships in international traffic, applies to the assessee. The assessee argued that Article 8 should exempt its profits from Indian taxation, claiming that its place of effective management is in Mauritius. The CIT(A) disagreed, concluding that the place of effective management was not in Mauritius, thus Article 8 did not apply.

2. Determination of the Place of Effective Management:
The CIT(A) and Assessing Officer (AO) both held that the effective management of the assessee was not in Mauritius. Despite the assessee having a Tax Residency Certificate from Mauritius and fulfilling certain local conditions (e.g., local directors, board meetings in Mauritius, local bank account, company secretary, and auditor), the AO opined that the management was effectively controlled from a third State. The CIT(A) supported this view, emphasizing that the mere registration and routine decisions made in Mauritius did not substantiate the claim of effective management being there.

3. Existence of a Permanent Establishment (PE) in India under Article 5 of the DTAA:
The AO determined that the assessee had a PE in India through its exclusive agent, Consolidated Cargo Services (CCS), which performed various functions on behalf of the assessee, including concluding contracts, dealing with government departments, and maintaining a bank account. The CIT(A) upheld this view, noting that CCS provided office space for the assessee's representative and was restricted from representing competing shipping lines, thus constituting a PE under Article 5.1 of the DTAA.

4. Tax Residency Certificate and its Validity in Determining Tax Benefits:
The assessee argued that the Tax Residency Certificate issued by Mauritius authorities should suffice to claim benefits under the DTAA, citing the Supreme Court's decision in the case of Azadi Bachao Andolan, which upheld the validity of such certificates. The Tribunal agreed with the assessee, noting that the Supreme Court had ruled that the certificate issued by Mauritius authorities constitutes sufficient evidence of residency and beneficial ownership, thus entitling the assessee to the benefits of the DTAA.

Conclusion:
The Tribunal, considering the Supreme Court's decision in Azadi Bachao Andolan, ruled in favor of the assessee. It held that the Tax Residency Certificate issued by Mauritius authorities should be accepted as sufficient evidence for claiming DTAA benefits, and thus the assessee's profits from the operation of ships should not be taxed in India under Article 8 of the DTAA. Consequently, the Tribunal did not find it necessary to address the other grounds raised by the assessee. The appeal was allowed, and the assessee was granted relief from Indian taxation on its shipping profits.