2018 (4) TMI 1421 - AT - Income Tax

Fixed place PE in India - Effective management of the assessee - Penalty levied u/s 271(1)(c) - Article-8 of Indo- Mauritius DTAA non applicability - Whether Freight Connection (India) Pvt. Ltd. would constitute agency PE of the assessee? - Held that - the effective management can be only in between two contracting state is not correct and as per the facts narrated above we are of the considered view that the effective management of the assessee is neither in Mauritius nor in India and we are in agreement with the views of Mr. Klaus Vogel who is an eminent authority of International Taxation that if the effective management of an enterprise is not in one of the contracting state but is situated in the third state the benefit of article-8 cannot be extended. The facts being identical following the decision of the coordinate bench rendered in the case of Bay lines (Mauritius)(2018 (2) TMI 1524 - ITAT MUMBAI) we hold that the assessee does not have Fixed place PE in India. The assessee does not have PE in India and its income being business income it cannot be brought to tax in India. Accordingly we set aside the orders passed by Ld CIT(A) on this issue in all the years under consideration. Penalty levied u/s 271(1)(c) - CIT(A) deleted the penalty holding that the issue relating to taxability of income is debatable in nature. Since we have held that the assessee is not liable for taxation in India for its business profits the penalty orders passed by the AO in all the five years would not survive. Accordingly we quash the impugned penalty orders passed by the tax authorities in all the five years.

Issues Involved:

1. Applicability of Article-8 of Indo-Mauritius DTAA.
2. Existence of Agency Permanent Establishment (PE) in India.
3. Existence of Fixed Place PE in India.
4. Justification of computing income under Section 44B of the Act.
5. Chargeability of interest under Sections 234A and 234B of the Act.
6. Attribution of profit if the agent is remunerated at arm’s length.
7. Penalty under Section 271(1)(c) of the Act.

Detailed Analysis:

1. Applicability of Article-8 of Indo-Mauritius DTAA:

The assessee, a shipping company incorporated in Mauritius, claimed exemption under Article-8 of the DTAA between India and Mauritius, asserting its place of effective management was in Mauritius. The Assessing Officer (AO) found the place of effective management to be in Gulf countries, not in India or Mauritius, thus disqualifying the assessee from the benefits of Article-8. The Tribunal upheld the AO’s findings, referencing the decision in the case of Bay Lines (Mauritius) and the authority of Klaus Vogel on International Taxation, which states that if the effective management is in a third state, the benefits of Article-8 cannot be extended.

2. Existence of Agency Permanent Establishment (PE) in India:

The AO considered M/s Freight Connection (India) Pvt. Ltd. (FCIPL) as the agency PE of the assessee. The Tribunal, following the precedent set in Bay Lines (Mauritius), held that FCIPL, being an independent agent with multiple principals, does not constitute an agency PE. The Tribunal referenced Article 5(5) of the DTAA and several judicial precedents, including the Bombay High Court’s ruling in B4U International Holdings Ltd., to conclude that FCIPL’s activities were not devoted exclusively or almost exclusively to the assessee.

3. Existence of Fixed Place PE in India:

The AO also deemed the business premises of FCIPL as the fixed place PE of the assessee. The Tribunal, consistent with the Bay Lines (Mauritius) decision, held that the provisions of Article 5(1) relating to Fixed Place PE do not apply when business is carried out through an independent agent. The Tribunal cited the Supreme Court’s decision in ADIT Vs. E-Funds IT Solution Inc. and the Mumbai Tribunal’s decision in Delmas France Vs. ADIT to support this conclusion.

4. Justification of Computing Income under Section 44B of the Act:

The assessee did not press the ground relating to the computation of profit under Section 44B of the Act. Consequently, the Tribunal dismissed this ground as not pressed in all the years under consideration.

5. Chargeability of Interest under Sections 234A and 234B of the Act:

For AY 2009-10, the Tribunal held that since the business income of the assessee is not liable to tax in India, the question of charging interest under Section 234B does not arise. Similarly, for AYs 1999-2000 and 2000-01, the Tribunal noted that charging interest under Section 234A is consequential and does not require adjudication.

6. Attribution of Profit if the Agent is Remunerated at Arm’s Length:

The assessee contended that no profit attribution is required if the agent is remunerated at arm’s length. The Tribunal did not find it necessary to adjudicate this alternative ground, given the conclusion that the assessee is not liable for taxation in India for its business profits.

7. Penalty under Section 271(1)(c) of the Act:

The revenue’s appeals challenged the deletion of penalties under Section 271(1)(c) for AYs 2003-04 to 2007-08. The Tribunal upheld the CIT(A)’s decision to delete the penalties, noting that the issue of taxability was debatable. Since the assessee was found not liable for taxation in India, the penalty orders were quashed.

Conclusion:

The Tribunal allowed all the appeals filed by the assessee and dismissed all the appeals filed by the revenue. The order was pronounced on 07.03.2018.

← Previous Next →