The Income Tax Appellate Tribunal (ITAT), Mumbai Bench rejected the invocation of Limitation of Benefit (LOB) and allows Indo-UAE tax treaty benefits on Shipping Income to Company managed and Controlled in UAE.
The assessee, Interworld Shipping Agency LLC is a limited company incorporated in the UAE, a tax resident of the UAE, and engaged in the business of services like ship chartering, freight forwarding, sea cargo services, shipping line agents. The uncontroverted stand of the assessee, as noted by the Assessing Officer, is that the assessee charters the ships for use in transportation of goods and containers in international waters, including to Kandla and Mundra ports as indeed other ports in India and elsewhere.
During the relevant previous year, the assessee had received Rs 64,41,25,715 on account of total freight collection, including prepaid collections, which, under section 44B r.w.s. 172, result in a taxable income, computed @ 7.5%, of Rs 4,83,09,429. The assessee, however, claimed that as the assessee is a tax resident of the UAE and as, under the Indo UAE tax treaty, the profits derived by an enterprise of a UAE or India from the operation by that enterprise of ships in international traffic shall be taxable only in the respective jurisdiction, the assessee is not to pay any tax in India. The relief was thus sought under section 90 read with the Indo UAE tax treaty.
The Assessing Officer did take note of the fact that the assessee had taken vessels on the time charter, for transportation of good by ship in the international traffic, as also the assessee’s filing of the commercial license issued by the Department of Economic Development, Government of Dubai, and tax residency certificate.
He, however, noted that as much as 80% of the profits of the assessee entity were to go to one Dimosthenis Lalagiannis, a Greek national. The Assessing Officer was of the view that since this person was a Greek national, it could be safely concluded that the business was not managed or controlled wholly from the UAE. It was also noted that the assessee entity is a partnership firm and not a company. As regards the tax residency certificate, and no objection certificates issued by the Indian income tax authorities in the past, the Assessing Officer was of the view that nothing turns on these certificates as these certificates are obtained on the basis of misrepresentation of facts.
It was also noted that, in terms of the amendments brought about by the Finance Act 2012, the tax residency certificate of a non-resident entity is a necessary but not sufficient condition for the grant of treaty benefits, and, therefore, treaty protection cannot be granted merely on the basis of a tax residency certificate.
Article 29 of Indo UAE tax treaty, which states that “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 entities not having bona fide business activities shall be covered by this Article”.
The coram headed by the Vice President, Pramod Kumar observed that when an entity is established in 2000, and the relevance of the Indo-UAE tax treaty comes into play only in 2015, it cannot be said that the “main purpose of creation of such an entity was to obtain the benefits” of the Indo UAE tax treaty. Unless the purpose of creating the entity in question is to avail the Indo UAE tax treaty benefits, the LOB clause in article 29 cannot come into play. Such a possibility is simply ruled out on the facts of this case. In any event, it is specifically added in the said LOB clause, that “the cases of entities not having bonafide business activities shall be covered by this article”.
The ITAT held that the assessee company is a resident of the UAE, in terms of requirements of Article 4(1)(b) of the Indo-UAE tax treaty, that the limitation of benefits provisions of article 29 of the Indo-UAE tax treaty cannot be pressed into service in this case, and that the assessee is eligible for treaty protection, in respect of its income earned in India, under the Indo UAE tax treaty. It is not even in dispute, and rightly so, that under the provisions of Article 8(1) of the Indo UAE tax treaty, which provides that “profits derived by an enterprise of a Contracting State from the operation by that enterprise of ships in international traffic shall be taxable only in that State”, the assessee company is protected from taxation of the income in question in India.