Tribunal rules on non applicability of LOB clause; observes timing when a treaty needs to be referred
In a recent decision,1 the Mumbai bench of Income Tax Appellate Tribunal (“ITAT” or “Tribunal”) has held that benefits of India UAE Double Taxation Avoidance Agreement (“India – UAE Treaty” or “Treaty”) should not be denied to Interworld Shipping Agency LLC (“Taxpayer”). The Assessing Officer (“AO”) and Dispute Resolution Panel (“DRP”) held that the Control and Management (“C&M”) of Taxpayer was not wholly in UAE and denied Treaty benefits. The ITAT rejected their orders and held that no income of Taxpayer would be taxable in India in light of the India UAE Treaty.
The Taxpayer is a Limited Liability Company incorporated in the UAE, engaged in providing services such as ship chartering, freight forwarding, sea cargo services, ship line agents, etc. The amount received by Taxpayer for the above services, was considered by AO to be taxable in India. However, the Taxpayer claimed that it being a tax resident of UAE, as per Article 82 of the Treaty profits derived from operation of ships in international water should be taxable only in UAE.
The AO did not accept claim of the Taxpayer and observed as follows:
The DRP confirmed AO’s order and observed as follows:
Aggrieved by the above, the Taxpayer appealed before the Tribunal.
The ITAT ruled in favour of the Taxpayer and held that no income was liable to tax in India as per the Treaty, on the following grounds –
On basis of the above reasoning, the Tribunal held that the Taxpayer is resident of UAE and accordingly benefits of the Treaty should be provided to the Taxpayer i.e. income from operation of ships in international water should be taxable only in UAE.
The Tribunal ruled in favour of the Taxpayer as it observed that the Greek national stayed in the UAE for 300 days in the relevant year, whereas this fact was not considered by the AO or DRP. However, the judgment clarifies that the director’s time period of stay in UAE is irrelevant for determining residential status of a company. It was observed that the conditions for a company to be resident of UAE under Article 4(1) of the Treaty is incorporation in UAE and C&M should be wholly in UAE. The Tribunal observed that the 183 days stay requirement is for individuals only and not directors of the company. Hence, even if the directors of the company stayed for less than 183 days in UAE but the C&M was wholly in UAE i.e. conduct of Board Meetings, taking key commercial decisions in UAE etc. then also the company would be resident in UAE.
The ruling provides guidance on what is the relevant time when the Treaty should be looked at. In the present case, the relevant time was not in the year 2000 but when the income was earned in the year 2015 by the Taxpayer. In this context, in M&A transactions, it becomes important to consider what is the relevant time for application of the treaty to claim that treaty benefits should not be given.
An observation was made by the AO and DRP that post amendment by Finance Act, 2012 TRC is a necessary but not a sufficient condition for claiming treaty benefits. However, in this context it should be noted that by way of a Press Release dated March 1, 2013, the Ministry of Finance has already clarified that “the Tax Residency Certificate produced by a resident of a contracting state will be accepted as evidence that he is a resident of that contracting state and the Income Tax Authorities in India will not go behind the TRC and question his resident status.” Therefore, the TRC should act as a sufficient proof and the residential status of an entity should not be questioned by the Indian tax authorities.
Additionally, it is trite law that corporate veil can be lifted only if an entity was set up with an intent to defraud or the transaction that is carried out is a sham or done in a manner to avoid taxes. Therefore, lifting of the corporate veil by tax authorities in transactions wherein there is no fraud or colourable device is against the law of the land. Even the Tribunal observed that Taxpayer was engaged in the shipping business since year 2000, hence the prior conduct of the Taxpayer should be taken into account before any efforts are made for lifting of the corporate veil.
– Vibhore Batwara, Ashish Sodhani & Parul Jain
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1 ITA No. 7805/Mum/19
2 Article 8 of India UAE Treaty provides that profits arising to an entity from operation of ships in international traffic should be taxable only in its state of residence.
3 (1981) 131 ITR 587 (SC)