In the case of Overseas Transport Co. Ltd (taxpayer) the Mumbai Bench of Income-tax Appellate Tribunal (tribunal) dealt with the issue of no permanent establishment (PE) constituted in India under Article 5 of the India–Mauritius tax treaty (tax treaty) in the absence of permanent infrastructure, office, supervisory staff, tangible and intangible assets in India or India dedicated agents exclusively working for the taxpayer. Moreover, directors of the taxpayer lived in the United Arab Emirates (UAE) and exercised their control over the affairs of a Mauritian entity from the UAE.
The taxpayer, a Mauritius based shipping group owned by UAE resident shareholders was engaged in shipping activity in India through Indian agents. The taxpayer received revenue from freight and claimed exemption under Article 8(2) of the tax treaty for the year under consideration. The tax treaty claim was relying on the Tax Residency Certificate (TRC) issued by the Mauritian revenue authorities.
The Indian Revenue Authorities (revenue) denied the benefit under Article 8(2) of the tax treaty relying on the fact that being a Mauritian resident, the board meetings were truly conducted in the UAE. Accordingly, revenue contended that the taxpayer constituted a fixed place PE under Article 5(1) and created a dependent agency PE in India under Article 5(5) of the tax treaty and consequentially levied a tax rate of 7.5% on the gross receipts attributable to the PE under Indian domestic tax laws, treating it as place of effective management (PoEM) in India.
Aggrieved by the revenue order, the taxpayer filed an appeal before the first appellate authority (first appeal). The first appeal concluded that the Indian agents could not be regarded as dependent agents of the taxpayer, since both entities perform their business activities independently earning commission income from multiple principals. Therefore, Indian agents cannot be regarded as exclusive agents of the taxpayer under Article 5(5) of the tax treaty, thus exempt from the attribution of profits principle under Article 7 of the tax treaty. The case ruled against was further contested before the Tribunal.
Fixed Place PE
Article 5(1) of the tax treaty is applicable when the foreign enterprise undertakes its business activity through a fixed place either wholly or partly particularly where such place of business is at the disposal of the foreign enterprise. On analyzing the facts of the case, there was no formal record to prove that the taxpayer undertook its core business activities through a fixed place of business in India absent any permanent infrastructure, office, and supervisory staff, tangible and intangible assets affiliated in India to constitute a fixed place PE.
The revenue’s contention that directors of the taxpayer company lived in the UAE, exercising control over affairs of the company from the UAE, excluded taxpayers from constituting a fixed place PE in India absent satisfaction of the basic conditions under article 5(1) of the tax treaty. The argument of the revenue that taxpayer has a PoEM in India was also found baseless, lacking any evidence or a cogent reason. Hence, the taxpayer, based on the available facts, clearly indicates that it did not constitute a fixed place of business to either wholly or partly carry out its business in India under Article 5(1) of the tax treaty.
Dependent Agent PE
The agents rendered services to multiple shipping companies including the taxpayer and received commission income. It was found that the taxpayer’s contribution of commission income for the Indian agents rendering services was an insignificant proportion of their overall income earned from multiple principals. The tribunal also observed that the Indian agents were merely acting in the ordinary course of their business, having independent status.
The tribunal observed that it was easily established that both the India agents were not exclusively working for the taxpayer and had their independent status maintained while rendering the services to the taxpayer in the ordinary course of their business. The tribunal relied on various jurisprudence to conclude that both the agents cannot be considered to have constituted a dependent agency PE in India applying the exceptions under Article 5(5) of the tax treaty.
The tribunal accordingly affirmed that the taxpayer is eligible to claim tax treaty benefits based on the facts of the case relying on the TRC issued by the Mauritian revenue in favor of the taxpayer.
The tribunal ruling being fact specific appears to be in line with the broad understanding pronounced by many courts related to the shipping business where the effective management of a shipping enterprise is not based in India.
It may be observed in numerous cases the term “fixed” refers to considerable or reasonable period of permanence in existence of the place of business in the source country hence, to constitute a PE, the presence of the foreign enterprise in the source country should be more than temporary or transitory or tentative in nature. Thus, it is imperative to refer to the landmark Supreme Court ruling of E-funds IT Solutions Inc which concluded that back office services outsourced by a foreign group to its Indian subsidiary cannot result in a PE of the foreign enterprise in India, simply because E-funds India was neither authorized to conclude contracts on behalf of the taxpayer, nor were any facts corroborated to prove satisfaction of the agency PE conditions under Article 5(4) of the India–U.S. tax treaty It was also observed that the principal test to ascertain whether the establishment has a fixed place in India is that such physically located premises should be “at the disposal” of the foreign company.
Separately, in the case of National Petroleum Construction pertaining to fixed place of PE the Delhi High Court held that the word “permanent” in the term “permanent establishment” indicates that there should be some degree of permanency attached to the fixed place of business before the same can be construed to be a fixed place PE of an enterprise. The word “permanent” does not imply for all times to come but merely indicates a place, which is not temporary, interim, short-lived or transitory. The jurisdictional tribunal in the case of Renoir Consulting Ltd observed that the word “permanent” presents a certain degree of permanence and a fixed place would include a movable place of business.
Conversely, the 2017 OECD Model Tax Commentary deals with the context of permanence test and prescribes essential determining factors to conclude such a test:
- establish a link between the place of business and a geographical point;
- the duration of operation in a Contracting State is immaterial; and
- it is not relevant that equipment constituting a PE should be actually fixed to the soil.
Thus, relying on the above principles, the 2017 OECD Model Commentary explained that even a stall or pitch in the market, a sales booth (erected using collapsible/mobile equipment) at an exhibition, or an area permanently used in a customs depot (e.g. for the storage of dutiable goods) can constitute a fixed place of business.
Taking an analogy from the Authority on Advance Ruling (AAR) in the case of Speciality Magazines (P.) Ltd. AAR opined that for Speciality Magazines to be held as devoting its activities “wholly or almost wholly” on behalf of the U.K. magazine, at least the majority of the Speciality Magazines’ revenue should come from the U.K. magazine. Accordingly, the AAR held that Speciality Magazines was an independent agent. Interestingly, the issue of PE is widely dealt with by the revenue relying on the Supreme Court ruling in the case of the Formula One World Championship Ltd where the conditions to constitute a PE were elaborately explained. The Delhi High Court in the case of Rolls Royce Singapore (P.) Ltd held that an Indian agent was acting exclusively for the Singapore company and it was prohibited from assisting any other company or person that competed with the Singapore company, hence the Indian agent could not be regarded as having independent status.
It will be important to analyze OECD BEPS Action Plan 7 Commentaries on “preventing the artificial avoidance of PE” that intend to expand the scope of PE owing to exclusive or almost exclusive dependency placed by a business on its parent entity. The OECD BEPS Action Plan 7 amends PE status, not only for contracts that create legal enforceable rights and obligations, but also for contracts that in substance are performed by such entities than by a person contractually obliged to do so, owing to the involvement, negotiation and final conclusion of contracts.
While countries like Mauritius remain excluded from the covered tax agreement under the multilateral instrument, with the requirements of the principal purpose test, the general anti-avoidance rule and related anti-abuse provisions satisfied, any tax treaty benefits claimed with the intention of structuring transactions, leading to tax losses for the revenue, will obligate taxpayers to carefully review their transactions which should not create situations of non-taxation or reduced taxation or causing artificial tax evasion or avoidance, including treaty shopping arrangements.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Shailendra Sharma is a Chartered Accountant associated with a multinational financial services firm, India.