DCIT(IT)-1(2)(1), MUMBAI vs. BAY LINES ( MAURITIUS), MUMBAI

and others M/s. Bay Lines (Mauritius) 3. At the outset, it has been admitted by the parties that the grounds raised by the Revenue as well as Cross Objection raised by the assessee are covered by the decision of the Tribunal in assessee’s own case right from A.Y.1998-1999 to A.Y.2012-13, wherein the Revenue’s appeal has been dismissed on similar ground and cross objection of the assessee has been decided against the assessee.

The brief facts are that assessee is a shipping company incorporated in Mauritius. It has shown gross receipts pertaining to freight of Rs.79,84,21,227/- in the A.Y.2013-14 and Rs.78,12,51,160/- in A.Y.2014-15. After applying the presumptive rate of tax u/s.44B which is 7.5% of these receipts was shown as income. However, in the return of income assessee claimed benefit of Article 8 of India-Mauritius DTAA and accordingly, the income from shipping activities was returned at ‘Nil’ and tax payable was also at ‘Nil’.

Ld. AO noted from various details and documents filed by the assessee that, assessee has carried out its activities from UAE and therefore, assessee was required to explain as to how the place of effective management is situated in Mauritius in order to be entitled to the benefit of India-Mauritius DTAA. AO also admitted that there is no change in the facts compared to the last year and others M/s. Bay Lines (Mauritius) and earlier years. The ld. AO noted that there are four directors of the assessee company out of which two of them were from Mauritius and two of them were in UAE. However, the share pattern of the assessee company was that only two Directors based on UAE were holding 50% of shares each, i.e., Mr. Saadi Rais held 50%; and Mr. Salim Rais held 50%; and both were UAE residents. Thus, he held that effective place of management was not in Mauritius. Thereafter, on perusal of the documents AO noted that there is an agency agreement between the assessee and Freight Connection India P. Ltd. (FCIPL) dated 01/12/1997 wherein the address of the Bay Lines was given as ‘P.O. Box No.7, Dubai, UAE’ and agency appointment letter dated 01/07/1995 from the assessee to FCIPL. Thus, he held that letter of appointment and the agency agreement of an agent was a major decision which was taken outside Mauritius therefore, effective management of the assessee company was situated in Dubai and not in Mauritius.

In response to show-cause notice as to why effective place of management should not be considered as a place different from India and Mauritius, assessee submitted that assessee has obtained tax resident certificate in Mauritius which is granted after compliance of several conditions and one of the conditions was that a company must have two Directors and Company’s Secretary must be in Mauritius. Further, and others M/s. Bay Lines (Mauritius) apart from that the other conditions were that it should have registered office in Mauritius and all the bank transactions must be channeled through off shore bank account in Mauritius and accounting records must be maintained in Mauritius. Even the Directors meeting were held in Mauritius. In this background it was stated that effective place of management was in Mauritius. The assessee’s detailed submissions have been incorporated in the assessment order. However, the ld. AO had rejected these contentions after observing and holding as under:- (i) Factual details as discussed in para 4.5 above clearly suggest that the place of effective management is not in India or Mauritius, but is in Dubai. (ii) Copy of Minutes of Board Meeting clearly shows that Mr. Saadi Rais and Mr. Salim Rais, participated in the meeting by telephone. However, no details or documentary evidences have been produced to show that there was even a meeting by way of telephonic conversation. (iii) In the A.Y.2003-04, the authorised representative of the assessee has furnished copy of charter agreement between the assessee and M/s. Amir Shipping LLC, Dubai, UAE, for the Vessel 'Wave 23". In the assessment order for A.Y.2003-04, It was mentioned by the A.O that this charter agreement was also entered into in Dubai only. The charter agreements are normally valid for 36 to 60 months. However, there is nothing on record to show that any agreement has been entered into in Mauritius. (iv) In the commentaries on the tax treaties by Mr. Klaus Vogel in his book of International taxation, who is an eminent authority of International taxation, it has been stated that if the effective management of an enterprise is not in one of the Contracting and others M/s. Bay Lines (Mauritius) States but is situated in a third state, the benefit of the article 8 cannot be extended. (v) In earlier assessment years also, assessee mentioned the Hon'ble Supreme Court's decision in the case of Azadi Bachao Andolan and accordingly assessment orders were passed which were decided by Ld. CIT (A) confirming the Assessing Officer's orders. However, the decision relied upon by the assessee does not hold good in this case. (vi) Although, the assessee has contended that the fright receipt is taxable in Mauritius, the assesssee has not furnished any documentary evidences to substantiate its claim. Even, the tax return fled with Mauritius tax authorities has not been furnished. (vii) The assessee has relied on the judgment of Hon'ble Mumbai Tribunal in the case of UASC/CSL Ltd. Vs. DCIT 12 SOT 586 (Mum). In the said case, the assessing officer has only formed an opinion that there is also a possibility of effective management being in a third State other than two contracting states, as the assessee has not furnished any details called for and has failed to substantiate that its place of effective management is in Mauritius. However, in the instant case, It has been categorically established that the effective management of the assessee is in Dubai and not in Mauritius, which has been confirmed by Ld. CIT(A) In earlier assessment years. 4.10 Accordingly, it is held that the effective management of the Assessee is neither In Mauritius nor in India but in a third country. Accordingly, the Assessee is not entitled for the benefit of Article 8 of the DTAA.

Accordingly, after giving his detailed reasoning, he has denied the benefit of Article 8. Thereafter, the ld. AO preceded that assessee has a PE in India in the form of FCIPL who is an dependent agent for assessee, in response to the show-cause notice as to why FCIPL should not be considered as a dependent and others M/s. Bay Lines (Mauritius) agent in terms of Article 5(4) of DTAA, assessee’s submissions were as under:- "As stated earlier, an Agency Agreement was entered by the Assessee with M/s Freight Connection (I) P Ltd, Mumbai dated December 1, 1997. It is submitted that the terms and conditions contained in the Agency Agreement are standard terms which are present in virtually all Agency Agreements. Some of the key terms of the Agency Agreement are reproduced below for quick reference: Clause 2 A. Agents shall solicit and book cargo and arrange for the reception of same for shipment, prepare and/or sign receipt and/or issue and/or send out receipts, manifests, loading permits, bill of lading, arrival notices and delivery orders and other papers or documents pertaining to the receipt and delivery of goods, as customary. B. (1) Principals shall authorize agents to select and appoint stevedores and other contractors on their behalf after securing their prior approval, agents shall supervise the stevedoring, chocking, clerking, tallying, pler work and all other works having to with the physical receipt, storing, handling, loading, discharging and delivering of cargo at the ports of India. C. The conform to all statutory or other applicable local, national or international rules, regulations and requirements and to promptly advise the principals of any and all proposed or adopted rules, regulations or orders, governmental or otherwise, which may affect the operations and activities of the principal within the area of representation. Clause 4 Principals instructions and procedures shall be faithfully observed with due diligence by agents. Agents shall collect all freights and other collectable amounts, if any, they shall transfer the net amount to principals after and others M/s. Bay Lines (Mauritius) deduction of disbursements amount within one month of ship's departure, subject to obtaining necessary approvals from Exchange Control authority in India. Clause 6 Cargo shall be booked by agents always in accordance with principal's tariff in force and in compliance with principal's written instructions. All collection, freight shall be in accordance with instructions to agents and also subject to principal's bills of lading clauses and exceptions. Clause 11 The Agent shall not act as agent or representative for any other company or business entity undertaking or carrying on business in competition with the principal. It is submitted that nowhere in the Agreement it is specified that M/s Freight Connection (1) P Ltd is an exclusive agent of the Assessee. The reference to all the Indian ports in terms of magnitude is out of context since the ports for which the freight booking is done by FCIPL are JNPT, MPT and NSICT which are all off Mumbai shoreline. Attention is invited to Clause 11 of the Agency Agreement reproduced above which only restricts that FCIPL cannot carry on business as an agent in competition to the business of the Assessee. To fortify the factual argument, FCIPL is actually an agent for other shipping lines which are not competing with the business of the Assessee. Before the facts of the case are put forward, it is imperative to understand the business of shipping. A shipping line, to conduct its business globally is required to appoint shipping agents at multiple ports in several countries to capture the shipping Freight business. However, it would not be in a position to set up infrastructure in all the countries where the ships dock to load and unload cargo. For this reason, the local compliances of a country are part of the requirement of the agent's business.

Further, assessee contended that –  FCIPL is only an agent for booking cargo for the assessee as per the Tariff fixed by it and it has no capacity to conclude contracts of any nature. It is contended that the booking of freight as an agent does not imply that FCIPL is empowered to 'conclude any contracts and others M/s. Bay Lines (Mauritius)  The assessee is not liable for any expenses, obligations or liabilities of expenses or otherwise of FCIPL  In its normal course of conduct of business, FCIPL does not act as a representative of the assessee but only as an agent for booking cargo, just as it does for other shipping lines for which also it is an Agent.  The risks associated with their respective business are mutually exclusive, The assessee has limited access to books and records related only to the agency business of FCIPL  The instructions are limited to booking of freight and the assessee has no say in the management of FCIPL. In other words, FCIPL is functionally independent of the Assessee.

Thus, FCIPL was an independent contractor. However, the principal relationship between the assessee and the FCIPL were that of principal and agent as per Article 5(5).

However, the ld. AO rejected the assessee’s contention and held that FCIPL was exclusive agent of the assessee who was doing agency work in all Indian ports in terms of agency agreement dated 01/12/1997. Therefore, it is a dependent agent who is habitually concluding the contracts on behalf of the assessee in the form of all the clearances from the Government department to other authorities. Apart from that they are carrying out various functions from deciding the brokers, contracting with the parties, loading of cargo, dealing with labours etc., Accordingly, he held that FCIPL is a dependent and others M/s. Bay Lines (Mauritius) agent PE and once assessee has been denied benefit of Article 8 and computed the income by applying 7.5% of gross income as per the provision of Section 44B.

The ld. CIT (A) following the Tribunal order of the earlier years denied the benefit of Article 8 against assessee; however in so far AO holding FCIPL as dependent agent, he held that FCIPL is not dependent agent but was acting as Independent Agent and hence there is no PE under Article 5. One of the important fact which has been noted by him is that, FCIPL was not wholly and exclusively doing business for the assessee but was acting as an independent agent for various other entities. The total income or revenue from the assessee was only 22.32%; and from third party customers in India as well as other principals, it was 77.68%. Various streams of operating income derived by FCIPL from its ordinary course of business, i.e., acting as a shipping agent and facilitating movement cargo was given as under:- Nature of Income Bay Lines Other Third Party Total (INR) Principals customers in India Agency 2,09,11,303 1,55,49,528 - 3,64,60,906 Commission Recovery of 69,26,503 18,96,250 88,22,753 communication expenses Logistic Fees 69,26,503 16,04,042 - 85,30,545 Documentation - - 4,36,62,222 4,36,62,222 charges and others M/s. Bay Lines (Mauritius) Container freight 5,82,41,036 5,82,41,036 station handling income Total (INR) 3,47,64,309 1,90,49,820 10,19,03,258 15,57,17,387 Total (%) 22.32% 12.23% 65.44% 100.00%

In support, copy of profit and loss account of FCIPL was also furnished. Thus, it was stated that FCIPL both legally and economically cannot be said to be wholly and almost wholly dependent on the assessee company for the purpose of business and therefore, it was an independent agent and accordingly, it cannot be held to be a DAPE under Article 5(4). The ld. CIT (A) deleted the said addition after holding as under:- “5.3 I have gone through the AO's order and also appellant's written submissions. The appellant has drawn attention to the Hon'ble ITAT's order in appellant's own case dated 20.02.2018 for A.Y.1998-99 to 2005-06 and A.Y.2007-08 to A.Y.2012-13 wherein similar issue was dealt in favour of the appellant holding that the business profits of the appellant company are not liable to tax in India under Article 7 of the India-Mauritius DTAA as the appellant does not have PE in India in accordance with Article 5 of the India- Mauritius DTAA. The Hon'ble ITAT Mumbai vide their order dated 20.02.2018 vide for Α.Υ.1998-99 ADIT(IT)3(2) vs. Bay Lines Mauritius and Cross Objection No.52/Mum/2010 (A.Y.1998-99), Bay Lines Mauritius vs. ADIT(IT)-3(2) and (Α.Υ.1999-2000) to ITA No.5513/2006 (Α.Υ.2000-01), ITA No.2454/Mum/2005 (Α.Υ.2001- 02), ITA No.5514/Mum/2006 (A.Y.2002-03), ITA No.5515/Mum/2006 (A.Y.2003-04), ITA No.834/Mum/2010 (A.Y.2004-05), ITA No.835/Mum/2010 (A.Y.2005-06), ITA No.8857/Mum/2010(A.Υ.2007-08), ITA No.385/Mum /2010 (A.Y.2008-09), ITA No.2340/Mum/2012 (A.Y.2009-10) ITA No.6703/Mum/2014 (A.Y.2010-11), ITA No.6704/Mum/2014 and others M/s. Bay Lines (Mauritius) (A.Y.2011-12) and ITA No.6716/ Mum/2016 (A.Y.2012-13), in context of agency PE issue has relied on the decision of Bombay High Courts in the case of DIT vs. B4U International Holdings Ltd. (2015) (374 ITR 453) (Bom) and stated at para 14 (pg.16) of its order as under: "We find that on a plain reading of Art.5(5), it is clear that for determining the independence, one should look at the agent and as to whether the agent has only one principal for whom the agent works exclusively. The fact that the principal has only one agent in India who undertakes all the activities for the principal is not relevant. In this respect, we draw strength from the decision of CIT(A) in A.Y.1998-99 is longer good law. Further, the Hon'ble ITAT Mumbai held that the appellant company does not have permanent establishment in India vide para 14 of its order as under: "Considering the above legal proposition and as well as facts of the present case we find that the Hon'ble Bombay High Court has affirmed the Tribunal's decision in B4U International Holdings which had held that the conclusion in DHL operations was erroneous. Therefore, we hold that the Freight Connection is an independent agent who acts in it ordinary course of its business and whose activities are not devoted exclusively or almost exclusively on behalf of the assessee. Therefore, it is held that the assessee does not have an Agency PE in India and the CIT(A) was right in so holding for the A.Y.1998-99 and the successor CIT(A) was wrong in taking a contrary view for the subsequent assessment years. Accordingly, we further hold that even if the assessee's case is not covered by Article 8, the business profits would not be chargeable to Indian tax as it does not carry on business in India through a permanent establishment (an agency PE) as per articles 7 and 5 of the DTAA No other facts or contrary judgments have been brought on record before us by the Ld. DR in order to controvert or rebut the findings recorded by the Ld.CIT(A). Moreover, there are no reasons for us to deviate from the findings recorded by the Ld.CIT(A). Therefore, we are of the considered view that the findings recorded by the Ld.CIT(A) are judicious and are well reasoned. Accordingly, we and others M/s. Bay Lines (Mauritius) uphold the same. Resultantly, this ground raised

The case of the ld. AO is that FCIPL was the sole agent of the assessee who was doing agency work for the assessee and it is a dependent agent which is habitually concluding contracts on behalf of the assessee. While making such a statement AO referred that agent was doing various clearances from the Government department and authorities and contracting with the parties for loading of cargo, dealing with labours etc., and maintaining and operating a bank account on behalf of the assessee. Nowhere, he has stated that either from the agreement or from any other document or evidence, that any of the activities given in Article 5(4) that FICPL was satisfied and the agent habitually concluding the contracts on behalf of the assessee. and others M/s. Bay Lines (Mauritius) 17. We have already incorporated various terms and clauses of the agreement which was part of the assessee submission before the ld. AO and other activities described therein, nowhere it can be said that FCIPL was wholly and exclusively dependent agent of the assessee albeit, it was only agent for booking for cargo for assessee as per the tariff fixed by the assessee and nowhere, it has been brought on record that it had the capacity to conclude the contracts of any nature. From the agreement and also from the submissions made before the authorities below it is seen that; firstly, FCIPL is only an agent for booking cargo for the assessee as per the Tariff fixed by it and it has no capacity to conclude contracts of any nature. Further, the booking of freight as an agent does not imply that FCIPL is empowered to 'conclude any contracts; secondly, the assessee is not liable for any expenses, obligations or liabilities of expenses or otherwise of FCIPL; thirdly, in its normal course of conduct of business, FCIPL does not act as a representative of the assessee but only as an agent for booking cargo, just as it does for other shipping lines for which also it is an Agent; fourthly, the risks associated with their respective business are mutually exclusive. The assessee has limited access to books and records related only to the agency business of FCIPL; and lastly, the instructions are limited to booking of freight and the assessee has no say in the management of FCIPL. In other words, FCIPL is functionally independent of the Assessee. Thus, simply booking of freight as an agent does not imply that FCIPL is empowered to conclude any contracts nor assessee was liable for any instances, and others M/s. Bay Lines (Mauritius) obligations or liabilities of expenses of FCIPL. It does not act as a representative of the assessee but only an agent for booking cargo and the risk associated was also that of an agent.

One very important fact which has been brought on record that FCIPL was doing business for other enterprises also and in as much as more than 77.60 % of the Revenue or the income was from other independent parties at only 22.32% Revenue was derived from assessee. In this regard we have already incorporated the table which encapsulates various operating income derived by FCIPL. Thus, FCIPL was an independent agent and not carrying out any work wholly and almost wholly for the assessee company. In any case this issue stands covered by the judgment of the Tribunal in assessee’s own case for the various issues and the relevant extract has already been incorporated by the ld. CIT (A) noted above. Accordingly, the order of the ld. CIT (A) is confirmed and the grounds raised