FORBES CONTAINER LINE PTE. LTD,MUMBAI vs. DDIT (IT) 3(2), MUMBAI

सुनवाई क� तार�ख /Date of Hearing : 21-4-2016 घोषणा क� तार�ख /Date of Pronouncement : 15-07-2016 आदेश / O R D E R

PER RAMIT KOCHAR, Accountant Member

ITA 972/Mum/2015 2

“The appellant objects to the order dated 14 November 2014 passed by the Commissioner of Income-tax (Appeals) - 10, Mumbai, [CIT(A)] on the following among other grounds:

Chargeability of income under section 44B of the Act

1. The learned CIT(A) erred in confirming the action of the DDIT (Int. tax.) in holding that the income of the appellant from operation of ships in international traffic ought to be taxed as per domestic tax law under section 44B read with section 5(2) and section 9 of the Act.

2. The learned CIT(A) ought to have appreciated the fact that the appellant was not engaged in the operation of ships during the relevant year under review and therefore, the provisions of section 44B are not applicable to the appellant's case.

Business Connection

3. The learned CIT(A) erred in confirming the action of the DDIT (Int. tax.) in holding that the appellant had business connection in India under the provisions of section 9(l)(i) of the Act.

Fixed Place PE

4. The learned CIT(A) erred in confirming the action of the DDIT (Int. tax.) in holding that the appellant is established to have carried on part of its business through a fixed place of business viz. through Forbes & Company Limited and this resulted in constitution of Fixed Place Permanent Establishment (PE) under Article 5 of the India- Singapore DTAA.

Control and management in Singapore

6. The learned CIT(A) erred in holding that the complete control is situated in India as the appellant is a 100% subsidiary of Forbes & Company Limited, being an Indian Company.

ITA 972/Mum/2015 3

7. The learned CIT(A) ought to have appreciated the fact that the control and management of the appellant is in Singapore.

8. The learned CIT(A) erred in confirming the action of the DDIT (Int. tax.) in holding that all the activities of the appellant are carried out by its agent i.e. Forbes & Company Limited and therefore the appellant had an Agency PE under Article 5 of the India-Singapore DTAA. 9. The learned CIT(A) ought to have considered the submissions of the appellant that as Forbes & Company Limited had been remunerated on arm's length basis, no further income could be taxable in India. Computation of income 10. The learned CIT(A) erred in confirming the action of the DDIT (Int. tax.) for including service tax while computing income under section 44B of the Act.”

(i) Assessee Company incorporated in 2006 and from beginning assessee had entered in to the agency agreement with associated concern regarding business from India. Till date there is no change of heir relation. So, element of continuity is remain intact. ii) They have real and Intimate connection because here principle FCLPL is subsidiary company of agent 'holding' company F&CL. And habitually secured the business for principle. iii) Holding company habitually secured the business from India for principle subsidiary company. And here Income directly attributed. iv) Principle and agent have Common control mechanism. Promoters of F&CL created the FCLPL as 100 percent subsidiary company in Singapore. One of Director of the FCLPL Mr. Amit Mittal also Director in the Indian parent company F&CL. and he permanently reside in India and looking after the policy and other important matter for the assessee company as well agent a parent company. Although, both company has separate legal entities in the eyes of laws but their control mechanism is common that is in the India only.

The A.O. further held that vide Article 7 of the DTAA between India and Singapore, the assessee company is established to have carried on part of its business through a fixed place of business in India, the assessee company falls within the definition of Permanent Establishment under paragraph 1 of Article 5 and in this case assessee company has fixed and permanent place in India from where it secured the business from India. It was further held that the effective management of the assessee company is in India and not in Singapore. The assessee company is incorporated in Singapore and is 100% subsidiary of Indian company F&CL. The assessee company has entered into ITA 972/Mum/2015 6 an agency agreement in India with VFSSL w.e.f. 1st January, 2007 whereby VFSSL was appointed as its agent in India . VFSSL is also 100% subsidiary of Forbes & Company Ltd. which is an Indian company. VFSSL has demerged its shipping agency division into its holding company Forbes & Company with effect from 1-4-2008. The assessee company submitted that in terms of the approved scheme during the financial year under consideration, VFSSL had carried on business activities in relation to its demerged division for the account of resulting company ie. Forbes & Company Ltd. In other words, the assessee company is 100% subsidiary of agent holding company Forbes & Company Ltd. The facts of this case were similar to the facts of assessment year 2009-10 and the case for the assessment year 2009-10 was dealt in detail was the observation of the AO. The extract of the assessment order is reproduced as under:- i) In the relevant year company has two directors in India namely; Amit Mittal and Padamkumar Unnikrishan. Assessee AR was asked to furnish the details of directors residential status vide order sheet entry dated 16.12.2011. In response of above AR only submitted their residence address and photo copy only passport front page of Amit Mittal. During the discussion AR stated that Amit Mittal is Indian residence and full time live living in India and working in holding company F&CL as director finance and look after the business for assessee company ( vide order sheet entry dated 20.11.2011). ii) As per available papers on record, it is seems that the all the important decision taken in India not in Singapore. Copy of agency agreement executed in Mumbai. Letter of authority for appearing before Income tax authority also executed in Mumbai dated ITA 972/Mum/2015 7 30.05.2010 with signature of Paddamkumar Unnikrishanan one of the director of company. iii) Perusal of the minutes of meeting of the Company Board meeting indicates that the decisions are predominantly routine in nature. Even not a single director meetings held during the financial year 2008-09 in Singapore. For that financial year only one meeting took place on 06 July 2009. Assessee also stated in his submission that “as per laws of prevalent in Singapore the company is required to hold only one board meeting and it was accordingly held in relation to year under consideration at the office of company located in Singapore.

Instant case it is observed that no significant decision regarding policy is taken. This clearly shows that faced of board meeting in Singapore is created with the full purpose to fulfill the requirement of Singapore law, to keep the certificate of incorporation alive and to avoid an impression that the real control of the company lies in Singapore. iv) The facade of one and two board meetings in a year in Singapore do not support the assessee's case in any way. In the case of Unit Construction company V Bullock [1961] 42 ITR 340 (HL)” IA Kenyan subsidiary was held to be resident in England because, though its Board meetings were always held in Kenya, it was managed, in branch of its articles, but its UK parent company." v) The OECD commentaries clarify that place of management does not necessarily mean office and can be said to be the control and co-ordination centre where all significant decision relating to the Management of an enterprise as a whole are taken.

ITA 972/Mum/2015 8 vi) The mind and brain of the organization of the assessee company are situated in India. It is a normal business practice that the Governing law in any agreement would be with relation to the place of control and management of the principle. vii) In this instant case, there is no material evidence filed by assessee which shows that key and commercial decision that for the business were taken in India nor in Singapore . There is no good reason for deviation from normal practice except in a situation where the control and management is not in the country of incorporation. This amply proves that the control and management of assessee is in India not in Singapore as assessee claimed. viii) In the case of Narotam & Pareira Limited v. CIT (1953) 23 ITR 454 (Bom), the Hon’ble High Court, Mumbai held that – “De facto control and management will decide residency.” Instant case the ultimate control and management of company rest in India from where case the ultimate control and management of company rest in India from where de facto control over the company’s affairs is exercised. ix) In view of the above, it is established beyond doubt that the real control of the assessee company lies in India as per meaning of clause 2(1) of Article 5 of the DTAA.

9.4 Thus, it is well established that the real control of the assessee company lies in India as per meaning of clause 2{1) of Article 5 of DTAA.”

ITA 972/Mum/2015 9 It was observed that F&CL was working as agent(parent/holding company) for the assessee company. The assessee company does not have any other agent in India for securing order and business . For the assessee company, F&CL is the exclusive agent in India who habitually conclude contracts on behalf of the assessee company in the form of all the clearances from the Government Department like Customs Department, RBI, Mumbai Port Trust etc. . F&CL is doing all the functions on behalf of the assessee company. Thus as per the AO, the assessee company has Permanent Establishment in India within the meaning of Article 5 of the DTAA and hence assessee company’s income is taxable under Article 7 of Indo-Singapore DTAA. Thus it was held by the AO that the business of the assessee company is covered by the provisions of section 44B of the Act which provides presumptive taxation and deems 7.5% of the gross receipts from shipping business to be income of the assessee company, vide assessment order dated 22-4-2014 passed u/s 144C(3) read with section 143(3) of the Act.

5.Aggrieved by the appellate orders dated 14-11-2014 passed by the ld. CIT(A), the assessee company filed second appeal with the Tribunal.

ITA 972/Mum/2015 10

“Challenging the order dated 31.10.13 of CIT(A)-10, Mumbai,the assessee had filed the present appeal. Assessee-company is engaged in business of operating ships in international traffic across Asia and Middle East.It is incorporated in Singapore.It is a ITA 972/Mum/2015 11 wholly owned subsidiary of Forbes and Co. Ltd.(FCL)and FCL is incorporated in India. It started its operation in 2006. The assessee company filed its return of income on 30.9.09, declaring total income at Rs. Nil.The Assessing Officer (AO)completed the assessment,u/s.144(3)r.w.s 143(3) of the Act on 9.2.12,determining the income of the assessee at Rs.2.97 crores, holding that the business of the assessee was covered by the provisions of section 44B of the Act.

2.The first effective Ground of Appeal is about chargeability of income u/s.44B of the Act and existence of Permanent Establishment (PE).During the assessment proceeding the AO found that FCL had entered into an agency agreement with M/s.Volkart Flemming Co. and Services Ltd.(VFSSL) w.e.f. 1.1.2007, that it was appointed as an agent in India by FCL. That VFSSL was 100% subsidiary of FCL, that VFSSL had demerged its shipping agency division into FCL w.e.f. 01.04. 2008.The AO referred to the provisions of Article-8 of DTAA entered into between India and Singapore and observed that being a Non-Vessel Operating Common Carrier(NVOCC) it was not eligible for claiming exemption under Article 8 of DTAA.He further held that income of the assessee was arising out of operation of ships in International traffic,that income arising /accruing to it was taxable in India as per the provisions of section 5(2) of the Act, that the provisions of Section 44B of the Act were applicable for the income earned by the assessee during the year under consideration.He referred to various case laws and held that the assessee had entered into agency agreement with associated concerns regarding business from India, that there remained an element of continuity,that it had real and intimate connection,that the holding company secured the ITA 972/Mum/2015 12 business from India for the assessee,that the principal and agent had common control mechanism, that the promoters of holding company created the assessee as a 100% subsidiary in Singapore,that one of the directors of the company was also director of the India parent company, that he was permanently residing in India and was looking after the policy matters of the assessee,that the control mechanism of both the entities was in India ,that the assessee had business connection in India.The AO referred to Articles -7 & 5 of the DTAA and held that the assessee had carried on part of business to a fixed place of business,that it fell within definition of PE under paragraph-1 of Article-5, that the assessee had fixed a permanent place in India from where it used to secure its business, that the office of the agent was fixed place for tax treaty purposes.

The AO directed the assessee to explain as to why it should not be held that it was having place of effective management in India.After considering the submission of the assessee,he held that the holding company was working as an agent for the assessee, that it did not have any other agent in India except the parent company,that the parent company was concluding the contracts on behalf of the assessee with various govt. agencies/RBI, that the parent company was carrying out various functions like deciding the brokers dealing with the labour for loading and unloading, maintaining and operating bank account, that the assessee had PE in India within the meaning of Article-5 of the DTAA, that the income of the assessee was taxable under Article-7 of the treaty,that income of the assessee was assessable in India as per the provisions of section 44B r.w.s 5(2) of the Act, that the section 44B dealt with computing with profits and gains of shipping ITA 972/Mum/2015 13 business of non residents,that business income of the assessee arising in India was to be taxed @7.5% of gross receipts from shipping business.

3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA).Before him, it made elaborate submissions with regard to charge - ability of income u/s.44B of the Act,business connections,PE and control and, management as well as Agency-PE.After considering the submission of the assessee and the assessment order,the FAA held that the assessee-company was controlled by the holding company,that the AO had rightly held that assessee had business connection in India, that management and control of the company was handled by the parent company, that the parent company was indulging in all kind of activities in India on behalf of the assessee,that it was collecting freight on behalf of the appellant and was maintaining bank account, that the assessee had a business connection in India and it is also an Agency-PE as well as fixed place of PE in India,that the management was with parent company located in India. He further held that AO had correctly applied the provisions of section 44B of the Act, that it did not qualify for the exemption of Article 8 of the DTAA.Finally, he upheld the order of the AO.

4.Before us,the Authorised Representative(AR)argued that the assessee was not holding any bank account in India,that it had no fixed place of business in India,that the assessee was a subsidiary of the Indian company,that as per the provisions of DTAA there was no PE in India.He referred to paragraph 10 of the Article 5 of the DTAA.With regard to Agency-PE, he referred to page No.63 and ITA 972/Mum/2015 14 65 of the PB and stated that only 2.29 % of the revenue was received from Indian company,that the substantial portion of income for the year under consideration was not from parent company.He further contended that the assessee was an independent entity,that it would take its own decision at Singapore that HO had no role in deciding the policies of the assessee,.He referred to case of Radha Rani Investment (16SOT 495).With regard to chargeability of income,he stated that he had not claimed exemption under Article 8, that AO himself had held that assessee was in the business of non vessel operating activities,that assessee was not in operation of ships, that AO had wrongly applied section 44B.He also placed reliance on page No.96-126 of the PB and referred to the case of Oceaneering International GmbH(ITA 1023/Mum/2014-AY10-11-dt.6.11.2015) and Mitchell Drilling International(P)Ltd.(62Taxmann.com24).The Departmental Representative (DR) argued that place of management of the company was in India,that the effective management was controlled by the parent company, that one of the directors was director in the parent company also, that only one Board meeting took place in Singapore, that the assessee was having PE in India, provisions of section 44B would be applicable.

5.We have heard the rival submission and perused the material before us.We find that the assessee company is a resident of Singapore,that the holding company is located in India, that it had entered into an agency agreement with VFSSL w.e.f. 1.1.2007, that the AO and the FAA had held that the assessee was having business connection in India and that the parent company was taking decision on behalf of the assessee,that they have further ITA 972/Mum/2015 15 held that the assessee had service PE/Agency-PE in India and that the income of assessee was taxable in India u/s.44B of the Act.

During the assessment proceedings relevant details about the Director handling the business at Singapore were submitted before the AO. It had also filed details of remuneration paid to Padmakumar Unnikrishnan (pg-56 of the PB).The assessee had,vide its letter dt.20.12.2011 (pg-53 of the PB),submitted a copy of minutes of meeting held in relation to the year under appeal and had informed the AO that as per the laws prevalent in Singapore,the assessee was required to hold only one board meeting.Though the AO and the FAA had mentioned that the assessee was maintaining bank account in India.However, they could not bring on record any evidence to support their claim.On the other hand the assessee had proved that its books of accounts were maintained in Singaprore.Not only this,it was proved that it was maintaining a bank account in Singapore and all banking transactions were made from that account only.In our opinion,both the authorities were not able to establish that effective management and control of affairs of the company was in India.We have gone through the e-mails placed by the assessee at pg No.96 to 127 of the paper book which clearly prove that business activities were carried out by the Singapore office.In our opinion,factors like staying of one of the directors in India or holding of only one meeting during the year under consideration or the location of parent company in India in themselves would not decide the residential status of the assessee.The assessee had received substantial portion of its income from the operation carried out in Middle East and other countries.It was handling its business from Singapore. We have gone through pg-65 of the paper book ITA 972/Mum/2015 16 which gives details of income of parent company.A perusal of the said page makes it clear that the claim,made by the assessee about earning substantial income from the entities other than the holding company, was factually correct.

We find that assessee had not claimed exemption of Article 8 of the DTAA as it was not in the shipping business. Therefore, the income of the assessee had to assessed as per the provisions of tax treaty which deals with business income. Here,we would like to mention that FAA was not justified in confirming the order of the AO holding that provisions of sec.44B of the Act would be applicable with regard to the disputed amount.Section 44 B deals with the shipping business and the AO had himself admitted that the assessee was not in shipping business.The assessee did not own or charter or took on lease any vessel or ship for the year under consideration, it was only providing container services to its various clients. Therefore, we have no hesitation to hold that provisions of section 44B were not applicable to the facts of the case under consideration. Considering the above discussion, we hold that the income of the assessee was to liable to be taxed as business income and that in absence of PE no income was taxable in India, that the provisions of section 44B were wrongly invoked by the AO. Reversing the order of the FAA, we decide effective ground of appeal in favour of the assessee.

6.The second effective ground of appeal, dealing with levy of interest u/s.234 of the Act, is consequential in nature. Hence,it is not being adjudicated. As a result appeal filed by the assessee stands.”

ITA 972/Mum/2015 17 Respectfully following the afore-stated decision of the co-ordinate bench of this Tribunal in assessee company’s own case for assessment year 2009-10 in vide orders dated 11-03-2016, we hold that income of the assessee company was liable to be taxed as business income and that in absence of Permanent Establishment in India , no income was taxable in India , that the provisions of Section 44B of the Act were wrongly invoked by the A.O. Reversing the orders of learned CIT(A), we decide effective grounds of appeal in favour of the assessee company by respectfully following the decision of the Tribunal in assessee company’s own case for assessment year 2009-10 in ITA no. 1607/Mum/2014 vide orders dated 11-03-2016 . We order accordingly.