FORBES CONTINER LINE PRE LTD,MUMBAI vs. ADIT (IT) 3(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार 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 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 FCLhad 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 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

Forbes-1607 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 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 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 2

Forbes-1607 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 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 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. 3

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