Monday, September 22, 2014

Charterer of ship can't be alleged as conduit if relevant docs prove its position; treaty benefits allowed

Where Cypriot shipping company was not merely a paper company and played its role, Indian agent could not be taxed for its income and treaty benefit of Article 8 of Indo-Cyprus DTAA would be available to it.


a)A Cyprus based company, ‘G’, appointed the assessee as an agent in India and it was in the shipping business. An Arabian company required a ship to transport ore from India to Sharjah. For this purpose, an agreement was entered into with ‘G’ for making available the ship for transporting Ore.

b)The assessee, as an agent of G, filed the return under section 172 and declared nil income claiming benefit of Article 8 of India-Cyprus treaty (‘DTAA’).

c)However, the AO denied the benefit of Article 8 of DTAA on ground that G was one person company having no staff, no office, etc., thus, the effective management of G was not in Cyprus, accordingly he made assessment under section 172. The CIT(A) confirmed the order of the AO. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)It was undisputed fact that G was a one-person company registered in Cyprus and it had no staff or big office establishment. It had no branches anywhere in the world; it was a resident of Cyprus for the tax purpose and it was incorporated in Cyprus.

2)Its only office establishment was in Cyprus. Arabian-company had made a contract with G as a charterer of the ship. The bill of lading recognized G as the ship charterer in the instant case. G had played definite role in transporting the ore by ship from India to Sharjah, which was evident from the fact that all contracts and the bill of lading had been made in the name of G. Thus, all these documents and the contracts had acknowledged the role of G as a ship charterer.

3)The other reasoning given by authorities below to deny benefit of Article 8 of DTAA was that the effective management of G was not in Cyprus because it had no staff, big office establishment in Cyprus and it was a one-person company. The authorities had relied on the OECD Commentary, which explained the words 'Effective Management'.

4)The Article 8 of DTAA defined the words 'Effective Management'. It was clearly mentioned therein that if the enterprise was registered and was having the head quarters in a country, its effective management would be in that country.

5)While other treaties like the ones with Mauritius, Poland, Netherlands do not define the words 'Effective Management'. Thus, for interpreting, the word ‘Effective management’ in these treaties, reliance might be placed on the OECD Commentary but so far as the Cypriot Treaty was concerned, its Article 8 explained the word 'Effective Management', thus, there was no need to refer to OECD Commentary. The CIT(A) had erred in holding that the income of G was taxable under section 172(4) in the hands of assessee as an agent and the treaty benefits were not available to G. - SHAAN MARINE SERVICES (P.) LTD. V. DY DIT (INTL. TAXN.-I), PUNE [2014] 48 388 (Pune - Trib.)