LE Staff

Mumbai, August 7, 2021: The Mumbai ITAT has ruled that the re-domiciliation of Taxpayer Company by itself did not affect treaty entitlement benefits on account of situs of incorporation, and in order to constitute a fixed place PE, there has to a fixed place of business from which business of foreign enterprise is carried out, and such a place of business should be at the disposal of foreign enterprise. 

The Coram of Pramod Kumar (Vice President) & Pavan K Gadale (Judicial Member) observed that as long as an agent was paid an arm’s length remuneration for the services rendered, nothing survives for taxation in the hands of the dependent agency permanent establishment. 

The assessee company was, as per the licence agreement with El-Zee Television Pvt Ltd, incorporated in the British Virgin Islands, but then, as per the tax residency certificate issued by the Government of Mauritius, this company was incorporated in Mauritius. If it’s a BVI company, as the agreement indicates, obviously the Indo Mauritian tax treaty benefits could not be extended to the assessee. Thus, the Department urged to hold that the treaty entitlements being granted, on the facts of this case, was inappropriate. 

The counsel for the assessee, on the other hand, submitted that the company, even though initially incorporated in the British Virgin Islands, was now registered in Mauritius. It was pointed out that the assessee company had duly been issued a tax residency certificate, which was not even called into question. 

The AO therefore preferred the present appeal challenging the action of CIT(A) in holding that no income in respect of the Pay Channel Subscription Agreement accrues to the assessee and that the subscription revenue collected was only business income of the telecasting company and not royalty. The AO further challenged the action of CIT(A) in holding that Zee Telefilms Limited (ZTL) did not constitute a Permanent Establishment (PE) of the assessee in India.

The Tribunal said that taking into account the smoothness and ease with which the assessee company was redomiciled in another sovereign jurisdiction, and the fact that tax residency certificate was issued even before the re-domiciliation process was complete, inasmuch as the re-domiciliation was completed on 30th June 1998 with the discontinuance of registration by the Registrar of Companies in Mauritius, it is found that the tax residency certificate was issued on 29th June 1998 itself, and therefore, the very concept of treaty entitlements, on account of situs of incorporation, seems to be much less conceptually justifiable- particularly so far as these taxpayer friendly offshore jurisdictions were concerned. 

“Obviously, there was nothing more than the fact of registration of a company which has been taken as treaty entitlement. The attachment with the jurisdiction of incorporation in these cases appears to be as ephemeral as required by the exigencies of treaty shopping, and this concept of re-domiciliation of the companies also appears to be an antithesis of the very justification of the situs of incorporation of a company being linked with the treaty entitlements,” observed the Coram. 

The ITAT opined that the AO however himself has granted the treaty benefits to the assessee all along, and it cannot be open to the Departmental Representative to wake up today to revisit this foundational aspect. 

The Coram further opined that in any case, given the ground realities of the offshore world, re-naming, re-structuring and even re-domiciliation of offshore companies are facts of life. A re-domiciliation of the company by itself cannot lead to denial of treaty entitlements of the jurisdiction in which the company is re-domiciled, though, of course, the fact of re-domiciliation of the company could at best trigger detailed examination or the re-domiciled company being actually fiscally domiciled in that jurisdiction. 

The counsel for the Revenue fairly agree that the issues in appeal are squarely covered by a decision of the coordinate bench, in assessee’s own case for the assessment years 2002-03, 2004-05, 2005-06 wherein the coordinate bench has observed that assessee does not have any office or place of management of its own, and its presence in India is only through its agents. 

A place of business should be at the disposal of the foreign enterprise for the purpose of its own business activities. This place has to be owned, rented or otherwise at the disposal of the assessee, and a mere occasional factual use of place does not suffice, reiterated the Tribunal. 

Hence, the Mumbai ITAT answered in favour of the assessee taking similar view of the matter as per the co-ordinate bench. 

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