The Hindu Business Line : Foreign shipping companies - Impact of India-Mauritius tax treaty

Chennai May 8 A recent decision of interest to foreign shipping companies is that of the Mumbai Tribunal in UASC/CSL Ltd vs DCIT. In this case, the taxpayer, a shipping company incorporated in Mauritius, had claimed 100 per cent tax relief in respect of receipt from shipping activities as per Article 8 of the tax treaty between India and Mauritius. The taxman had declined the relief, saying that the effective place of management of the company was situated in a third State. However, the tribunal's decision went in favour of the company.

"The decision was based on the landmark precedent set by the Supreme Court in the Azadi Bachao Andolan case, in 2003," recounts Mr Mrugen Trivedi, Senior Manager, BSR & Co, speaking to Business Line.

The Mauritius treaty never ceases to be in the news. For instance, when responding to the debate on the Finance Bill, 2007, the Finance Minister, Mr P. Chidambaram, said on May 3 that the double-taxation avoidance agreement (DTAA, or the treaty) with Mauritius is not only a legacy issue, but also `a delicate issue' with political and diplomatic implications. "With the assistance of the Ministry of External Affairs, we are addressing the issue and we think that we can find a reasonable solution," he added.

The issue of treaty shopping and the use of Mauritius as a jurisdiction to make investments into India has been a matter of considerable controversy, reminisces Mr Trivedi. "In April 2000, the Central Board of Direct Taxes (CBDT) issued Circular no. 789 to the effect that a Tax Residency Certificate (TRC) issued by the Mauritius authorities would be regarded as sufficient to evidence the residential status and the beneficial ownership for the purposes of applying the India-Mauritius tax treaty." Here's more from Mr Trivedi.

On the Azadi Bachao Andolan case.

The validity of the April 2000 circular was challenged in a PIL (public interest litigation) before the Delhi High Court. The Delhi High Court quashed the circular and the matter ultimately reached the Supreme Court. The Supreme Court reversed the High Court's judgment and upheld the validity of the circular (wherein it is stated that that the TRC issued by the Mauritius tax authorities would constitute sufficient proof of residence of an entity in Mauritius). In the UASC/CSL case, the taxpayer had filed the TRC issued by Mauritius tax authorities in support of its claim.

The Azadi Bachao Andolan verdict thus cleared many a doubt concerning the interpretation of the India-Mauritius treaty, especially the issue of `treaty shopping' by a resident of a third country. The Supreme Court observed that if it was intended that a national of a third country should be precluded from accessing the benefits under India-Mauritius treaty, then a suitable limitation clause to that effect should have been provided in the treaty. By implication, where such a clause does not exist in a treaty, it cannot be read into it.

On `effective management'.

In the UASC/CSL case, the company had four directors out of whom two directors were residents of Mauritius. There is a CBDT circular, dated February 10, 2003, which clarifies that where a company is found to be a resident of both the countries (Mauritius and India), then for the purpose of taxation such company shall be deemed to be a resident of the country in which place of effective management is situated. The topic came up for discussion in Integrated Container Feeder Service vs JCIT, a 2005 case before the Mumbai tribunal. There again, the company, incorporated in Mauritius, engaged in the business of operating ships in international traffic from India had claimed income from shipping business as taxable only in Mauritius as per Article 8 of the India-Mauritius treaty. But the decision went against the taxpayer.

Why so?

In the Integrated Container Feeder Service case the tax officer held that the real and effective control was in Dubai, as the co-ordination and control was in the hands of the shareholders who were based in Dubai and not in Mauritius.

The tax officer further held that the agents constituted a permanent establishment (PE) in India within the meaning of Article 5 of the treaty. The tribunal upheld the taxman's finding that the place of effective management was not in Mauritius.

The tribunal had reasoned that the TRC (given by the Mauritius Authorities but never produced before the lower authorities), the circular No.789 and the Supreme Court decision in the case of Azadi Bachao Andolan had no bearing on the issue, as residence or otherwise was not a criteria under Article 8 to determine the taxability of income from shipping business, and the only criteria was the place of effective management. Finally, the Tribunal held that the income should be computed as per section 44B of the Income-Tax Act, 1961, being a special provision for computing shipping income in the case of non-residents. A recent circular from Mauritius may help clear the air.

On the Mauritius circular.

The Mauritius Revenue Authorities issued a Circular on October 3, 2006 to enhance the procedure relating to the issue of TRC. As per the circular, companies must have two resident directors from Mauritius at all time. Also, these directors should be of good repute and must have the requisite qualifications. All the meetings of the board must be held, chaired, and have their minutes recorded in Mauritius. The company must keep all its accounting records at its registered office in Mauritius. It must also ensure all banking transactions are routed through an account in Mauritius. Companies applying for the TRC should furnish an undertaking on all these accounts every year, when it comes up for renewal.

Also, the certificate will be issued on the recommendation of the Finance Service Commission of Mauritius. The recommendation can be revoked by the commission if it feels the company has not fulfilled the conditions of the circular and is not in good standing.

On the impact of the circular.

The new circular from Mauritius strengthens the case for genuine Mauritius resident companies to take benefit of the tax treaty instead of letterbox companies. With this circular, the Mauritius authorities almost step into the shoes of Indian tax authorities to make the same inquiry as the latter is supposed to do before granting relief under the treaty. Let's hope, therefore, this circular will put apprehensions expressed by our tax authorities at rest, in general.

Specifically, in the context of foreign shipping companies, it would be helpful if the interpretation of the term "effective management" in Article 8 of the tax treaty is also in line with the "tax residence" criterion as, under common law principles, it seems that the "head and brain" of a Mauritius "tax resident company" ought to reside in Mauritius itself based on the conditionalities required by Mauritius tax authorities as enunciated above.

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