Tribunal holds BVI company re-domiciled in Mauritius entitled to India-Mauritius tax treaty benefits, also holds agency PE to be tax neutral

In a first ruling on the issue, the Income Tax Appellate Tribunal, Mumbai (Tribunal) in its recent judgment in the case of Asia Today Limited (Taxpayer) [ITA No. 4628/2006, ITA No.4629/2006, ITA 1877 of 2008 and CO No. 123/2008], ruled that re-domiciliation from British Virgin Islands to Mauritius cannot by itself result in denial of the benefits of the India-Mauritius tax treaty (Tax Treaty).

Further, following the Supreme Court ruling and various other judgments, the Tribunal holds that where Taxpayer has a Permanent Establishment (PE) in the form of a dependent agent in India who is remunerated on an arm’s length basis, no further profits are to be attributed to the PE in India. However, the Tribunal does note that this treatment is incompatible with the scheme of taxation of non-residents having a PE in India as the remuneration received by the agent is taxed in India anyway de hors the existence of a PE and this conclusion effectively makes it tax neutral for the non-resident having a PE in India.

Entitlement to Tax Treaty benefits

Background

The Taxpayer is a foreign telecasting company and was incorporated in British Virgin Islands (BVI) in the year 1991. It re-domiciled / migrated to Mauritius in the year 1998. As a result, the Taxpayer was deregistered as a company in BVI and got registered as a company in Mauritius on 30 June 1998. Further, the Taxpayer was issued a tax residency certificate (TRC) by the Mauritius authorities on 29 June 1998.

As the Taxpayer was a company originally incorporated in BVI, the tax authorities denied the Tax Treaty benefits to it. In response, the Taxpayer submitted that though originally incorporated in BVI, it has been registered in Mauritius on account of re-domiciliation, holds a valid TRC and therefore, is entitled to Tax Treaty benefits.

The Commissioner of Income Tax (Appeals) upheld Taxpayer’s claim. Aggrieved, the tax authorities preferred an appeal before the Tribunal.

Tribunal ruling

The Tribunal ruled in favour of the Taxpayer and held that re-domiciliation cannot result in denial of Tax Treaty benefits basis and made the following important observations:

PE in India

Background

The Taxpayer earned advertisement revenue by selling advertising time and subscription revenues from India through its Indian affiliates, Zee Telefilms Limited and El Zee.

In the facts of the case, the tax authorities concluded that the Taxpayer had a taxable presence in India (in the form of a fixed place PE and an agency PE) and argued on principles of profit attribution to the PE.

The tax authorities claimed that the Indian affiliates / agents constituted virtual projection of the Taxpayer in India and therefore, a fixed place PE in India on the basis of the following:

The tax authorities alternatively argued that the Taxpayer had an agency PE in India on account of its Indian affiliates acting as dependent agents.

Tribunal ruling

The Tribunal agreed with the contention of the tax authorities that the Taxpayer had a PE in India but not on account of having any fixed place at its disposal but on account of Indian affiliates acting as dependent agents of the Taxpayer. Some of the key aspects dwelled upon by the Tribunal are as under:

Attribution of profits to Agency PE

Background

During the proceedings before the tax officer as well as the Tribunal, the Taxpayer argued that even if there is a PE in India, the Indian agents are remunerated on an arm’s length basis and therefore, considering the well settled judicial position as well as the orders passed in Taxpayer’s own case for the preceding years, no further profits can be attributed to the PE in India.

Tribunal ruling

The Tribunal extensively discussed the tax implications of a foreign entity having a PE in India on account of having an Agency PE in India. Some of the key observations are outlined as under:

Comment

At the outset, this is a first of its kind ruling on the issue of tax treaty entitlement of an entity that has re-domiciled from its place of incorporation to another jurisdiction having a favourable tax treaty with India. The observation that re-domiciliation could be on account of various business considerations and legal factors is welcome and shows the open-mindedness of the Tribunal while approaching this issue. In absence of any material or even a suggestion that the Taxpayer is not fiscally domiciled in Mauritius, the Tribunal viewed tax authorities stand as nothing but driven by a doubt, not supported by any material.

The Taxpayer holding a valid TRC coupled with absence of any findings suggesting anything contrary to Taxpayer’s treaty eligibility was the key driver here, and the fact of re-domiciliation was not considered as reason enough for denial of treaty benefits.

Separately, on the issue of attribution of profits to a PE, the Tribunal followed binding judicial precedents. At the same time, it has also deliberated strongly on the alternate view that in case of a foreign entity having an Agency PE in India, attribution of profits to a PE in India may not be limited to the profits earned by the dependent agent in India. It is noteworthy that similar observations were made in the Tribunal’s past ruling in the case of Set Satellite (supra) which was overruled by the Bombay High Court. Also, given the Supreme Court ruling in the case of Morgan Stanley (supra), the alternative view may not find favour, unless there is a larger bench ruling considering these aspects or a legislative amendment.

In the draft profit attribution rules issued by the CBDT for comments from the stakeholders, the position laid down by the Supreme Court is proposed to be made applicable only where the revenue earned by a taxpayer from the activities carried on by an Indian agent does not exceed INR 1 million. That said, there has been no update yet on the draft rules.

-     Ritu Shaktawat (Partner) and Rahul Jain (Principal Associate)

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