August 2021
Benefits of DTAA cannot be denied merely due to re-domiciliation of taxpayer – Mumbai bench of Tribunal
In brief
Recently, the Mumbai bench of the Income-tax Appellate Tribunal (Tribunal)1observed that the benefit under the India-Mauritius Double Tax Avoidance Agreement (DTAA) cannot be denied merely because of
re-domiciliation from one country to another.
In detail
Facts
● The taxpayer, a company incorporated in the British Virgin Islands (BVI), sells advertisement time and subscription revenue through its Indian affiliates.
● The taxpayer re-domiciled to Mauritius pursuant to which the Registrar of Companies, Mauritius granted a ‘Certificate of Incorporation by Continuation’ effective from the date of deregistration in the country of incorporation. Simultaneously, the taxpayer was granted a certificate for its discontinuance in BVI.
● Thereafter, the taxpayer acquired a tax residency certificate (TRC) and other registrations in Mauritius;
and ceased to exist in BVI.
● During the assessment proceedings, the Tax Officer (TO) held that the taxpayer constituted a Permanent Establishment (PE) in India, as its Indian affiliates constitute a virtual presence of the taxpayer.
● The Revenue argued in this case for the first time during the hearing before the Tribunal that the taxpayer is not eligible for the benefit of the DTAA, as it was incorporated in BVI and re-domiciled in Mauritius.
Issues before the Tribunal
● Can the benefits of the DTAA be denied because of re-domiciliation?
● Did the taxpayer establish a PE in India and can any additional income be attributable to such PE?
Tribunal’s ruling
Eligibility of benefit under the DTAA
● Re-domiciliation (Continuation) is a process by which a company moves its place of incorporation from one jurisdiction to another, maintaining the same legal identity.
● The Tribunal took cognizance of the earlier Court rulings that once a TRC is produced, it is not open to the tax authorities to doubt the tax residency of the taxpayer.
● Furthermore, the Revenue Authority cannot revisit foundational issues regarding granting of the DTAA benefit to the taxpayer before the Tribunal, since such benefit had been granted by the TO and there is no tangible ground to doubt it.
● Therefore, the benefit under the DTAA cannot be denied merely because of the re-domiciliation of the taxpayer. Given the ground reality of the offshore world, re-naming, re-structuring and even
re-domiciliation of the offshore companies are facts of life.
PE issue
● On the issue of PE, the Tribunal upheld the view of the co-ordinate bench in the taxpayer’s own case.
The Tribunal held that as no material has been produced to prove that the remuneration paid to the agents is not at arm’s length, no additional income is attributable to the PE2. Therefore, the existence of a PE is academic.
The takeaways
● The Tribunal has recognised and appreciated the concept of re-domiciliation of a company and upheld the DTAA benefits, relying on the appropriate TRC. Furthermore, the Tribunal also appreciated the ground reality of the offshore world where re-naming, re-structuring and even re-domiciliation of offshore companies are facts of life.
● The Tribunal has reinforced the legal principle that when an agent is remunerated at arm’s-length, there cannot be additional attribution of the PE.
1ITA Nos. 4628 and 4629/Mum/2006 and 1877/Mum/08, and CO No. 123/Mum/2008
2Principle upheld by the High Court in Set Satellite Pte Limitedv.CIT [2009] 307 ITR 205 (Bombay)
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In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.
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