The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that periodic visits by overseas management and use of business software doesn’t create a fixed place Permanent Establishment (PE) in India and, therefore, their freight income could not be subjected to tax in India.

In a consolidated order covering 18 cross appeals involving both the assessees and the Income Tax Department across multiple assessment years, the bench of Saktijit Dey (Vice President) and Bijayananda Pruseth (Accountant Member) concluded that the Revenue failed to establish the existence of either a Fixed Place Permanent Establishment (PE) or a Dependent Agent Permanent Establishment (DAPE) in India. Consequently, all departmental appeals were dismissed while the assessees’ appeals were partly allowed. 

The appellant/assessee is Mauritius-incorporated shipping companies engaged in the international transportation of cargo through sea routes. The companies operate as non-vessel owning container carriers (NVOCCs), transporting cargo through containers using slots purchased on vessels.

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For the relevant assessment years, the companies claimed exemption under Article 8 of the India–Mauritius Double Taxation Avoidance Agreement (DTAA), contending that income from shipping operations was taxable only in Mauritius.

However, the Income Tax Department denied the treaty benefit after holding that the companies’ Place of Effective Management (POEM) was situated in Dubai rather than Mauritius. Since earlier Tribunal decisions had already decided this issue against the assessees, they conceded the point before the Tribunal. 

Once the treaty benefit under Article 8 was denied, the principal controversy shifted to whether the companies had a Permanent Establishment in India, enabling taxation of their shipping income.

The Assessing Officer argued that Freight Connection India Pvt. Ltd. (FCIPL), acting as the Indian agent of the shipping companies, effectively constituted both a Dependent Agent Permanent Establishment (DAPE) under Article 5(4), and a Fixed Place Permanent Establishment under Article 5(1) of the India–Mauritius DTAA.

The department relied heavily on information gathered during a survey conducted at FCIPL’s premises in 2016.

According to the Department, FCIPL was performing extensive functions on behalf of the shipping companies, including negotiating freight contracts, dealing with customs and port authorities, arranging cargo loading and unloading, collecting freight, managing containers, using proprietary “Sunliner” software supplied by the overseas companies.

The Department further argued that Mr. B.H. Surty, General Manager of the Dubai-based managing agent Sun Marine Shipping Services LLC, periodically visited FCIPL’s Mumbai office and used its conference room while supervising Indian operations.

Based on these facts, the Department contended that FCIPL’s premises were effectively at the disposal of the foreign enterprises, thereby creating a Fixed Place PE. 

The Commissioner (Appeals) accepted that FCIPL functioned as an independent agent, thereby rejecting the Revenue’s contention regarding DAPE.

However, the Commissioner held that the foreign companies nevertheless had a Fixed Place PE, primarily because Mr. Surty regularly used FCIPL’s office during his visits to India; and FCIPL carried on business using the shipping companies’ proprietary software.

The Commissioner also relied upon the Supreme Court’s judgment in Hyatt International South West Asia Ltd. to support the conclusion. 

The Tribunal carefully examined the evidence and found that the Revenue had failed to establish the two essential requirements for a Fixed Place PE the foreign enterprise must have a place at its disposal in India; and business of the foreign enterprise must actually be carried on through that place.

According to the Bench, neither condition was satisfied.

The Tribunal observed that Mr. B.H. Surty was not an employee of Bay Lines or Arc Lines, but an employee of the Dubai-based managing agent. His visits to India occurred only once every three to four months for about a week, and he merely used FCIPL’s conference room during such visits.

The Tribunal held that these occasional visits did not establish that FCIPL’s premises were at the disposal of the overseas companies or that business was being conducted from those premises in India. 

The Tribunal also rejected the Department’s argument that the use of the “Sunliner” software established a Permanent Establishment.

It noted that FCIPL had already been using container-tracking software even before adopting the Sunliner application in 2014. The new software merely enabled real-time tracking of containers and did not alter the business model or demonstrate control by the foreign enterprises.

Accordingly, the Tribunal held that mere provision of operational software does not satisfy either the “disposal test” or the “business activity test” required under Article 5(1). 

A substantial part of the Tribunal’s order distinguished the Supreme Court’s ruling in Hyatt International South West Asia Ltd.

The Bench noted that in Hyatt, the foreign enterprise exercised extensive operational control over Indian hotels, including appointing key managerial personnel, framing operational policies, controlling branding and marketing, supervising financial operations, deploying staff without prior approval.

In contrast, Bay Lines and Arc Lines exercised no comparable control over FCIPL.

The Tribunal emphasised that FCIPL remained an independent business entity and there was no evidence that the foreign companies could freely use or control FCIPL’s premises. Therefore, the Hyatt decision was held to be factually distinguishable and inapplicable. 

The Tribunal further observed that the Revenue had attempted to argue that the 2016 survey created new factual circumstances.

However, after analysing the survey statements, the Bench found that FCIPL’s role had remained unchanged since 1995, the business model remained identical, the overseas management structure remained the same, no new material demonstrated effective control over FCIPL’s premises.

Accordingly, the Tribunal held that its earlier decisions, which consistently ruled that the assessees had no PE in India, continued to apply. 

While dismissing the Department’s appeals, the Tribunal reaffirmed that FCIPL could not be treated as a Dependent Agent Permanent Establishment because it functioned as an independent agent serving several principals and was not working exclusively or almost exclusively for Bay Lines or Arc Lines.

The Tribunal noted that commission earned from the assessees constituted only a portion of FCIPL’s total receipts, demonstrating its independent business status. 

Having held that neither a Fixed Place PE nor a DAPE existed, the Tribunal ruled that no part of the freight receipts could be taxed in India, notwithstanding the denial of Article 8 benefits.

The Bench reiterated that the burden to establish the existence of a Permanent Establishment lies upon the Revenue, and that burden had not been discharged in the present case. 

The Tribunal also ruled that interest received on income-tax refunds should be taxed at the concessional rate prescribed under Article 11(2) of the India–Mauritius DTAA, following earlier judicial precedents and the Bombay High Court’s decision on the issue. 

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