SKP Tax Alert
| Volume 8 Issue 31
 Foreign companies having an Indian holding company does not result in PE nor POEM in India

Recently, the Mumbai Bench of the Income Tax Appellate Tribunal, in the case of Forbes Container Line Pte Ltd vs ADIT (ITA No. 1607/MUM/2014) has held that the location of one director or the parent company being in India cannot be the only factor used to determine the Place of Effective Management (POEM) in India.

Facts of the case
  • Forbes Container Line Pte Ltd (FCL Singapore or the taxpayer) was incorporated in Singapore. It was a Non-Vessel Operating Carrier Company (NVOCC) and had operations across Asia and the Middle East. FCL Singapore was a wholly owned subsidiary of Forbes and Co. Ltd (FCL India) which was a company incorporated in India. FCL Singapore had filed its return of income declaring nil income.
  • The Assessing Officer (AO) was of the view that the effective management and control of the taxpayer was in India as one of the directors of the taxpayer was also a director in FCL India, was permanently residing in India and was looking after the policy matters of the taxpayer. Also, only one board meeting was held in Singapore.
  • Furthermore, it was held by the AO that FCL India was involved in providing support services, maintenance of the bank account, concluding contracts on behalf of the taxpayer with various banks/Reserve Bank of India (RBI), deciding the brokers, dealing with labour for loading and unloading thereby acting as a deemed agent for FCL Singapore and leading to the formation of an Agency Permanent Establishment (Agency-PE). Accordingly, the AO also held that the taxpayer had a fixed place PE in India and its income was taxable under section 44B (shipping income) of the Income Tax Act (Act).
  • The First Appellate Authority (FAA) upheld the order of the AO on all grounds.
  • Aggrieved by the decision of the FAA, the taxpayer appealed to the Tribunal.

Taxpayer’s contention
  • It had no fixed place of business in India; it was only a subsidiary of the Indian company. Furthermore, as per the provisions of Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore, under paragraph 10, a mere holding-subsidiary relationship does not constitute a PE.
  • There was no bank account held in India. It only had a bank account in Singapore and all the transactions were effected through the same.
  • Only 2.29% of the revenue was earned and received from FCL India and the majority of the income for the year under consideration was from operations carried out in the Middle East and other countries.
  • Furthermore, the AO himself had admitted that the income earned was from the NVOCC and was not covered under the shipping activities and hence, there was no question of applicability of the provisions of section 44B of the Act

 Tax Authorities’ contention
  • The effective management and control was by FCL India and both the companies had a common director who was staying in India.
  • Only one meeting was held during the year under consideration in Singapore.
  • The income earned by the appellant would be liable to tax under section 44B as FCL India constituted a PE of FCL Singapore in India.

Tribunal’s observations
  • The mere presence of the following factors does not decide the POEM of the company in India:
    • staying of one of the directors in India;
    • holding of only one meeting during the year in Singapore; and
    • location of the parent company in India.
  • With regard to the applicability of section 44B of the Act, it is held that since FCL Singapore did not own or charter or took on lease any vessel or ship, it was only providing container services to its various clients. Therefore, it was not engaged in shipping activities and hence, the provision of section 44B of the Act did not apply.
  • The income of FCL Singapore was liable to be taxed as business income and in the absence of a PE, no income was taxable in India.
SKP's comments
This decision reaffirms that a mere holding-subsidiary relationship does not lead to the PE of a foreign company in India. Furthermore, for deciding the POEM, all factors need to be taken together and one should not be swayed by the mere presence or absence of some of the factors. In this case, on cohesive appraisals of all the facts, the Tribunal came to the conclusion that the POEM is actually in Singapore and not in India.

The recent guidelines issued by the CBDT has categorically bifurcated the determination of POEM on the basis of activity of the business, though the said guidelines have not yet been finalised and are only applicable from financial year 2016-17. This is a welcome decision in deciding the POEM of a company. It also affirms the decision that if a company is engaged in NVOCC activities, it is not a shipping activity.

SKP
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