[ITAT] No DTAA Relief Where POEM Lies Outside Both Contracting States

Introduction

In a significant ruling interpreting the interplay between treaty provisions and domestic law, the Hon’ble Income Tax Appellate Tribunal, Mumbai Bench (‘ITAT’) in DCIT v. Bay Lines (Mauritius)[i], adjudicated upon the eligibility of Bay Lines (Mauritius) (‘assessee’) to claim exemption under a. 8 of the India-Mauritius Double Taxation Avoidance Agreement (‘said DTAA’) and the existence of a permanent establishment (‘PE’) in India under a. 5. The case turned on the determination of the place of effective management (‘POEM’) and the characterization of an Indian agent’s activities under international tax norms. This dual ruling offers clarity on treaty benefits vis-a-vis POEM and sets a precedent on delineating dependent agency under cross-border tax arrangements.

Brief Facts

• The assessee is a company incorporated in Mauritius, engaged in the business of operating ships for the carriage of cargo. For the assessment years (AY) 2013-14 and 2014-15, the assessee declared gross receipts from freight and computed presumptive income at 7.5% under s. 44B of the Income-tax Act, 1961 (IT Act). However, the assessee claimed ‘Nil’ income by invoking the benefit of a. 8 of the said DTAA, which provides for exclusive taxation of shipping profits in the country where the POEM of the enterprise.

• The dispute arose when the Assessing Officer (‘AO’) issued a show-cause notice (SCN) questioning the assessee’s claim of having its POEM in Mauritius. In response, the assessee submitted that it had obtained a tax residency certificate (‘TRC’) from Mauritius and maintained board meetings and bank accounts there.

• The AO denied the assessee the benefit under a. 8, holding that its POEM was in the UAE and not Mauritius. This was based on several findings, including that the company was owned 100% by two UAE-based directors, who controlled the major decisions of the company, and Charter agreements were signed in the UAE, not Mauritius. Additionally, it was claimed that the assessee failed to produce documentary evidence of the actual conduct of board meetings in Mauritius, and the minutes submitted were generic. It was also alleged that the UAE-based directors operated bank accounts and other commercial operations from the UAE.

• Based on these findings, the AO concluded that the POEM of the assessee was located in the UAE. Consequently, since the POEM was not in Mauritius, the assessee was denied exemption under a. 8. The AO then examined whether a PE existed in India, which would permit the taxation of shipping income in India under domestic law.

• The AO found that Freight Connection India Pvt. Ltd. (‘FCIPL’), an entity engaged in cargo booking on behalf of the assessee, constituted a dependent agent PE (‘DAPE’) in India. This was based on the factors such as FCIPL allegedly acting almost exclusively for the assessee, it habitually concluding contracts, interacting with government authorities, and liaising with clients on behalf of the assessee. The AO considered these activities to fulfil the conditions for a DAPE under a. 5 of the said DTAA.

• Aggrieved, the assessee appealed before the Commissioner of Income Tax (Appeals) [‘CIT(A)’], arguing that the POEM was in Mauritius, supported by its TRC, bank accounts, and board meetings and that FCIPL was an independent agent, deriving only 22.32% of its total revenue from the assessee and had business dealings with multiple other clients.

• The CIT(A) upheld the AO’s finding on POEM, agreeing that the assessee’s effective management was situated in the UAE and not in Mauritius. However, on the PE issue, the CIT(A) ruled in favour of the assessee. The CIT(A) held that FCIPL was not a dependent agent, as it derived only 22.32% of its income from the assessee and rendered similar services to others. The Revenue filed an appeal before the ITAT challenging the CIT(A)’s findings on the PE issue, while the assessee filed a cross-objection contesting the denial of benefits under s. 8 of the said DTAA.

Held

• The ITAT dismissed the assessee’s cross-objection and upheld the CIT(A)’s conclusion that the POEM of the assessee was not in Mauritius but in the UAE. Accordingly, the assessee was not entitled to claim exemption under s. 8 of the said DTAA. It was noted that a. 8 provides that profits from the operation of ships are taxable only in the state where the POEM of the enterprise is located. The ITAT clarified that POEM must be identified based on where key management and commercial decisions that are necessary for the conduct of the business as a whole are made, and not solely on the basis of tax residency or formal board meeting documentation.

• The ITAT affirmed the CIT(A)’s factual findings, including that the board minutes produced by the assessee were generic, which cast doubt on whether any real decision-making occurred in Mauritius. It was also observed that the directors managing the business resided in the UAE, made key commercial decisions, and handled operational matters from the UAE.

• On the second issue, the ITAT rejected the Revenue’s appeal and upheld the CIT(A)’s view that FCIPL was not a DAPE under s. 5 of the said DTAA. The ITAT emphasized that FCIPL did not have the authority to conclude contracts on behalf of the assessee, that FCIPL did not maintain stock or bear business risks for the assessee, and that its functions were limited to cargo booking and acting as a freight forwarder, which is typical of an independent agent.

• The ITAT also relied on the fact that FCIPL’s revenue from other clients, excluding the assessee, was about 77.60%, clearly indicating that it did not work ‘wholly or almost wholly’ for the assessee. Accordingly, the ITAT held that the conditions for constituting a DAPE under a. 5(5) of the said DTAA were not met and that the presence of a commercial agent in India alone does not create a PE unless the agent habitually concludes contracts or performs activities meeting the PR threshold.

Conclusion

The ruling presents a nuanced interpretation of treaty provisions in light of evolving international tax principles, particularly concerning the determination of POEM and the DAPE test. The Hon’ble ITAT correctly confirmed that the situs of POEM is determined not merely by formal indicia like tax residency or board resolutions but by where de facto strategic and commercial decisions are made. The ITAT also recognized that the presence of facilitatory entities in India, like freight agents, does not ipso facto create a PE unless they habitually conclude contracts or function in a dependent capacity.

By affirming the denial of a. 8 benefits due to the POEM being located in a third country (UAE), the decision reinforces the requirement of strict compliance with treaty conditions. Simultaneously, by rejecting the Revenue’s contention on DAPE, the ITAT appears to have preserved the integrity of the ‘independent agent’ rule under s. 5 of DTAAs, holding that FCIPL’s functions lacked the degree of control, exclusivity, and contract-concluding authority needed to establish a DAPE.

This decision is a useful precedent for cross-border shipping enterprises and tax authorities alike, delineating the evidentiary threshold for POEM and clarifying that arm’s length agency relationships in India do not automatically trigger taxability under PE rules.

End Note

[i] 2025 SCC OnLine ITAT 2976 dated 28.03.2025.

Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.