Cyprus-India Double Tax Agreement in relation to shipping activities

In a recent case concerning the application of double tax agreement between Cyprus and India, the Indian Income-Tax Appellate Tribunal confirmed that the wording of the agreement concerning taxing rights in relation to international shipping activities was not clear and therefore the tax authorities could not further interpret it.  This meant that the company was subject to tax in Cyprus and not, as the Indian tax authorities suggested, in India, resulting in substantial savings.
The case concerned a Cyprus registered company, namely Messrs Glendive Enterprises Limited which entered into an agreement with Arabian Recources FZC, Sharjah UAE to provide a ship to transport bauxite ore from India to Sharjah.  Glendive entered into an agreement to charter the MV Thelisis, with Shaan Marine Services Private Limited acting as its agent in India.
In its Income Tax Return Shaan claimed Glendive was not liable to tax in India, on the grounds that Article 8 of the Double Tax Treaty between India and Cyprus provides that profits of enterprises engaged in international shipping are taxable only in the state which the headquarters of the enterprise are located.  As Glendive was registered and tax-resident in Cyprus, its profits were liable to tax in Cyprus and not India.
The Indian Assessing Officer however did not accept this. He asserted that Glendive had failed to demonstrate that its place of effective management and control was in Cyprus. The taxpayer’s appeal against this assessment was initially turned down by the Commissioners and the taxpayer then appealed to the Appellate Tribunal.
After examining all the relevant documents of the case, the Appellate tribunal concluded that Glendive’s role in the transaction was real and material. All the contracts and the bill of lading were in Glendive’s name. The Tribunal also dismissed the Assessing Officer’s contention that the effective management of Glendive could not be in Cyprus. The Tribunal pointed out that Article 8 of the double taxation agreement between Cyprus and India explicitly states that if an enterprise is registered and has its headquarters in a country, then its place of effective management is in that country and its profits will be taxable in that country.  The Tribunal therefore directed the Assessing Officer to cancel the assessment.
This Decision confirms the principle that legally binding agreements between parties cannot be disregarded, and demonstrates the necessity to clearly document all aspects of transactions.