2016 (10) TMI 1178 - AT - Income Tax

Tribunal rules in favor of assessee: Inland Haulage Charges & IT costs not taxable under DTAA

The Tribunal ruled in favor of the assessee, holding that Inland Haulage Charges (IHC) and IT system usage and support costs should not be taxed in India ... Entitled to the benefit of Article 9(1) of DTAA between India and Denmark - Inland Haulage Charges (IHC) and also IHC related to movement of cargo from ICD/CFS from Indian Ports and Vice Versa within the context of section 44B - Held that:- Entire IHC of the assessee is necessarily in connection with transport of containers either discharged or loadable at Indian ports for the purpose of delivery through international waters, a fact which is undisputed. IHC is not only directly connected with the business of shipping but it is also a part of overall international voyage and hence it is directly covered within the definition of profits from operation of ships in international traffic. IHC earned by the assessee is taxable only in Denmark and not in India as per Article 9(1) of the India Denmark Tax Treaty. We also noted from the facts that single BL is issued by the assessee to its shippers for the entire combined transport i.e from the place of origin in India to final destination outside India. It is also a fact on records that the assessee is not carrying out separate business activity of carrying cargo between mainland and a port in India, without any obligation of its transport on its ship in international waters. This issue is covered in favour of the assessee by decision of the Co-ordinate bench of Mumbai Tribunal in the case of Deputy Director Of Income Tax (International Taxation v. Safmarine Container Lines N.V. [2010 (5) TMI 670 - ITAT MUMBAI]. The entire IHC of the assessee is necessarily in connection with transport of containers either discharged or loadable at Indian ports for the purpose of delivery through international waters and is directly connected with such transportation will always be included within the term “operations of ships”. The activities of the IHC are connected directly or an ancillary activity that provides minor contribution and should not be regarded as a separate business to the operations of ships. These activities are linked or connected to each other and as such one cannot say that one is to be conducted efficiently without the other and which have a nexus to the main business of the assessee of operations of ships should be considered as integral part of income from shipping operations. Accordingly, we allow the claim of assessee and hence, this common issue of assessee appeal is allowed and that of revenue is dismissed. Whether the amount received by the assessee from Maersk India Private Limited (MIPL) towards MIPL’s ship of IT system usage and support cost of SAP based on ERP Solution i.e. Finance and Accounting of Container Transport (FACT) is taxable in the hands of the assessee as Royalty/Fees for technical services under the Act as well under the provisions of DTAA between India and Denmark or not? - Held that:- The FACT cost represent merely allocation of cost incurred and hence in the nature of reimbursement of expenses not having any element of profit embedded in it. Such recovery only includes proportionate cost incurred by the assessee for the development and maintenance of the system. Such recoupment of cost does not constitute income chargeable to tax in the hands of the assessee. It is undisputed that the assessee is in business of conducting operation of ships in international traffic and not engaged in the business of providing communication services, and therefore, per se no separate royalty/FTS were rendered by the assessee. We allow this issue of assessee’s appeal. Levying interest u/s 234B the Appellant was not liable to pay any advance tax - Held that:- The issue is covered in favour of the assessee in the case of DDIT (IT) Vs NGC Network Asia LLC (2009 (1) TMI 174 - BOMBAY HIGH COURT), wherein it is held that interest u/s 234B of the Act will not apply to non-resident assessee Issues Involved:1. Taxability of Inland Haulage Charges (IHC) under the Double Taxation Avoidance Agreement (DTAA) between India and Denmark.2. Taxability of amounts received for IT system usage and support costs as Royalty/Fees for Technical Services.3. Charging of interest under Section 234B of the Income Tax Act.Issue-wise Detailed Analysis:1. Taxability of Inland Haulage Charges (IHC):The primary issue was whether the assessee was entitled to the benefits of Article 9(1) of the DTAA between India and Denmark concerning the Inland Haulage Charges (IHC) related to the movement of cargo from ICD/CFS to Indian ports and vice versa within the context of Section 44B of the Income Tax Act.The Assessing Officer (AO) initially treated IHC as chargeable to tax in India, denying the beneficial provisions of Article 9(1) of the DTAA. The AO's view was that inland transportation activities were not directly connected with international transport and should be taxed in the source country. However, the Dispute Resolution Panel (DRP) held that IHC related to the movement of cargo from ICD/CFS to Indian ports and vice versa should not be taxed in India under Article 9 of the DTAA, as these activities are part of international traffic.The Tribunal agreed with the DRP, stating that IHC is directly connected with the business of shipping in international traffic and hence taxable only in Denmark. The Tribunal relied on the decision in the case of Safmarine Container Lines NV, which was upheld by the Bombay High Court, indicating that activities like IHC are integral to international shipping operations and should not be taxed separately.2. Taxability of IT System Usage and Support Costs:The second issue was whether the amount received by the assessee from Maersk India Private Limited (MIPL) for IT system usage and support costs for SAP-based ERP solutions (FACT) should be taxed as Royalty/Fees for Technical Services under the Income Tax Act and the DTAA between India and Denmark.The AO had treated the recovery of FACT costs as royalty/Fees for Technical Services and taxed it under Section 115A of the Act. However, the Tribunal noted that the Mumbai Tribunal had previously ruled that such recoveries are integral to international shipping business operations and cannot be taxed in India. The Tribunal emphasized that the FACT system is an integral part of the shipping operations and is used globally to manage the business efficiently. Therefore, the recovery of costs for the FACT system was considered a reimbursement of expenses without any profit element, and thus not chargeable to tax in India.3. Charging of Interest under Section 234B:The final issue was whether the AO erred in charging interest under Section 234B of the Income Tax Act, despite the assessee not being liable to pay any advance tax.The Tribunal referred to the decision of the Bombay High Court in the case of NGC Network Asia LLC, which held that interest under Section 234B does not apply to non-resident assessees when the duty to deduct tax at source is on the payer. The Tribunal, following this precedent, decided in favor of the assessee, ruling that interest under Section 234B should not be levied.Conclusion:The Tribunal allowed the appeal of the assessee regarding the taxability of IHC and FACT costs, ruling that these should not be taxed in India under the DTAA provisions. Additionally, the Tribunal ruled against the charging of interest under Section 234B, aligning with the precedent set by the Bombay High Court. Consequently, the appeal of the revenue was dismissed.