Shipping software cost recoveries were held integral to ship operations and outside royalty or technical services taxation.

Amounts recovered from an Indian agent for use and maintenance of shipping software were treated as part of the shipping business and not as a separate technical service. The software supported container inland services, accounting, integrated billing, warehouse functions and container tracking, and the receipts were recovered on a cost-to-cost basis without markup. The Tribunal held that this use was integral and ancillary to the operation of ships in international traffic, so the recovery could not be segregated as independent royalty or fees for technical services under section 9(1)(vii) or Article 13 of the DTAA. The receipts were therefore covered by Article 9(1) as income from operation of ships in international traffic and not taxable in India as royalty or fees for technical services.

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Issues: Whether the amounts recovered from the Indian agent towards use and maintenance of the FACT software were taxable as royalty or fees for technical services, or were covered as income derived from operation of ships in international traffic under Article 9(1) of the DTAA.

Analysis: The software was developed and maintained for the efficient conduct of the assessee's shipping operations and was used by the agent for container inland services, accounting, integrated billing, warehouse functionality, and tracking of containers. The receipts were on cost-to-cost basis without markup. The Tribunal held that the software usage was only an integral and ancillary part of the shipping business and could not be segregated from the shipping operations so as to constitute independent technical services. It further held that the recovery of such cost did not amount to royalty or fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961 or Article 13 of the DTAA.

Conclusion: The receipts were held to be covered by Article 9(1) of the DTAA as income from operation of ships in international traffic and were not taxable in India as royalty or fees for technical services.

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