2017 (2) TMI 993 - SC - Income Tax

Maersk Net telecommunication facility income classified as shipping business revenue not technical services under Indo-Danish DTAA Article 19

Director of Income Tax (IT) – I Versus A.P. Moller Maersk As

The SC held that income from Maersk Net telecommunication facility constituted shipping business income rather than fees for technical services under the ... Nature of Income from 'Maersk Net' - Income from the use of Global Telecommunication Facility called 'Maersk Net' OR as fees for technical services under the Indo-Danish Double Taxation Avoidance Agreement - Whether any technical services rendered by the assessee to its three agents and the payment made by the agents was in the form of fee for the said technical services OR the payment was nothing but reimbursement of the cost by the three agents to the assessee for using the Maersk Net. Held that:- Revenue itself has given the benefit of Indo-Danish DTAA to the assessee by accepting that under Article 9 thereof, freight income generated by the assessee in these Assessment Years is not chargeable to tax as it arises from the operation of ships in international waters. Once that is accepted and it is also found that the Maersk Net System is an integral part of the shipping business and the business cannot be conducted without the same, which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, it is only a facility that was allowed to be shared by the agents. By no stretch of imagination it can be treated as any technical services provided to the agents. In such a situation, 'profit' from operation of ships under Article 19 of DTAA would necessarily include expenses for earning that income and cannot be separated, more so, when it is found that the business cannot be run without these expenses. This Court in Commissioner of Income Tax-4, Mumbai v. Kotak Securities Limited [2016 (3) TMI 1026 - SUPREME COURT] has categorically held that use of facility does not amount to technical services, as technical services denote services catering to the special needs of the person using them and not a facility provided to all. Thus High Court is correct in holding that the income from the use of Global Telecommunication Facility called 'Maersk Net' can be classified as income arising out of shipping business and not as fees for technical services Issues Involved:1. Whether the income from the use of the Global Telecommunication Facility called 'Maersk Net' can be classified as income arising out of shipping business and not as fees for technical services.Detailed Analysis:Issue 1: Classification of Income from 'Maersk Net'Background and Facts:The respondent assessee, a foreign company engaged in the shipping business and tax resident of Denmark, utilized a global telecommunication facility known as 'Maersk Net'. This system was used by the assessee's agents to facilitate various shipping-related activities. The primary question was whether the payments made by these agents for using 'Maersk Net' should be classified as income from the shipping business or as fees for technical services under the Indo-Danish Double Taxation Avoidance Agreement (DTAA).Assessment and Initial Rulings:The Assessing Officer (AO) initially treated the payments as fees for technical services and taxed them under Article 13(4) of the DTAA at 20%. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view. However, the Income Tax Appellate Tribunal (ITAT) reversed this decision, holding that the payments were merely reimbursements for a cost-sharing arrangement and not fees for technical services. The ITAT relied on the decisions of the Madras High Court in Skycell Communications Ltd. and the Delhi High Court in Commissioner of Income Tax v. Bharti Cellular Ltd.High Court's Decision:The High Court of Bombay dismissed the Revenue's appeal, affirming that the 'Maersk Net' system was an automated software-based communication facility. It was part of a cost-sharing arrangement essential for the shipping business and did not constitute technical services. The High Court referenced the principles from the case of The Director of Income Tax (International Taxation)-1 v. M/s. Safmarine Container Lines NV, emphasizing that the payments were reimbursements for costs incurred in the shipping business.Supreme Court's Analysis:The Supreme Court upheld the High Court's decision, noting several key points:- The 'Maersk Net' system was integral to the shipping business, providing essential information and coordination for agents.- The payments made by the agents were for the reimbursement of costs incurred in maintaining this system, not for technical services.- There was no profit element in the payments, as confirmed by the AO and CIT(A).- The Revenue had already accepted that freight income under the Indo-Danish DTAA was not taxable, and the 'Maersk Net' system was part of this shipping business.Legal Principles Applied:The Supreme Court referred to its own decision in Commissioner of Income Tax-4, Mumbai v. Kotak Securities Limited, which distinguished between technical services and facilities. Technical services involve specialized, exclusive services catering to specific needs, whereas facilities are general services available to all users. The 'Maersk Net' system was deemed a facility, not a technical service.Conclusion:The Supreme Court concluded that the payments made by the agents for using the 'Maersk Net' system were reimbursements for costs and not fees for technical services. The appeals by the Revenue were dismissed, affirming that the income in question arose from the shipping business and was not taxable as technical service fees under the Indo-Danish DTAA.