Indian Tribunal: Software Maintenance charges to CMA CGM not taxable under DTAA

The Tribunal concluded that the payments made by the Indian company to CMA CGM, France for 'Software Maintenance charges' were not taxable in India under the Double Taxation Avoidance Agreement (DTAA) between India and France. As a result, there was no requirement for the Indian company to deduct tax at the source, and the disallowance under Section 40(a)(i) of the Income-Tax Act, 1961 was deemed unwarranted. The appeal was allowed, directing the Assessing Officer to verify the amount of Tax Deducted at Source (TDS) and grant appropriate credit as per the law. The grounds related to the interest levied under Sections 234B and 234C were consequently allowed.

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Issues Involved
1. Confirmation of disallowance under Section 40(a)(i) of the Income-Tax Act, 1961.
2. Nature of payment for 'Software Maintenance charges' and its tax implications.
3. Application of Double Taxation Avoidance Agreement (DTAA) between India and France.

Detailed Analysis

1. Confirmation of Disallowance under Section 40(a)(i)
The primary issue in this appeal is the confirmation of disallowance under Section 40(a)(i) of the Income-Tax Act, 1961, concerning the payment of 'Software Maintenance charges' amounting to Rs. 6,85,69,596/-. The authorities below disallowed the deduction on the grounds that the assessee failed to withhold tax on the payment made to its Associated Enterprise (AE) in France.

2. Nature of Payment for 'Software Maintenance Charges'
The assessee, an Indian company acting as a shipping agent, made payments to CMA CGM, France for the use of software tools (LARA, DIVA, and Ocean). The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that these payments were in the nature of 'royalty' and 'fees for technical services' under Section 9(1)(vi) and 9(1)(vii) of the Act, respectively. The AO observed that the payments were excessive compared to the previous year and did not concur with the assessee's justification for the increase.

The Tribunal examined the agreements between the assessee and CMA CGM, France, which revealed that the payments were part of a cost allocation arrangement for using the software to facilitate shipping operations. The Tribunal concluded that these payments were not for the use of any copyright but for the use of software for business purposes. Therefore, the payments did not qualify as 'royalty' under the DTAA.

3. Application of Double Taxation Avoidance Agreement (DTAA)
The Tribunal analyzed the DTAA between India and France, particularly Article 9, which deals with 'Shipping' income. It was determined that the profits derived by CMA CGM, France from the operation of ships in international traffic are taxable only in France. The Tribunal also referred to the decision in A.P. Moller Maersk v. DDIT (IT) and the Hon'ble Supreme Court's ruling in DIT v. A.P. Moller Maersk, which held that income arising from the use of a global tracking system linked to shipping operations is not 'fees for technical services' but income from shipping operations.

The Tribunal further examined the Protocol appended to the DTAA, which includes a Most Favoured Nation (MFN) clause. This clause ensures that if India limits its scope of fees for technical services in a DTAA with any other OECD country, such limited scope shall apply to the DTAA with France. The Tribunal found that the payments made by the assessee did not 'make available' any technical knowledge, experience, skill, or know-how to the assessee, thus falling outside the scope of 'fees for technical services' under the DTAA.

Conclusion
The Tribunal concluded that the payments made by the assessee to CMA CGM, France were not taxable in India under the DTAA. Consequently, there was no obligation on the part of the assessee to deduct tax at source, and the disallowance under Section 40(a)(i) of the Act was not warranted. The appeal was allowed, and the AO was directed to verify the amount of TDS and allow appropriate credit as per law. The grounds regarding the levy of interest under Sections 234B and 234C were consequentially allowed.

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