TaxTMI 
TaxTMI 
2013 (11) TMI 827
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....enmark. It is mainly engaged in the business of operation of ships, chartering and other related activities of shipping in international traffic, which is covered under Article-9 of Double Taxation Avoidance Agreement (for short "DTAA") between India and Denmark. Its shipping operation in India is carried out by Maersk India Pvt. Ltd. (for short "MIPL") which is an agent of the assessee. The assessee, in its return of income, has shown gross freight earning of Rs. 37,96,29,97,137, which was claimed as not taxable as per Article-9(1) of the DTAA, as the profits derived from the operation of ships in international traffic was carried out by the assessee was fully taxable in Denmark, which is the effective place of management of the assessee. During the course of the scrutiny proceedings, the Assessing Officer noted that the assessee has receipts from its operation on account of I.T. support services given to MIPL which was not offered for income. In response to the show cause notice, it was submitted that the assessee has recovered an amount of Rs. 60,04,349 from MIPL towards share of cost of SAP Software Solution i.e., FACT for tracking and recording various transactions. The amount....
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.... as "reimbursement of cost" is payment for technical services provided by the assessee and the same has to be treated as income from fees for technical services in the hands of the assessee as was done in the earlier years by the Assessing Officer. Thereafter, he referred to Article-13 of the DTAA, which defines royalty and fees for technical services and held that it has to be taxed under the said Article r/w section 9 of the Act. In coming to his conclusion, he relied upon the following case laws:- 1. E.P.W. Da Costa And Anr. v Union Of India, [1980] 121 ITR 751 (Del.); 2. CIT v. Travel Corporation Of India Ltd., [1994] 209 ITR 555 (Bom.); 3. Danfoss Industries Pvt. Ltd., In Re. [2004] 268 ITR 001 (AAR); and 4. State of Uttar Pradesh & Anr. v. Union of India, 130 SIC 001 (SC). Relying on the ratio of the aforesaid decisions, he came to the conclusion that the payment received by the assessee as reimbursement charges from MIPL are in the nature of royalty and fees for technical services and, accordingly, he taxed the amount @ 10% under section 115A. The income from the shipping business was taken at nil by him in view of the provisions of Article-9 of the DTAA and R....
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.... held that such a payment of usage of software by MIPL cannot be termed as "Fees for Technical Services" ("FTS") and it is only a part of operation of ships only which cannot be taxed under Article-9(1) of the DTAA. All these facts of earlier years' have been dealt by the learned Commissioner (Appeals) in his order vide Para-4.4 to 4.8 of his order. 6. The learned Commissioner (Appeals), after appreciating the assessee's submission based on the material placed on record and also the earlier decision of the Tribunal in assessee's own case on similar issue, observed and held as under:- "Decision: I have carefully considered the contentions of both the A.O. as well as the appellant. It is observed that the FACT system software solution has been developed by the appellant for efficient and effective carrying cut of CIS operations around the world. This FACT system software is used by all its group companies carrying out CIS operations. The FACT system software assists in accounting, integrated bulling, warehouse functionality, etc., which in turn help the appellant in carrying on its shipping business in a more effective and efficient manner. It is furt....
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.... years, which have been decided by the Tribunal right from the assessment year 2000-01 to 2007-08. In the series of the order, the Tribunal invariable in all the assessment years, in assessee's own case has held that on similar usage of software by the agents/group entities developed by the assessee for its operation of shipping business cannot be taxed, either as FTS or royalty and it is a part and parcel of the shipping operations only. Once the Assessing Officer at Para-6 of his order has himself held that this issue is identical to the earlier assessment years, then the learned Departmental Representative cannot contradict the facts in the present assessment year that they are different on the ground that there was a different version of the software used in this year. The ERP system software solution which is called as FACT was in fact used for container inland services which is mainly for management and tracking of container which are kept at warehouse and also for accounting of freight receipt, etc. All these solutions provided by the software are directly linked and is integral part of over all operations of the shipping business in an effective manner. Under the new pr....
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....traffic and its effective place of management is at Denmark. All its profits from shipping business is taxed in Denmark only. In the return of income, the gross receipts earned from operations of ships has been claimed as non-taxable under Article-9(1) of the Indo Denmark DTAA and the same has been allowed so by the Assessing Officer in his order dated 18th January 2011. He has computed "Nil" income under the head "Shipping Business". The main controversy is with regard to the treatment of amount of Rs. 66,04,349 recovered from MIPL towards software usage which has been developed and maintained by the assessee. The Assessing Officer has treated the said payment in the nature of "royalty" or "FTS" under the provisions of the Act and also under the DTAA. As per the material on record, the software developed by the assessee is based on ERP system which is the software solution called FACT for tracking and recording various transactions. This software enables the various agents of the assessee all over the world (which have also been termed as "group companies" in the impugned orders) in the container inland service which are part of the shipping operations only. This software is used ....
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.... that profits from activities directly connected with such operations as well as profits from activities which are not directly connected with operations of the enterprises ships in international traffic as long as they are ancillary to such operations are also to be considered as profits derived from operation of ships in international traffic. The following further examples have been given in the commentary:- "6. Profits derived by enterprises from the transportation of passengers or cargo otherwise than by ships or aircraft that it operates in international traffic are covered by the paragraph to the extent that such transportation is directly connected with the operation, by that enterprise, of ships or aircraft in international traffic or is an ancillary activity. One example would be that of an enterprise engaged in international transport that would have some 01 Its passengers or cargo transported internationally by ships or aircraft operated by other enterprises, e.g. under code-sharing or slot-chartering arrangements or to take advantage of an earlier sailing. Another example would be that of an airline company that operates a bus service connecting a town with it....
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....e Hon'ble Delhi High Court upheld the decision of the Tribunal. We are of the view that the aforesaid decision fully supports the plea of the assessee before us. We are of the view that receipt in question by the assessee would be profits derived from operation of ships in international traffic and therefore not taxable in India in view of the provisions of Article 9(1) of the DTAA. We have already explained the nature of receipt by the assessee from its agent in India. The activity of providing communicating facility is only to facilitate assessee's international traffic operations. These activities are directly connected with such operations. They can be said to be ancillary to such operations. They can also be said to be preparatory and auxiliary activity related to transportation and would therefore be covered by the provisions of Article 9(1) of DTAA. We therefore hold that the receipt in question cannot be brought to tax in India. In view of the above conclusion, we are not dealing with the issue as to whether receipt can be considered as business profit and if so considered, the same cannot be taxed in India because the assessee does not have PE in India." 11. Onc....