TaxTMI 
TaxTMI 
2013 (11) TMI 970
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.... by the assessee, appeal in ITA no.2477/Mum./2008, has been preferred by the Revenue and the cross objection no.134/Mum./2008, has been preferred by the assessee, which is arising out of Revenue's appeal in ITA no.2477/Mum./2008, all challenging the impugned order dated 17th January 2008; (iii) For the assessment year 1999-2000, the Revenue has filed appeal in ITA no.5826/Mum./2006, Cross Objection no.61/Mum./2007, has been preferred by the assessee which is arising out of the Revenue's appeal in ITA no.5826/Mum./ 2006, and the assessee has filed appeal in ITA no.5393/Mum./2006, all challenging the impugned order dated 10th July 2006; (iv) For the assessment year 2000-01, the assessee has filed appeal in ITA no.1970/Mum./2008, the Revenue has filed appeal in ITA no.2478/Mum./ 2008 and the Cross Objection no.135/Mum./2008, has been preferred by the assessee which is arising out of the Revenue's appeal in ITA no.2478/Mum./2008, all challenging the impugned order dated 17th January 2008; (v) For the assessment year 2001-02, the assessee has filed appeal in ITA no.1972/Mum./2008, the Revenue has filed appeal in ITA no.2479/Mum./ 2008 and the Cross Objection no.136/Mum./2008, h....
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....turn of income. B) The freight receipts from shipping business from India should be assessed in the hands of SVENDBORG and1912 and not in the hands of assessee. 2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in directing the AO to examine the taxability of freight receipts in the hands of SVENDBORG and 1912, separately. 3. On the facts and in the circumstances of the case and in law, the Ld, CIT(A) erred I holding that as the payments are made by MPIL and MLIL to SVENDBORG AND 1912, the taxability of the same has to be considered in the assessment of SVAENBORG and 1912, ignoring the facts that the TDS certificates issued by MPIL and MLIL and filed alongwith the return of income indicates that the amount has been paid to the assessee after withholding taxes @ 20% on the payment. 4. On the facts and in the circumstances of the case and in law, the LD.CIT(A) erred in holding that the interest levied U/s 231B is not justified as the assessee cannot be said to be liable for advance tax." In the aforesaid grounds of appeal, the Revenue has mainly raised the following issues, which require our adjudication on merits:- (i) Whether th....
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....lved are that the assessee i.e., A.P. Moller, is a partnership firm existing under the laws of Denmark. The said partnership firm consisted of four individuals namely, Mr. Maersk McKinney Moller, Mr. Jess Soderberg, Mr. Knud Stubkjaer and Mr. Bjarne Hansen. The said firm was the managing owner of the following two companies:- (i) Aktieselskabet Dampskibsselskabet, Svendborg (Svendborg); and (ii) Dampskibsselskabet af 1912, Aktieselskab (1912). 5. Both the companies are incorporated under the Danish laws and are Public Limited Companies, listed in Copen Hagen Stock Exchange. With effect from 1st January 1913, the company "1912" has been merged into "Svendborg" and thereafter, the merged company has been re-named as "A.P. Moller Maersk A/S". These two companies are engaged in the business of shipping operation all over the world and are tax resident of Denmark as the effective place of management is in the Denmark. In accordance with the Danish laws, both the companies viz. Sevendborg and 1912 have appointed the assessee firm A.P. Moller as their "Managing Owner" for managing their shipping operations globally. As per the Articles of Association of these two limited companie....
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....s. The documents enclosed along with the letter included the following:- Bills of lading which were issued in the name of the listed Companies as owners of the vessels; Agency agreement dated 6 January 1997 between Firm A. P. Moller entered on behalf of the two limited Companies and Maersk India Limited (Agents) in India; Copy of Articles of Association of the limited Companies indicating that Firm A.P. Moller has been appointed as managing owner and vested with authority which may bind the Companies; Certificate of tax residency issued by tax Danish authorities (SKAT) for the two limited Companies to the managing owner Firm A. P. Moller; Incorporation certificates of the Companies as issued by Danish Commerce and Companies Agency; and Other documents to show that shipping freight receipts belong to these companies and not to the assessee firm. 7. It has been stated that on 28th March 2002, based on these documents, the DIT relief certificate for 100% relief in respect of the shipping income has been given. The copy of such certificate has been enclosed in the paper book at Page-152. 8. During the course of the scrutiny proceedings, the Assessing Officer req....
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.... was filed in case of A.P. Moller under section 139(1) and the computation of income filed along with the return of income mentioned gross receipts of shipping operation in case of A.P. Moller and the relief under Article-9 of the DTAA has been claimed by A.P. Moller, therefore, the entire shipping income belongs to A.P. Moller only. Earlier also the return of income were filed by the A.P. Moller only and benefit of DTAA has been claimed by A.P. Moller, thus, under the provisions of section 139(1) the income is assessable in the hands of an "assessee" because the return of income is filed only for his / its income. He also noted that in the application for claiming DIT relief, the name of the assessee has been given as A.P. Moller only and also referred to such application made by the assessee from time to time. He also referred to other documents like copy of certificate of double taxation relief and residency certificate from Danish tax authorities which only referred the name of A.P. Moller. He even incorporated the copy of certificate from A.P. Moller at Page-10 of the assessment order. After discussing these details from Page-8 to 11, he has drawn following premise to prove th....
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....in India as per Article 9 of the DTAA. Claim of the AR is not acceptable as no specific discussion on this issue is available in the DTAA. Unless and until the DTAA itself provides that in the case of income which is flowing through entities such as partnerships has to be considered in the hands of the final recepients and DTAA benefits are to be given to these recepients, such a course of action 'cannot be contemplated. On the other hand, as per the Income Tax Act, partnerships are taxable entities and once the benefits of the DTAA is* not available to such entities, they become liable to tax in India, as such. The OECD commentary also mentions the same, i.e., there has to be special inclusion in the DTAA, by the two contracting States, for extension of benefits of the DTAA. 8. As the provisions of the DT AA are held to be not applicable in the case of the assessee, the provisions of the I.T.Act, 1961, will apply. 9. The freight receipts of M/s.A.P. Moller amounting to Rs.13,82,79,58,262.66 are from the business of Shipping and as such are covered by the provisions of section 44B of the I. T. Act, 1961. This Section deems the income of non-resident assessees to be 7.5% of th....
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.... around the world. MIL and MLIL are making payments to AP. Moller for the use of the services. Thus, what is being termed as 'reimbursement of costs' is basically payment for the technical services provided by A P. Moller on the basis of its infrastructure facility. The same is borne out by the agreements also. In fact, such a situation arose in the case of M/s. Arthur Andersen & Co., India, and the Id.ITAT, Mumbia, '0' Bench, in their order dated 29.07.2003, in ITA No.9125/Muml 1995, for AY.1994-95, with regard to order u/s. 195(2) of the I.T. Act, 1961, have opined that: "Repayment of money cannot be construed to be the income of the recipient but it is to be proved that the amount in question is actually 'reimbursement' bereft of any profit for the services rendered. The nomenclature is not decisive to ascertain the real character of payment. In the present case attendant circumstances suggest that ex facie, the amount paid is not just reimbursement. It could be fee for technical services in the garb of reimbursement. 10.5 As the assessee is not entitled to the benefits of the DT AA as already discussed in the foregoing paras, the amount paid by MLiL and MIL to A.P. Moller ar....
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.... both the companies. The ships and other assets used in the shipping business are owned by Svendborg and 1912 and not by the appellant. Further, it is apparent from the bill of lading that the bill is issued in the name of Svendborg and 1912. The appellant is only managing the day to day operations of Svendborg and 1912 in its capacity as managing owner. It is entitled to management fees for the services rendered by it as managing owner. The income from operations of ships therefore accrues to Svendborg and 1912 and not to the appellant which merely acts as managing owner. The freight receipts from shipping business from India should thus be assessed in the hands of Svendborg and 1912 and not in the hands of the appellant. The DDIT should examine the taxability of the freight receipts in the hands of Svendborg and 1912 separately." 13. The learned Commissioner (Appeals), after holding that the assessee is not liable for tax insofar as shipping income is concerned, however, proceeded to examine, whether the management fees paid by Svendborg and 1912 to the assessee is liable for taxation under section 9(1) of the Act in India because such a payment amounts to income from "fee for....
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....ining to Indian operations would, therefore, be determined under the provisions of Indian Income Tax Act only. Hence, he held that the said payment is taxable under section 9(1)(vii). He further observed that since the assessee could not provide for the quantification of the figures pertaining to Indian operations, he directed the Assessing Officer to determine the amount of fees / reimbursement received from Svendborg and 1912 for earning freight income in India and such income so ascertained would be liable for tax on net income basis under the provisions of section 115A r/w 44D of the Act. 15. On the issue of taxability of the amount paid by MIPL and MLIL towards their sharing of the cost for I.T. Global Online System, the assessee reiterated the same submissions. However, the learned Commissioner (Appeals) directed the Assessing Officer to consider the taxability of these payments in the assessment of Svendborg and 1912 and not in the hands of the assessee. 16. Regarding levy of interest under section 234B, the learned Commissioner (Appeals) agreed with the contention of the assessee that it was not liable for payment of advance tax after following various decisions cited....
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....ts received from the two companies in India namely, MIPL and MLIL towards cost of software development by the assessee for global telecommunication facilities and for the use of its global shipping business the learned Departmental Representative submitted that these payments are in the nature of "fees for technical services" or "royalty" for the reason that firstly, the payment is made towards usage of software and secondly, these two companies have also deducted tax @ 20% on the payment made to the assessee, therefore, the same has rightly been treated as fees for technical services within the meaning of section 9(1)(vii) by the Assessing Officer, which is taxable in India. On this issue also, he strongly relied upon the order of the Assessing Officer. 20. The learned Senior Counsel, Mr. Porus Kaka, on behalf of the assessee, first of all, explained the true nature of relationship between the assessee firm and the two companies and also the activities carried out by these two companies, and the function and the role of the assessee firm. He submitted that the assessee firm is the managing owner of these two companies which are carrying on the operation of ships in the internat....
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....fficer has categorically held that income from shipping business belongs to the companies and has also given relief under Article-9 of the DTAA. In the other years also, the Assessing Officer has given the relief under DTAA on shipping income. There never have been dispute or quarrel about the shipping income being non -taxable in India under Article-9. Even on the application filed for DIT relief, the assessee has received the certificate for claiming benefit under DTAA of the shipping income by the Assessing Officer. He drew our specific attention to the various documents filed before the Assessing Officer from where he pointed out that, it is clearly borne out that the main shipping business is carried out by these two companies whereas the assessee is only the managing owner and these companies in all matters would be represented by the managing owner only. It was for this reason, the return of income all through out has been filed under the name of the assessee firm, albeit, the shipping income was always meant to belong to these two corporate companies. This is also evident from the fact that in all the assessment orders for the earlier years as well as subsequent years, the ....
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....s assessed the income in the status of company, then it was an mistake which can be rectified under section 292B. He submitted that the confusion was always is on the part of the assessee, because the same assessee has been claiming to be a partnership firm and the return of income is being filed as managing owner of the companies in the representative capacity showing the status of a corporate company. The income is being shown under the name of the assessee firm and there is no such clarification in the return of income. This is evident from the copies of return of income filed by the assessee, a copy of which was also provided by the assessee's counsel. He also reiterated that once the return of income has been filed by the assessee in the earlier years and the assessee has been paying taxes on the same shipping income then how in the subsequent years on same facts it can be said that income belongs to the companies and not to the assessee firm. 23. Now coming to the issu,e whether the assessee firm is entitled to the benefit of the Indian Denmark DTAA and whether the management fees received by the assessee firm is chargeable to tax in India or not, which is the subject matt....
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....ective management is carried out. The taxability of managing agency cannot be governed by the place of business but from the place where business is managed and profits are calculated. The decisions which were relied upon by the learned Sr. Counsel, were, Salt & Industries Agencies Ltd. v/s CIT, [1950] 18 ITR 58 (Bom.); K.R.M.T.T. Thiagaraja Chetty & CO. v/s CIT, [1953] 24 ITR 535 (SC); and Shoorji Vallabhdas v/s CIT, [1960] 39 ITR 775 (SC). The issue involved in Shoorji Vallabhdas (supra) was, whether the assessee firm which was resident of British India and was the managing agent of the two shipping companies which were also resident in British India and the business of these two companies was to carry cargo on other parts of India which were the native States (i.e., outside British India), the income received from these States can be said to have accrued or arisen in British India, when the part of commission for managing the ships pertained to the native States. The Hon'ble Supreme Court affirming the decision of the Bombay High Court held that when the assessee has performed all the services in British India then the commission also which it earned in respect of the two shippi....
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....as arisen or accrued directly or indirectly to the assessee or from any business connection in India or through any property in India. No service has been utilized in business or profession carried on in India for the purpose of earning any income in India. The assessee's entire remuneration is based on GRT of the ships per annum which is calculated on the basis of carrying capacity of the ship and has nothing to do with the freight receipts earned in India or elsewhere. 25. Regarding the reasoning given by the learned Commissioner (Appeals) as well as the Assessing Officer that benefit of Indo Denmark DTAA will not be applicable to the assessee as the assessee is a partnership firm and it is a transparent entity in the Denmark, he submitted that the partnership firm is a taxable in respect of its profit not in its own right but in the hands of the partner as per the Danish laws and, therefore, the treaty benefits cannot be declined as long as the entire income of the partnership firm is taxed in the resident country i.e., Denmark. This issue has been discussed threadbare in the decision of a co-ordinate bench in Linklaters LLP (supra) wherein the Tribunal, after discussing the ....
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.... entity under Switzerland, then the benefit of the treaty cannot be given. Moreover, he submitted that the MIPL is the subsidiary of A.P. Mollar group and, therefore, there is a strong economic connection with the assessee firm, two companies (Svendborg and 1912) and MIPL. Even if the managerial services are rendered in the Denmark then also it pertains for entire global business and any strategy made at global level, involves Indian operation or business in India also. Thus, he strongly relied upon the findings given by the learned Commissioner (Appeals) on this issue. 28. We have carefully considered the entire gamut of facts and material placed on record with reference to the rival contentions putforth by the parties and also the findings of the Assessing Officer as well as the learned Commissioner (Appeals). In the present case, the assessee, A.P. Moller is a partnership firm existing under the laws of Denmark and is also the resident of Denmark. As per the Memorandum of Articles of Association of the two Danish companies namely, Svendborg and 1912, which are public limited companies incorporated and registered under Danish law, the assessee has been appointed as the managin....
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....o time at the beginning of every financial year for obtaining annual double income tax relief / port clearance certificate. Along with the said application, detail information and documents have been filed which goes to show that firstly, the bills of lading have been issued in the name of the listed companies i.e., Svendborg and 1912 as owners of the vessels, secondly, agency agreement between the assessee firm on behalf of these two limited companies and agents in India i.e., MIPL, which evidences that booking and receiving of freight receipt are done by MIPL on behalf of these two companies; thirdly, copies of the Articles of Association of the limited companies clearly indicate that the firm A.P. Mollar has been appointed as managing owner and vested with the authorities which may bind the companies; fourthly, certificate of tax residency issued by the tax Danish authorities for the two limited companies to the managing owner A.P. Moller that they are tax resident of Denmark; and lastly, incorporation certificates of these two companies issued by the competent Danish authorities. From these documents, it can be deduced that shipping income is that of two companies and the asses....
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.... be said to belong to the assessee firm. From the Article of Association and other material placed on record, it is evident that the assessee firm is the managing owner and in that capacity only, it manages the affairs of these two companies for which it is remunerated as per the relevant terms agreed between the parties. In such a situation, it cannot be held that whatever income accrues during the carrying on such business belongs to the assessee firm. Once the entire infrastructure including the vessels which are deployed in the international traffic belongs to the two companies, then it cannot be said that the income accruing from exploiting / deployment of such assets / vessels belong to the assessee firm. The assessee can be compared to a CEO of a company who is managing the affairs of the company and this does not lead to any inference that the income of the company belongs to the CEO. As per the Article of Association, the assessee acts as a representative of the two companies and in that capacity, it acts and does obligations on behalf of the two companies. All THE DOCUMENTS referred to before us also goes to show that the assessee is only representative and the actual shi....
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....f the Indo-Denmark treaty to the assessee firm which has also been confirmed by the learned Commissioner (Appeals), on the ground that the assessee firm is transparent entity i.e., not liable for tax in Denmark and, therefore, by virtue of Article-3 and 4, the benefit of treaty would not be available. Under the Indo Denmark DTAA, Article-3(1)(e) defines the term "Person" to include an individual, a company and any other entity which is treated as taxable units under the taxation laws in force in the respective contracting States. Article- 4(1), the term "Resident" of a contracting State means any person who, under the laws of that the State is liable to tax therein by reason of his domicile resident, place of management or any other criterion of similar nature. Thus, a person who is a resident of contracting State is entitled to treaty benefit if an income of such a person is subjected to taxation of the State of resident. As per the Danish laws, the partnership firm as such is not taxable, however, the entire income of the partnership firm is taxed in the hands of the partner and, therefore, the entire income earned by the partnership firm can be said to be fully taxable in the re....
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....ate bench of the Tribunal, Mumbai, in Linklaters LLP (supra), wherein the learned Accountant Member, speaking on behalf of the Bench, has not only considered the various commentaries, international views but also various Court decisions on this point to come to the following conclusion:- "71. Viewed in the light of the detailed analysis above, in our considered view, it is the fact of taxability of entire income of the person in the residence State, rather than the mode of taxability there, which should govern whether or not the source country should extend treaty entitlement with the contracting state in which that person has fiscal domicile. In effect thus, even when a partnership firm is taxable in respect of its profits not in its own right but in the hands of the partners, as long as entire income of the partnership firm is taxed in the residence country, treaty benefits cannot be declined." 32. Thus, even though the partnership firm is a transparent entity but once its income and profit is taxed in the hands of the partners, the treaty benefit should be extended to the partners. Accordingly, we respectfully following the reasoning and the conclusion drawn by the co-ordi....
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.... however, the person paying their royalties or fees for the technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated." 34. Thus, for taxing the royalty and fees for technical services in case of a non-resident under the Indo Denmark DTAA, the basic condition is that there has to be a P.E. or fixed base in connection with which such a liability has been incurred. Not only this, such royalty or fees for technical services are borne by such P.E. or fixed base. If that is not so, the same cannot be taxed in the hands of the non-resident. In this case, admittedly, this payment has not been made by any P.E. to the assessee firm albeit the payment has been made by non-resident company i.e., two Danish companies to another non-resident i.e., a....
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.... of the Tribunal has been followed in the following manner:- "10. We have heard the rival contention, perused the relevant findings of the authorities below and the material available on record. It is an undisputed fact that the assessee is wholly engaged in the business of operation of ships in the international 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 solu....
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....profits directly obtained by the enterprise from transportation of passenger or cargo by ships or aircraft from operations in international traffic. They have also opined that such enterprises carrying on large variety of activities to permit, facilitate or support their international traffic operations; and 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 pa....
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.... The Netherlands company allowed the agent to use premises given on license to it by AAI. For allowing such a use, Netherlands company .recovered rent from the agent. The Tribunal held that rent received was also income from operation of aircraft in international traffic. The 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....
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....do not find any reason to deviate from such a findings and conclusions. Accordingly, the ground raised by the Revenue is treated as dismissed." 36. Thus, the payment made by the MIPL and MLIL can neither be taxed as fees for technical services nor as royalty. Thus, the 4th issue also stands decided in favour of the assessee. 37. The Revenue, in its appeal in ITA no.5825/Mum./2006, for the assessment year 1997-98, has also challenged levy of interest u/s 234B. 38. After hearing both the parties, we find that this issue stands covered in assessee's own case in ITA no.375/Mum./2011 dated 20th July 2011 and also by the decision of Bombay High Court in DIT (IT) v/s NGC Network Asia LLC, [2009] 313 ITR 187 (Bom.). In any case, we have already held that no part of the income is taxable in the hands of the assessee firm and, therefore, question of levy of interest under section 234B does not arise. The ground thus raised by the Revenue is treated as dismissed. 39. In assessee in its appeal in ITA no.5392/Mum./2006, for the assessment year 1997-98, has raised one more ground challenging the levy of interest under section 234D of the Act. 40. It has been admitted by both the p....
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....ITA no.3632/Mum./2007, for the assessment year 2003 -04. All these grounds are treated as dismissed in view of our findings given in ITA no.3019/Mum./2005. 44. The second issue, raised by the Revenue in its appeals for all the year under assessment, is whether the learned Commissioner (Appeals) has erred in law and in facts in holding that the I.T. system cost is assessable in the hands of the two companies viz. Svendborg and 1912. 45. The aforesaid issue has been raised vide ground no.3 in ITA no.3019/Mum./ 2005, ITA No.2479/Mum./2008, Cross objection no.351/Mum./2005; Cross objection no.136/Mum./2005, for the assessment year 2001-02, ground no.4 and 5 in ITA no.3032/Mum./2006, for the assessment year 2002-03, ground no.2 in cross objection no.25/Mum./2007, for the assessment year 2002-03, ground no.4 and 5 in ITA no.3632/Mum./2007, for the assessment year 2003 -04. In view of our decision given above in the forgoing paragraphs, this issue is decided against the Department and in favour of the assessee. Therefore, all the grounds raised by the Revenue are treated as dismissed whereas the grounds raised in cross objection by the assessee are treated as allowed. 46. The thi....
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....egard to chargeability of interest under section 234B which has been raised by the Revenue vide ground no.6 in ITA no.5826/Mum./2006, for the assessment year 1999-2000, ground no.4 in ITA no.3019/Mum./ 2005 for the assessment year 2001-02. This issue has been decided against the Revenue and in favour of the assessee as above, therefore, the same is being treated as dismissed. 49. The sixth issue raised by the assessee is, whether the learned Commissioner (Appeals) has correctly held that the interest is leviable under section 234D. This issue has been raised in ground no.6 in ITA no.1968/ Mum./2008, for the assessment year 1998-99, in ITA no.5393/Mum./2006, for the assessment year 1999-2000, in ITA no.1970/Mum./2008, for the assessment year 2000-01, in ground no.3, in ITA no.2786/Mum./2005, for the assessment year 2001-02, in ground no.6 in ITA no.1972/Mum./2008, for the assessment year 2002-03, in ground no.5 in ITA no.4991/ Mum./2006, for the assessment year 2002-03 and in ground no.2953/Mum./2007, for the assessment year 2003-04. In view of our findings given above, we restore the issue back to the file of the Assessing Officer and direct him to give effect of this order keep....