2012 (9) TMI 293 - AT - Income Tax

India-Denmark DTTA - amount received towards assessee s share of shared IT Global Portfolio tracking system - assessee in the present case is a non-resident company incorporated under the laws of Denmark - Held that - The payments received by the Assessee are for providing a facility to its agents as that the payment received is nothing but a payment by way of reimbursement of the cost for providing a particular facility - AO in coming to the conclusion that the payment was for fee for technical services has relied on the fact that there has been use of sophisticated equipments, this by itself will not be sufficient to holding technical services being rendered. As decided in CIT v. Bharati Cellular Ltd.(2008 (10) TMI 321 - DELHI HIGH COURT) that to call a payment as fee for technical service, the payment should be for use of human skills and where only machines perform or give some services that would not be enough to call a payment a payment for FTS - As submitted by DR that the basic data is entered by human effort and therefore the payment should be treated as FTS cannot be accepted because ultimately the machine only performs and no human element is involved - that the huge cost for installation of the system and the huge payment made by the Assessee by itself is an indication that the payment is FTS is without any merit as the percentage of payment received by the Assessee towards reimbursement compared to the total receipts in the form of freight etc., from shipping business in India is less than 1%. Thus the receipt in question cannot be considered as Fees for Technical services rendered. The amount in question received by the assessee from MIPL, MLIL and SIPL was not in the nature of FTS and the same being part of the income from shipping business was not taxable in India as per Article 9 of the DTAA since the place of effective management of the assessee company is situated in Denmark - in favour of assessee.

Issues Involved:
1. Taxability of amounts received from MIPL, MLIL, and SIPL.
2. Nature of the amounts received (whether it constitutes reimbursement or fees for technical services).
3. Applicability of Article 9 of the DTAA between India and Denmark.
4. Consideration of the amounts as business income and the existence of a permanent establishment in India.

Detailed Analysis:

1. Taxability of Amounts Received from MIPL, MLIL, and SIPL:
The primary issue in these appeals is whether the amounts received by the assessee from MIPL, MLIL, and SIPL towards their share of the shared IT Global Portfolio tracking system can be brought to tax in India. The assessee, a non-resident company incorporated in Denmark, argued that the income from shipping operations accruing in India is not taxable in India under Article 9 of the DTAA between India and Denmark. The Assessing Officer initially accepted this claim and did not tax the shipping income in India.

2. Nature of the Amounts Received (Reimbursement or Fees for Technical Services):
The assessee claimed that the amounts received were merely a 'cost sharing arrangement' and thus constituted reimbursement of expenses. However, the Assessing Officer contended that these payments were for technical services rendered by the assessee and taxed them under Article 13(2) of the DTAA as 'fees for technical service' at 20% under section 115A of the I.T. Act, 1961. The CIT(A) upheld this view, stating that the use of advanced technology and sophisticated systems by the assessee constituted technical services, and thus, the payments could not be considered mere reimbursements.

3. Applicability of Article 9 of the DTAA between India and Denmark:
The assessee argued that the receipts were intrinsically linked to the shipping business and thus covered by Article 9 of the DTAA, which exempts such income from taxation in India. The CIT(A) did not address this argument, focusing instead on the classification of the receipts as fees for technical services.

4. Consideration of the Amounts as Business Income and Existence of a Permanent Establishment in India:
The assessee also contended that if the receipts were considered income, they should be classified as business income. Since the assessee did not have a permanent establishment (PE) in India, such income should not be taxable in India. This argument was also not addressed by the CIT(A).

Tribunal's Findings:

Nature of Receipts:
The Tribunal referred to a similar case, Dampskibsselskabet af 1912 A/s, where it was held that the payments were not fees for technical services but reimbursements of costs. The Tribunal noted that the assessee maintained a global telecommunications facility essential for its international shipping business and that the costs were shared with its agents. The Tribunal concluded that the payments were for providing a facility, not for rendering technical services, and thus did not constitute fees for technical services.

Article 9 of the DTAA:
The Tribunal held that the receipts were part of the income from the shipping business and thus not taxable in India under Article 9 of the DTAA. The Tribunal emphasized that the activities facilitated international traffic operations and were ancillary to such operations, falling within the scope of Article 9(1) of the DTAA.

Permanent Establishment:
The Tribunal did not explicitly address the issue of a permanent establishment, as it concluded that the receipts were not taxable in India under Article 9 of the DTAA.

Conclusion:
The Tribunal allowed the appeals, holding that the amounts received by the assessee from MIPL, MLIL, and SIPL were not fees for technical services and were part of the income from the shipping business, exempt from taxation in India under Article 9 of the DTAA. The additions made by the Assessing Officer and confirmed by the CIT(A) were deleted, and the appeals were allowed in favor of the assessee.

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