2013 (11) TMI 827 - AT - Income Tax

Indo Denmark DTAA - Taxability of software as Royalty or FTS - Shipping Business - income from software usage which has been developed and maintained by the assessee Held that - Article-9(1) of Indo Denmark DTAA provides that the profits derived from operations of the ships in international traffic shall be taxable at a place where the effective management of the enterprise is situated and such a profit is exempt from tax in the other contracting State. The term Profit under this Article has to be construed more broadly so as to include not only the activities directly connected with the shipping operations but also to include income from activities which facilitates or support such operation as well as any ancillary activities - The OECD commentary on Article-8 (similar to Article-9 of the Indo-Denmark DTAA) also expresses the same view. If any activity is directly linked with carrying on shipping operations and results into some kind of an income, then it has to be treated as a part of such shipping operations only. In assessee s own case of the earlier year, it has been held that the cost recovered from the various agents towards usage of software are directly connected with the shipping operations then the same has to be treated as covered under Article-9(1) and, hence, it cannot be taxed in India. Thus, respectfully following the judicial precedence, held that any kind of receipts recovered by way of software usage/development cost from MIPL cannot be taxed in India under Article-9(1) of DTAA. Further, this receipt also cannot be taxed as fees for technical services or royalty independently because in the present case, the assessee is not rendering any service of managerial, technical or consultancy to its agent or group entities by allowing its group companies to be usage of software. The assessee s main income is only from freight receipt received from operations of ships and it is not providing any technical service to them. It has developed a software for running of shipping business globally in a more effective and efficient manner and access of such software has been provided to various agents/group companies all over the world who are using this software for facilitating the freight receipts from shipping, for which they are reimbursing the cost to the assessee without any mark-up. Such a recovery of a cost cannot be held to be fees for technical services Decided against the Revenue.

Summary

Issues Involved:
1. Whether the payments received by the assessee are in the nature of royalty or fees for technical services under section 9(1)(vii) of the Income Tax Act, 1961 and Article 13(4) of Indo-Denmark DTAA.
2. Whether the payments received are covered under Article 9(1) of the Indo-Denmark DTAA, exempting them from tax in India.

Issue-wise Detailed Analysis:

Issue 1: Nature of Payments as Royalty or Fees for Technical Services

The Revenue challenged the decision of the Commissioner (Appeals) who held that the payments received by the assessee were not in the nature of royalty or fees for technical services. The Assessing Officer had treated the payments received from Maersk India Pvt. Ltd. (MIPL) for IT support services as fees for technical services and taxed them under section 115A of the Income Tax Act, 1961 at 10%. The Assessing Officer relied on several judicial pronouncements to support this view, including cases like E.P.W. Da Costa And Anr. v. Union Of India and CIT v. Travel Corporation Of India Ltd.

The Commissioner (Appeals) and the Tribunal, however, found that the payments were reimbursements for the use of the SAP-based ERP system software called FACT, which was used for tracking and recording various transactions related to the shipping business. The Tribunal noted that the software was integral to the shipping operations and was used by the CIS division of MIPL for accounting, integrated billing, and warehouse functionality. It was concluded that these payments were not for any independent technical services but were part of the overall shipping operations.

Issue 2: Applicability of Article 9(1) of Indo-Denmark DTAA

The Tribunal examined whether the payments received for the use of the FACT system software were covered under Article 9(1) of the Indo-Denmark DTAA. Article 9(1) provides that profits derived from the operation of ships in international traffic are taxable only in the country where the enterprise's effective management is situated, exempting such profits from tax in the other contracting state.

The Tribunal found that the software developed by the assessee was essential for the efficient operation of its shipping business and that the payments received were directly connected to the shipping operations. The Tribunal referenced its own decisions from previous years, where similar payments were considered part of the shipping operations and thus not taxable under Article 9(1). The Tribunal also drew on OECD commentary and other judicial precedents, such as the Delhi High Court's decision in DIT v. K. Royal Dutch Airline, to support its conclusion.

Conclusion:

The Tribunal upheld the Commissioner (Appeals)'s decision, ruling that the payments received by the assessee for the use of the FACT system software were not in the nature of royalty or fees for technical services. Instead, these payments were part of the overall shipping operations and were covered under Article 9(1) of the Indo-Denmark DTAA. Therefore, the payments were not taxable in India. The Revenue's appeal was dismissed.

Order Pronouncement:

The order was pronounced in the open Court on 8th November 2013.