2017 (2) TMI 1356 - AT - Income Tax

Profit derived from the operation of ships in international traffic - DTAA between India and Denmark - whether treated as Royalty as per Article 13 and section 9(1)(vi) and (vii) - income deemed to accrue and arise in India - incurring expense towards operation maintenance and upgradation of SAP based ERP solution (FACT)- Held that - As decided in assessee s own case amendment is carried out under domestic law same cannot be read into the treaty. Accordingly we are of the view that The FACT cost represent merely allocation of cost incurred and hence in the nature of reimbursement of expenses not having any element of profit embedded in it. Such recovery only includes proportionate cost incurred by the assessee for the development and maintenance of the system. Therefore such recoupment of cost does not constitute income chargeable to tax in the hands of the assessee. It is undisputed that he assessee is in business of conducting operation of ships in international traffic and not engaged in the business of providing communication services and therefore per se no separate royalty/FTS were rendered by the assessee. Hence we allow this issue of assessee s appeal. Income from Inland Haulage Charges IHC of cargo - whether covered under Article 9 of the tax treaty between India and Denmark and therefore not liable for tax in India and that section 44B - Held that - As decided in assessee s own case the activities of the IHC are connected directly or an ancillary activity that provides minor contribution and should not be regarded as a separate business to the operations of ships. These activities are linked or connected to each other and as such one cannot say that one is to be conducted efficiently without the other and which have a nexus to the main business of the assessee of operations of ships should be considered as integral part of income from shipping operations. Accordingly we allow the claim of assessee - repayment of money may be construed as reimbursement only if it is bereft of profits for the services rendered. There is no profit element in the pro rata costs paid by the agents of the assessee to the assessee and accordingly we have no hesitation in holding that the amounts paid by the agents to utilize the amount arose out of the shipping business cannot be brought to tax as sought to be done - revenue appeal dismissed.

Issues Involved:
1. Treatment of amounts received towards SAP-based ERP (FACT) and IT and procurement costs.
2. Taxability of income from Inland Haulage Charges (IHC) of cargo under the India-Denmark DTAA.
3. Applicability of Section 44B of the Income Tax Act to Inland Haulage Charges.
4. Determination of whether Inland Haulage Charges are deemed to accrue in India under Section 9(1)(i) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of amounts received towards SAP-based ERP (FACT) and IT and procurement costs:
The primary issue is whether the amounts received for the SAP-based ERP system (FACT) and IT procurement costs should be treated as profits derived from the operation of ships in international traffic under Article 9 of the DTAA between India and Denmark or as royalty under Article 13 and Section 9(1)(vi) and (vii) of the Income Tax Act.

The tribunal noted that the issue was previously adjudicated in favor of the assessee in earlier assessment years. The FACT system is integral to the shipping business, used for efficient management of operations globally, and the costs recovered are merely reimbursements without any profit element. Various judicial precedents, including decisions by the Hon’ble Bombay High Court, support this view, holding that such reimbursements are not taxable in India as they are part of the shipping operations under Article 9(1) of the DTAA.

2. Taxability of income from Inland Haulage Charges (IHC) of cargo under the India-Denmark DTAA:
The tribunal addressed whether income from Inland Haulage Charges (IHC) is covered under Article 9 of the tax treaty between India and Denmark and, therefore, not liable for tax in India.

The tribunal and the Hon’ble Bombay High Court have consistently held that IHC is directly connected to the transport of containers and is an integral part of the shipping operations. The tribunal emphasized that the activities related to IHC are ancillary and contribute to the main business of shipping operations, making them part of the income from shipping operations under Article 9(1) of the DTAA.

3. Applicability of Section 44B of the Income Tax Act to Inland Haulage Charges:
The tribunal examined whether Section 44B, which deals with the taxation of shipping business income, applies to IHC.

The tribunal concluded that IHC is necessarily connected with the transport of containers and is an integral part of the shipping operations. Therefore, Section 44B does not apply separately to IHC, as it is included within the term "operations of ships" under Article 9(1) of the DTAA.

4. Determination of whether Inland Haulage Charges are deemed to accrue in India under Section 9(1)(i) of the Income Tax Act:
The tribunal considered whether IHC should be deemed to accrue or arise in India under Section 9(1)(i) of the Income Tax Act.

The tribunal and the Hon’ble Bombay High Court have held that IHC is part of the international shipping operations and, under the DTAA, such income is taxable only in Denmark. The activities related to IHC are directly connected to the shipping operations and do not constitute a separate business, thus not falling under Section 9(1)(i).

Conclusion:
The tribunal upheld the directions of the DRP, dismissing the revenue's appeal. The amounts received for the SAP-based ERP system (FACT) and IT procurement costs are not taxable as royalty or fees for technical services but are part of the shipping operations under the DTAA. Similarly, income from IHC is covered under Article 9 of the DTAA and is not taxable in India. The tribunal's decision aligns with previous rulings by the Hon’ble Bombay High Court and other judicial precedents.

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