2018 (2) TMI 1949 - AT - Income Tax

Profit derived from the operation of ships in international traffic - DTAA between India and Denmark - income deemed to accrue and arise in India - whether treated as Royalty as per Article 13 and section 9(1)(vi) and (vii) - nature of certain IT costs and Inland Haulage Charges IHC received by the assessee during the course of shipping business - HELD THAT - We find that both the issues, on similar facts and circumstances, have already been settled in assessee s favor in his own case for several other years 2017 (2) TMI 1356 - ITAT MUMBAI as held 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 - 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.

Summary

Issues Involved:
1. Taxability of IT system support services.
2. Taxability of Inland Haulage Charges (IHC).

Detailed Analysis:

1. Taxability of IT System Support Services:
The assessee, a Danish Public Limited Company engaged in international shipping, received ?20.53 Lacs for IT system support services, which it did not offer as income, claiming it was a reimbursement of costs from group companies/agents. The costs included infrastructure support software, workspace management systems, network costs, procurement costs, and other IT support services. The Assessing Officer (AO) disagreed, categorizing these receipts as Fees for Technical Services (FTS) taxable at 10% under treaty provisions.

The Dispute Resolution Panel (DRP) sided with the assessee, referencing past orders for similar cases, including decisions by the Tribunal and the Hon’ble Bombay High Court. The Tribunal reiterated that the IT costs were integral to the shipping business and not separate technical services, thus not taxable in India. The Tribunal emphasized that the costs were reimbursements without profit markup, aligning with the precedent set in prior judgments (e.g., DIT(IT) Vs. A.P. Moller Maersk A/s).

2. Taxability of Inland Haulage Charges (IHC):
The assessee received ?388.16 Crores as IHC, which it claimed were part of the shipping business and not taxable in India under Article-9 of the DTAA. The AO contended that these charges did not constitute income from international traffic and were taxable under Section 44B, estimating the taxable income at ?29.11 Crores.

The DRP supported the assessee’s stance, citing previous Tribunal orders and the Hon’ble Bombay High Court’s decision, which held that IHCs are integral to shipping operations and thus not taxable in India. The Tribunal noted that IHCs were directly connected to the transportation of goods, forming an inseparable part of the shipping business. This view was consistent with the Tribunal’s earlier decisions and the Hon’ble Bombay High Court’s ruling, which stated that such charges are covered under Article 8(2)(b)(ii) and (c) of the DTAA and not liable to tax in India.

Conclusion:
The Tribunal upheld the DRP’s directions, confirming that both IT system support services and IHCs were not taxable in India as they were integral to the international shipping business. The revenue’s appeal was dismissed, with the Tribunal relying on binding judicial precedents and consistent past rulings in favor of the assessee. The order emphasized the importance of adhering to DTAA provisions over domestic tax laws where applicable.