2020 (7) TMI 599 - AT - Income Tax

Royalty/ Fees for Technical Services - Receipt of Business Support Charges - whether what has been recovered from DIPL is the general maintenance and running cost of various global systems which does not amount to the definition of Royalty as prescribed under Explanation 2 to Section 9(1)(vi) ? - Whether appellant s contention that business support charge receipt is reimbursement of cost incurred and hence not chargeable to tax ? - HELD THAT - In the instant case, the appellant acts as the central coordinator for all Damco entities across the globe. As a central coordinator, the appellant procures from various service providers viz. insurance, procurement of various product and information technology related support services etc. needed by Damco entities across the globe. The appellant enters into MSA with Damco operating entities and therefore, recovers the cost of procurement/provision from these entities. All these costs are only reimbursed to the appellant and there is no mark-up. Receipt of business support charge is not taxable as fees for technical services/royalty under the Act or the relevant DTAA as the same is purely in the nature of reimbursement of cost. Services/procurement rendered by the appellant are in the nature of coordinating services whereby various costs incurred are pooled together and charged/recovered as reimbursement costs on the basis of various allocation keys like number of Headcount/Headcount usages/Number of users/Country operational cost/Country revenue etc., which is uniformly applied across the group. Reimbursement of cost related to Global Service Centre is in effect provided to the group by Maersk Global Services Centre and is in the nature of low end BPO and hence cannot come in the field of managerial, technical and consultancy. Similarly, the business support services related to procurement and issuance are also reimbursement of cost incurred for the benefit of the group companies and not technical, managerial or consultancy in nature. Similarly, reimbursement of cost towards administrative services cannot be held to be in the nature of technical, managerial and consultancy in nature. Thus we hold that the receipt of business support charge is not taxable as fees for technical services/royalty under the Act or the relevant DTAA as the same is purely in the nature of reimbursement of cost.- Decided in favour of assessee.

Issues Involved:
1. Whether the business support charges received by the appellant are in the nature of Royalty/Fees for Technical Services (FTS) under the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA).
2. Whether the business support charges received by the appellant are merely reimbursements of costs and hence not chargeable to tax.
3. Whether the AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act.
4. Whether the AO erred in the levy of interest under Sections 234B and 234C of the Act.
5. Whether the AO erred in calculating tax at 10.8% instead of 10%.

Detailed Analysis:

1. Nature of Business Support Charges:
The primary issue revolves around whether the business support charges of ?26,25,81,349/- received by the appellant are in the nature of Royalty/Fees for Technical Services under the Income Tax Act and the DTAA between India and Denmark.

The appellant, a company incorporated in Denmark and part of the A.P. Moller Maersk group, acts as a central coordinator for various support services to all Damco entities globally. The appellant procures services like insurance, accounting software, travel, and fixed assets at a group level, which are subsequently recovered from various group entities, including Damco India Pvt. Ltd. (DIPL), without any mark-up.

The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) concluded that the services provided by the appellant were technical in nature, thus taxable as royalty and fees for technical services. The AO's decision was based on the Management & Service Agreement, which indicated that DIPL was getting access to the group IT network systems and related maintenance and support services.

2. Reimbursement of Costs:
The appellant argued that the charges were merely reimbursements of costs incurred for the benefit of the group entities and did not constitute income. The appellant emphasized that these costs were pooled together and charged/recovered as reimbursements based on various allocation keys like headcount usage, operational cost, and revenue, uniformly applied across the group.

The Tribunal found that the services rendered by the appellant were in the nature of coordinating services, and various costs incurred were pooled together and charged as reimbursements. The Tribunal observed that the reimbursement of costs related to Global Service Centre was in the nature of low-end BPO and could not be classified as managerial, technical, or consultancy services.

3. Legal Precedents:
The Tribunal relied on several legal precedents to support its decision:
- A.P. Moller Maersk AS (2017): The Supreme Court held that payments received for providing a global telecommunication facility were not taxable as fees for technical services.
- TUV Bayren (India) Ltd. (2012): The Bombay High Court held that audit work and certification did not come within the realm of fees for technical services.
- Kotak Securities Ltd. (2016): The Supreme Court explained that technical services denote services catering to the special needs of the consumer, distinguishing them from general facilities.
- Maersk Global Service Centres (India) Pvt. Ltd. (2012): The Tribunal held that services performed by Maersk GSC were in the nature of low-end BPO.
- Linde AG: The Tribunal held that procurement fees were commercial profits and not fees for technical services.
- Creative Infocity Ltd. (2017): The Gujarat High Court held that reimbursement of expenses was not fees for technical services but simple reimbursement.

4. Penalty Proceedings and Interest Levy:
The Tribunal did not delve into the penalty proceedings under Section 271(1)(c) and the levy of interest under Sections 234B and 234C, as the primary issue was resolved in favor of the appellant.

5. Tax Calculation:
The Tribunal did not address the issue of incorrect tax calculation at 10.8% instead of 10%, as the primary issue was resolved in favor of the appellant.

Conclusion:
The Tribunal concluded that the receipt of business support charges of ?26,25,81,349/- was not taxable as fees for technical services or royalty under the Income Tax Act or the relevant DTAA, as it was purely in the nature of reimbursement of costs. The Tribunal set aside the order of the CIT(A) and allowed the appeal filed by the assessee for AY 2012-13 and AY 2013-14. The Tribunal also addressed the procedural delay in pronouncing the order due to the COVID-19 pandemic, citing extensions granted by the Supreme Court and the Bombay High Court.

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