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TMI Blog2013 (11) TMI 827X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount received from MIPL was only recovery of proportionate cost incurred by the assessee for maintenance and up-gradation of the FACT and, therefore, it is in the nature of reimbursement of cost not chargeable to tax in India as the same was without any mark-up and was on cost to cost basis. Various judicial pronouncements were also relied upon in support of the contention that such a nature of reimbursement of cost cannot be brought to tax. These judicial pronouncements have been incorporated by the Assessing Officer from Pages-3 to 5 of the assessment order. Besides this, it was also submitted that the payment received from MIPL neither constitutes royalty nor fees for technical services either under the Income Tax Act, 1961 or under the DTAA. The assessee is not engaged in the business of providing SAP service and, therefore, it does not qualify as fees for technical services under section 9(1)(vii) or Article-13 of the DTAA. Various case laws were also relied upon in support that such services do not qualify as fees for technical services. These decisions have been incorporated by the Assessing Officer at Page-6 of the assessment order. Without prejudice, it was also submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the DTAA and ₹ 60,04,349 was taxed as fees for technical services @ 10%. 4. Before the learned Commissioner (Appeals), the assessee submitted that it is wholly engaged in the operation of ships in international traffic and in order to carry on its business operations in the efficient manner and also as a necessary business requirement, the assessee has developed and maintained SAP based ERP system software solution called FACT for tracking and recording various transactions. The assessee requires its agent to only use FACT system software for smooth operation of Containers Inland Services (CIS) around the world. For this purpose, the assessee has entered into service level agreement with MIPL w.e.f. 1st January 2008 and under this arrangement expenditure incurred towards FACT system software is allocated on the basis of weighted number of users. Various tools of the FACTS system software were also elaborated before the learned Commissioner (Appeals) which has been incorporated in Para-4.1 of the appellate order. It was further submitted that this FACT system software is used by CIS Division of MIPL which handles the container freight, equipment repairs maintenance an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is further seen that the Hon'ble Mumbai Tribunal had rendered a judgment in the case of 1912, an entity which merged into the appellant, on a similar IT issue holding that the payments received on account global tracking system are intrinsically linked to shipping income as provide under article 9 of DTAA. Although in the present year, the IT charges relate to the CIS division, being in the nature of an ERP-based solution (as opposed to global IT portfolio charges which relate to the Agency Division in the past years), I find that the issue is covered in favour of the appellant, in principle. The Hon'ble Tribunal has categorically held that payments received by the appellant for providing IT communication facilities to its agent are covered by article 9 of the DTAA. This order of the Hon'ble Tribunal had beer! followed by my predecessor while dealing with appeal for AY 2005-06. In light of the above orders in the appellant's own case, I hold that the amounts received by the appellant towards FACT system software are not FTS but are its income derived from operation of ships in international traffic and therefore not chargeable to tax in India under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Under the new provisions of customs rules, containers are now kept in various container stations, which are kind of warehouses and this software helps in tracking these containers, accounting the freight receipts, assisting in integrated billing system and various other warehouses functionality. Thus, the software is only for facilitating the working under CIS system. In the earlier years also, the software were developed for supporting various kind of communication services and tracking services of the containers and the handling system. The usage of such software by the agents and the payment of cost thereon were not only held by the Tribunal as part of shipping activities but also not falling under the ambit of FTS under Article-13 or section 9(1)(vii). He referred to the serious of decisions which have been rendered in assessee's case and drew our specific attention to order dated 11th June 2010, passed in ITA no.2083 to 2085/Mum./2009, for the assessment years 2001-02 to 2003-04. The Tribunal, in this decision, has not only considered the Article-9 of the DTAA but also the provisions of section 9(1)(vii) and Article-13 for coming to the conclusion that the receipts by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only. This software is used by CIS division, which handles tracking of the containers, accounting and integrated billing of freight receipts, warehouse functionality, etc. which in turn, helps the assessee in conducting its shipping business in more effective and efficient manner globally. This software in fact is a tool and integrated part of shipping operations only. Usage of software cannot be segregated from such activities of over all shipping operations so as to hold it as rendering of any independent technical services. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnecting a town with its airport primarily to provide access to and from that airport to the passengers of its international flights. 7. A further example would be that of an enterprise that transports passengers or cargo by ships or aircraft operated in international traffic which undertakes to have those passengers or that cargo picked up in the country where the transport originates or transported or delivered in the country of destination by any mode of inland transportation operated by other enterprises. In such a case, any profits derived by the first enterprise from arranging such transportation by other enterprises are covered by the paragraph even though the profits derived by the other enterprises that provide such inland transportation would not be. 27. Eminent Author Klaus Vogel on double taxation conventions, Third Edition at page 484 while dealing with article 8 of the OECD model convention has expressed the following opinion on the issue:- In addition to the transportation of passengers and freight typically included in the term operation of ships or aircraft, Article 8 extends to cover all activities connected with such transportation services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. 11. Once in assessee's own case 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, we also 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. 12. 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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