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TMI Blog2020 (1) TMI 292X X X X Extracts X X X X X X X X Extracts X X X X ..... section 9(1)(vi) is not a part of the DTAA. We have noted above that on the plain language of section 9(1)(vi) de hors the effect of Explanation 4, the consideration does not fall in the realm of 'royalty'. Now we turn to the 'Maintenance charges' of the software paid by the assessee, which have been impliedly treated by the authorities below as 'fees for technical services' u/s 9(1)(vii) as well as the DTAA. Though there is no separate quantification of such an amount, but the same is a part of the overall consideration as per the Agreements. Section 9(1)(vii) deals with income by way of 'fees for technical services'. Explanation 2 gives definition of 'fees for technical services' to mean any consideration for the rendering of any managerial, technical or consultancy services. As the maintenance of software is in the nature of a technical service, it is held that the same is covered u/s. 9(1)(vii) of the Act. Reverting to the DTAA, it is seen that para 4 of the Article 13 deals with 'fees for technical services'. In the present context, it provides that the term fees for technical services means consideration for services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,85,69,596/-. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transactions. The TPO accepted the international transaction in question at ALP and did not recommend any transfer pricing adjustment. The AO, vide his order dated 14-03-2016 passed u/s. 143(3) r.w.s. 92CA(4) of the Act observed that the assessee debited Software Maintenance charges at ₹ 6.86 crore, which amount was about 400% higher in comparison with the preceding year, in which such Software charges stood at ₹ 1.67 crore. The assessee was called upon to give the details of the expenses and further comments as to why no deduction of tax at source was made from such payment. The assessee justified increase in Software services cost by stating that earlier it was using only Ocean Agents Accounting and Reporting Financial Tool provided by CMA CGM, France, its Associated Enterprise (AE) and from this year, it started using two more new Business Reporting tools, viz., LARA and DIVA provided by its AE. On the question as to why no deduction of tax at source was made, the assessee submitted that the amount was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee failed to withhold tax on the payment of ₹ 6.85 crore and odd made to its AE, namely, CMA CGM, France. Whereas the case of the assessee is that no deduction of tax at source was warranted, the Revenue has set up a case that the amount was chargeable to tax in India in the hands of the CMA CGM, France and hence the assessee was obliged to deduct tax at source. The rival contentions can be properly appreciated by firstly examining the nature of services availed by the assessee under the respective Agreements for using these Software, namely, LARA DIVA on one hand and the Ocean on the other. 5. In so far as services under LARA DIVA are concerned, both were provided to the assessee under 'Lara and Diva IT Agreement' dated 23-12-2011 effective from 01-01-2011, a copy of which has been placed at page 130 onwards of the paper book. Preamble of the LARA and DIVA IT Agreement states that: 'CMA CGM (i.e. the French AE) is a company acting in the maritime transport which operates a fleet of vessels (and notably container ships) over worldwide shipping lines and whereas in order to pursue its business activity, CMA CGM has appointed an international netwo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on LARA data, DIVA provides simple operation list/reports, decisional pivot table, cube and monitoring tools. The tools provided under DIVA are : - Booking Forecasts - Operational list of loading, discharge and transshipment - Controlling Reports on Freighting and Invoicing - Control report of Detention and Demurrage - Report for disbursement account checking - Logistics and Tracking reports - Productivity, quality and performance monitoring - Sales activity and commercial reporting 7. On an overview of the relevant clauses of the LARA and DIVA IT Agreement, it is palpable that LARA and DIVA applications are meant for use by different entities of the CMA CGM all over the world so as to facilitate the business operations of CMA CGM group, which are confined to shipping. These two applications are basically aimed at facilitating the shipping business operations of the assessee and CMA CGM, France. 8. Now we turn to the other Agreement for use of Ocean IT System. A copy of such Agreement has been placed at page 141 onwards of the paper book. Preamble of the Ocean IT System Agreement is on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession', if any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India etc. on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139. Section 195 of the Act provides that any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salaries ) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. Instantly, we are not concerned with any interest payment by the assessee to CMA CGM, France. Thus, section 195 will be attracted only on the assessee paying to CMA CGM, France any 'sum chargeable under the provisions of this Act'. When we read section 40(a)(i) in juxtaposition to section 195, the position which emerges is that the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lement in the hands of the recipient. 13. We have noted supra that CMA CGM, France is involved in the shipping business. At this stage, let us examine the relevant parts of Article 9 of the DTAA with France, as is applicable to CMA CGM, France, dealing with 'Shipping' income, as under :- '1. Profits derived by an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in that Contracting State. 2. Notwithstanding the provisions of paragraph 1, such profits may be taxed in the other Contracting State from which they are derived provided that the tax so charged shall not exceed : (a) during the first five fiscal years after the entry into force of this Convention, 50 per cent, and (b) during the subsequent five fiscal years, 25 per cent, of the tax otherwise imposed by the internal law of that Contracting State. Subsequently, only the provisions of paragraph 1 shall be applicable. 3. .. 4. For the purposes of this article interest arising on funds connected with the operation of ships in international traffic shall be regarded as profits derived from the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue its business activities, CMA CGM, France appointed its affiliates for the other countries. The assessee in question is one of such affiliates, who is looking after Indian operations of CMA CGM, France. The provision of the software by CMA CGM, France to its worldwide entities is mainly aimed at facilitating its shipping business. If that be the position, then the amount received by CMA CGM, France from the assessee will assume the character of profit derived from the operation of ships as it is inextricably linked with its shipping activity. 17. The Mumbai Bench of the Tribunal in A.P. Moller Maersk v. DDIT (IT) [2013] 33 taxmann.com 44 (Mumbai) (Trib.)considered a case in which the assessee, a non-resident, was engaged in the business of shipping. In the course of its international shipping business, the assessee received certain amount from MIPL, LIL and SIPL on account of cost shared cost of global tracking system which was considered as linked to the shipping income. The AO held such amount to be Royalty/Fees for technical services. The Tribunal upheld the action of the CIT(A) in treating the amount as profit derived from operation of ships. Eventually, when this ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of CMA CGM, France. Ex-consequenti, there will be no obligation on the part of the assessee to deduct tax at source and the fortiori is that there will not be any disallowance u/s.40(a)(i) of the Act. 20. Now let us examine the case from the perspective of the authorities below, whereby it has been held that the amount paid/payable by the assessee on this count is royalty and fees for technical services under the Act and the DTAA does not come to the rescue of the assessee. 21. On going through the above clauses of the Agreements for which the assessee paid Software Maintenance charges, it emerges that two types of services were availed by the assessee. First and the foremost is the assistance in carrying out the business operations, such as, in sales, quotation/booking, container tracking, export import documentation and disbursements of accounts. The second, which is a small part of the overall amount, concerns with the maintenance of the information system of LARA DIVA and Ocean. The authorities below have held that the amount paid by the assessee is not only 'royalty' towards use of software but also 'fees for technical services'. Implie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance because the amendment has been brought in by the Finance Act, 2012, which, in normal circumstances, would have been effective from financial year starting from 01-04-2012. As the assessment year under consideration is 2012-13 with the corresponding financial year from 2011-12, the assessee at the material time could not have anticipated that a future provision would make the income chargeable to tax retrospectively in the hands of the payee thereby mandating it to deduct tax at source. Even if this insertion is retrospective, it cannot take the hands of clock back in time in so far as the deduction of tax at source is concerned since the time for deduction of tax at source stood expired before the insertion of the Explanation 4. With the retrospective insertion of the Explanation 4 by the Finance Act, 2012, the amount may become chargeable to tax in the hands of the recipient subject to other provisions, but certainly it cannot cast an obligation on the payer to deduct tax at source during the period in which the Explanation 4 was actually not there on the statute. It is axiomatic that law cannot require an impossible to be complied with. Resultantly, it is held that the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the laws of that Contracting State (India). Going by the mandate of para 2, royalties and fees for technical services paid by an Indian enterprise to a French enterprise can also be taxed in the hands of the French enterprise in India. However, what is material for consideration is the definition of 'royalties' and 'fees for technical services' as given in the Article 13, which is as under:- 3. The term royalties as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 4. The term fees for technical services as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15, in consideration for services of a managerial, technical or consult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sole business needs, with no rights to sublicense whatsoever. The Affiliated Company shall not attempt or permit to decompile or reverse-engineer any software licensed under this Agreement. 31. On going through the above clauses of the Agreements, it is vivid that the assessee was allowed the use of the software for its own business purpose and there was no permission to sub-licence the same. There is a specific bar on the assessee in not sub-licensing the software, which were to be used for its sole business needs. In other words, the consideration was for the use of software for its own business purpose and not for the use of, or the right to use, any copyright of software. As the consideration payable by the assessee for use of LARA, DIVA and Ocean was only for the use of the software for its own business purpose and not having right to copyright, the same will not constitute 'Royalties' within Article 13(3) of the DTAA. 32. Even if for a moment, we presume that the amount is chargeable to tax in the hands of the CMA CGM, France as royalty u/s 9(1)(vi) of the Act with the assistance of Explanation 4, as urged by the ld. DR, the same would escape taxati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later.' 37. The above para contains the Most Favoured Nation (MFN) clause in the DTAA between India and France, which seeks to provide that if India, after 1.9.1989, has limited, inter alia, its scope of fees for technical services in a DTAA with any other OECD country, then such limited scope shall stand substituted in the DTAA with France. Portuguese Republic is a member of the OECD with which Indian has entered into a DTAA on 30.4.2000. The term 'fees for included services' has been defined in the Article 12(4) of the DTAA between India and Portuguese, which reads as under : - 'For the purposes of this Article fees for included services means payments of any kind, other than those mentioned in Articles 14 and 15 of this Convention, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services: (a) are ancillary an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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