DDIT (IT) 1(1), MUMBAI V. A.P. MOLLER MAERSK A/S, MUMBAI

ITA 1807/MUM/2012

• Counselvise Citation: 180719914 RSA 2012
• Duration Of Justice: 1 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-11-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 18-07-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 15-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEERAJA PRADHAN
• Assessee Lawyers: PORUS KAKA AW MR DIVESH CHAWLA
• Keywords: Double taxation relief
• Section: 2; 143(3)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI , , , BEFORE SHRI RAJENDRA SINGH , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEMBER . / ITA NO. 1807 / MUM ./ 2012 ( / ASSESSMENT YEAR : 2008 09 ) DY. DIRECTOR OF INCOME TAX (INTEREST TAX) 1(1), SCINDIA HOUSE BALLARD ESTATE, N.M. ROAD MUMBAI 400 038 .. / APPELLANT V/S M/ S. A.P. MOLLER MAERSK A/S C/O MAERSK INDIA PVT. LTD. EMPIRE INDUSTRIES COMPLES 414 SENAPATI BAPAT MARG LOWER PAREL, MUMBAI 400 013 .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAECA4801C / REVENUE BY : MS. NEERAJA PRADHAN / ASSESSEE BY : M R. PORUS KAKA A/W MR. DIVESH CHAWLA / DATE OF HEARING 22.10.2013 / DATE OF ORDER 08.11.2013 / ORDER , / PER AMIT SHUKLA , J.M. THE PRESENT APPEAL HAS BEEN PREFERRED BY THE REVENUE, CHALLENGING THE IMPUGNED ORDER DATED 29 TH SEPTEMBER 2011 , PASSED BY THE LEARNED COMMISSIONER (APPEALS) X , MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED M/S. A.P. MOLLER MAERSK A/S 2 UNDER SEC TION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ) FOR THE ASSESSMENT YEAR 20 08 09 . THE SOLE DISPUTE FOR OUR ADJUDICATION ARISING FROM THE PRESENT APPEAL IS THAT THE LEARNED COMMISSIONER (APPEALS) HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT TH E PAYMENTS RECEIVED BY THE ASSESSEE ARE IN THE NATURE OF ROYALTY OR FEES FOR TECHNICAL SERVICES IN VIEW OF THE PROVISIONS OF SECTION 9(1)(VII) & (VII) OF THE ACT AS WELL AS PER ARTICLE 13(4) OF INDO DENMARK DTAA. 2 . FACTS IN BRIEF : THE ASSESSEE, A.P. MOLLER MAERSK A/S , IS A DANISH PUBLIC LIMITED COMPANY AND IS TAX R ESIDENT OF DENMARK. IT IS MAINLY ENGAGED IN THE BUSINESS OF OPERATION OF SHIPS, CHARTERING AND OTHER RELATED ACTIVITIES OF SHIPPING IN INTERNATIONAL TRAFFIC, WHICH IS COVERED U NDER ARTICLE 9 OF D OUBLE TAXATION AVOIDANCE AGREEMENT (FOR SHORT DTAA ) BETWEEN INDIA AND DENMARK. ITS SHIPPING OPERATION IN INDIA IS CARRIED OUT BY MAERSK INDIA PVT. LTD. (FOR SHORT MIPL ) WHICH IS AN AGENT OF THE ASSESSEE. THE ASSESSEE, IN ITS RETURN OF INCOME, HAS SHOWN GROSS FREIGHT EARNING OF ` 37,96,29,97,137, WHICH WAS CLAIMED AS NOT TAXABLE AS PER ARTICLE 9(1) OF THE DTAA , AS THE PROFITS DERIVED FROM THE OPERATION OF SHIPS IN INTERNA TIONAL TRAFFIC WAS CARRIED OUT BY THE ASSESSEE WAS FULLY TAXABLE IN DENMARK , WHICH I S THE EFFECTIVE PLACE OF MANAGEMENT OF THE ASSESSEE. DURING THE COURSE OF THE SCRUTINY PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS RECEIPTS FROM ITS OPERATION ON ACCOUNT OF I.T. SUPPORT SERVICES GIVEN TO MIPL WHICH WAS NOT OFFERED FOR IN COME. IN RESPONSE TO THE SHOW CAUSE NOTICE, IT WAS SUBMITTED THAT THE ASSESSEE HAS RECOVERED AN AMOUNT OF ` 60,04,349 FROM MIPL TOWARDS SHARE OF COST OF SAP SOFTWARE SOLUTION I.E., FACT FOR TRACKING AND RECORDING VARIOUS TRANSACTIONS. THE AMOUNT RECEIVED F ROM 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 O N 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 M/S. A.P. MOLLER MAERSK A/S 3 PRONOUNCEMENTS HAVE BEEN INCORPORATED BY THE ASSESSING OFFICER FRO M PAGES 3 TO 5 OF THE ASSESSMENT ORDER. BESIDES THIS, IT WAS ALSO SUBMITTED THAT THE PAYMENT RECEIVED FROM MIPL NEITHER CONSTITUTE S ROYALTY NOR FEES FOR TECHNICAL SERVICES EITHER UNDER THE INCOME TAX ACT, 1961 OR UNDER THE DTAA. THE ASSESSEE IS NOT ENG AGED 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 SUBMITTED THAT EVEN IF, WITHOUT ADMITTING, THAT THE ASSESSEE HAS A P.E. IN IN DIA, EVEN THEN THE AMOUN T RECOVERED TOWARDS FACT COST WOULD NOT BE TAXABLE IN INDIA, BECAUSE SUCH REIMBURSEMENT OF SOFTWARE COST FORMS INTEGRAL PART OF THE SHIPPING BUSINESS ONLY AND ARE DIRECTLY COVERED UNDER ARTICLE 9 OF THE DTAA AND, THEREFORE, THE SAME IS NOT TAXABLE IN INDIA . RELIANCE WAS PLACED ON THE DECISION OF THE TRIBUNAL, MUMBAI BENCH, IN DDIT V/S BALAJI SHIPPING U.K. LTD., 315 (AT) 62 (MUM.) AND IN DDIT V/S SAFMARINE MARINE CONLAENER LINES N.V., 314 (AT) 15 (MUM.). IT WAS ALSO BROUGHT TO THE NOTICE OF THE ASSESSING OFF ICER THAT IN CASE OF EARLIER ENTITY I.E., 1912 WHICH HAS BEEN MERGED WITH THE ASSESSEE IN THE YEAR 2003, THE TRIBUNAL, FOR THE ASSESSMENT YEAR 2001 02 TO 2003 04 HAS HELD THAT REIMBURSEMENT OF CERTAIN I.T. CHARGES CANNOT BE TAXED IN INDIA BECAUSE IT DIRECT LY RELATES TO THE ACTIVITIES WHICH ARE ANCILLARY, PREPARATORY AND AUXILIARY OF BUSINESS OF OPERATIONS OF SHIPS IN INTERNATIONAL TRAFFIC AND IS COVERED UNDER ARTICLE 9. 3 . THE ASSESSING OFFICER DID NOT ACCEPT THE ASSESSEES SUBMISSION AND HELD THAT THE PAYMEN TS MADE BY MIPL TO THE ASSESSEE ARE FOR USE OF SERVICES. WHAT HAS BEEN TERMED AS REIMBURSEMENT OF COST IS PAYMENT FOR TECHNICAL SERVICES PROVIDED BY THE ASSESSEE AND THE SAME HAS TO BE TREATED AS INCOME FROM FEES FOR TECHNICAL SERVICES IN THE HANDS OF TH E ASSESSEE AS WAS DONE IN THE EARLIER YEARS BY THE ASSESSING OFFICER. THEREAFTER, HE REFERRED TO ARTICLE 13 OF THE DTAA, WHICH DEFINES ROYALTY AND FEES FOR M/S. A.P. MOLLER MAERSK A/S 4 TECHNICAL SERVICES AND HELD THAT IT HAS TO BE TAXED UNDER THE SAID ARTICLE R/W SECTION 9 OF THE ACT. IN COMING TO HIS CONCLUSION, HE RELIED UPON THE FOLLOWING CASE LAWS: 1 . E.P.W. DA COSTA AND ANR. VS UNION OF INDIA, [1980] 121 ITR 751 (DEL.); 2 . CIT V/S TRAVEL CORPORATION OF INDIA LTD., [1994] 209 ITR 555 (BOM.); 3 . DANFOSS INDUSTRIES PVT. LTD., IN RE. [2004 ] 268 ITR 001 (AAR); AND 4 . STATE OF UTTAR PRADESH & ANR. V/S UNION OF INDIA, 130 SIC 001 (SC). RELYING ON THE RATIO OF THE AFORESAID DECISIONS, HE CAME TO THE CONCLUSION THAT THE PAYMENT RECEIVED BY THE ASSESSEE AS REIMBURSEMENT CHARGES FROM MIPL ARE IN T HE NATURE OF ROYALTY AND FEES FOR TECHNICAL SERVICES AND, ACCORDINGLY, HE TAXED THE AMOUNT @ 10% UNDER SECTION 115A. THE INCOME FROM THE SHIPPING BUSINESS WAS TAKEN AT NIL BY HIM IN VIEW OF THE PROVISIONS OF ARTICLE 9 OF 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 A ND 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 LEVE L AGREEMENT WITH MIPL W.E.F. 1 ST JANUARY 2008 AND UNDER THIS ARRANGEMENT EX PENDITURE 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 THI S FACT SYSTEM SOFTWARE IS USED BY CIS DIVISION OF MIPL WHICH HANDLES THE CONTAINER FREIGHT, EQUIPMENT M/S. A.P. MOLLER MAERSK A/S 5 REPAIRS & MAINTENANCE AND LOGISTIC BUSINESS. THE BROAD NATURE OF ACTIVITIES CARRIED OUT BY THE CIS DIVISION WERE DESCRIBED AS UNDER: CONTAINER FREIGHT STATION THIS INCLUDES PROVISION OF WAREHOUSING FACILITIES TO THE CUSTOMERS OF THE APPELLANT BY MOVING AND STORING CONTAINERS AT THE FACILITY MAINTAINED AT THE PORT. EQUIPMENT MAINTENANCE AND REPAIRS THIS INCLUDES MAINTENANCE AND REPAIRS OF CONTAINERS USED BY THE APPELLANT IN ITS BUSINESS ACTIVITIES FOR CARRIAGE OF CARGO FOR ITS CUSTOMERS. TRUCKING THIS INCLUDES CARRIAGE OF CONTAINERS FOR THE APPELLANTS CUSTOMERS FROM THE PORT TO THE ULTIMATE DESTINATION OF THE CUSTOMERS. THE CIS DIVISION OF THE MI PL USES THE FACT SYSTEM SOFTWARE FOR ITS ACCOUNTING, INTEGRATED BILLING SYSTEM, WAREHOUSE FUNCTIONALITY, ETC. WHICH IN TURN HELPS THE APPELLANT IN CARRYING ON ITS SHIPPING BUSINESS IN A MORE EFFECTIVE AND EFFICIENT MANNER . 5 . THUS, IT WAS SUBMITTED THAT THI S SOFTWARE WAS USED WHOLLY FOR SHIPPING OPERATIONS ONLY AND, THEREFORE, THE PAYMENT MADE FOR USE OF SUC H SOFTWARE CANNOT BE SEGREGATED FROM SHIPPING BUSINESS BESIDES THIS, VARIOUS DECISIONS OF THE TRIBUNAL IN ASSESSEES OWN CASE WERE RELIED UPON WHEREIN I T HAD BEEN CATEGORICALLY HELD THAT SUCH A PAYMENT OF USAGE OF SOFTWARE BY MIPL CANNOT BE TERMED AS FEES FOR TECHNICAL SERVICES ( FTS ) AND IT IS ONLY A PART OF OPERATION OF SHIPS ONLY WHICH CANNOT BE TAXED UNDER ARTICLE 9(1) OF THE DTAA. ALL THESE FACTS OF EARLIER YEARS HAVE BEEN DEALT BY THE LEARNED COMMISSIONER (APPEALS) IN HIS ORDER VIDE PARA 4.4 TO 4.8 OF HIS ORDER. 6 . THE LEARNED COMMISSIONER (APPEALS), AFTER APPRECIATING THE ASSESSEES SUBMISSION BASED ON THE MATERIAL PLACED ON RECORD AND ALSO THE E ARLIER DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE ON SIMILAR ISSUE, OBSERVED AND HELD AS UNDER: DECISION: I HAVE CAREFULLY CONSIDERED THE CONTENTIONS OF BOTH THE A.O. AS WELL AS THE APPELLANT. IT IS OBSERVED THAT THE FACT SYSTEM SOFTWARE SOLUTION H AS BEEN DEVELOPED BY THE APPELLANT FOR EFFICIENT AND EFFECTIVE CARRYING CUT OF CIS OPERATIONS AROUND THE WORLD. THIS FACT SYSTEM SOFTWARE IS USED BY ALL ITS GROUP COMPANIES CARRYING OUT CIS M/S. A.P. MOLLER MAERSK A/S 6 OPERATIONS. THE FACT SYSTEM SOFTWARE ASSISTS IN ACCOUNTING, INTEGR ATED BULLING, WAREHOUSE FUNCTIONALITY, ETC., WHICH IN TURN HELP THE APPELLANT IN CARRYING ON ITS SHIPPING BUSINESS IN A MORE EFFECTIVE AND EFFICIENT MANNER. IT IS FURTHER SEEN THAT THE HON'BLE MUMBAI TRIBUNAL HAD RENDERED A JUDGMENT IN THE CASE OF 1912, A N 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 CHAR GES 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 H ON'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 DEALIN G 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 A ND THEREFORE NOT CHARGEABLE TO TAX IN INDIA UNDER THE PROVISIONS OF ARTICLE 9(1) OF THE DTAA. GROUND NOS. 1 (A) AND 1(D) ARE ACCORDINGLY ALLOWED . 7 . BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTATIVE, AFTER REFERRING TO THE NATURE OF PAYMENT, AS DISCUSSED B Y THE ASSESSING OFFICER , SUBMITTED THAT THE EARLIER YEAR S TRIBUNAL ORDER CANNOT BE RELIED UPON , BECAUSE THE SOFTWARE USED IN THIS YEAR AS PER THE AGREEMENT DATED 1 ST JANUARY 2008, WAS DIFFERENT FROM THE SOFTWARE USED IN THE EARLIER YEARS. SHE ALSO SUBMITT ED THAT THE ENTIRE ASPECT OF THE AGREEMENT AS WELL AS THE NATURE OF THE SOFTWARE HAS NOT BEEN DISCUSSED EITHER BY THE LEARNED COMMISSIONER (APPEALS) OR BY THE ASSESSING OFFICER WHICH NEEDS TO BE RE EXAMINED AND THE MATTER SHOULD BE SET ASIDE TO THE FILE OF THE ASSESSING OFFICER. SHE FURTHER SUBMITTED THAT ONCE THE SOFTWARE HAS BEEN DEVELOPED BY THE ASSESSEE WHICH HAS BEEN GIVEN TO THE GROUP ENTITIES FOR USAGE AND ANY PAYMENT RECEIVED FROM USAGE OF SOFTWARE, HAS TO BE TAXED AS FTS OR ROYALTY ONLY . SHE THUS S TRONGLY RELIED UPON THE FINDINGS OF THE ASSESSING OFFICER . M/S. A.P. MOLLER MAERSK A/S 7 8 . IN THE COUNTER ARGUMENT, THE LEARNED SR. COUNSEL, MR. PORUS KAKA, ON BEHALF OF THE ASSESSEE SUBMITTED THAT THERE IS PRACTICALLY NO DIFFERENCE OF FACTS FROM THE EARLIER YEARS, WHICH HAVE BEEN DECI DED BY THE TRIBUNAL RIGHT FROM THE ASSESSMENT YEAR 2000 01 TO 2007 08. IN THE SERIES OF THE ORDER, THE TRIBUNAL INVARIABLE IN ALL THE ASSESSMENT YEARS , IN ASSESSEES OWN CASE HAS HELD THAT ON SIMILAR USAGE OF SOFTWARE BY THE AGENTS / GROUP ENTITIES DEVELOP ED BY THE ASSESSEE FOR ITS OPERATION OF SHIPPING BUSINESS CANNOT BE TAXED , EITHER AS FTS OR ROYALTY AND IT IS A PART AND PARCEL OF THE SHIPPING OPERATION S ONLY. ONCE THE ASSESSING OFFICER AT PARA 6 OF HIS ORDER HAS HIMSELF HELD THAT THIS ISSUE IS IDENTICAL TO THE EARLIER ASSESSMENT YEARS, THEN THE LEARNED DEPARTMENTAL REPRESENTATIVE CANNOT CONTRADICT THE FACTS IN THE PRESENT ASSESSMENT YEAR THAT THEY ARE DIFFERENT ON THE GROUND THAT THERE WAS A DIFFERENT VERSION OF THE SOFTWARE USED IN THIS YEAR. THE ERP SY STEM SOFTWARE SOLUTION WHICH IS CALLED AS FACT WAS IN FACT USED FOR CONTAINER INLAND SERVICES WHICH IS MAINLY FOR MANAGEMENT AND TRACKING OF CONTAINER WHICH ARE KEPT AT WAREHOUSE AND ALSO FOR ACCOUNTING OF FREIGHT RECEIPT, ETC. ALL THESE SOLUTIONS PROVIDED BY THE SOFTWARE ARE DIRECTLY LINKED AND IS INTEGRAL PART OF OVER ALL OPERATIONS OF THE SHIPPING BUSINESS IN AN EFFECTIVE MANNER . UNDER THE NEW PROVISIONS OF CUSTOMS RULES, CONTAINERS ARE NOW KEPT IN VARIOUS CONTAINER STATIONS , WHICH ARE KIND OF WAREHOUSE S 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 EARL I ER 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 B Y THE TRIBUNAL AS PART OF SHIPPING ACTIVITIES BUT ALSO NOT F A LLING 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 ASSESSEES CASE AND DREW OUR SPECIFIC ATTENTION TO ORDER DA TED 11 TH JUNE 2010, PASSED IN ITA NO.2083 TO 2085/MUM./2009, FOR THE ASSESSMENT YEARS 2001 02 TO 2003 04. THE TRIBUNAL, IN THIS M/S. A.P. MOLLER MAERSK A/S 8 DECISION, HAS NOT ONLY CONSIDERED THE ARTICLE 9 OF THE DTAA BUT ALSO THE PROVISIONS OF SECTION 9(1)(VII) AND ARTICLE 13 FOR COMI NG TO THE CONCLUSION THAT THE RECEIPTS BY WAY OF REIMBURSEMENT OF SOFTWARE BY VARIOUS AGENTS / GROUP ENTITY ARE PART AND PARCEL OF THE OPERATION OF SHIPS AND, HENCE, NOT TAXABLE UNDER ARTICLE 9(1) AND ALSO DO NOT FALL IN THE REALM OF FTS UNDER SECTION 9(1) (VII) R/W ARTICLE 13. 9 . HE FURTHER SUBMITTED THAT E VEN OTHERWISE ALSO , WHAT THE ASSESSEE HAS RECEIVED FROM MIPL , IS RECOVERY OF THE COST OF THE SOFTWARE WHICH IS BEING USED FOR THE SHIPPING BUSINESS AND, THEREFORE, IT CANNOT BE HELD AS FTS OR ROYALTY. MOREO VER, IN THIS CASE, THE RECEIPT OF ` 60,04,349, FROM REIMBURSEMENT OF COST OF SOFTWARE CONSTITUTES MUCH LESS THAN 2% OF THE OVER ALL RECEIPTS FROM SHIPPING BUSINESS. THEREFORE, IT CANNOT BE HELD THAT THE ASSESSEE WAS RENDERING ANY KIND OF SERVICE AS DEFINED IN SECTION 9(1)(VII) OR UNDER ARTICLE 13 OF THE DTAA TO MIPL. HE, THUS, STRONGLY RELIED UPON THE FINDINGS OF THE LEARNED COMMISSIONER (APPEALS) AND ALSO THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE EARLIER YEARS. 10 . WE HAVE HEARD THE RIVAL CO NTENTION, PERUSED THE RELEVANT FINDINGS OF THE AUTHORITIES BELOW AND THE MATERIAL AVAILABLE ON RECORD. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE IS WHOLLY ENGAGED IN THE BUSINESS OF OPERATION OF SHIPS IN THE INTERNATIONAL TRAFFIC AND ITS EFFECTIVE PLACE O F MANAGEMENT IS AT DENMARK. ALL ITS PROFITS FROM SHIPPING BUSINESS IS TAXED IN DENMARK ONLY. IN THE RETURN OF INCOME, THE GROSS RECEIPTS EARNED FROM OPERATIONS OF SHIPS HAS BEEN CLAIMED AS NON TAXABLE UNDER ARTICLE 9(1) OF THE INDO DENMARK DTAA AND THE SAM E HAS BEEN ALLOWED SO BY THE ASSESSING OFFICER IN HIS ORDER DATED 18 TH JANUARY 2011. HE HAS COMPUTED N I L INCOME UNDER THE HEAD SHIPPING BUSINESS . THE MAIN CONTROVERSY IS WITH REGARD TO THE TREATMENT OF AMOUNT OF ` 66,04,349 RECOVERED FROM MIPL TOWARDS SOFTWARE USAGE WHICH HAS BEEN DEVELOPED AND MAINTAINED BY THE ASSESSEE. THE ASSESSING OFFICER HAS TREATED THE SAID PAYMENT IN THE NATURE OF ROYALTY OR FTS UNDER THE PROVISIONS OF THE ACT AND ALSO UNDER THE DTAA. AS PER THE MATERIAL ON RECORD, THE SOFTW ARE DEVELOPED BY THE ASSESSEE IS BASED ON ERP M/S. A.P. MOLLER MAERSK A/S 9 SYSTEM WHICH IS THE SOFTWARE SOLUTION CALLED FACT FOR TRA CK ING AND RECORDING VARIOUS TRANSACTIONS. THIS SOFTWARE ENABLES THE VARIOUS AGENTS OF THE ASSESSEE ALL OVER THE WORLD ( WHICH HAVE ALSO BEEN TERMED AS GR OUP COMPANIES IN THE IMPUGNED ORDERS ) IN THE CONTAINER INLAND SERVICE WHICH ARE PART OF THE SHIPPING OPERATIONS ONLY . THIS SOFTWARE IS USED BY CIS DIVISION , WHICH HANDLES TRACKING OF THE CONTAINERS, ACCOUNTING AND INTEGRATED BILLING OF FREIGHT RECEIPTS , W AREHOUSE 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 O F OVER ALL SHIPPING OPERATIONS SO AS TO HOLD IT AS RENDERING OF ANY INDEPENDENT TECHNICAL SERVICE S . 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 TH E 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 DENM ARK DTAA) A LSO EXPRESSES THE SAME VIEW. IF ANY ACTIVITY IS DIRECTLY LINKED WITH CARRYING ON SHIPPING OPERATIONS AND RESULTS INTO SOME KIND OF AN INCOME, THEN IT HAS TO BE TREATED AS A PART OF SUCH SHIPPING OPERATIONS ONLY. THIS ASPECT OF THE MATTER HAS BEE N DISCUSSED AT LENGTH BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR S 2001 02 TO 2003 04 IN ITA NO.2083 TO 2085/MUM./2009, WHEREIN THIS ISSUE HAS BEEN ANALYSED IN DETAIL FROM PARA 24 TO 28 WHICH, FOR THE SAKE OF READY REFERENCE IS REPRODUCE D HEREIN BELOW: THE OECD COMMENTARY ON ARTICLE 8 RELATING TO TAXATION OF INCOME FROM OPERATION OF SHIPS ON INTERNATIONAL TRAFFIC IS IDENTICAL WORDED TO ARTICLE 9(1) OF DTAA BETWEEN INDIA AND DENMARK. OECD IN ITS COMMENTARY ON ARTICLE 8 PARAGRAPH 1 HAS E XPLAINED EXPRESSION PROFIT OF AN ENTERPRISE FROM THE M/S. A.P. MOLLER MAERSK A/S 10 OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC. IT HAS BEEN OPINED IN THAT COMMENTARY THAT THE PROFITS COVERED CONSIST OF PROFITS DIRECTLY OBTAINED BY THE ENTERPRISE FROM TRANSPORTATION OF PASSENGER OR CARG O BY SHIPS OR AIRCRAFT FROM OPERATIONS IN INTERNATIONAL TRAFFIC. THEY HAVE ALSO OPINED THAT SUCH ENTERPRISES CARRYING ON LARGE VARIETY OF ACTIVITIES TO PERMIT, FACILITATE OR SUPPORT THEIR INTERNATIONAL TRAFFIC OPERATIONS; AND THAT PROFITS FROM ACTIVITIES D IRECTLY CONNECTED WITH SUCH OPERATIONS AS WELL AS PROFITS FROM ACTIVITIES WHICH ARE NOT DIRECTLY CONNECTED WITH OPERATIONS OF THE ENTERPRISES SHIPS IN INTERNATIONAL TRAFFIC AS LONG AS THEY ARE ANCILLARY TO SUCH OPERATIONS ARE ALSO TO BE CONSIDERED AS PROFI TS DERIVED FROM OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC. THE FOLLOWING FURTHER EXAMPLES HAVE BEEN GIVEN IN THE COMMENTARY: - '6. PROFITS DERIVED BY ENTERPRISES FROM THE TRANSPORTATION OF PASSENGERS OR CARGO OTHERWISE THAN BY SHIPS OR AIRCRAFT THAT IT OPERATES IN INTERNATIONAL TRAFFIC ARE COVERED BY THE PARAGRAPH TO THE EXTENT THAT SUCH TRANSPORTATION IS DIRECTLY CONNECTED WITH THE OPERATION, BY THAT ENTERPRISE, OF SHIPS OR AIRCRAFT IN INTERNATIONAL TRAFFIC OR IS AN ANCILLARY ACTIVITY. ONE EXAMPLE WOULD BE THAT OF AN ENTERPRISE ENGAGED IN INTERNATIONAL TRANSPORT THAT WOULD HAVE SOME 01 ITS PASSENGERS OR CARGO TRANSPORTED INTERNATIONALLY BY SHIPS OR AIRCRAFT OPERATED BY OTHER ENTERPRISES, E.G. UNDER CODE - SHARING OR SLOT - CHARTERING ARRANGEMENTS OR TO TAKE ADVANTAGE OF AN EARLIER SAILING. ANOTHER EXAMPLE WOULD BE THAT OF AN AIRLINE COMPANY THAT OPERATES A BUS SERVICE CONNECTING 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 TRA NSPORTED 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 P ARAGRAPH 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 M/S. A.P. MOLLER MAERSK A/S 11 ARTICLE 8 OF THE OECD MO DEL 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 TRA NSPORTATION SERVICES. THERE ARE PRIMARILY PREPARATORY AND AUXILIARY ACTIVITIES RELATED TO TRANSPORTATION, SUCH AS THE SERVICES OF AGENCIES SELLING PASSAGE TICKETS ON BEHALF OF THE ENTERPRISE CONCERNED OR ON BEHALF OF THIRD ENTERPRISES. THEREFORE, PROFITS F ROM THE ACTIVITIES OF LEGALLY DEPENDENT AGENCIES OF SHIPPING OR AIR TRANSPORT ENTERPRISES, TOGETHER WITH ANY OTHER PROFITS MADE BY THEM, ARE TAXABLE AT THE PLACE OF MANAGEMENT.' 28. THE HO N 'BLE DELHI HIGH COURT IN THE CASE OF DIT VS. K. ROYAL DUTCH AIRLI NE, 178 TAXMAN 291 (DEL) HAD TO DEALT WITH THE CASE WHERE THE ASSESSEE WHO WAS TAX RESIDENT OF NETHERLANDS CARRYING ON BUSINESS OF OPERATION OF AIRCRAFT IN INTERNATIONAL TRAFFIC, WAS GIVEN RIGHT TO USE A SHED IN CARGO COMPLEX AT BOMBAY FOR USE AS A WAREHOU SE AND OFFICE. THIS LICENSE WAS GRANTED BY AIRPORT AUTHORITY OF INDIA (AAI). THE NETHERLANDS COMPANY ENTERED INTO AN AGREEMENT WITH AN AGENT IN INDIA FOR HANDLING CARGO ON ITS BEHALF. THE NETHERLANDS COMPANY ALLOWED THE AGENT TO USE PREMISES GIVEN ON LICEN SE TO IT BY AAI. FOR ALLOWING SUCH A USE, NETHERLANDS COMPANY .RECOVERED RENT FROM THE AGENT. THE TRIBUNAL HELD THAT RENT RECEIVED WAS ALSO INCOME FROM OPERATION OF AIRCRAFT IN INTERNATIONAL TRAFFIC. THE HON'BLE DELHI HIGH COURT UPHELD THE DECISION OF THE TRIBUNAL. WE ARE OF THE VIEW THAT THE AFORESAID DECISION FULLY SUPPORTS THE PLEA OF THE ASSESSEE BEFORE US. WE ARE OF THE VIEW THAT RECEIPT IN QUESTION BY THE ASSESSEE WOULD BE PROFITS DERIVED FROM OPERATION OF SHIPS IN INTERNATIONAL TRAFFIC AND THEREFORE NOT TAXABLE IN INDIA IN VIEW OF THE PROVISIONS OF ARTICLE 9(1) OF THE DTAA. WE HAVE ALREADY EXPLAINED THE NATURE OF RECEIPT BY THE ASSESSEE FROM ITS AGENT IN INDIA. THE ACTIVITY OF PROVIDING COMMUNICATING FACILITY IS ONLY TO FACILITATE ASSESSEE'S INTERNAT IONAL TRAFFIC OPERATIONS. THESE ACTIVITIES ARE DIRECTLY CONNECTED WITH SUCH OPERATIONS. THEY CAN BE SAID TO BE ANCILLARY TO SUCH OPERATIONS. THEY CAN ALSO BE SAID TO BE PREPARATORY AND AUXILIARY ACTIVITY RELATED TO TRANSPORTATION AND WOULD THEREFORE BE COV ERED BY THE PROVISIONS OF ARTICLE 9(1) OF DTAA. WE THEREFORE HOLD THAT THE RECEIPT IN QUESTION CANNOT BE BROUGHT TO TAX IN INDIA. IN VIEW OF THE ABOVE CONCLUSION, WE ARE NOT DEALING WITH THE ISSUE AS TO WHETHER RECEIPT CAN BE CONSIDERED AS BUSINESS PROFIT AND IF SO CONSIDERED, THE SAME CANNOT BE TAXED IN INDIA BECAUSE THE ASSESSEE DOES NOT HAVE PE IN INDIA. M/S. A.P. MOLLER MAERSK A/S 12 11 . ONCE IN ASSESSEES OWN CASE IT HAS BEEN HELD THAT THE COST RECOVERED FROM THE VARIOUS AGENTS TOWARDS USAGE OF SOFTWARE ARE DIRECTLY CONNECTED WITH TH E 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 / D EVELOPMENT 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 I N THE PRESENT CASE, THE ASSESSEE IS NOT RENDERING ANY SERVICE OF MA NAGERIAL, TECHNICAL OR CONSULTANCY TO ITS AGENT OR GROUP ENTITIES BY ALLOWING ITS GROUP COMPANIES TO BE USAGE OF SOFTWARE . THE ASSESSEES MAIN INCOME IS ONLY FROM FREIGHT RECEIPT RECEIVED FROM OPERATIONS OF SHIPS AND IT IS NOT PROVIDING ANY TECHNICAL SERVI CE 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 COST TO THE ASSESSEE WITHOUT ANY MARK UP. SUCH A RECOVERY OF A COST CANNOT BE HELD TO BE FEES FOR TECHNICAL SERVICE S . THIS ISSUE AGAIN HAS COME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE RIGHT FROM THE ASSESSMENT YEAR 2001 02 TO 2007 08 WHEREIN THE TRIBUNAL HAS VERY CATEGORICALLY HELD THAT SUCH PAYMENTS RECEIVED BY THE ASSESSEE TOWARDS RECOVERY OF COST IS NOT FEES FOR TECHNICAL SERVICES. EVEN IN THE LATEST JUDGMENT IN FOR THE ASSESSMENT YEAR 2006 07 AND 2007 08, THE TRIBUNAL, VIDE ORDER DATED 28 TH AUGUST 2013, HAVE HELD THAT SUCH PAYMENTS ARE NOT IN THE NATURE OF FTS AFTER FOLLOWING THE EARLIER YEARS DECISION. THUS, THE FINDING OF THE LEARNED COM MISSIONER (APPEALS) AS REPRODUCED ABOVE ARE IN CONSONANCE WITH THE DECISIONS GIVEN BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE EARLIER YEARS AND, THEREFORE, AS A JUDICIAL PRECEDENCE, WE DO NOT FIND ANY REASON TO DEVIATE FROM SUCH A M/S. A.P. MOLLER MAERSK A/S 13 FINDINGS AND CONCLUSI ONS. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS TREATED AS DISMISSED. 13 . 1 3 . IN THE RESULT, REVENUES APPEAL IS TREATED AS DISMISSED. 8 TH NOVEMBER 2013 ORDER PRONOUNCED IN THE OPEN COURT ON 8 TH NOVEMBER 2013 SD / - RAJEND RA SINGH ACCOUNTANT MEMBER SD / - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 8 TH NOVEMBER 2013 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY ORDER . / PRADEEP J. CH OWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI