The two-judge bench of the Supreme Court in DIT(IT) v. A.P. Moller Maersk A S, categorically held that the income from the use of Global Telecommunication Facility called ‘Maersk Net’ can be classified as income arising out of shipping business and not as fees for technical services.
The bench comprising of Justice A.K Sikri and Justice Abhay Manohar Sapre was hearing a bunch of appeals filed by the Revenue against the order of the Bombay High Court.
The sole question before the Apex Court was that whether the income from the use of “Maersk Net” is an integral part of the shipping business and cannot be taxed in India as fees for technical service under the Indo-Danish Double Taxation Avoidance Agreement.
The assessee-Company, a tax resident of Denmark is engaged in shipping business. The Assessing Officer assessed the income in the hands of the assessee and allowed the benefit of the Indo-Denmark DTAA and found that the assessee had agents working for it, namely, Maersk Logistics India Limited (MLIL), Maersk India Private Limited (MIPL), Safmarine India Private Limited (SIPL) and Maersk Infotech Services (India) Private Limited (MISPL), who booked cargo and acted as clearing agents for the assessee. In order to help all its agents, across the globe, in this business, the assessee had set up and was maintaining a global telecommunication facility called Maersk Net System which is a vertically integrated communication system for which the agents were paying for said system on pro-rata basis. The assessee maintained that it was merely a system of cost sharing and the payments received by the assessee from MIPL, MLIL, SIPL and MISPL were in the nature of reimbursement of expenses.However, the AO competed assessment by holding thatthe amounts paid by these three agents to the assessee was consideration/fees for technical services rendered by the assesses and, accordingly, held them to be taxable in India under Article 13(4) of the DTAA and assessed tax @ 20% under Section 115A of the Income Tax Act, 1961.
On appeal, the ITAT and the Bombay High Court held in favor of the assessee and therefore, the revenue approached the Apex Court for relief.
The bench observed that a common facility of using Maersk Net System is provided to all the agents across the countries to carry out their work using the said system. Further, no technical services are provided by the assessee to the agents.“Once these are accepted, by no stretch of imagination, payments made by the agents can be treated as fee for technical service. It is in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems.It is reemphasised that neither the AO nor the CIT (A) has stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Record shows that the assessee had given the calculations of the total costs and pro-rata division thereof among the agents for reimbursement.
Not only that, the assessee have even submitted before the Transfer Pricing Officer that these payments were reimbursement in the hands of the assessee and the reimbursement was accepted as such at arm’s length. Once the character of the payment is found to be in the nature of reimbursement of the expenses, it cannot be income chargeable to tax.”
It was also noted that the AO, as per the relevant DTAA, has already allowed exemption to the assessee for the freight income arises from the operation of ships in international waters.“Once that is accepted and it is also found that the Maersk Net System is an integral part of the shipping business and the business cannot be conducted without the same, which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, it is only a facility that was allowed to be shared by the agents. By no stretch of imagination it can be treated as any technical services provided to the agents.In such a situation, ‘profit’ from operation of ships under Article 19 of DTAA would necessarily include expenses for earning that income and cannot be separated, more so, when it is found that the business cannot be run without these expenses.”
Read the full text of the Judgment below.
