2010 (6) TMI 462 - AT - Income Tax

DTAA - Fees for technical services or business income - There is no finding by the AO or CIT(A) that there was a profit element embedded in the payments received from the Assessee from its agents in India - Installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee - The Hon ble Delhi High Court in the case of DIT v. K. Royal Dutch Airline (2008 -TMI - 31360 - DELHI HIGH COURT) upheld that rent received was also income from operation of aircraft in international traffic - Accordingly the receipt is considered as business profit the same cannot be taxed in India because the assessee does not have PE in India - Decided in the favour of the assessee

Summary

Issues Involved:

1. Taxability of amounts received by the assessee from Indian agents.
2. Classification of the payments as 'fees for technical services' (FTS).
3. Determination of whether the receipts are part of income from the business of shipping and thus exempt under Article 9 of the DTAA.
4. Consideration of whether the receipts, if deemed income, can be taxed in India in the absence of a permanent establishment (PE).

Issue-wise Detailed Analysis:

1. Taxability of Amounts Received by the Assessee from Indian Agents:

The primary issue was whether the amounts received by the assessee from Maersk India Pvt. Ltd. (MIPL), Maersk Logistic India Ltd. (MLIL), and Safmarine India (P) Ltd. (SIPL) for shared IT Global Portfolio tracking system could be taxed in India. The assessee, a non-resident company incorporated in Denmark, argued that these amounts were merely reimbursements for costs incurred in maintaining a global telecommunications facility essential for its international shipping business. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had previously held these amounts as taxable in India under the category of 'fees for technical services' (FTS).

2. Classification of the Payments as 'Fees for Technical Services' (FTS):

The CIT(A) held that the payments received by the assessee were for rendering technical services and thus taxable under Article 13(2) of the DTAA at 20% under Section 115A of the Income Tax Act, 1961. The CIT(A) reasoned that the assessee used advanced technology and infrastructure, and the payments were not mere reimbursements but fees for technical services. However, the Tribunal disagreed, noting that the payments were for providing a facility essential for international shipping and not for rendering technical services. The Tribunal referenced the decision of the Hon'ble Madras High Court in Skycell Communications Ltd., which clarified that the use of sophisticated equipment does not necessarily constitute the provision of technical services.

3. Determination of Whether the Receipts are Part of Income from the Business of Shipping and Thus Exempt Under Article 9 of the DTAA:

The Tribunal examined Article 9 of the DTAA between India and Denmark, which states that profits derived from the operation of ships in international traffic are taxable only in the contracting state where the place of effective management is situated. Given that the assessee's place of effective management was in Denmark, the Tribunal concluded that the receipts were part of the income from the business of shipping and thus exempt from tax in India. The Tribunal referenced the OECD commentary and the decision of the Hon'ble Delhi High Court in DIT v. K. Royal Dutch Airline, which supported the view that ancillary activities related to international traffic operations fall under the exemption provided by Article 9.

4. Consideration of Whether the Receipts, if Deemed Income, Can Be Taxed in India in the Absence of a Permanent Establishment (PE):

The assessee contended that even if the receipts were considered income, they could only be taxed as business income, which would not be taxable in India due to the absence of a PE. Since the Tribunal concluded that the receipts were part of the income from the business of shipping and thus exempt under Article 9 of the DTAA, it did not need to address this issue in detail.

Conclusion:

The Tribunal held that the payments received by the assessee from its Indian agents were not 'fees for technical services' but reimbursements for costs incurred in maintaining a global telecommunications facility essential for international shipping. Consequently, these receipts were part of the income from the business of shipping and exempt from tax in India under Article 9 of the DTAA. The Tribunal allowed the appeals filed by the assessee.