TMI Blog2020 (1) TMI 1641X X X X Extracts X X X X X X X X Extracts X X X X ..... ping business under the DTAA. When we examine the nature of income of CMA CGM, France under consideration, it becomes unequivocal that the same, being, directly concerned with the operation of ships, cannot be considered as anything other than profits derived from operation of ships and hence covered under Article 9 of the DTAA. As such, it would not magnetize any taxation in the hands 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. 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount was about 400% higher in comparison with the preceding year, in which such Software charges stood at Rs.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 not covered either u/s.9(1)(vi) or 9(1)(vii) of the Act and further it was entitled to the benefit under India-France Double Taxation Avoidance Agreement (hereinafter also called ` the DTAA ) read along with Protocol having the Most Favoured Nation (MFN) clause. The AO did not concur with the submissions advanced on behalf of the assessee and held that it paid the said sum for availing IT Support services from its AE, which was not just Maintenance charges as claimed by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 network of agencies in order to render shipping services . It further provides that :` the Agent (i.e. the assessee in question) is part of this international network of agencies and has been appointed as shipping agent by CMA CGM in order to represent and to provide the latter, in India, with some services regarding transport documentation, commercial, logistics and port operations services . Not only the preamble of the Agreement, the relevant Articles of the Agreement also reiterate the scope of services in the same terms. Article 2 of the Agreement gives the `Description o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent 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 same lines as that of the LARA and DIVA Agreement. It also provides that CMA CGM is a company acting in the maritime transport and as such operates a fleet of freighters and container ships over worldwide shipping lines. To pursue its business activity, CMA CGM has implemented an international network located within its main ports of call. It further provides that: `The common objective of the parties is to build, deploy and maintain a global group system in order to rationalize and to improve the CMA CGM Group organization as well as reducing its functional costs. Similar to the LARA and DIVA IT Agreement, the Ocean IT System Agreement also provides that it is for help in business operations of CMA CGM, France an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 liability for deduction of tax at source in the hands of the assessee will arise only when the sum paid to CMA CGM, France is chargeable to tax in India in its hands. In case the amount is found to be not chargeable to tax in India, the payment made without deduction of tax at source would not magnetize disallowance u/s 40(a)(i) of the Act. 11. With the above prefatory remarks, we will examine if the amount paid by the assessee to CMA CGM, France is chargeable to tax in India. It is noted that the assessee made payment to CMA CGM, France in terms of the LARA, DIVA and Ocean IT System Agreements. Article 3 of the LARA and DIVA Agreement deals with `Consideration and provides that: the Agent (i.e. the assessee) agrees to pay a consideration in order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 operation of such ships, and the provisions of Article 12 shall not apply in relation to such interest. 14. Para 1 of the DTAA states that the profits derived by an enterprise of a Contracting State (France) from the operation of ships in international traffic shall be taxable only in that Contracting State of which the enterprise is resident (France). Thus, any profits and gains derived by an enterprise from the operations of ships in the hands of CMA CGM, France is not chargeable to tax in India in terms of para 1 of Article 9. 15. Para 2 opens with a non-obstante clause and provides that profits from operation of ships may be taxed in the other Contracting State (India) from which they are derived provided that the tax so charged shall not exceed 50% during the first five fiscal years after the entry into force of this Convention and 25% during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ared 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 matter came up before the Hon ble Supreme Court in DIT Vs. A.P. Moller Maersk (2017) 392 ITR 186 (SC), their Lordships held that the High Court was correct in holding that the income from the use of Global Telecommunication Facility called 'Maersk Net' was income arising out of shipping business and not as `Fees for technical services . In reaching this conclusion, the Hon ble Supreme Court noted that the communication system in question was an integral part of shipping business which was allowed use by Agents in order to enable them to discharge their role more effectively. 18. On a consideration of the gamut of facts instantly obtaining before us, in the hue of the decision of the Hon ble Supreme Court in the case of A.P. Moller Maersk (supra), it becomes graphically clear that CMA CGM, France received the amount from the assessee in order to facilitate its shipping business. As such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 . Impliedly they have referred to the payment made towards maintenance of software as fees for technical services and for carrying out other business operations, as Royalty . 22. Section 9(1)(vi) of the Act deals with taxation of income by way of `royalty . It provides that the `royalty will be taxed if it is payable in respect of any right, property or information used or services utilized. Explanation 2 gives the definition of the term royalty . Explanation 4, which is relevant for our purpose, reads as under:- `For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. 23. On going through the mandate of the Explanation 4, which has been inserted by the Finance Act, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 retrospective insertion of Explanation 4 to section 9(1)(vi) cannot necessitate tax withholding during the period when the provision was actually not a part of the enactment, so as to warrant disallowance u/s 40(a)(i) of the Act. 25. At this stage, it would be relevant to note that section 90(1) of the Act provides that the Central Government may enter into an agreement with the Government of any other country for the granting of relief of tax in respect of income on which tax has been paid in two different tax jurisdictions. Subsection (2) of section 90 unequivocally provides that where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax or for avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, 'the provisions of this Act shall apply to the extent they are more beneficial to that assessee . Crux of the sub-section (2) is that where a DTAA has been entered into with another country, then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 15, in consideration for services of a managerial, technical or consultancy nature. 28. Para 3 of Article 13 clearly provides that the term `Royalties means a consideration for the use of or the right to use any copyright of literary, artistic or scientific work etc. What is relevant in the phraseology of para 3 is that in order to qualify as `Royalties under the DTAA, it is necessary that the payment should be a consideration for use of any copyright and not copyrighted article. If an assessee is allowed to use a software product, the payment for the same would not fall within the expression consideration for the use of any copyright . It is only when the assessee is allowed to copyright the literary, artistic or scientific work etc. that the same would call for inclusion within the meaning of para 3 of the Article 13. 29. Let us visit the Agreements for ascertaining as to what the assessee was allowed to do with the software. Article 6 of the LARA and DIVA Agreement, which is material for our purpose at this stage, reads as under : CMA CGM warrants that it is the legitimate owner of all intellectual property rights necessary to the performance of its obligations u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of the DTAA because the parallel of Explanation 4 to 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 . 33. 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) of the Act 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. 34. 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. 35. 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or . (b) make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein. 38. The ld. CIT(A) has discussed this aspect on page 22 onwards of the impugned order. He found that the word `or and not the word `and has been used between the clauses (a) and (b) of Article 12(4) of the DTAA with Portuguese. He held the case of the assessee to be falling under clause (a). Thus it is seen that the ld. CIT(A) admitted that the clause (b) is not attracted to the facts of the instant case because CMA CGM, France did not make available any technical knowledge, experience or skill etc. to the assessee. In so far as clause (a) is concerned, it talks of any payment for services which are ancillary and subsidiary to the application or enjoyment of the right, property or information for which payment described in paragraph 3 is received. It is only if the services ancillary to the enjoyment of right, property or information as per para 3 are availed that they will fall within the ambit of `fees for include ..... X X X X Extracts X X X X X X X X Extracts X X X X
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