Payment for Net Communication system developed by principal for smooth functioning of shipping business is not FTS

In this Case Hon’ble Supreme Court held that Payments made by the agents to the concerned foreign assessee, for using the facility of Net Communication System, developed by the assessee for smooth functioning of its international shipping business cannot be classified as fees for technical services and would not be chargeable as income under Income Tax Act, 1961.

Issue before Supreme Court

Whether the High Court is correct in holding 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 under the Indo-Danish Double Taxation Avoidance Agreement.?

Brief Facts of the Case

The respondent assessee is a foreign company engaged in the shippinj business and is a tax resident of Denmark. There is a Double Taxation Avoidance Agreement (hereinafter referred to as the ‘DTAA‘) between India and Denmark. The Assessing Officer (AO) assessed the income in the hands of the assessee and allowed the benefit of the said DTAA. However, while making the assessment, the AO observed 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). These agents 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. The agents were paying for said system on pro-rata basis. According to the assessee, 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. The AO did not accept this contention and held that the 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.

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