Reimbursement from agents abroad for global telecommunication facility is not fees for technical service

Brief of the case 

Assessee is a foreign company engaged in shipping business and had 3 clearing agents in India; namely, Maersk Logistics India Limited (MLIL), Maersk India Private Limited (MIPL) and Safmarine India (Pvt) Limited (SIPL). The assessee procured and maintained a global telecommunication facility called MaerskNet for effective and efficient conduct of the business via networking with the agents. The agents were to share the cost of this equipment and therefore the assessee received the reimbursement of cost from the agents. The Assesssing officer did not accept this contention and held the amounts paid by agents to be fees for technical services liable to tax u/s 115A of IT act @ 20%. Assessee’s further appeal to CIT also confirmed the Assessing Officer’s stand. However, the Tribunal allowed the appeal following the decisions of Madras High Court Skycell Communications Limited 251 ITR 53 (Mad) and the Delhi High Court in Commissioner of Income Tax vs. Bharti Cellular Ltd. 319 ITR 139 (Del).

In the case of Skycell Communications Limited it was held that payment from subscribers is for use of airtime and not fees for any technical service and hence not liable for deduction of tax u/s 194J.

In the case of Bharti Celllular Ltd. It was held that the interconnect charges or port access charges cannot be regarded as      fees for technical services and so not subject to TDS u/s 194J.

Finally, the Mumbai High Court held that there being ‘no profit element’ involved in the payment of pro-rata costs by the agents, such payment is only in the nature of reimbursement of expense and not fees for technical service.

Facts of the case

• The assessee is a foreign company into shipping business, with 3 agents in India for booking cargo. The Assessing Officer taxed the assessee in India and allowed the benefit of DTAA between India and Netherlands. The assessee procured and maintained a global telecommunication facility called MaerskNet for effective and efficient conduct of the business via networking with the agents, for which the assessee recovered the share of cost from these 3 agents.
• According to the Asessing Officer this recovery of cost was in the nature of fees received for technical service and hence it was liable to tax u/s 115A @ 20%. However, the assessee averred it to be merely cost sharing of MaerskNet.
• Assessee’s further appeal to CIT also confirmed the Assessing Officer’s stand.
• Further, at the disposal of the Tribunal, the assessee submitted that it was not possible to conduct international shipping business efficiently without MaerskNet and the its cost sharing was billed to the agents and such payment was sheer reimbursement of the expense. It was further clarified that it was not fees for technical services as there was absence of human involvement in terms of “rendering of services” which would be the requirement of Article 13(4).
• The Tribunal observed that utilisation of the Maersk Net Communication system was an automated software based communication system which did not require the assessee to render any technical services. It was merely a cost sharing arrangement.
• Considering the fact that the payment by the agents was lacking the profit element the Mumbai High court held it to be merely reimbursement of cost.

Contention of the Revenue

• The Revenue claimed that the agent were using devices provided by the assessee which would amount to the assessee rendering technical services, the consideration for which would be correctly termed as “fees for technical services” and, therefore, the same was liable to be taxed in India.
  

Contention of the Assessee

• The payment received by the assessee was merely a cost sharing arrangement between the assessee and its agents to efficiently conduct its shipping business and no provision of technical services.
  

Held by High Court

• Due to the absence of any profit element in the amount paid by the agents it was held that it was purely in the nature of reimbursement of cost of MaerskNet.
• Further, MaerskNet was part of the shipping business and therefore subject to DTAA. Thus, it is not possible for the revenue to unilaterally decide contrary to the provisions of the DTAA.