TII CASES

2017-TII-14-HC-MUM-INTL

DIT Vs A P MOLLER: BOMBAY HIGH COURT (Dated: April 3, 2017)

Income Tax - Sections 9(1)(vii), 115A, 143(3) - India-Denmark DTAA - Articles 9, 13

Keywords: Royalty - Fee for technical fees - Containers Inland Services - Reimbursement of cost & 'Profit'

The assessee, a Danish public limited company, was engaged in the business of operation of ships, chartering and other related activities of shipping in international traffic, which was covered under Article-9 of DTAA. Its shipping operation in India was carried out by Maersk India Pvt. Ltd. which was an agent of the assessee. The assessee, in its ROI, had shown gross freight earning of Rs. 37,96,29,97,137, which was claimed as not taxable as per Article-9(1) of the DTAA, as the profits derived from the operation of ships in international traffic was carried out by the assessee was fully taxable in Denmark. During assessment, AO had noted that assessee had receipts from its operation on account of I.T. support services given to MIPL which was not offered for income. In response to the show cause notice, it was submitted that the assessee had recovered an amount of Rs. 60,04,349 from MIPL towards share of cost of SAP Software Solution i.e., FACT for tracking and recording various transactions. The amount received from MIPL was only recovery of proportionate cost incurred by the assessee for maintenance and up-gradation of the FACT and, therefore, it was in the nature of reimbursement of cost not chargeable to tax in India as the same was without any mark-up and was on cost to cost basis. It was also submitted that the payment received from MIPL neither constitutes "royalty" nor "fees for technical services" either under the Act or under the DTAA.

Tribunal held that the software developed by the assessee is based on ERP system which is the software solution called FACT for tracking and recording various transactions. This software enables the various agents of the assessee all over the world (which have also been termed as "group companies" in the impugned orders) in the container inland service which are part of the shipping operations only. This software is used by CIS division, which handles tracking of the containers, accounting and integrated billing of freight receipts, warehouse functionality, etc. which in turn, helps the assessee in conducting its shipping business in more effective and efficient manner globally. This software in fact is a tool and integrated part of shipping operations only. Usage of software cannot be segregated from such activities of over all shipping operations so as to hold it as rendering of any independent technical services;

Article-9(1) of Indo Denmark DTAA provides that the profits derived from operations of the ships in international traffic shall be taxable at a place where the effective management of the enterprise is situated and such a profit is exempt from tax in the other contracting State. The term "Profit" under this Article has to be construed more broadly so as to include not only the activities directly connected with the shipping operations but also to include income from activities which facilitates or support such operation as well as any ancillary activities. The OECD commentary on Article-8 (similar to Article-9 of the Indo-Denmark DTAA) also expresses the same view. If any activity is directly linked with carrying on shipping operations and results into some kind of an income, then it has to be treated as a part of such shipping operations only.

Once in assessee's own case it has been held that the cost recovered from the various agents towards usage of software are directly connected with the shipping operations then the same has to be treated as covered under Article-9(1) and, hence, it cannot be taxed in India. Thus, respectfully following the judicial precedence, we also held that any kind of receipts recovered by way of software usage / development cost from MIPL cannot be taxed in India under Article-9(1) of DTAA. Further, this receipt also cannot be taxed as fees for technical services or royalty independently because in the present case, the assessee is not rendering any service of managerial, technical or consultancy to its agent or group entities by allowing its group companies to be usage of software. The assessee's main income is only from freight receipt received from operations of ships and it is not providing any technical service to them. It has developed a software for running of shipping business globally in a more effective and efficient manner and access of such software has been provided to various agents / group companies all over the world who are using this software for facilitating the freight receipts from shipping, for which they are reimbursing the cost to the assessee without any mark-up. Such a recovery of a cost cannot be held to be fees for technical services.

On appeal, the High Court held that,

Whether in case the Revenue after losing its grounds before the Tribunal has filed an appeal before the High Court, but withdraws the same before hearing, such a case deserves to be dismissed: YES: HC

++ the Counsel appearing for the Appellant-Assessee, on instructions, seeks to withdraw all these appeals, arising from the order dated 8th November, 2013 = 2013-TII-198-ITAT-MUM-INTL of the Income Tax Appellate Tribunal. Accordingly, all these Appeals are dismissed as withdrawn.

Revenue's appeal dismissed

2017-TII-23-HC-KOL-TP

PRICE WATERHOUSE Vs CIT: CALCUTTA HIGH COURT, (Dated: March 29, 2017)

Income Tax

Keywords: determination of ALP - reference - international transaction - AE & interim stay order

The assessee is a firm engaged in providing finance and audit related services to its client. The counsel for the assessee had contended that there ought to have been proper determination as to whether the transactions involved came within the ambit of the international transactions or not before reference, and the TPO does not have jurisdiction to determine that question. The First Court, in the judgment under appeal, observed that TPO ought to examine the question as to whether the transactions involved constitute international transaction or not under the provisions of the statute. It had further pointed out that assessee was enjoying a protection in the form of an interim order of stay during pendency of the writ petition till the judgment was delivered by the First Court. It was also submitted that the proceeding before TPO had not yet been commenced in terms of the directions contained in the judgment and order under appeal at the request of the assessee on the ground of pendency of the appeal.

On appeal, the High Court held that,

Whether interim stay granted by the Tribunal with regard to the issue of jurisdiction of TPO for determination of ALP, can be disposed of by the Court without complete & authentic documentation - NO: HC

++ in such circumstances, we propose to hear out the appeals themselves. The stay petitions taken out in connection with these two appeals contain the pleadings filed before the First Court and we do not think any formal paper book is required for adjudicating the appeals. Service of notices of both the above appeals along with compliance of other formalities, accordingly, are dispensed with, to which arrangement counsel for the Revenue has agreed. Let these appeals be fixed on 25th April, 2017 at 10.30 A.M. On that date the respondents-Revenue shall produce the records. On the question of grant of interim order, we are prima facie, satisfied with the appellants’ case at this stage on the point of jurisdiction of the Transfer Pricing Officer. We, accordingly, stay the operation of the judgment and order till 2nd May, 2017. We are limiting the term of the interim order on the prayer of the Revenue directed towards expeditious disposal of both the appeals. The applications being G.A.No.881 of 2017 and G.A. No.882 of 2017 are disposed of in the above terms. These applications, however, shall be retained with the records as they contain the pleadings filed before the First Court.

Assessee's writ partly allowed

2017-TII-22-HC-MUM-TP

CIT Vs JOHNSON AND JOHNSON LTD: BOMBAY HIGH COURT (Dated: April 3, 2017)

Income Tax - Sections 92(2), 92C(1), 144 - rule 10B & India-Sri Lanka DTAA - Article 7

Keywords: publicity expenses - professional sponsorship expenses - commercial expediency - royalty payment - technical knowhow & brand value

The assessee company, a subsidiary of Johnson & Johnson Inc. US, holding 75 per cent of shares with the balance 25 per cent being held by DePuy Medical, India, set up its operations in India in 1957. The assessee deals in various products either manufactured by the assessee or traded on account of local or foreign purchases. The assessee incurred publicity and sales promotion expenses of Rs.163.27 crores during the relevant financial year. The TPO has stated that said expenses on publicity and sales promotion has resulted into higher sales on which correspondingly higher royalty has been paid to the parent company J&J US. Therefore, the benefit of higher publicity and sales promotion expenses are accrued to the parent company J&J US but the cost thereof is not apportioned to the parent company. The TPO sought explanation from the assessee as to why the cost of arrangement as emanating from the records, is resulting into the benefit to the parent AE, but not apportioned as per section 92(2). The TPO stated that the assessee and the parent company J&J US should have shared sales promotion expenses in the ratio of royalty to sales or would have renegotiated a lower royalty rate.

On appeal, the High Court held that,

Whether TP adjustment can be made merely on the basis, that a payment made to its AEs by assessee is excessive in nature, which could lead to determination of ALP without resorting to any of the methods prescribed under the Act - NO: HC

++ the order of Tribunal allowed the assessee's appeal before it by deleting the addition of Rs.200.82 lakhs being TP adjustment on account of sales promotion and publicity expenses being payable by assessee' parent M/s. Johnson & Johnson, USA. This on the ground that TPO has, while holding that the parent company should share this expenditure on publicity and sales promotion as it benefits therefrom, as higher sales result in higher royalty, has not determined ALP by following any of the methods prescribed u/s 92C(1) read with Rule 10B. TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in Section 92C(1). In this case, there is nothing on record to indicate that TPO had applied any one of the prescribed methods in Section 92C(1) to determine the ALP before disallowing the payment of Rs.200.82 lakhs incurred by the Respondent on account of publicity and sales management as being excessive and/or payable by its parent, M/s. Johnson & Johnson, USA. The impugned order holds that TP adjustment done by disallowing the payment, on the basis of an assumption that it is excessive, is an action completely dehors the provisions of TP adjustment found in chapter X of the Act. The determination of the ALP has to be done only by following one of the methods prescribed under the Act. In view of the above, as the Revenue has not acted in accordance with the clear mandate of law, the questions as proposed does not give rise to any substantial question of law. Thus, not entertained;

Whether in case, no submissions have been made by the Revenue as to give reasons why the decision of Special Bench should be applied in assessee's case for considering the matter afresh, the issue can still be restored to the TPO - NO: HC

++ the order of the Tribunal negatived the Revenue's alternative contention that the issue of determination of the ALP be restored to the TPO to consider the matter afresh. This on the basis of guidelines laid down by the Special Bench of the Tribunal in the case of LG Electronics v/s. ACIT 2013-TII-15-ITAT-DEL-SB-TP. The impugned order records the fact that no specific submissions were made as to how the guidelines prescribed in LG Electronics would be applicable to the Respondent Assessee's case. Even before us, no submissions have been made as to the reasons why the decision of the Special Bench in LG Electronics should be applied in the present facts. Therefore, we are unable to understand the grievance of the Revenue on the above issue. Thus, the question as framed does not give rise to any substantial question of law. Thus, not entertained.

Revenue's appeal partly admitted