DIT vs. A. P. Moller Maersk AS (Supreme Court)

S. 9(1)(vii)/ Article 12: In order to constitute “technical services”, services catering to the special needs of the person using them must be rendered. The provision of a common facility is not “technical services”. Amount paid towards reimbursement of a common technical computer facility is not “fees for technical services”. Amount received by way of reimbursement of expenses does not have the character of income  (March 6, 2017)


(i) The assessee is having its IT System, which is called the Maersk Net. As the assessee is in the business of shipping, chartering and related business, it has appointed agents in various countries for booking of cargo and servicing customers in those countries, preparing documentation etc. through these agents. Aforementioned three agents are appointed in India for the said purpose. All these agents of the assessee, including the three agents in India, used the Maersk Net System. This system is a facility which enables the agents to access several information like tracking of cargo of a customer, transportation schedule, customer information, documentation system and several other informations. For the sake of convenience of all these agents, a centralised system is maintained so that agents are not required to have the same system at their places to avoid unnecessary cost. The system comprises of booking and communication software, hardware and a data communications network. The system is, thus, integral part of the international shipping business of the assessee and runs on a combination of mainframe and non-mainframe servers located in Denmark. Expenditure which is incurred for running this business is shared by all the agents. In this manner, the systems enable the agents to co-ordinate cargos and ports of call for its fleet.

(ii) Aforesaid are the findings of facts. It is clearly held that no technical services are provided by the assessee to the agents. Once these are accepted, by no stretch of imagination, payments made by the agents can be treated as fee for technical service. It is in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. It is reemphasised that neither the AO nor the CIT (A) has stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Record shows that the assessee had given the calculations of the total costs and pro-rata division thereof among the agents for reimbursement. Not only that, the assessee have even submitted before the Transfer Pricing Officer that these payments were reimbursement in the hands of the assessee and the reimbursement was accepted as such at arm’s length. Once the character of the payment is found to be in the nature of reimbursement of the expenses, it cannot be income chargeable to tax.

(iii) Pertinently, the Revenue itself has given the benefit of Indo-Danish DTAA to the assessee by accepting that under Article 9 thereof, freight income generated by the assessee in these Assessment Years is not chargeable to tax as it arises from the operation of ships in international waters. Once that is accepted and it is also found that the Maersk Net System is an integral part of the shipping business and the business cannot be conducted without the same, which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, it is only a facility that was allowed to be shared by the agents. By no stretch of imagination it can be treated as any technical services provided to the agents. In such a situation, ‘profit’ from operation of ships under Article 19 of DTAA would necessarily include expenses for earning that income and cannot be separated, more so, when it is found that the business cannot be run without these expenses. This Court in Commissioner of Income Tax-4, Mumbai v. Kotak Securities Limited (2016) 383 ITR 1 (SC) has categorically held that use of facility does not amount to technical services, as technical services denote services catering to the special needs of the person using them and not a facility provided to all.

(iv) In the present case, a common facility of using Maersk Net System is provided to all the agents across the countries to carry out their work using the said system.

(v) Mr. Radhakrishnan, learned senior counsel appearing for the assessee, laboured to demonstrate that reliance by the High Court on its earlier judgment in the case of M/s. Safmarine Container Lines NV was not appropriate as that was the case where Indo-Belgium DTAA was considered by the Court which was different from Indo-Denmark DTAA. However, having regard to the factual position noted above, it is not even necessary to go into this aspect, though we may observe that it is the principle of law enunciated in Safmarine which is followed. Mr. Radhakrishnan also referred to Article 17 of the Agency Agreement between the assessee and the Indian agents which provides that the assessee may, from time to time, temporarily place its employees in agents office “for training or other purposes”. However, it could nowhere be pointed out that payment in question was made by the agents to the assessee for the aforesaid purposes. Mr. Radhakrishnan also argued that arrangement of profits is not essential to qualify receipt as income from free for technical services. This argument is, again, untenable as on the facts of this case it is clearly established that the payment made by the assessee was not for reimbursement of any technical services.

(vi) After the arguments were concluded, additional written submissions were filed by Mr. Radhakrishnan on behalf of the Revenue wherein altogether new point is raised viz. the payments made by the agents to the assessee for use of that Maersk Net System can be treated as royalty. However, this desperate attempt on the part of the Revenue cannot be allowed as no such case was sought to be projected before the High Court or even in the appeals in this Court. We have already mentioned in the beginning the issue raised by the Revenue itself which shows that the only contention raised is as to whether the payment in question can be treated as fee for technical services. Having held that issue against the Revenue, no further consideration is required of any other aspects in these appeals. These appeals are, therefore, bereft of any merit and are accordingly dismissed.

Cases referred:

Commissioner of Income Tax-4, Mumbai v. Kotak Securities Limited (2016) 383 ITR 1 (SC)

CIT v. Bharti Cellular Ltd. [CIT v. Bharti Cellular Ltd., (2014) 6 SCC 401: (2011) 330 ITR 239]

The Director of Income Tax (International Taxation)-1 v. M/s. Safmarine Container Lines NV (2014) 367 ITR 209

Skycell Communications Ltd. & Anr. v. Deputy Commissioner of Income Tax & Ors (2001) 251 ITR 53

Commissioner of Income Tax v. Bharti Cellular Ltd (2009) 319 ITR 139


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