Director of Income Tax v. A.P. Moller Maersk, Civil Appeal No. 2960 of 2017 (Supreme Court Of India, Civil Appellate Jurisdiction)

The Danish-resident taxpayer had set up and maintained a global telecommunication facility connected to computers in Denmark to assist all of its appointed agents in various countries in booking and tracking of cargo and servicing customers in those countries. The expenses of this “Maersk Net” system were shared by all the agents through charges made to them by the taxpayer. Three of them were resident in India. The Indian Revenue authority assessed on the basis that the taxpayer’s receipts from the three agents was fees for technical services rather than income arising from the taxpayer’s international shipping business. At issue were Article 13 of the India-Denmark Double Taxation Agreement (the “DTA”), which permitted India to impose tax of 20% on the gross amount of fees for technical services (essentially defined as “consideration for the services of technical or other personnel”); and Article 9 of the DTA, which provided for a reduced rate of Indian tax on “profits derived from the operation of ships in international traffic.”

In finding for the Art. 9 characterization, Sikri J stated (at paras 11 and 12):

…It is clearly held that no technical services are provided by the assessee to the agents. … 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. … 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.

…'[P]rofit' from operation of ships under Article…9 … 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 [a] 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.

A Danish international shipping company (“Maersk”) charged local agents in India, who booked and tracked cargo, for their pro rata share of the costs of a Maersk computer and telecommunication system that was key to these functions. Article 13 of the India-Denmark Treaty permitted India to impose tax of 20% on the gross amount of fees for technical services (essentially defined, somewhat similarly to Art. 12(4) of the India-Canada Treaty) as “consideration for the services of technical or other personnel”), and Article 9 provided for a reduced rate of Indian tax on “profits derived from the operation of ships in international traffic.”

In finding that Maersk’s fees came within Article 9 rather than 13, Sikri J stated (at para 12):

'[P]rofit' from operation of ships under Article…9 … would necessarily include expenses for earning that income and … [the] more so, when it is found that the business cannot be run without these expenses. This Court … has categorically held that use of [a] 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.