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NON-REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8040 OF 2015

DIRECTOR OF INCOME TAX (IT) – I .....APPELLANT(S)

VERSUS

A.P. MOLLER MAERSK A S .....RESPONDENT(S)

W I T H

CIVIL APPEAL NO. 2959 OF 2017 (ARISING OUT OF SLP (C) NO. 5979 OF 2017

@ SLP (C) … CC NO. 18880 OF 2015)

CIVIL APPEAL NO. 2958 OF 2017 (ARISING OUT OF SLP (C) NO. 5978 OF 2017

@ SLP (C) … CC NO. 20220 OF 2015

CIVIL APPEAL NO. 2962 OF 2017 (ARISING OUT OF SLP (C) NO. 5984 OF 2017

@ SLP (C) … CC NO. 20248 OF 2015

CIVIL APPEAL NO. 2961 OF 2017 (ARISING OUT OF SLP (C) NO. 5983 OF 2017

@ SLP (C) … CC NO. 20404 OF 2015

CIVIL APPEAL NO. 2964 OF 2017 (ARISING OUT OF SLP (C) NO. 5992 OF 2017

@ SLP (C) … CC NO. 18833 OF 2015

CIVIL APPEAL NO. 2963 OF 2017 (ARISING OUT OF SLP (C) NO. 5985 OF 2017

@ SLP (C) … CC NO. 20038 OF 2015

Civil Appeal No. 8040 of 2015 & Ors. Page 1 of 15

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A N D

CIVIL APPEAL NO. 2960 OF 2017 (ARISING OUT OF SLP (C) NO. 5980 OF 2017

@ SLP (C) … CC NO. 19935 OF 2015

J U D G M E N T

A.K. SIKRI, J.

Delay condoned.

2. Leave granted in all SLPs.

3. In these appeals, which are filed by the Revenue challenging the

validity of the judgment passed by the High Court of Bombay, the

appellant-Revenue  has  posed  the  issue  that  arises  for

consideration in the following manner:

“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?”

4. Similar question of law, according to the Revenue, arises in all

these appeals and for the sake of convenience, we will take note

of the facts of Civil Appeal No. 8040 of 2015.   

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5. The  High  Court  has  decided  the  aforesaid  issue  by  common

judgment  dated 29.04.2015,  which is  under  appeal.   From the

aforesaid,  it  becomes clear  that  the only  issue that  has to  be

decided  by  this  Court  is  whether  the  income from the  use  of

“Maersk  Net”  is  an  integral  part  of  the  shipping  business  and

cannot be taxed in India as fees for technical service under the

Indo-Danish Double Taxation Avoidance Agreement.

6. Seminal  facts  giving  background of  the  dispute  may be  taken

note of at this stage in order to understand the nuances of the

aforesaid issue.  The respondent assessee is a foreign company

engaged  in  the  shipping  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

Civil Appeal No. 8040 of 2015 & Ors. Page 3 of 15

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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.   

7. The assessee preferred an appeal against the Assessment Order

before the Commissioner of Income Tax (Appeals) (for short, 'CIT

(A)').   The  CIT(A)  vide  order  dated  23.08.2010  dismissed  the

appeal.   Aggrieved  by  the  order  passed  by  the  CIT(A),  the

assessee  preferred  further  appeal  before  the  Income  Tax

Appellate Tribunal (ITAT).  Here the assessee succeeded as the

ITAT,  by  order  dated  14.12.2012,  allowed  the  appeal  of  the

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assessee following decisions of the Madras High Court in Skycell

Communications  Ltd.  &  Anr. v.  Deputy  Commissioner  of

Income Tax & Ors.1, and the Delhi High Court in Commissioner

of Income Tax v. Bharti Cellular Ltd.2.  The ITAT considered the

nature of the costs incurred by the assessee and observed that

the  three  agents  were  booking  cargo  and  acting  as  clearing

agents  for  the assessee and were entitled  to  utilisation of  the

Maersk Net facility which consisted of a communication system

connected to a mainframe and other computer services in each of

the countries of operation.  These were all connected to Maersk

Net Connecting Point (MCP) which were installed in each of the

premises.   This  communication  network  enabled  the  agent

concerned to access via the MCP the following services:

“Global Customer Service System (GCSS);

Global Schedule Information System (GSIS);

Global  Transportation  Systems  such  as Customer Information and Cargo Tracking (Star Track),  Transportation  Schedule  and  Service Guide;

Maersk Product Catalogue (MEPC);  

Maersk Shared Knowledge System (MSKS);

EDI  Data Quality  Enhancement  and Electronic Data Interchange;  

1 (2001) 251 ITR 53 2 (2009) 319 ITR 139

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System for Documentation (RKDS), Equipment Management,  Container  Control  (RKEM), Freight  Invoicing  (RKFR/RKIN/MLIS), Accounting and Performance (RRIS) Geography (GEO),  Statistics  (RKMS)  and  Tables (RKTS/RKST).”

8. Aggrieved by the order passed by the ITAT, the department filed

ITA No. 1306 of 2013 before the High Court of Bombay.  The High

Court,  by  judgment  dated  29.04.2015,  has  dismissed  the

Revenue's appeal holding that the ITAT has correctly 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 between the assessee and its

agents  to  efficiently  conduct  its  shipping  business.   The  High

Court has further held that the principles involved in the decision

of  The Director  of  Income Tax  (International  Taxation)-1 v.

M/s.  Safmarine  Container  Lines  NV3 will  also  govern  the

present case and that the Maersk Net used by the agents of the

assessee entailed certain costs reimbursement.  It was part of the

shipping business  and  could  not  be  captured under  any other

provisions of the Income Tax Act except under DTAA.  It is also

pertinent to mention that while arriving at the aforesaid decision,

3 (2014) 367 ITR 209

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the High Court has specifically observed that there is no finding

by the AO or the Commissioner that there is only profit element

involved  in  the  payments  received  by  the  assessee  from  its

agents.   

9. It is in the aforesaid circumstances the issue arose as to whether

any  technical  services  were  rendered  by  the  assessee  to  its

aforesaid three agents and the payment made by the agents was

in the form of fee for the said technical services OR the payment

was nothing but reimbursement of the cost by the three agents to

the assessee for using the Maersk Net.   

10. The  facts  which  emerge  on  record  are  that  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,

Civil Appeal No. 8040 of 2015 & Ors. Page 7 of 15

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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.   

11. 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

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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.

12. 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.

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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  Limited4 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.   

After taking note of Section 19 of the Income Tax Act,1961

and  explanation  2  thereof  which  defines  fee  for  technical

services, the Court went on to describe the meaning of the said

expression in the following manner:

“6.  What  meaning  should  be  ascribed  to  the words  “technical  services”  appearing  in Explanation 2 to clause (vii) to Section 9(1) of the Act is the moot question. In CIT v. Bharti Cellular Ltd. [CIT v. Bharti Cellular Ltd., (2014) 6 SCC 401 : (2011) 330 ITR 239] this Court has observed as follows: (SCC p. 402, para 5)

“5. Right from 1979, various judgments of the High Courts and Tribunals have taken the view that the words “technical services” have got to be read in the narrower sense by  applying  the  rule  of  noscitur  a  sociis, particularly, because the  words  “technical services”  in  Section  9(1)(vii)  read  with

4 (2016) 383 ITR 1 (SC)

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Explanation 2 comes in between the words “managerial and consultancy services”.”

7.  “Managerial  and  consultancy  services”  and, therefore, necessarily “technical services”, would obviously  involve  services  rendered  by  human efforts. This has been the consistent view taken by  the  courts  including  this  Court  in  Bharti Cellular Ltd. [CIT v. Bharti Cellular Ltd., (2014) 6 SCC  401  :  (2011)  330  ITR  239]  However,  it cannot be lost sight of that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which such services may be  provided.  The  search  for  a  more  effective basis, therefore, must be made.

8. A reading of  the very  elaborate order of  the assessing officer containing a lengthy discourse on  the  services  made  available  by  the  Stock Exchange  would  go  to  show  that  apart  from facilities of a faceless screen based transaction, a constant  upgradation  of  the  services  made available  and  surveillance  of  the  essential parameters  connected  with  the  trade  including those of a particular/single transaction that would lead credence to its authenticity is provided for by the  Stock  Exchange.  All  such  services,  fully automated,  are available to all  members of  the Stock Exchange in respect of  every transaction that  is  entered  into.  There  is  nothing  special, exclusive or customised service that is rendered by the Stock Exchange. “Technical services” like “managerial  and  consultancy  service”  would denote seeking of services to cater to the special needs  of  the  consumer/user  as  may  be  felt necessary and the making of the same available by the service  provider. It  is  the  above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of  the service,  the latter, even if termed as a service, is available to all and would, therefore, stand out in distinction to the  former.  The  service  provided  by  the  Stock Exchange for which transaction charges are paid fails  to satisfy  the aforesaid test  of  specialised,

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exclusive and individual requirement of the user or  consumer  who  may  approach  the  service provider  for  such  assistance/service.  It  is  only service of the above kind that, according to us, should come within the ambit of the expression “technical services” appearing in Explanation 2 to Section 9(1)(vii) of the Act. In the absence of the above  distinguishing  feature,  service,  though rendered, would be mere in the nature of a facility offered or available which would not be covered by  the  aforesaid  provision  of  the  Act.

9.  There  is  yet  another  aspect  of  the  matter which,  in  our  considered  view, would  require  a specific notice. The service made available by the Bombay  Stock  Exchange  [BSE  Online  Trading (BOLT) System] for which the charges in question had  been  paid  by  the  appellant  assessee  are common services that every member of the Stock Exchange is  necessarily  required  to  avail  of  to carry  out  trading  in  securities  in  the  Stock Exchange. The view taken by the High Court that a member of the Stock Exchange has an option of  trading  through  an  alternative  mode  is  not correct. A member who wants to conduct his daily business in the Stock Exchange has no option but  to  avail  of  such  services.  Each  and  every transaction by a member involves the use of the services  provided  by  the  Stock  Exchange  for which a member is compulsorily required to pay an additional  charge (based  on  the  transaction value)  over  and  above  the  charges  for  the membership in the Stock Exchange. The above features  of  the  services  provided  by  the  Stock Exchange  would  make  the  same  a  kind  of  a facility  provided  by  the  Stock  Exchange  for transacting  business  rather  than  a  technical service  provided  to  one  or  a  section  of  the members  of  the  Stock  Exchange  to  deal  with special situations faced by such a member(s) or the  special  needs  of  such  member(s)  in  the conduct  of  business in the Stock Exchange.  In other words, there is no exclusivity to the services rendered by the Stock Exchange and each and every  member has to  necessarily  avail  of  such services  in  the  normal  course  of  trading  in securities in the Stock Exchange. Such services,

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therefore,  would  undoubtedly  be  appropriate  to be  termed  as  facilities  provided  by  the  Stock Exchange on payment and does not amount to “technical  services”  provided  by  the  Stock Exchange, not being services specifically sought for by the user or the consumer. It is the aforesaid latter feature of a service rendered which is the essential  hallmark  of  the  expression  “technical services”  as  appearing  in  Explanation  2  to Section 9(1)(vii) of the Act.”

13. 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.

14. 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

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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.   

15. 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

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are, therefore, bereft of any merit and are accordingly dismissed.

.............................................J. (A.K. SIKRI)

.............................................J. (ABHAY MANOHAR SAPRE)

NEW DELHI; FEBRUARY 17, 2017.

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