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III. Direct Taxes Case Laws:
1. DIT Vs. A. P. Moller Maersk, Civil Appeal No. 8040 of 2015, Date of Judgment: 17.02.2017, Supreme Court of India
Issue:
Whether the payments made by the agents to the concerned foreign
assessee, for using the facility of Net Communication System, developed
by the assessee for smooth functioning of its international shipping
business would be classified as fees for technical services and would be
chargeable as income under Income Tax Act, 1961?
Held_No
Brief Facts:
The assessee is a foreign company engaged in the shipping business
and is the tax resident of Denmark. While making the assessment, the AO
duly provided the benefit of Double Taxation Avoidance Agreement (DTAA)
between India and Denmark to the assessee. During the assessment
proceedings, the AO observed that the assessee had agents working for it
in India who booked cargos and acted as clearing agents for assessee.
The assessee was maintaining a global telecommunication facility called
Maersk Net System which is a vertically integrated communication system.
The assessee said the agents were paying for the telecommunication
system on the pro-rata basis. The assessee contended that payments
received by the assessee were in the nature of the reimbursement of
expenses. But the AO contended that the said amounts paid by the agents
are fees for the technical services rendered by the assessee and is
therefore taxable in India under Article 13(4) of the DTAA and is
assessed @ 20% u/s 115A of the Income Tax Act, 1961. Regarding the same,
the appeal filed by the assessee before CIT(A) was dismissed but the
assessee’s appeal was allowed by the ITAT. Aggrieved by the order of the
ITAT, the Revenue filed an appeal in the High Court of Bombay wherein
the order of the ITAT was upheld by the Court stating that 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. It was
also held 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. Aggrieved by which, the Revenue
appealed before the Hon’ble Apex Court.
Held:
The Hon’ble Supreme Court Upheld the decision of the High Court of
Bombay and held 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. This Net
system is a facility which enables the agents to access several
information like racking of cargo of a customer, transportation
schedule, customer information, documentation system and several other
information. Thus, the system is an 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. It is
clearly held that no technical services are provided by the assessee to
the agents. Payments made by the agents are in the nature of
reimbursement of costs. Also, neither AO nor CIT(A) has stated that
there was any profit element embedded in the payments made by the agents
to the assessee and therefore, it cannot be chargeable to tax under the
Income Tax Act.
Therefore, the appeal of revenue is dismissed.
(Please click here for judgment)
2. ITO Vs. Shri Vivek Ramrao Parashkar, I.T.A. No.1733/ 2014, Date of Order: 27.02.2017, ITAT - Mumbai
Issue:
Whether excess expenditure incurred over and above the value of
contract can be claimed as revenue expenditure, in case where assessee
is following contract completion method?
Held: Yes
Brief Facts:
The assessee is a developer and engaged in the business of
construction, running and operation of hotels, dealers in all types of
Hero Honda two wheelers and gas agency, etc. During assessment
proceedings, AO found that under one of the proprietary concerns of the
assessee a net loss was shown. The said proprietary concern was engaged
in the business of construction and during the year it undertook a
project to construct bus stand and commercial complex. The AO found that
the part of the expenses incurred during the year on account of
purchases and direct expenses were capitalized to Work-In-Progress and
part of expenses were shown as revenue expenditure.
There
were no sales during the year and resultantly the assessee suffered loss
as current year loss which was set off against the income from other
proprietary concerns. The assessee submitted that due to flood which
happened in the year 2002, the entire construction done by the assessee
had collapsed, and the loss shown during the year was primarily on
account of expenses on maintenance of bus stand and commercial shops
constructed by the assessee which were not to be reimbursed to the
assessee under the MOU and accordingly shown the current year loss. The
AO rejected the contentions of the assessee and added the same to the
total WIP. Being aggrieved by that the assesse appealed to the CIT(A)
and the CIT(A) has allowed the appeal of assessee and delete the
additions made by AO. However, against the order of AO, revenue has
preferred appeal to ITAT.
Held:
The Hon’ble ITAT held that it was an undisputed fact that the
construction was badly damaged due to floods and its negative effect and
the expenditures incurred to maintain bus stand and commercial complex
was not recoverable under BOT and as per AS-7 when the cost of contract
is likely to exceed the contract revenue then the loss incurred on the
contract should be recognized as revenue expenditure immediately.
Considering these facts, it upheld the order of the ld. CIT(A).
Therefore, the appeal of the revenue is dismissed.
(Please click here for judgment)
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