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02-01-2020, CMA CGM Agencies India, Section 9(1)(vii), 40(a)(i), Tribunal Pune
In this appeal, challenge is laid to the order of the CIT(A)-1, Pune, dated 04-08-2017 in relation to the assessment year 2012-13.
2. The first and the only substantial ground is against the confirmation of disallowance u/s. 40(a)(i) of the Income-Tax Act, 1961 (hereinafter also called ‘the Act’) in respect of payment of ‘Software Maintenance charges’ amounting to Rs.6,85,69,596/-.
3. The factual matrix of the case is that the assessee, an Indian company, is engaged in the business as shipping agent. Return was filed declaring total income at Rs.44,86,04,590/-. The assessee reported certain international transactions in Form No.3CEB. Such transactions included `Payment of Software Maintenance charges’ to CMA CGM, France amounting to Rs.6,85,69,596/-. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of the international transactions. The TPO accepted the international transaction in question at ALP and did not recommend any transfer pricing adjustment. The AO, vide his order dated 14-03-2016 passed u/s. 143(3) r.w.s. 92CA(4) of the Act observed that the assessee debited Software Maintenance charges at Rs.6.86 crore, which amount was about 400% higher in comparison with the preceding year, in which such Software charges stood at Rs.1.67 crore. The assessee was called upon to give the details of the expenses and further comments as to why no deduction of tax at source was made from such payment. The assessee justified increase in Software services cost by stating that earlier it was using only Ocean Agents Accounting and Reporting Financial Tool provided by CMA CGM, France, its Associated Enterprise (AE) and from this year, it started using two more new Business Reporting tools, viz., LARA and DIVA provided by its AE. On the question as to why no deduction of tax at source was made, the assessee submitted that the amount was not covered either u/s.9(1)(vi) or 9(1)(vii) of the Act and further it was entitled to the benefit under India-France Double Taxation Avoidance Agreement (hereinafter also called ` the DTAA’) read along with Protocol having the Most Favoured Nation (MFN) clause. The AO did not concur with the submissions advanced on behalf of the assessee and held that it paid the said sum for availing IT Support services from its AE, which was not just Maintenance charges as claimed by the assessee. Relying on the judgment of Hon’ble Karnataka High Court in CIT Vs. Synopsis International Old Ltd. (2013) 212 Taxman 454 (Kar.) it was held that the amount paid by the assessee was chargeable to tax in the hands of recipient as Royalty u/s.9(1)(vi) of the Act. He further came to hold that the amount paid by the assessee for use of Software was also covered within section 9(1)(vii) of the Act, being, ‘fees for technical services’ in the hands of payee. He further did not accept the contention of the assessee about the grant of the benefit under the DTAA read with the Protocol by observing that the ‘make available’ clause was not defined in the Treaty read with the Protocol. This is how, the addition of Rs.6.85 crore and odd was made. The ld. CIT(A) held the amount to be in the nature of `royalty’ and also ‘fees for technical services’ u/s. 9(1)(vi)/(vii) of the Act. He further did not approve the assessee’s contention of being covered by the DTAA along with the Indo- Portuguese DTAA on the premise that the use of the word ‘or’ between clauses (a) and (b) proved that there was no requirement of fulfilling the conditions stipulated in clause (b) regarding ‘make available’. He, therefore, echoed the disallowance made by the AO u/s. 40(a)(i) of the Act. The assessee is aggrieved by the confirmation of the disallowance.
4. We have heard the rival submissions and gone through the relevant material on record. The AO proceeded with the issue by firstly observing that the payment of Software charges made by the assessee for the year was excessive and secondly, it was hit by section 40(a)(i) of the Act for want of non deduction of tax at source. He, however, did not make any disallowance on account of excessive payment and restricted himself only to the disallowance u/s. 40(a)(i) of the Act on the ground that the assessee failed to withhold tax on the payment of Rs.6.85 crore and odd made to its AE, namely, CMA CGM, France. Whereas the case of the assessee is that no deduction of tax at source was warranted, the Revenue has set up a case that the amount was chargeable to tax in India in the hands of the CMA CGM, France and hence the assessee was obliged to deduct tax at source. The rival contentions can be properly appreciated by firstly examining the nature of services availed by the assessee under the respective Agreements for using these Software, namely, LARA & DIVA on one hand and the Ocean on the other.
5. In so far as services under LARA & DIVA are concerned, both were provided to the assessee under `Lara and Diva IT Agreement’ dated 23-12-2011 effective from 01-01-2011, a copy of which has been placed at page 130 onwards of the paper book. Preamble of the LARA and DIVA IT Agreement states that: `CMA CGM (i.e. the French AE) is a company acting in the maritime transport which operates a fleet of vessels (and notably container ships) over worldwide shipping lines and whereas in order to pursue its business activity, CMA CGM has appointed an international network of agencies in order to render shipping services’. It further provides that :` the Agent (i.e. the assessee in question) is part of this international network of agencies and has been appointed as shipping agent by CMA CGM in order to represent and to provide the latter, in India, with some services regarding transport documentation, commercial, logistics and port operations services’. Not only the preamble of the Agreement, the relevant Articles of the Agreement also reiterate the scope of services in the same terms. Article 2 of the Agreement gives the `Description of the IT services’ separately by LARA and DIVA. In the context of LARA, this Article states that CMA CGM will provide to the assessee any and all IT services which, in turn, grants many