(2017) 392 ITR 186 (SC)
Income deemed to accrue or arise in India; double taxation relief
No. A pro-rata recovery of the actual cost of a shared facility, without any mark-up or profit element, is a reimbursement and not income. It is neither royalty nor a fee for technical services.
Are amounts recovered from group agents as their share of the cost of a common communication system in the nature of royalty or fees for technical services?
The assessee, a Danish shipping company, operated a global telecommunication and tracking system that its agents worldwide, including agents in India, used to book cargo, track containers and communicate within the network. The cost of maintaining the system was shared among the agents in proportion to their use, and the Indian agents were charged their pro-rata share of the actual cost with no mark-up. The Revenue treated these recoveries as fees for technical services or royalty for the use of a system and process, and sought to tax them in the assessee's hands.
The Bombay High Court held the recoveries to be reimbursements not chargeable to tax. The Revenue appealed to the Supreme Court, which affirmed.
For the assessee
The shipping income itself was exempt under the treaty, and the communication system was an integral part of conducting that shipping business rather than a separate service offered for profit. What was recovered was the actual cost apportioned among users, with no element of income, and a recovery of cost cannot be income at all.
For the Revenue
The agents obtained the use of a sophisticated system and paid for it. Payment for the use of a process or for services of a technical nature falls within the definitions of royalty and fees for technical services, and the absence of a mark-up does not change the character of the receipt.
The Court held that no income arose at all. It found as a fact that the system was maintained for the purpose of the assessee's own shipping business and that its cost was simply distributed among the agents who used it, without any mark-up or profit element. A payment that does no more than restore to the payee the expenditure it has incurred on the payer's behalf is a reimbursement; there is no profit, and therefore no income, embedded in it. The Court held that since the receipts contained no income element, the characterisation debate over royalty and fees for technical services did not arise. It further observed that the system was an integral part of the shipping operation whose profits were protected by the treaty, so recoveries connected with that operation could not be carved out and taxed separately under a different article. The Court also relied on consistency, noting that the position had been accepted in earlier years without challenge.
Applied under Sections 9 and 159 of the IT Act 2025, and the leading authority on cost-sharing and reimbursement arrangements within multinational groups — shared IT systems, global communication platforms, centralised services and cost contribution arrangements. The decisive facts are the absence of mark-up and clear evidence of actual cost, which makes contemporaneous allocation documentation essential in practice.