TMI Blog2004 (6) TMI 273X X X X Extracts X X X X X X X X Extracts X X X X ..... As with those countries. The Assessee is in the appeal before us for all the three years. The Revenue is in appeal for Financial Years 1998-99 to 1999-2000 only. As the issues are common in all the three years, these appeals are disposed of by a consolidated order. 2. The remaining three appeals are by assessee against sustenance of penalty under section 271C for these three years. We will take first the appeals of the assessee and department in regard to levy of interest under section 201 and 201(1A). 3. The brief facts of the case are that the assessee is a domestic company which had acquired four Boeing Cargo Aircrafts in mid-1997 from a foreign company. The assessee obtained license from the Director General of Civil Aviation (DGCA), the licensing authority, to operate these aircrafts on international routes only. It also engaged crew, technical personnel, engineers and other ground staff and wet-leased the aircrafts to a foreign cargo company. The assessee periodically made payments to non-residents on account of overhaul, repairs of its aircrafts, engines sub-assemblies and rotables (hereinafter referred to as 'components') in workshops abroad. No tax was deducted at sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inIndia, their income was not chargeable to tax. The Revenue is in appeal against the order of the CIT(A) on this point. 5. Both the assessee and Revenue have raised several grounds of appeal. The learned counsel has filed written submissions on issue-wise. Thereafter the counsel of the assessee argued grounds issue-wise and attention of the Bench was drawn on various documents placed on record. These documents are in shape of copy of agreement; copy of written submissions; details of payments; detail of receipts. Attention of the Bench was drawn on various case laws relied upon by him. The counsel of the assessee has also invited attention of the Bench on issue-wise written submissions placed on record. On the other hand, the learned DR. strongly relied upon the orders of Assessing Officer and the findings of CIT(Appeals) to the extent the order of the Assessing Officer was confirmed. Heavy reliance was placed on the decisions relied upon by Assessing Officer and CIT(Appeals) and it was stated that the ratio of the decision of the Tribunal in case of Sahara Airlines is squarely applicable on the facts of the present case. Therefore, the order of the Assessing Officer should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout any involvement of or consultation with the assessee, and therefore these do not tantamount to "fees for managerial, consultancy or technical services" as defined in Explanation 2 to section 9(1)(vii) of the Act?" 7. This issue goes to the root of the controversy. The company operates aircrafts which it had acquired in the middle of 1997 from a foreign company. It had wet-leased these aircrafts to another foreign company. The CIT(A) has held that the major payments were covered by a comprehensive 'Technical Support Services Agreement' as per attachment 'A' of the Contract with Technik. She held that services rendered by Technik were not in the nature of routine repairs as they involved modification of aircraft and its designing for airworthiness etc. which involved knowledge of sophisticated technology and that highly trained engineers were employed by these foreign companies in carrying out the repairs. She therefore held that the impugned payments to the non-residents fell within the ambit of Explanation 2 to section 9(1)(vii) of the Act. The CIT(A) was of the view that the facts of the case are similar to those in the case of Mannesmann Demag Lauchhammer v. CIT [1988] 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... craft. Every aircraft operator has to strictly abide by these guidelines. Failure to do so would result in immediate withdrawal of the license and the aircraft would be grounded. It is stated that since the assessee was under obligation to keep the aircrafts in flying condition, it had to maintain them in accordance with the guidelines of DGCA so that it would have a valid airworthiness certificate without which it would not be possible to carry on the business. It is explained that the engineering department of the assessee would constantly track the flying hours of every component. That before the expiry of flying hour, component for overhaul repairs which ordinarily would also involve replacement of parts would be dismantled by the assessee's engineers and flown to Technik workshops in Germany. It is stated that parts were supplied by Technik under separate agreement of sale, loan or exchange. In due course, the overhauled component would be dispatched by Technik along with airway bill for which the freight would be paid by the assessee. The overhauled component would be fitted into aircrafts by the assessee's own personnel. 11. The ld. Counsel took us through the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel emphasized before the CIT(A) that these services were not availed of by the assessee and no payment was made on this account. Ld. Counsel took us through the invoices raised by Technik which were filed with the CIT(A) (contained in assessee's Paper Book B), to show that no payment was made for any of those services. It was submitted the modification of an aircraft including development design is an extremely rare event occurring when the manufacturer (Boeing in the present case) finds something seriously wrong with the aircraft of a particular model and issues an international alert. Every licensing authority including DGCA insists that the prescribed modification or alert service is carried out in an authorised workshop. It is stated that no such need for modification or alert service arose during the period that the assessee was in business. Therefore, no such work was carried out by Technik. It is submitted that the payments for specific repair work were made in a piecemeal manner on the basis of invoices raised by the Technik. Regarding training, it is stated that the assessee had made payments for training of its crew and engineers to another foreign company, namely, Lu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 'fees for technical services' as per the provisions of the DTAA with UK. It was further stated that the assessee did not pay any hotel bill for any personnel of Technik as no employee of Technik ever visitedIndiafor supervising repairs or any consultancy service to the assessee. 15. It was explained that as per the International Conventions, every component containing rotable parts is allotted a unique identity number and its historical record is maintained in a tag which accompanies the component throughout its life. Such component including engines needs to be overhauled periodically in accordance with Boeing's manual. The assessee sends the components together with tag to the workshop abroad. Technik's workshops inGermanyare duly authorised by the manufacturer, namely, the Boeing USA. Upon receipt, the Technik overhauls the component in accordance with the Manufacturer's Manual, as per the requirement of the DGCA. The assessee has no say in the matter. It does not even know as to what kind of repairs have been carried out as no employee of the assessee visits Technik's facilities in connection with the repair work. It is submitted that all that the assessee is interested in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dras v. Ganon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353 and Builders 'Association of India v. Union of India [1989] 73 STC 370 wherein it was held that works contract constitute a class of contracts in which the contractor either himself or through his employee uses certain expertise in performing the work for achieving the task contracted for. That it is in the process of achieving such a task that the contractor utilises his expertise. That when the work is carried out on an inanimate object without any participation or interaction the assessee, the 'human element' is absent. 18. The Ld. Counsel also referred to the decision of the Supreme Court in the case of Birla Cement Works v. CBDT [2001] 248 ITR 216, wherein the Apex Court has affirmed the decision of the Calcutta High Court holding that the word "work" means engagement in the performance of a task, duty or the like and "it covers all forms of physical and mental exertion or both combined for the overall attainment of some object other than recreation or amusement." Reliance was also placed on a recent decision of the Supreme Court in the case of Hindustan Shipyard Ltd. v. State of Andhra Pradesh [2000] 119 STC 533 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Airlines vis-a-visLufthansa Technik,Germany LCI --------------------------------------------------------------------------------------------- S.No. Sochata-Sahara Contract Art II Technik LCI Contract PB II --------------------------------------------------------------------------------------------- A. Repairs-Engineering Coordination- Repairs of engines and components.No Engineering overall material coordination or material coordination B. Provide parts incorporated into Provide parts under separate and independent equipment in the course of individual contracts of loan/exchange or sale. repairs. Material used during the repairs were sold and invoiced accordingly. C. Maintain files on all related No such requirement. No such facility availed Engineering specifications etc. of. No payment was made for any such service. D. Provide warehousing and inventory No such requirement. No such facility availed of. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Lufthansa Technical Training GmbH, Germany to whom fees was paid during F.Ys. 1997-98 and 1999-2000 on which tax was duly deducted before remittance. No payment was made to Technik --------------------------------------------------------------------------------------------- Article III(A) --------------------------------------------------------------------------------------------- A. Deliver to Sochata all equipment No such requirement LCI may send any engine or CFM 56 engines owned by Sahara for component to any authorised workshop in any other repairs or maintenance country as indeed it often did so. --------------------------------------------------------------------------------------------- S.No. Sochata-Sahara Contract Art V Technik LCI Contract PB II Prices --------------------------------------------------------------------------------------------- A. 1. Labour @ US$ 48 per man hour For work performed for r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis (ECM). No such service was availed of as ECM was throughout the period carried out by LCI's own engineers at Sharjah. (DM 1000 per day on this account would be chargeable on if the service were availed of-since this optional service was not availed of no bill was ever raised-no payment ever made), (cl. 1.3.1 read with cl. 3.2 of Technik Contract). Similarly, ECM fixed charge of DM 30,000 per annum-never neither charged nor paid as this optional service was never availed of. 4. Reliability Tracking and Reporting- Not availed of-No bill raised-no payment made. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source". (Reproduced from pg. 6530 of Chaturvedi Pithisaria's Income Tax Law, Fifth Edition, and Vol. 4). It was submitted that Technik carried out normal maintenance repairs including supply of spares, and therefore, had Technik been a domestic-company the payments to it would be covered by the provisions of section 194C and not by the provisions of section 194J, which cover fees for technical services as defined in section 9(1)(vii). The Ld. Counsel contends that periodic overhaul repairs of components carried out in accordance with the instructions issued by the DGCA were routine normal repairs as against 'out-of-ordinary' repairs including assignment of technical personnel, which may be required in case of break-down or accident. 21. For the Revenue, the Ld. CIT(DR) strongly relied on the orders of the authorities below. He submits that the decision of Delhi High Court in the case of SRF Finance Ltd. in fact supports the Revenue's case. According to theLd. DRthe assessee has used sophisticated technical experience and skills of the personnel of the Technik in the process of repairs and overhaul carried out by them. Ld. DR vehemently submitted that the CBDT Circular No. 715 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'. The Explanation defines fees for technical services to mean that any payments made to a non-resident for rendering services like 'managerial' 'technical' or 'consultancy' services would be treated as "fees for technical services". The three types of services envisaged above also include the provision of the services of technical or other personnel. 24. It cannot be disputed that the assessee is under legal as well as contractual obligation to keep its aircrafts in airworthy condition. It has therefore two options available for achieving this object:- a. to handover the management of maintenance and upkeep of aircrafts and inventories to a contractor for running a successful programme for keeping them in airworthy condition on an ongoing basis; or b. manage on its own all aspects relating to a successful programme for maintenance of aircrafts and components and send them periodically to authorised workshop for executing overhaul repairs as per manufactures manual. If on facts, as in the case of Sahara Airlines, it is found that the engineering ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usively in accordance with, the existing laws of the Federal Republic of Germany. The exclusive place of jurisdiction for any legal actions that should arise out of, or in connections with, this Agreement shall beHamburg/Germany. 14.3 The place of delivery and redelivery shall be the Lufthansa Technik Base performing the work. 14.4 Lufthansa Technik reserves its ownership rights on all components, engine accessories, and spares supplied until full payment of all invoices has been made. 14.5 In case of non-payment by the Customer, both parties agree that Lufthansa Technik has by virtue of its work performed a right of retention as well as a contractual lien of the subject-matter being in custody of Lufthansa Technick. The right of retention and the contractual lien as well as a set-off-right may also be applied on account of claims from previous orders of supplies or any other claims from customer's business relationship with Deutsche Lufthansa Aktiengesellschaft and/or its affiliates. In cases of controversies between the parties regarding the performance of work the work in question may be submitted to the manufacturer for judgment whose decision shall enable the parties to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis for concluding that the payments were primarily made for rendering of technical services. The only relevant part of the Technik contract which needs consideration is the 'Attachment C which deals with 'Components Overhaul'. 27. The relevant terms of the contract by way of attachment 'C' of the Technik Agreement are:- Attachment 'C' 1. Scope of services 1.1 Repair, overhaul, modification and test of all components as far as identical with Lufthansa Technik's own components. In cases of differences in the dash-number repair/overhaul items shall only be accepted after Lufthansa Technik's prior telex confirmation. 1.2 Material, supply out of Lufthansa Technik stock for above components repair/overhaul in accordance with Art. 2 hereof. 1.3 Lufthansa Technik shall be entitled to sub-contract repair and overhaul of components in accordance with Art. 4 of the GTA. 1.4 Each overhauled component will be redelivered with the following documentation: 1. JAA form (Airworthiness Approval Tag) 2. Workshop Report 3. Test Reports if applicable. 2. Material Provisioning 2.1 Repairable and consumables required for the work to be performed on the Customer's component ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur. The second is clearly a contract for work and labour not involving sale of goods. The third is a contract for sale where the goods are sold as chattels and the work done is merely incidental to the sale." Attachment "C" of the Technik contract is the first type of "work contract" as categorised in the above quoted passage. 29. A Chart was furnished before the CIT (Appeals) and also before us giving the year-wise breakup of the payments made to Technik and others (Page 152 of Paper Book B) under the heads; 'labour', 'material', 'repairs' and 'others'. It is noticed that 'repairs' and 'materials' account for about 60 per cent of the total amount of payment and 'labour charges' account about 30 per cent. The balance 10 per cent of payments falling under the head 'others' primarily include airport charges, fuel and parking charges etc. It is clear that the co-ordination of transportation of the components to the Technik's facilities inGermanywas the assessee's responsibility. Technik carried out the job work of repairs and replacement of parts at its own discretion. The overhauled components along with certificate of airworthiness is sent back at the assessee's cost. The Techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an international loan could be said to be technical services. The Hon'ble High Court held that such financial consultancy services were technical service by observing:- "The petitioner-company intended to utilise the expert services of qualified and experienced professionals who could prepare a scheme for raising the required finances and tie up the required loan. Being unable to find such a professional inIndia, it had to seek the services of a consultant outsideIndia. The non-resident company offered its services as financial adviser to the petitioner's project. Those services included, inter alia, financial structure and security package to be offered to the lender, study of various lending alternatives for the local and foreign borrowings, making an assessment of export credit agencies worldwide and obtaining commercial bank support on the most competitive terms, assisting the petitioner company in loan negotiations and documentation with lenders and structuring, negotiating and closing the financial for the project in the co-ordinated and expeditious manner." In the above case there was no dispute that the Swiss company provided advisory services to the Indian company. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal fees. The three types of services would also include the provision of services of technical or other personnel. It might be possible to argue that in merely repairing certain machineries for which the warranty period had already expired, there is no consultancy services either the provision of technical or other personnel Normally, managerial or technical consultancy services would be done by a non-resident company by utilizing the services of their Managers and Technicians. The Company has to act only through its employers or Directors. Thus, the human element in such consultancy services is already implied. But, the Legislature in their wisdom had decided to add the words in parenthesis and so the provision of services of technical or other personnel for any purpose would be treated as technical services, be it for a small repair work or a large reconstruction work. We, therefore, do not find any reason why the technical consultancy in respect of repair works cannot be considered as technical fees." We find that in Mannesmann Dernag Lauchhammer's case, the foreign company rendered 'technical consultancy' by way of deputing a technician toIndiafor supervising repairs to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect to normal maintenance repairs would be relevant for understanding true import of the said Explanation in the context of section 9(1)(vii)(b) of the Act. 36. We also find no merit in the contention of the Ld. DR that since section 195 deals only with payment to a non-resident, the assessee cannot raise the plea that the income of the non-resident on account of such payments was not chargeable to tax under the provisions of the Act. The law on the subject is quite clear. If the payments to non-resident are not chargeable to tax, the assessee can always take this plea even if it has made no application under section 195(2) of the Act. The decision of the ITAT 'E' Bench in the case of ACIT v. Pepsi Foods cited by theLd. DRdoes not help him. In that case, transfer of technology was admittedly involved and in that context, the Tribunal observed:- "a bare reading of the provisions of section 195 clearly shows that if any sum to be paid by an assessee, not falling within the preceding sections, to any non-resident, is chargeable to tax under the Act, then assessee is under obligation to deduct the lax at source either at the time of payment or at the time of credit in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the following conditions are required to be fulfilled:- (a) the assessee is resident ofIndia, (b) income is earned from a source outsideIndia, and (c) there exists a direct nexus between the payment (expenditure) and earning of the income. All the three conditions should be cumulatively satisfied for exempting "fees for technical services" from chargeability of tax. The first and the third conditions are clearly satisfied. Dispute is in regard to the second condition. The CIT(A) has taken a view that as per terms of the agreement between the assessee and LCAG merely gets priority over others in the use of the aircraft. That there is no prohibition on the assessee to wet-leasing of the aircrafts to any third party. According to CIT(A), aircrafts have been wet-leased solely to LCAG,Germany, but also to other parties and therefore it cannot be said that the revenues have been earned wholly from a source outsideIndia. The Assessing Officer has held that since the income from leasing of aircrafts is assessed to the tax inIndia, the source of income is situated inIndia. 39. Ld. Counsel for assessee has made the following submissions: (i) Section 9(1)(vii)(b) clearly applies t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 'A' of the certificate gives the year-wise breakup of the lease rentals as under: Details of Traffic Revenue from wet-lease of aircrafts by Lufthansa Cargo India Private Ltd. -------------------------------------------------------------------------- F.Y 1997-98 F.Y. 1998-99 F.Y. 1999-2000 -------------------------------------------------------------------------- Traffic Revenue from wet lease of aircraft's received from -------------------------------------------------------------------------- Lufthansa Cargo AG 318,513,565 854,612,518 657,569,352 (Germany) -------------------------------------------------------------------------- Singapore Airlines - 67,352,333 41,020,195 (Singapore) -------------------------------------------------------------------------- Pacific Asia Cargo Airlines - 26,125,451 37,769,600 (Indonesia) -------------------------------------------------------------------------- Shareef Express Travels - 2,038,548 1,065,865 (UAE) ------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be German Law. In this connection, reliance was placed on a decision of Supreme Court in the case of Dhanrajmal Gobindram v. Shamji Kalidas Co. [1961] (3) SCR 1020, wherein it has been held:- "Whether the proper law is the lex loci contractus or lex loci solutionis is a matter of presumption; but there are accepted rules for determining which of them is applicable. Where the parties have expressed themselves, the intention so expressed overrides any presumption." Reliance was also placed on the decision of the Supreme Court in the case of Kunwar Trivikram Narain Singh v. State of Uttar Pradesh [1965] 57 ITR 29, wherein it was held that in certain circumstances the contract itself can be the 'source of income'. Thus, if the wet-leasing contract were to be considered as the source from which income is earned, the said source is outsideIndiaas the contract has been made outsideIndia. However, if the activity of wet-leasing were to be considered as the 'source', the same also took place outsideIndia. Hence the situs of the source of the receipts was outsideIndia. The assessee has put its aircrafts to use by wet-leasing them outsideIndiaand earned rental income in US dollars outs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a non-resident earning income from a source withinIndia, under section 9(1)(vi)(c), but the principle stated therein is equally applicable to a resident under section 9(1)(vii)(b) of the Act in determining whether income was earned from a source outsideIndia. Lastly, it is submitted that it is indisputable that payments to the non-resident have been made for overhaul repairs for earning income from the activity of wet-leasing. There is therefore a direct nexus between the payments and the earning of income from sources outsideIndia. 45. For the Revenue,Ld. DRstated that it could not be said that the entire income was earned from sources outsideIndia. He drew our attention to the relevant paras in the orders of the Assessing Officer and CIT(A), wherein it was found that the entire income of the assessee could not be said to have been earned from sources outsideIndia. He strongly relied upon the findings in the orders of the authorities below. 46. We have carefully considered the rival submissions. It would be appropriate at this stage to set out the terms of the LCAG contract dated28-4-1997. These are extracted below:- 1. Scope of Agreement This Agreement shall set forth t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andor any place mutually agreed upon between the Parties. Capacities and Flight Schedules Annex No. 2 1. Capacities to be made available by LCI- Should LCAG anticipate that the capacity provided by LCI under the Agreement cannot be utilised by LCAG in its entirety in any calendar month, LCAG shall give promptly written notice of such determination to LCI. In the instance such notice is given more than 60 days before the date of the flight concerned, LCI will use its utmost efforts to re-market the capacities and flights not to be utilised by LCAG. Should LCI be able to sell any such capacities on its own behalf, LCAG shall be entitled to a refund as set forth in Annex 3 of the Agreement, but only within the minimum block Hours guaranteed to LCAG to LCI under this Agreement. Charges and Payments Annex No. 3 As set forth in Article 3.2 of the agreement the following terms and conditions apply for the calculation and payments of any charges by the LCIL for the Capacity provided under this agreement. 1. "Block Hour" is defined as the period of time operated by the Aircraft gate to gate expressed in hours commencing when the Aircraft moves from the blocks to begin a flight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-resident parties. A miniscule fraction of the lease rental (0.2%) has been earned from an Indian party. But, this cannot detract from the fact that virtually entire income has been earned from non-residents through the activity of wet-leasing of the aircrafts carried on outsideIndia. 49. The assessee's activity of wet-leasing of aircrafts is a distinct activity which constitutes a source from which income has been earned. Revenue is not correct in identifying this leasing activity with the transportation activity of the lessee, LCAG,Germany. The following observations of the Supreme Court in the case of Gosalia Shipping (P.) Ltd. are apposite:- "If any guidance is to be sought from the terms of the agreement between the parties, the conclusion seems inescapable that the amount which the timecharters were required to pay to the owners of the ship was not payable on account of the carriage of goods but was payable on account of the use and hire of the ship. Indeed, the other terms of the charter-party and the general tenor of the documents show that the payment was in fact to be made by the time-charterers for use and hire of the ship. If the charterers are liable to pay the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia. All the aircrafts were acquired by the assessee outside India-three under hire-purchase agreement and one under dry-lease agreement-from a foreign company for which payments were made in foreign exchange. The leasing revenues were earned outsideIndiafrom non-resident lessees. The Ld. Counsel referred to the Annual Accounts of the assessee for the three financial years (Paper Book-1) to show that leasing revenues were earned in foreign exchange from foreign airline companies. He also submitted a chart indicating transactions in foreign exchange for each of the three financial years as obtaining from the Annual Accounts of the assessee. As per this chart the leasing revenues earned in foreign exchange were 100%, 99.79% and 99.86% for the Financial years 1997-98, 1998-99 and 1999-2000, respectively. This chart also gives the figures of direct operational expenses in foreign exchange on actual payment basis as culled out from the Annual Accounts of the company for three years (Paper Book). As per the annual accounts, the direct expenses are mainly on account of lease rent, travelling and training, foreign office expenses, maintenance, interest on aircrafts acquired under hire-pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or instance, where a person carries on manufacture, sale, export and import, it is not possible to say that the place where the profits accrue to him is the place of sale. The profits received relate firstly to his business as a manufacturer, secondly to his trading operations, and thirdly to his business of import and export. Profit or loss has to be apportioned between these business in a business like manner and according to well established principles of accountancy in such eases it will be doing no violence to the meaning of the words "accrue" or "arise" if the profits attributable to the manufacturing business are said to arise or accrue at the place where the manufacture is being done and the profits which arise by reason of the sale are said to arise at the place where the sales are made and the profits in respect of the import and export business are said to arise at the place where the business is conducted....." The above passage is also sufficient in our opinion to establish that the apportionment of income, profits or gain between those arising from business operations carried on in the taxable territories and those arising from business operations carried on without ..... X X X X Extracts X X X X X X X X Extracts X X X X
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