TMI Blog2005 (4) TMI 269X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in the business of running aircrafts for carriage of passengers. Some of the aircrafts, run by it are owned by it whereas the others are taken by it on lease from various non-residents. The assessee had taken two aircrafts on lease for a period of 6 years from ILFC and separate agreements were entered into in respect of each aircraft. The terms and conditions of these agreements are identical. According to art. 1.6 r/w art. 5.3 of the agreement, the assessee was required to pay the lease rent @ US $ 2,40,000 per month w.e.f. 31st Dec, 1995, and US $ 2,41,000 per month w.e.f. 1st Jan., 1995. According to art. 1.7 r/w art. 5.4, the assessee was also required to pay supplemental rent in the form of reserves @ US $ 234 per flight hour. According to Art. 5.4, the supplemental rent is based on the use of the aircraft by the lessee during the lease term. These reserves have been categorised as "airfreight reserves", "engine reserves" and "landing gear reserves". These reserves are created to meet the cost of expenditure incurred by the lessee in respect of the deficiencies and work specified in arts. 13.1 and 13.2. According to art. 13.3, the assessee is entitled to reimbursement fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... common practice to provide for such reserves in the agreement. An aircraft is required to undergo some statutory checks after running particular number of flight hours, 'C check and 'D' check are two such mandatory checks. The aircraft will not be provided with necessary airworthiness certificate by aviation authorities of respective country if such checks are not carried out. These checks are quite expensive, especially, 'D' check. The lessor wants to ensure that the lessee will carry out such check on its aircraft when it falls due. In order to avoid any default by the lessee, the lessor creates a separate reserve, charges some amount from lessee on per flight hour basis and keeps depositing this amount in that reserve. Whenever a mandatory check falls due, the lessee is required to get the respective check done and claim, as reimbursement, the amount spent by the lessee on such check. The reimbursement is limited upto a maximum of the amount lying in that reserve. If the lessee defaults in getting any check carried out in time, then the lessor can call back the aircraft and get the respective check done out of the reserves lying with the lessor. The same is the logic for all ty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the appellant as an assessee in default under s. 201(1) of the Act in respect of payment of supplemental lease rent to AMTEC, MAS and Lufthansa vide paras 65 and 66 of order dt. 10th May, 2000. On appeal by the appellant, the CIT(A) cancelled the order of the AO observing as follows: "As far as the payments to Malaysian Airlines, Lufthansa and Amtech are concerned, I find that the submission of the appellant that the agreements with these parties were approved by the CBDT after 1st April, 1996, is correct. The Dy. CIT has made no discussion in the order under appeal with regard to payments to these parties. From the copy of the orders of the CBDT it is seen that the following have been approved: ------------------------------------------------------ Sl. Name of the Date of Amounts Date of No. Party agreement as per CBDT order CBDT order ------------------------------------------------------ 1. Amtec Jet 31.12.1996 US $ 39,000 23.04.1997 Inc per month US $ 90 per 28.10.1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, for the benefit of this order, is being reproduced as under: '195(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries') shall, at the time of the credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. (2) Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities and salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the AO to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-s. (1) only on that proportion of the sum which is so chargeable.' The perusal of the above section shows that obligation to deduct the tax at source under this section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 996, were exempt from taxation, but from 1st April, 1996, the legislature has excluded the payments made for providing spares, facilities or services in connection with the operation of the leased aircraft from the ambit of s. 10(15A) of the Act. If the facts of the case are to be brought within the exclusionary provisions of s. 10(15A) of the Act, then it must be shown that payments are not only in connection with the operation of the aircraft but also such payments relate to the supply of spares or provisions of facility or service provided by the lessor. In our considered opinion, there must exist inextricable link between the above two requirements. Therefore, in order to resolve the controversy before us, it would be useful to go through the relevant terms and conditions of the agreement between the assessee and ILFC which are being reproduced as under:..........." After analysing the terms of the agreement between the parties, the Tribunal further concluded as follows: "The perusal of the above covenants of the agreement reveals that lessee was responsible to bear all the expenses in the course of the term of the lease on account of operational cost, repair and replacemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services by the lessor. On the other hand, the terms of the lease clearly provide that it is the absolute responsibility of the lessee to bear all the expenses and the losses during the operation of the leased aircraft. It is not the case of the Department that the lessor provided any spares to the lessee against such payments. Further, there is no material/evidence to suggest that the lessor ever provided for any of facility or service to the lessee against such payments. Merely because that the payment of supplemental rent was to meet certain types of operational cost, it cannot be said that such payment was attributable to any facility or service by the lessor. At this stage, we may like to mention that s. 10(15A) of the Act, as originally inserted, exempted from taxation the payments made for acquiring the aircraft on lease from Government of a foreign State or a foreign enterprise under an agreement approved by the Central Government. Admittedly, the agreement in question dt. 30th Sept., 1994, was approved by the Central Government under s. 10(15A) of the Act. It is also not in dispute that prior to 1st April, 1996, the entire payment including the supplemental rent under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services of pilots and other members of the crew along with the aircraft and for the training of the pilots and other crew members. The payments for the aforesaid services provided by the foreign enterprises would normally have been liable to income-tax, if these services were not provided under the lease agreement. The tax avoidance, as aforesaid, needs to be checked. The Bill, therefore, seeks to substitute cl. (14A) of s. 10 by a new clause. The new cl. (15A) seeks to restrict the scope of the aforesaid income-tax exemption by excluding therefrom payments made for providing spares, facilities or services in connection with the operation of the leased aircraft. The proposed amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to asst. yr. 1996-97 and subsequent years.' From the above, it is crystal clear that the intention of the legislature was to tax the payment made for spares, facilities or services provided by the recipient. Therefore, the change in the law has to be understood in that context. So, if any payment has to be brought within the exclusionary portion of s. 10(15A) of the Act, then it must be established (i) that lessor either ..... X X X X Extracts X X X X X X X X Extracts X X X X
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