TMI Blog2015 (5) TMI 873X X X X Extracts X X X X X X X X Extracts X X X X ..... and its components maintained, serviced or overhauled by designated centres. It is this specification which makes the aircraft safe and airworthy because international and national domestic regulatory authorities mandate that certification of such component safety is a condition precedent for their airworthiness. The exclusive nature of these services cannot but lead to the inference that they are technical services within the meaning of Section 9(1)(vii) of the Act. The ITAT’s findings on this point are, therefore, erroneous. This question is accordingly answered in favour of the Revenue. Whether payments made by the assessee fell within the purview of the exclusionary clause of Section 9(1)(vii)(b) of the Act and were not, therefore, chargeable to tax at source? - Held that:- Coming to the instant case, it is evident that fee which has been named as "success fee" by the assessee has been paid to the NRC. In the present case, the ITAT held that the overwhelming or predominant nature of the assessee’s activity was to wet-lease the aircraft to LCAG, a foreign company. The operations were abroad, and the expenses towards maintenance and repairs payments were for the purpose of ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r an Agreement dated April 28, 1997. In airline parlance, wet leasing means the leasing of an aircraft along with the crew in flying condition to a charterer for a specified period. The lessor has the responsibility for maintaining the crew and the aircraft in airworthy condition. The lessee is free to direct the flight operations by naming destinations in advance and load any lawful cargo for carriage. The lessee pays rental on the basis of number of flying hours during the period subject to a minimum guarantee as per the terms of the charter party. 4. India is a party to several International Conventions governing aircraft maintenance. Under the Aircraft Act, 1934 read with Aircraft Rules, 1937, the necessary regulatory and enforcement powers have been delegated by the Government to the DGCA. The latter issues notifications and guidelines etc. from time to time in regard to the maintenance and upkeep of aircraft. Every aircraft operator has to strictly abide by these guidelines; non-compliance entails in immediate withdrawal of the license and grounding of aircraft. As the assessee was obliged to keep the aircraft in flying condition, it had to maintain them in accordance wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e described below:- (a) Provision of Personnel (b) Engineering Support Services including: i) Engineering work which includes air worthiness. ii) Directives and Alert services iii) Development design and modification iv) Familiarization course. Article 2 of the Agreement stated that such services would be provided by Technik at the request of the assessee. 7. In the assessment proceedings, it was contended 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 assessee stressed that in terms of 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 used to send components with tag to the workshop abroad. Technik's workshops ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. The assessee's alternate plea that in any case the payments made to residents of USA, UK, Israel, Netherlands, Singapore and Thailand could be taxed as business profits only and not as fees for technical services keeping in view the relevant provisions of the DTAAs with those countries too was rejected. The AO passed orders under Section 201 of the Act deeming the assessee to be an assessee in default for the financial years 1997-98 to 1999-2000, and levied tax as well as interest under Section 201 (1A) of the Act. 9. On appeal, the CIT (A) rejected the assessee's contention that the payments made to the various non-residents for carrying out overhaul repairs were not chargeable to tax. The payments made to Technik were treated as the model for considering the question of taxability of payments made to all other foreign companies. CIT (A) held that such repairs required knowledge of sophisticated technology and trained engineers are employed by the non-residents for carrying out the overhaul repairs. According to the CIT (A), the repairs constituted 'fees for technical services' and therefore were subject to TDS. With reference to payments made to residents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny of the optional services enumerated in Attachment 'A' and 'B'. Ld. DR has also could not controvert that payments to Technik were made for specific job work of repairs and replacement of parts, and no technician was assigned to India for consultancy or supervision of repairs. We are therefore of the view that simply because Attachment 'A' and 'B' stipulate charges for optional services, it cannot be said that any payment is attributable to such services. These services are optional and could be performed on specific request by the assessee. On the facts brought out before us such option was not exercised by the assessee. Ld. DR also could not indicate any clause in the Technik Agreement which would oblige the assessee to pay the fees towards optional services even if such an option is not exercised by the assessee. In the circumstances, we hold that CIT (A) was not correct in making attachments 'A' and 'B' of the Technik Contract as the basis for concluding that the payments were primarily made for rendering of technical services Attachment C reads as follows: Attachment 'C' 1. SCOPE OF SERVICES 1.1 Repair, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repair work the Customer shall pay a minimum charge per event of DM 1,000,-. Upon an analysis of the various terms of the agreement and the actual services provided by Technik and availed by the assessee, it was held that the amount received by the former was a routine business receipt and not technical fee: it cannot therefore be said that Technik rendered any managerial, technical or consultancy service to the assessee. 11. Upon a consideration of the wet leasing activity of the assessee and the agreements it entered into with foreign companies, the ITAT held that these arrangements showed that: (i) The assessee has to maintain the crew and keep the aircrafts in airworthy state. (ii) The assessee company earns rental income on block-hours basis. (iii) The assessee cannot wet-lease the aircrafts to a third party without a written permission from the LCAG. (iv) In case of non-utilisation of aircrafts by the LCAG, it has to pay minimum guaranteed rental 240 block-hours per month in accordance with Clause No. 2.2 read with, Annexure 3 of the contract. (v) The amount of leasing revenues depends on the number of flying hours utilised by LCAG and not on the valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnight stay of crew and airport charges etc. When the aircrafts landed in Indian airports for delivering and picking up cargo. 52. The Ld. CIT DR relied on the order the Assessing Officer and contended that the assessee's business was controlled from India and therefore it cannot be said that the business was carried on outside India. 53. We have carefully considered the rival submissions and we have also gone through the annual accounts of the assessee for the Financial Years ended 31.3.98, 31.3.99 and 31.3.2000 respectively, filed in the Paper Book. The question whether a business is carried on in India or outside India cannot be decided by the situs of the Head Office or the place of control of the business. The assessee, being an Indian company, would have the Head Office or the place of control in India. We agree that the assessee's business of wet-leasing of aircrafts have been predominantly carried on outside India. The assessee's business of wet-leasing of aircrafts is composed of a number of operations such as acquisition of aircrafts, wet-leasing, maintenance of crew and engineering personnel, aircrafts maintenance and establishment, etc. It is settle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-residents is not chargeable to tax under the Act. Counsel also stressed that if the assessee was of the view that no tax was deductible on the payments made to foreign companies it should have made an application with the AO under Section 195(2) of the Act. Stating that Section 195(1) is concerned with payment to non residents and not with the taxability of the corresponding income of the non-resident it was argued that if the assessee defaulted by not having deducted tax at source at the time of payment, it cannot later argue that the corresponding income of the non-resident was not chargeable to tax. Learned counsel also relied on the concurrent findings of the CIT (A) that all payments made were in accordance with the Agreements signed by the Assessee with Technik. It was contended that payments for various services were specified in the Agreement on annual basis while other charges are on man hour basis. The charges were for specialized and sophisticated services which fell squarely within the ambit of fees for technical services as envisaged under Explanation 2 to Section 9(1)(vii) of the Act. He drew our attention to the various findings recorded in the orders of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is correct and should not be disturbed. It was submitted that the ITAT took pains to analyze the correspondence, invoices raised by Technik and the relevant clauses of the agreement with it. The service obtained from that entity was in line with Attachment C, which was concerned only with overhaul and repair. 16. It was urged that by reason of Section 5(2) of the Act, a non-resident is liable to tax in India in respect of all income from whatever source derived which (a) is received or is deemed to be received in India by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during the year. Section 9 of the Act deems certain income to accrue or arise in India. Counsel submitted that the said provision prescribes that fees for technical services payable, inter alia, by a person resident in India is deemed to accrue or arise in India and, therefore, liable to tax in India in the hands of non-resident service provider. He relied on the Supreme Court judgment in Ishikawajima Harima Heavy Industries Ltd. v. DIT 2007 (288) ITR 408 to say that to apply Section 9(1)(vii), services should not only be rendered in India, but also utiliz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recent Supreme Court judgment interpreting Section 9(1)(vii) of the Act in GVK Industries Ltd. v. ITO 371 ITR 453. Explaining the interplay between Section 9(1)(vii) and the amendment made by Finance Act, 2007 and Finance Act, 2010 resulting in retrospective insertion of Explanation to Section 9(2) of the Act, the Court clarified that the exception provided in terms of clause (b) to Section 9(1)(vii) was not overridden by insertion of Explanation to Section 9(2) of the Act and that for fees for technical services to be taxed in India, it is imperative that the payer is resident in India and that the services are utilized in India. As a sequitur, where the resident utilizes the services provided by the non-resident service provider for purpose of earning income from any source outside India, payment for such services is not deemed to accrue or arise in India and hence not taxable in India. The Supreme Court also dealt with the two principles, namely situs of residence and situs of source of income and pointed out that the Source State Taxation rule which confers primacy to right to tax a particular income or transaction to the State/nation where the source of the said income is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use international and national domestic regulatory authorities mandate that certification of such component safety is a condition precedent for their airworthiness. The exclusive nature of these services cannot but lead to the inference that they are technical services within the meaning of Section 9(1)(vii) of the Act. The ITAT s findings on this point are, therefore, erroneous. This question is accordingly answered in favour of the Revenue. Question No.2. 21. This question relates to the treatment of expenditure incurred by the assessee (i.e. the payments made) towards its activities outside India. Here, the assessee s submission was that the payment made fell within the exclusionary part of Section 9(1)(vii)(b) and was not affected by the Explanation to Section 9(2). The assessee stressed upon the fact that no foreign technician was deputed to work in India. The assessee s submission is that the source of its income is wet-leasing activity to non-resident companies and consequently the source of income is outside India. Secondly, leasing revenue was received in convertible foreign exchange directly from foreign charterers through wired transfer in assessee s account denomi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluded. The Revenue also relied on the retrospective amendment to Section 9(2) made in 2010 to say that regardless of the question as to whether the expenditure is towards income earned abroad, the payee is deemed to have earned income in India by virtue of the amendment. 23. Before proceeding to analyse the merits of the rival contentions, it would be essential to extract the stipulations in the contract between LCAG and the assessee. They are as follows: 3.1 Operations The Aircrafts employed shall hold a valid Certificate of Airworthiness issued by the Civil Aviation Authority of India (DGCA) or by any other country should such issuance become necessary to perform the obligations of LCI as set forth under this Agreement. The Aircraft shall remain registered under the registration of LCI during the entire period of this Agreement. LCI shall ensure that Aircraft registrations and authorizations are suitable to perform flights to all countries set forth in the flight schedules hereunder. LCI shall maintain the Aircraft during the term of this Agreement in accordance with LCI s maintenance program and schedule as approved by the Civil Aviation Administration of India or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Block Hours being in the minimum Block Hours guaranteed by LCAG, the rate (Rate B) for such Block Hours not actually performed for reasons not proved to be under the control of LCI shall be US$ 1,225.00 (US $ One Thousand Two Hundred and Twenty Five) per Block Hour. The explanation to Section 9(2) was inserted by the Finance Act, 2007 with retrospective effect from 1.6.1976. The said Explanations read as under: For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub- section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India. The Finance Act, 2010 substituted the same explanation with effect from 1.6.1976. It now reads as follows: Explanation.- For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely, Situs of residence and Situs of source of income have witnessed divergence and difference in the field of international taxation. The principle Residence State Taxation gives primacy to the country of the residency of the assessee. This principle postulates taxation of world-wide income and world-wide capital in the country of residence of the natural or juridical person. The Source State Taxation rule confers primacy to right to tax to a particular income or transaction to the State/nation where the source of the said income is located. The second rule, as is understood, is transaction specific. To elaborate, the source State seeks to tax the transaction or capital within its territory even when the income benefits belongs to a non-residence person, that is, a person resident in another country. The aforesaid principle sometimes is given a different name, that is, the territorial principle. It is apt to state here that the residence based taxation is perceived as benefiting the developed or capital exporting countries whereas the source based taxation protects and is regarded as more beneficial to capital importing countries, that is, developing nations. Here comes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it. 35. In this context, a reference to the decision in C.I.T. V. Bharti Cellular Limited and others 2009 (319) ITR 139 would be apposite. In the said case, while dealing with the concept of consultancy services , the High Court of Delhi has observed thus: Similarly, the word consultancy has been defined in the said Dictionary as the work or position of a consultant; a department of consultants. Consultant itself has been defined, inter alia, as a person who gives professional advice or services in a specialized field. It is obvious that the word consultant is a derivative of the word consult which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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