Tax Management India. Com
                            Law and Practice: A Digital eBook ...
TMI - Tax Management India. Com
Case Laws Acts / Rules Notifications Circulars Tariff/ ITC HSN Forms Manuals SMS News Articles Highlights
        Home        
 
Extracts
Home List
← Previous Next →

DHL Air Limited Versus Dy. CIT (IT) , 2 (1) (2) , Mumbai

2017 (10) TMI 245 - ITAT MUMBAI

Disallowance u/s. 40(a)(i) - maintenance of aircraft and engine/repairs and maintenance of aircraft and travelling and accommodation charges - PE in India - Held that:- The impugned expenditure has been incurred by the assessee in pursuance of maintenance contract between the assessee and M/s EAT, Germany. In the case of Kandla Port Trust (2011 (11) TMI 469 - ITAT RAJKOT ), it was held that the payment made for annual maintenance contracts would not fall under the category of fee for technical s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the present case. Hence, consistent with the view taken in the above cited cases, we hold that the payment made towards annual maintenance contracts would fall under the category of works contract. In that view of the matter, the payment given by the assessee would constitute business receipts in the hands of M/s EAT and the same is not taxable in India, since it does not have PE in India. In that case, there is merit in the contentions of the assessee that it is not required to deduct tax at s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

m of the assessee requires verification at the end of the AO. Accordingly we set aside the order passed by the AO on this issue and restore the same to his file with the direction to examine this issue afresh by duly following the ratio of decision rendered in the case of ASK wealth advisors (P) Ltd (2015 (10) TMI 921 - ITAT MUMBAI ). - Decided in favour of assessee for statistical purposes. - I.T.A. No. 1438/Mum/2017 - Dated:- 4-10-2017 - Shri B.R. Baskaran (AM) And Ramlal Negi (JM) For The Ass .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

se to following issues: (a) Disallowance made u/s. 40(a)(i) of the Act in respect of maintenance of aircraft and engine/repairs and maintenance of aircraft. (b) Disallowance u/s. 40(a)(i) of the Act in respect of travelling and accommodation charges. 4. The assessee has taken an alternative ground that if income is computed u/s. 44BBA of the Act, the above said disallowances are not called for. 5. Facts relating to the case are stated in brief. The assessee-company is tax resident of UK. It file .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

also fully responsible for functioning of the aircraft, i.e., it should also provide competent personnel for operation of the aircraft and should also ensure that there is no interruption in service due to strike or injuries to crew members or due to inferior quality working. The assessee should also ensure that the aircraft is properly maintained and all necessary maintenance services are carried out at regular intervals. 7. During the year under consideration, the assessee claimed following e .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Act for the failure to deduct tax at source. The view so taken by the Assessing Officer was also confirmed by learned DRP. Accordingly, the Assessing Officer passed final assessment order disallowing the above expenditure claimed by the assessee u/s 40(a)(i) of the Act. 8. The disallowances listed as (i) and (ii) relate to expenditure incurred on maintenance of aircraft and engine/repairs and maintenance of aircraft. Hence both the issues are addressed together. 9. The assessee submitted before .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

h, (EAT) Germany for providing maintenance, repairs and overhaul services and the said company charged the assessee on the basis of per flight hour support in respect of its aircrafts operated by the assessee. Accordingly, EAT was paid flight hour rate based on the flight hour flown by the aircrafts covered by the contract. The assessee further submitted that EAT is a company incorporated in Germany and hence tax resident of Germany. It is entitled to benefits of India-Germany Double Taxation Av .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

airs and maintenance of aircraft/engine is not liable for tax deduction at source u/s. 195(1) of the Act, as the said payment is not chargeable to tax in India in the hands of EAT. Learned DRP did not agree with the contentions of the assessee and accordingly rejected the same with following observations:- 4. Objection No. 2- Disallowance of payments of ₹ 1,13,50,933 made to EAT towards maintenance of aircraft engines under Section 40(a)(i) of the Act Grounds of Objections On the facts and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

S') under Article 12 of the India-Germany tax treaty. On the facts and circumstances of the case, and in law, the Assessing Officer erred in holding that the payment made towards maintenance of aircraft engines to EAT arises in India as per the India - Germany tax treaty. The Assessee prays that the Assessing Officer be directed to allow deduction in respect payments made to EAT towards engine PBH amounting to ₹ 1,13,50,933 . Facts of the Case 4.1 The assessee has to mandatorily undert .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he aircrafts covered under the contract. A statement giving the details of the payment made to EAT amounting to ₹ 1,13,50,933/- in respect of Engine Power by Hour (PBH) charges along with a copy of the relevant invoices were submitted by the assessee. 4.2 The PBH involves replacing internal components of the aircraft engines (known as rotable components) if these components have exceeded their prescribed flying hours or if these components have become unusable / defective. 4.3 Since the pa .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

g and logistic support of the aircraft and the above payments represents business receipts of EAT. EAT does not have a PE in India as per Article 5 of the tax treaty between India and Germany. Therefore the said payment to EAT is not taxable in India as per the India Germany tax treaty. Consequently no tax is required to be deducted at source in respect of the payment made by the Assessee to EAT. Further, the payments made to EAT for engine PBH do not constitute FTS both under the Act as well as .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Kandla Port Trust v. DOT (50 SOT 109) (Rajkot) DDRC SRL Diagnostic (P.) Ltd. [2016] 157 1TD 92 (Mumbai - Trib.) ADIT v. BHEL-GE-Gas Turbine Servicing (P.) Ltd. [2012] 53 SOT 460 (Hyderabad) In view of the above, the Assessee submits that payments made to EAT are towards standard services/ facilities and therefore do not constitute FTS under section 9(1)(vii) of the Act as well as the Article 12 of the India-Germany tax treaty. Without prejudice to the above, Assessee also submits that even if th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be de .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sessee The aforesaid payments are being made by the Assessee to EAT pursuant to the cost sharing agreement. The said agreement is a global agreement and not India specific. The payments are being made for repairs and maintenance of the 22 specified B-757 aircrafts operated by the Assessee. Further, the repairs and maintenance activities are undertaken outside India. Moreover this agreement was entered in December 2002 even before the PE came into existence in India. Therefore these payments are .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ee in India. Since Condition 1 prescribed in para 6 of the Article 12 of the India- Germany tax treaty is not fulfilled, the payments made to EAT would not qualify as FTS under the aforesaid article. In view of this, the payment made to EAT would be taxable in India only if EAT has a PE in India. The Assessee submits that EAT does not have any PE in India. Based on the above facts and in law, the disallowance of payment to EAT as proposed by the AO is not justified and ought to be deleted . Dire .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s as being projected by the assessee. This is further supported by the fact that the bills are raised not based on supply of spare parts but based on number of hours of flight undertaken by the aircrafts. Thus, the substance of the contract is service and not mere supply of spares. When overall scope of contract is in nature of works contract, the dominant purpose test cannot be applied and all other ancillary obligation pale into the main contract. This view gets support from decision of 5 memb .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nical services means: The term 'fees for technical services as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this Agreement. 4.8 Thus the technical services rendered by EAT are taxable as FTS under the DTAA also. 4.9 Further, as per article 12(6), the FTS arises in the c .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

assessee because what is required under the 12(6) is that such cost is borne by the PE. Undisputedly the payments made to EAT are recorded in the books of PE for computing profits of the PE and hence the same can be said to be borne by the PE. It makes no difference whether such cost is based on allocated cost under the global agreement. The other contention of appellant that the agreement was executed before the PE of assessee came into existence is also not relevant as the period of service f .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ax withholding liability u/s 195, is untenable and the same is hereby rejected. The action of the A.O. of making the disallowance of ₹ 1,13,50,933/- is upheld. The objection filed by the assessee is dismissed. 5. Objection No. 3 - Disallowance of payments of ₹ 1 ,75,93,595 made to EAT towards repairs and maintenance under Section 40(a)(i) of the Act. Grounds of Objections On the facts and circumstances of the case, and in law, the Assessing Officer has erred in proposing to disallow .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s to EAT arises in India as per the India Germany tax treaty. The Assessee prays that the Assessing Officer be directed to allow deduction in respect payments made to EAT towards repairs and maintenance amounting to ₹ 1,75,93,595/- . Facts of the Case 5.1 The assessee had availed repairs and maintenance services under the cost sharing contract with EAT. The services were in the nature of routine aircraft repair and maintenance. These expenses have to be incurred in order to maintain the ai .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Fees for Technical Services) of India and Germany tax treaty and since no tax was deducted, the expense was disallowed under 40(a)(i) of the Act. Assessee's Submissions 5.4 The EAT has the capability to provide certain maintenance, engineering and logistic support of the aircraft and the above payments represents business receipts of EAT. EAT does not have a PE in India as per Article 5 of the tax treaty between India and Germany. Therefore the said payment to EAT is not taxable in as per t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nature of routine repairs and replacement from the perspective of an airline company like the Assessee. In the following decisions the Courts have upheld the view that payments towards standard services/ facilities do not constitute FTS: * Kandla Port Trust v. DC1T (50 SOT 109) (Rajkot) * DDRC SRL Diagnostic (P.) Ltd. [2016] 1571TD 92 (Mumbai - Trib.) * ADIT Vs. BHEL-GE-Gas Turbine Servicing (P.) Ltd. (2012] 53 SOT 460 (Hyderabad) In view of the above, the assessee submits that payments made to .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

echnical services shall be deemed to arise in a Contracting State when the payer is that State itself, a land or a political subdivision, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties pr fees for technical services was incurred, and s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he FTS i.e. the Assessee has a PE in India in connection with which the liability to pay the FTS was incurred; and o Condition 2: such FTS are borne by the PE of the Assessee The aforesaid payments are being made by the Assessee to EAT pursuant to the cost sharing agreement. The said agreement is a global agreement and not India specific. The payments are being made for repairs and maintenance of the 22 specified 8-757 aircrafts operated by the Assessee. Further, the repairs and maintenance acti .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e of computing profits taxable in India. Therefore the Assessee submits that the liability to make the aforesaid payments to EAT was not connected with the PE of the Assessee in India. Since Condition I prescribed in para 6 of the Article 12 of the India- Germany tax treaty is not fulfilled, the payments made to EAT would not qualify as FTS under the aforesaid article. In view of this, the payment made to EAT would be taxable in India only if EAT has a PE in India. The Assessee submits that EAT .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

appellant is similar to the one as discussed in objection number 2 above and nature of services also being similar as well as the recipient of the amounts is also the same, therefore, for the same reasons given by us while giving directions to objection number 2 above, the objections raised by the appellant is found untenable and the same is rejected. The action of the A.O. of making the disallowance of ₹ 1,75,93,595/- is upheld. The objection filed by the assessee is dismissed. 10. The Ld .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nvited our attention to Article 12 of India-Germany treaty relating to Royalties and Fees for Technical Services . He submitted that clause (1) of Article 12 states that the royalty and fee for technical services arising in the contracting state and paid to a resident of other contracting state may be taxed in the other state. He submitted that the payment was made to a German company and hence it may be taxed only in Germany. He submitted that the tax authorities have placed their reliance on c .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ty to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. The Ld A.R submitted that the above said clause shall apply only if the liability was incurred in connection with the PE. He submitted that the assessee had incurred overa .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

CD on taxability of interest under Article 11. He submitted that the clause 11(5) relating to Interest payments and clause 12(6) relating to payment of royalty and fees for technical services are identically worded. He submitted that the OECD has examined different kinds of situations vis-à-vis the taxability of interest income under Article 11(5). One of the situations is that, if the loan is contracted by the head office of the enterprise and its proceeds are used for several permanent .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rks is a works contract and hence the same constitutes business profit. In this regard, the Ld A.R placed reliance on the following case law:- (a) Kandla Port Trust (50 SOT 109) (b) DDRC SRC Diagostics (P) Ltd (2016) (157 ITD 92) He submitted that the co-ordinate benches have placed reliance on the Circular No.715 dated 08-08-1995 issued by CBDT, where in the Board has clarified as under:- Q.No.29 : Whether a maintenance contract including supply of spares would be covered under section 194C or .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tically worded both under the Act and India-German DTAA. Hence the impugned payments constitute payment made for works contract and hence shall constitute business profits in the hands of M/s EAT. Since EAT does not have permanent establishment in India, the business profits are not taxable in India. Since the impugned payments are not taxable in India, there is no liability to deduct tax at source u/s 195 of the Act. 12. On the contrary, the Ld D.R placed strong reliance on the orders passed by .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

supra), the co-ordinate bench has noticed that the CBDT has expressed the view in Circular No.715 (supra) that routine, normal maintenance contracts which includes supply of spares will be covered by sec. 194C of the Act. The bench further noticed that the revenue could not produce any material to show that the clarifications issued by the CBDT would not apply to the facts available in the case before it. Accordingly the bench held that the provisions of sec. 194C shall apply to the payment made .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the same is not taxable in India, since it does not have PE in India. In that case, there is merit in the contentions of the assessee that it is not required to deduct tax at source u/s 195 of the Act, as no part of the amount paid to M/s EAT is chargeable in India in the hands of M/s EAT. Accordingly we set aside the order passed by AO on this issue and direct him to delete the impugned additions. 15. The next issue contested by the assessee relates to the disallowance u/s. 40(a)(i) of the Act .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 

Discussion Forum
what is new what is new
 


|| Home || About us || Feedback || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.