2017 (10) TMI 245 - AT - Income Tax

Tribunal overturns disallowance for aircraft repairs, reconsiders travel charges. Importance of service nature and DTAA.

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

DHL Air Limited Versus Dy. CIT (IT), 2 (1) (2), Mumbai - [2018] 63 ITR (Trib) 149 Issues Involved:1. Disallowance under Section 40(a)(i) of the Income Tax Act for maintenance and repairs of aircraft and engine.2. Disallowance under Section 40(a)(i) of the Income Tax Act for traveling and accommodation charges.Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(i) for Maintenance and Repairs of Aircraft and Engine:The assessee, a UK tax resident, filed an appeal challenging the disallowance of expenses under Section 40(a)(i) of the Income Tax Act for maintenance and repairs of aircraft and engine. The expenses included Rs. 113.50 lakhs for maintenance and Rs. 175.93 lakhs for repairs. The Assessing Officer (AO) disallowed these expenses due to the failure to deduct tax at source, a decision upheld by the Dispute Resolution Panel (DRP).The assessee argued that payments made to European Air Transport Leipzig GmbH (EAT), a German company, for maintenance and repairs were not taxable in India as EAT did not have a Permanent Establishment (PE) in India. The payments were considered business profits under the India-Germany Double Taxation Avoidance Agreement (DTAA) and not subject to tax deduction at source.The DRP disagreed, stating that the services provided by EAT were technical in nature and fell under Article 12 of the India-Germany tax treaty. The payments were deemed to arise in India as they were borne by the PE in India. The DRP upheld the AO's disallowance, considering the payments as fees for technical services.The Tribunal, however, sided with the assessee, referencing cases like Kandla Port Trust and DDRC SRL Diagnostic (P) Ltd., which classified routine maintenance contracts as works contracts and not technical services. The Tribunal concluded that the payments were business receipts not taxable in India due to the absence of a PE, and thus, no tax deduction at source was required. The AO's disallowance was set aside, and the additions were directed to be deleted.2. Disallowance under Section 40(a)(i) for Traveling and Accommodation Charges:The second issue involved the disallowance of traveling and accommodation charges reimbursed to Blue Dart Aviation Ltd (BDAL). The AO disallowed these reimbursements under Section 40(a)(i) due to the failure to deduct tax at source.The assessee contended that BDAL had already deducted tax at source where required. The Tribunal referenced the case of ASK Wealth Advisors (P) Ltd vs. ACIT, which held that no disallowance could be made on reimbursements if the holding company had deducted tax at source.The Tribunal directed the AO to verify the details of tax deductions for the reimbursements. The AO was instructed to re-examine the issue following the principles established in the ASK Wealth Advisors case.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the AO to delete the disallowance for maintenance and repairs of aircraft and engine and to re-examine the disallowance for traveling and accommodation charges. The judgment emphasized the importance of the nature of services and the applicability of DTAA provisions in determining tax liabilities and deductions at source.