2022 (7) TMI 1147 - AT - Income Tax

Appellate Tribunal rules in favor of Assessee on aircraft engine rental income taxability under DTAA provisions

Income-tax Officer (TDS), Ward 1 (1) (1), Intl. Taxation, New Delhi Versus AIR India Ltd.

The Appellate Tribunal upheld the decision of the Commissioner, ruling in favor of the Assessee regarding the taxability of rental income from the ... TDS u/s 195 - Withholding the tax on payment made to the nonresident/ foreign entity who do not have ‘PE’ in India - HELD THAT:- It is trite to say that the liability to deduct tax under section 195 arises only, when the amount being paid is chargeable to tax under the Income Tax Act of India and if the person or supplier or manufacturer to whom payment made, is a tax resident of a foreign country or non-resident, having no ‘PE’ in India, then such entity can not be subjected to taxation in India and consequently payment made to it not liable to deduct any TDS under Section 195 of the Income Tax Act 1961. In this case M/s. GSI Engine B.V. from whom the Assessee had taken ‘Aircraft Engine’ on a lease rent basis, admittedly is a tax resident of Netherland, having no ‘PE’ in India and consequently cannot besubjected to taxation in India and thuspayment made to M/s GSI Engine B.V. does not attract the provisions of Act for withholding the tax, hence we are inclined to sustain the impugned order passed by the Ld. Commissioner, as the same does not suffers from any perversity, impropriety and/or illegality. Consequently, the appeal of the Revenue Department is dismissed. Issues:1. Interpretation of Double Taxation Avoidance Agreement (DTAA) between India and Netherland regarding taxability of rental income from an aircraft engine.2. Whether the liability to deduct tax under section 195 arises when the payment made is chargeable to tax under the Income Tax Act.Issue 1: Interpretation of DTAA regarding taxability of rental income from an aircraft engine:The appeals were filed by the Revenue Department against the orders passed by the Commissioner of Income Tax (Appeals) concerning the taxability of rental income from an aircraft engine for the assessment year 2017-18. The Assessing Officer had held that the rental payment for the engine hired by the Assessee is taxable as royalty under Article 12(4) of the DTAA between India and Netherland. However, the Commissioner allowed the appeal of the Assessee, stating that the rental income of the aircraft engine does not fall under the DTAA provisions. The Commissioner emphasized that the liability to deduct tax under section 195 arises only when the sum being paid is chargeable to tax under the Income Tax Act. The Assessee argued that the rental of the aircraft engine is not taxable in India as per the DTAA provisions.Issue 2: Liability to deduct tax under section 195:The Tribunal considered the case involving a nonresident foreign entity, M/s. GSI Engine B.V., from whom the Assessee had taken an aircraft engine on a lease rent basis. It was established that M/s. GSI Engine B.V. is a tax resident of Netherland with no Permanent Establishment (PE) in India. The Tribunal noted that the liability to deduct tax under section 195 arises only when the payment made is chargeable to tax under the Income Tax Act. Since M/s. GSI Engine B.V. could not be subjected to taxation in India due to the absence of a PE, the payment made to them did not attract the provisions of the Act for withholding tax. Consequently, the Tribunal upheld the Commissioner's order, stating that it was not erroneous, improper, or illegal. The appeal of the Revenue Department was dismissed based on these findings.In conclusion, the Appellate Tribunal upheld the decision of the Commissioner, ruling in favor of the Assessee regarding the taxability of rental income from the aircraft engine under the DTAA provisions. The Tribunal emphasized the importance of considering the presence of a PE in India when determining the liability to deduct tax under section 195. The appeal of the Revenue Department was dismissed, and the orders dated 09.06.2017 and 30.06.2017 were upheld.