TaxTMI 
TaxTMI 
2002 (2) TMI 319
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....ration (in short ILFC). The assessee is a company incorporated in India, which is engaged 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 Article 1.6 read with Article 5.3 of the agreement, the assessee was required to pay the lease rent @ US $ 2,40,000 per month w.e.f. 31-12-1995 and US $ 2,41,000 per month w.e.f. 1-1-1995. According to Article 1.7 read with Article 5.4, the assessee was also required to pay supplemental rent in the form of reserves @ US $ 234 per flight hour. According to Article 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 s....
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....cquiring it. The relevant observations made by Assessing Officer in paras 10 & 11 are being reproduced as under: "In the international aviation industry, it is a 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 air worthiness 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 amounts lying in that reserve. If the lessee defaul....
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.... had failed to deduct the tax at source which it was liable to deduct under section 195 of the Act from the payment made by it to ILFC in assessment years 1996-97 to 1998-99. Accordingly, he treated the assessee in default as per the provisions of section 201(1) of the Act and raised the demand of tax by grossing up the rate of tax as under: F.Y. US$ Rate of tax INR Rate of tax Short Deduction 1996-97 967015 38 3,67,46,570 55% (122.2% after grossing up) 4,49,11,658 1997-98 887838 40 3,55,13,520 48% (92.3% after grossing up) 3,27,78,979 1998-99 925455 43 3,97,94,505 -do- 3,67,30,384 The above action of Assessing Officer has been confirmed by the CIT(A). 6. The learned Sr. Counsel for the assessee, Mr. Dastur has vehemently assailed the orders of the CIT(A) as well as the Assessing Officer by raising various submissions. Firstly, it was contended by him that before an assessee is considered as an assessee in default under section 201 of the Act, it must be shown by the revenue that assessee was under obligation to deduct the tax at source under section 195 of the Act which it had either failed to deduct the....
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....ntended by him that payments under the agreement as supplemental rent did not fall within the exclusionary provisions of section 10(15A) of the Act. He took us through the relevant clauses of the agreement and contended that it was the total responsibility of the lessee to keep the leased aircraft in good running condition and the lessor was not required either to provide for spares or to provide any facility or service in connection with the operation of leased aircraft. According to him, a reserve was created only to ensure that lessee keeps the aircraft in good airworthy condition. Therefore, it was pleaded that the payment was in fact the connection with the acquisition of the leased aircraft and, therefore, Assessing Officer was not justified in holding that such payment was not connected with acquisition of the aircraft on lease but only for running/operating of the aircraft. if such payment was not for acquiring the leased aircraft then, according to him, the Assessing Officer should have held the assessee in default for earlier years also. It was further stated by him that the word "acquire" has been used by the Legislature with reference to the use of the aircraft and not ....
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....eimbursed by the lessor from the reserves. He also drew our attention to the decision of the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 for the proposition that in interpreting the provisions of a statute, the speech of the mover of the bill is relevant and, therefore, the speech of the Finance Minister would be relevant in finding out the mischief which was taken care of while substituting the provisions of section 10(15A) of the Act. In this regard, he also took us through the notes explaining the provisions of Finance Bill, 1995. It was further submitted by him that the words "facility or service" have very wide connotations and would include the expenditure incurred on the operation of the aircrafts. According to him, the creation of reserve was merely a devise to circumvent the provisions of section 10(15A) of the Act. He drew our attention to the relevant clauses of the agreement to point out that the payment to reserve depended upon the flying hours and therefore, it was rightly connected with the operation of the aircraft. No payment was to be made if the aircraft was not operated. Therefore, it was concluded by him by submitting that whatever was ....
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.... Act. The provisions for deducting the tax at source are incorporated in Chapter XVIII of the Act. In the present case, we are concerned only with the provisions of section 195 of the Act, relevant portion of which, 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 Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so ch....
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....A) 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: "The subject matter of this Lease is one (1) used Boeing B-737-400 aircraft which Lessee desires to lease from Lessor and Lessor is willing to lease to Lessee. In consideration of and subject to the mutual covenants, terms and conditions contained in this Lease, Lessor hereby agrees to lease to Lessee and Lessee hereby agrees to lease from Lessor the Aircraft for the Lease Term and the parties further agree as follows: 5.3 Rent 5.3-1 Lessee will pay Lessor the following amounts monthly in advance as rent from the Aircraft ("Rent"): Period of Lease Term Amount of monthly rent From Delivery thru December 31, 1994 ....
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.... arise from any act or omission or the active or passive negligence of Lessor or of any other direct, incidental or consequential damages, including strict or absolute liability in tort. 8.7 No liability to Repair or Replace: Lessor will not be liable for any expense in repairing or replacing any item of the Aircraft or be liable to supply another aircraft or any item in lieu of the Aircraft or any part thereof if the same is lost, confiscated, damaged, destroyed or otherwise rendered unfit for use. 10.1 Costs of Operation: Lessee will pay all costs incurred in the operation of the Aircraft during the Lease Term, for profit or otherwise, including the costs of flight crews, cabin personnel, fuel, oil, lubricants, maintenance, insurance, storage, landing and navigation fees, airport charges, passenger directly or indirectly, in connection with or related to the use, movement and operation of the Aircraft. The obligations, covenants and liabilities of Lessee under this paragraph arising prior to return of the Aircraft to Lessor will continue in full force and effect, notwithstanding the termination of this Lease or expiration of the Lease Terms. 12.1 Genera....
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....letins compliance or other maintenance matters. Lessee will not discriminate against the Engines with respect to overhaul build standards and disc replacements. (d) Incorporation in the Maintenance Program for the Aircraft of a full corrosion prevention and control program as recommended by Manufacturer, the Aviation Authority and the FAA (but in any event no less frequently than at the "C" Check or equivalent), including periodic inspection by penetration of fuel tanks, periodic inspection and clean up under galleys and lavatories and the correction of any discrepancies in accordance with the recommendations of Manufacturer and the Structural Repair Manual. (e) If Lessee at its option chooses to comply with the Aviation Authority or the Maintenance Program requirements by means of sampling within its fleet, performance of all such inspections and tasks on the Aircraft. (f) Maintaining in English and keeping in an upto date status all Aircraft Documentation. (g) Maintaining historical records, in English, for condition monitored, hard time and life limited parts, the hours and cycles the Aircraft and Engines operate and all maintenance and repair....
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....d to Lessor under the laws of the State of Registration and lex situs. To the extent permitted by the Laws of the state of Registration and the lex situs it is the intent of the Lessor and Lessee that without further act and immediately upon any replacement part becoming incorporated, installed or attached to the Airframe or an Engine as above provided, (i) title to the removed part will thereupon vest in Lessee, free and clear of all rights of Lessor, (ii) title to the replacement part will thereupon vest in Lessor free and clear of all rights of Lessee and (iii) such replacement part will become subject to this Lease and be deemed to be a part hereunder to the same extent as the parts originally incorporated or installed in or attached to the Airframe or such Engine. 13.1 Airframe Reserves: Lessor will reimburse Lessee from the Airframe Reserves for the actual cost of the completed schedule major structural inspection and rectification of structural deficiencies (overhauls) of the Airframe (i.e., the complete 'D' Check or equivalent if the Aircraft is on a block 'D' maintenance system under Lessee's Maintenance Program or 'D' Check level struc....
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....excess of the amounts reimbursed hereunder. If on any occasion the balance in the Airframe or an Engine Reserve is insufficient to satisfy a claim for reimbursement in respect of the Airframe or such Engine, the shortfall may not be carried forward or made the subject of any further claim for reimbursement. 13.6 Reimbursement after Termination Date: Lessee may not submit any invoice for reimbursement from the Reserves after the Termination Date unless on or prior to such date Lessee has notified Lessor in writing that such outstanding invoice will be submitted after the Termination Date and the anticipated amount of such invoice. So long as Lessee has provided such notice to Lessor, Lessee may then submit such outstanding invoice at any time within nine (9) months after the Termination Date. Subject to the foregoing, any balance remaining in the Airframe and Engine Reserves on the Termination Date, including termination on account of a total loss of the Aircraft, will be retained by Lessor." 10. 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....
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....f any 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. 12. At this stage, we may like to mention that section 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 dated30-9-1994was approved by the Central Government under section 10(15A) of the Act. It is also not in dispute that prior to1-4-1996, the entire payment including the supplemental rent und....
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.... 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 afore said, needs to be checked. The Bill, therefore, seeks to substitute clause (15A) of section 10 by a new clause. The new clause (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 from1-4-1996, and will, accordingly, apply in relation to assessment year 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, facility 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 section 10(15A) of the Act, then it must be established (i) tha....
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....nt without deducting the tax at source; and (iii) that if any tax was leviable, the Assessing Officer had grossly erred in grossing up the rate of tax. The leaned Sr. DR has also advanced counter arguments in respect of such contentions. Since the assessee has succeeded on the main contention, it is not necessary for us to express any opinion with reference, to the above contentions of the parties. 15. Similar payments on account of supplemental leased rent were also made by the assessee to other non-resident foreign companies i.e., AMTEC, Malaysian Airlines System (MAS) and Lufthansa during the financial years 1997-98 to 1998-99. Such payments are discussed by Assessing Officer in paras 65 and 66 of his order. The following demands have been raised by the Assessing Officer under section 201(1) of the Act: F. Years AMTEC MAS Lufthansa 1997-98 3,67,601 75,23,429 1,13,28,008 1998-99 NIL 27,36,160 NIL The above demands have been raised by Assessing Officer for the reasons given by him in the case of ILFC and the same have been confirmed by the CIT(A). Accordingly, following our own decision in the case of ILFC, we also set aside the orde....
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...._____ (give name and address of remitter) remitting_____________________________________ (give amount in words and figures stating currency) to M/s_______________________________________ (give name & address of the person to whom remitted) being the_______ for the period_______. The remitter (in this capacity as a representative assessee) and the person to whom money is remitted have * no liabilities outstanding. *made satisfactory arrangements for payment of taxes due under the IT Act, 1961, IT Act, 1922, Excess Profits Tax Act, 1940, Business Profits Tax Act, 1947, WT Act, 1957, Expenditure Tax Act, 1957, and Company's (Profits) Surtax Act, 1964 in respect of the remittance(s) referred to above. Signature Name & Address of the Issuing Authority (Stamp) Strike out which is not applicable. These types of NOCs are issued by IT Department as per requirements of RBI given in their Exchange Control Manual for. allowing anyone to remit money outsideIndia. These NOCs are not orders under section 195(2). It does not prescribe any rate and materially enable the assessee to remit the amount in accordance with the RBI requirements. These NOCs have no l....
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....tes cannot be equated with and are not in conformity with the order under section 195(2) of the Act. Hence, this contention of the assessee is rejected. 19. The second contention raised by Mr. Dastur is that agreement in question is not merely agreement of lease but it is an agreement of purchase of spares by way of hire purchase. He drew our attention to the terms of the agreement appearing at page 325 of the paper book and the particular attention was drawn to page 337 to point out that the terms of the agreement provides option to the assessee to purchase the spare part at the end of the agreement. According to him, this option was in fact exercised and, therefore, the transaction should be considered as transaction of purchase of the spares. Hence, such transaction would be out of the ambit of the provisions of Income-tax Act. We are unable to accept this contention also. In law, there is a difference in the lease agreement and hire purchase agreement. In hire purchase agreement, the intention from the very beginning is to purchase the item and the payment is treated as capital expenditure for all purposes and consequently, depreciation can also be claimed by the hirer. In f....
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.... the paper book. According to this article, no tax is payable unless the non-resident has permanent establishment inIndia. According to the learned counsel for the assessee, there is no permanent establishment of the lessor and, therefore, it was not liable to pay tax and consequently, the question of deducting tax at source by the assessee did not arise. This contention may be a plausible one but we find that such contention was neither raised before Assessing Officer nor before the CIT(A). Further, the question whether the lessor had a permanent establishment inIndia, is question of fact which requires verification. Therefore, in the interest of justice, we would have restored the matter to the file of Assessing Officer but for our legal finding in the later part of the order wherein we have held that order for Financial Year 1994-95 could not legally be passed after a period of 5 years from the end of financial year. In view of the same, the demand raised by Assessing Officer in this regard stands quashed. Now, we take up the issue relating to payments on account of payments to various parties of United Kingdom (UK). The assessee had entered into agreements with various parti....
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.... India will be excluded from the ambit of fee for Technical Services only if the same is utilized in a business or profession carried in India or is to earn income from a source located outside India. The place of payment or training would not be relevant. The Assessing Officer has rightly held the appellant liable for tax deduction at source on the payments made on account of training. The appeal on this ground is dismissed." Aggrieved by the same, the assessee is in appeal before the Tribunal. 21. The main contention of the learned counsel for the assessee is that such payments do not fall within the definition of fees for technical services either under section 9(1)(vii) of the Act or Article 13 of DTAA with UK. He took us through the agreement with Hughes Flight Training appearing at page 347 of the paper book. According to him, the agreement in fact was not for training but for the use of a simulator only. He drew our attention to page 350 of the paper book to point out that charging for use of the simulator without instructor was only 171 Pound per hour, while it was 256 Pound per hour with instructor. He then drew our attention to page 359 of the paper book to point ou....
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....of giving knowledge to each trainee, it was provided to assessee's instructors, who, in turn, provided the same to its personnels. It was also submitted by him that such training falls within the ambit of "fee for technical services" as defined in section 9(1)(vii) of the Act as well as Article 13(4) of the DTAA. Regarding grossing up, he left the issue to the Bench. 23. After considering the rival submissions of the parties, we do not find merit in the main contention of the ld. counsel for the assessee. We have gone through the entire agreement entered into by the assessee with M/s Hughes Flight Training of U.K. After considering the same, we are of the view that it was an agreement for training of assessee's personnels and not for mere use of simulator. Training can be given to the trainees either directly or through customer's instructors. Clause 14 of the agreement clearly provides for free training to assessee's instructors, who, in turn, had provided the same to its personnels. Since training to assessee's instructors was free of charge, the payment in the invoice was shown for use of simulator alone but that does not mean that technical knowledge was ....
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....s Ltd. v. CIT [1996] 222 ITR 354 (Ker.) and the decision of the Tribunal in the case of Mannesmann Demag Lauchhammer v. CIT [1988] 26 ITD 198 (Hyd.) to strengthen his view. Accordingly, it was held by him that assessee was required to deduct the tax at source under section 195 of the Act. It is to be noted that in the course of proceedings before the Assessing Officer, the assessee had furnished an opinion of Mr. A.S. Thind, an Advocate, according to whom the payments were in the nature of business profits and the same could not be taxed since the payee had no permanent establishment in India. This opinion was not accepted by the Assessing Officer. Ultimately, he created a demand of Rs. 1,66,77,217 by applying the rate of tax of 25 per cent after grossing up the rate of 20 per cent. This view has been confirmed by the CIT(A) by observing as under: "The submissions of the appellant are considered. Whereas the appellant has contested that to qualify as technical services there has to be a transfer of technical knowledge or skills to the person making the payment, the DCIT has held that the rendering of repair works constitutes technical services. In the present case the appe....
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....ined the agreement between the assessee and Sochata of France appearing. The relevant portion of the preamble of the agreement reads as under: 'Whereas, Sahara India Airlines has expressed its desire to have SOCHATA perform modification and/or repair services and/or refurnishment services (hereinafter referred to collectively as the "Services") on SAHARA CFM 56 series engines, engine modules, engine shop modules and engine parts, which engines, engine modules, engine shop modules, engine parts and controls and accessories are hereinafter sometimes referred to respectively as the "Engines" "Modules", "Shop Modules", "Parts" and "Controls and Accessories" and collectively as the "Equipment"'. 29. The scope of the word "repair" has been defined in Article I (T) as under: "'Repair" shall mean the disassembly, inspection Repair, Parts replacement where necessary, and reassembly and test when applicable of the subject Equipment in accordance with the applicable CFM56 shop manual and or other documents approved and authorized by the JAA/FAA and SAHARA."' 30. The nature of services to be carried out are specified in Article II reproduced below: ....
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....TA for services under this Agreement, all Equipment from the fleet of CFM56 Engines owned and/or operated bySAHARA, which require Repair or maintenance. 31. Article V deals with the prices and the relevant portion of which is reproduced as under: "Services performed by SOCHATA under the terms of this Agreement shall be invoiced on a time and material basis: A. Labour: 1. Direct labour time utilized by SOCHATA in performing services at SOCHATA's facility under the terms of this Agreement on a time and material basis, shall be invoiced at Forty Eights US Dollars (US$ 48) per man hour. 2. The conditions for working away of SOCHATA's facility (on site technical assistance services) will be discussed on a case by case basis. B. Parts: 1. SOCHATA furnished new Parts, materials and supplies will be invoiced at then current list price plus Ten Point Five per cent (10.5%) handling charge. 2. SOCHATA furnished non-Life Limited used serviceable Parts will be invoiced at Eighty Five per cent (85%) of the then current catalog list price of the latest procurable replacement part. 3. SOCHATA furnished Life Limited ....
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....an Airforce for servicing assembling, repairing and overhauling of airforce planes. According to Clause 3 of the Agreement, the necessary spares and materials were to be provided by the Indian Airforce. However, where there was delay in supply of the essential items, the assessee was required to provide such spare parts for which it could charge the price equivalent to the cost plus 10% where items were manufactured by the assessee and the cost plus 5% where such spares were purchased from outside. The question before the Court was whether there was any sale of spare parts or whether the contract was contract of work only not involving sale. After examining the Agreement, it was held by the Hon'ble Supreme Court that the primary intention of the parties was to keep the aircrafts repaired and not for sale or purchase of the spare parts. Vide para 18 of the order, their Lordships held as under: "It cannot be said as a general proposition that in every case of works contract, there is necessarily implied the sale of the component parts which go to make up the repair. That question would naturally depend upon the facts and circumstances of each case. Mere passing of proper....
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....with USA. In this connection, he drew our attention to the above clause which reads as under: "In respect of Articles 11 (Dividends), 12 (interest) and 13 (Royalties, fee for technical services and payments for the use of equipment); if under any Convention, Agreement or Protocol signed after 1st September, 1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services, payments for the use of equipment to a rate lower or a scope more restricted that the rate of scope provided for in this Convention, Agreement or Protocol on the said items of income shall also apply under this Convention, Agreement or Protocol enters into force, whichever enters into force later." Proceeding further, it was submitted that the DTAA with USA was signed after the date specified in the above clause and accordingly, it was contended that payments made by assessee under the agreement would not fall within the definition of fee for technical services as provided in Article XII(4) of DTAA with USA and consequently, should be understood as business profits under section 9(1)(i). Proceeding fu....
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....as further observed that it was not ruled out that payments included some amounts pertaining to the repair. It was further held by him that in respect of purchases, the assessee was not required to deduct the tax at source. Accordingly, he directed the Assessing Officer to examine the invoices and then exclude the payments relating to such purchases and tax only the payments relatable to service or repair charges. Still aggrieved, assessee is in appeal before the Tribunal on this issue. 38. After hearing both the parties, we do not find any merit in the ground taken by the assessee on this issue. Even the learned counsel for the assessee could not seriously challenge the directions given by the CIT(A). Accordingly, we uphold the order of the CIT(A) on this issue. 39. The next issue relates to the payments made to Jeppson & Co. The assessee had been taking navigational data from the above company of the Germany. According to the Assessing Officer, the payment for supply of data amounted to royalty within the meaning of Explanation 2(iv) of section 9(1)(vi) which says "the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experie....
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....iving reasonable opportunity of being heard to the assessee. As far as the issue regarding grossing up of rate of tax is concerned, it is held that the lower authorities were not justified in grossing up the same for the reasons given by us in the earlier part of the order. To that extent, the order of CIT(A) stands modified. 42. The last issue arising out of these appeals is whether the orders of Assessing Officer under section 201 of the Act were passed within the period of limitation. It has been admitted by the ld. counsel for the assessee that no period of limitation is prescribed for passing of such orders but it was contended by him that such orders must be passed within the reasonable period. In this connection, he relied on the decision of the Calcutta High Court in the case of CIT v. Dunlop Rubber Co. (India) Ltd. [1980] 121 ITR 476 and the decision of the Tribunal in the case of Raymond Woollen Mills Ltd. v. ITO [1996] 57 ITD 536 (Bom.) wherein it has been held that period of 4 years is a reasonable period and, therefore, any order passed after that period should be held to be invalid. 43. On the other hand, the ld. Sr. DR has submitted that no period of limitation....