TaxTMI 
TaxTMI 
2005 (4) TMI 269
X X X X Extracts X X X X
X X X X Extracts X X X X
....ia, 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 art. 1.6 r/w art. 5.3 of the agreement, the assessee was required to pay the lease rent @ US $ 2,40,000 per month w.e.f. 31st Dec, 1995, and US $ 2,41,000 per month w.e.f. 1st Jan., 1995. According to art. 1.7 r/w art. 5.4, the assessee was also required to pay supplemental rent in the form of reserves @ US $ 234 per flight hour. According to Art. 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 specified in arts. 13.1 and 13.2. According to art. 13.3, the assessee is entitled to r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dustry, 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 airworthiness 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 amount lying in that reserve. If the lessee defaults in getting any check carried out in time, then the lessor can call back the aircraft and get the respective check done out of the reserves lying with the lessor. The same is the l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e AO considered the appellant as an assessee in default under s. 201(1) of the Act in respect of payment of supplemental lease rent to AMTEC, MAS and Lufthansa vide paras 65 and 66 of order dt. 10th May, 2000. On appeal by the appellant, the CIT(A) cancelled the order of the AO observing as follows: "As far as the payments to Malaysian Airlines, Lufthansa and Amtech are concerned, I find that the submission of the appellant that the agreements with these parties were approved by the CBDT after 1st April, 1996, is correct. The Dy. CIT has made no discussion in the order under appeal with regard to payments to these parties. From the copy of the orders of the CBDT it is seen that the following have been approved: ------------------------------------------------------ Sl. Name of the Date of Amounts Date of No. Party agreement as per CBDT order &nbs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; per cycle hour 14.05.1997 ------------------------------------------------------ As the payments are fully covered by the CBDT approvals to all the agreements the same are clearly exempt under s. 10(15A). The Dy. CIT is directed to exclude the same from the computation of short deduction. Appellant gets relief as below: ------------------------------------------------------- Financial year 1997-98 (Rs.) 3,67,601 (Amtec) 75,23,420 (MAS) 1,13,28,008 (Lufthansa) &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct (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 AO to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-s. (1) only on that proportion of the sum which is so chargeable.' The perusal of the above section shows that obligation to deduct the tax at source under this section arises only if the payment is chargeable to tax under the provisions of the Act. So, the crucial question is whether the payments made by assessee to ILFC as supplemental rent under the agreement are chargeable to tax under the provisions of the Act. The stand of the assessee is that such payments are exempt from taxation under the provisions of s. 10(15A) of the Act, while the stand of the Revenue is that such payments fall within the exclusionary provisions of s. 10(15A) of the Act as substituted w.e.f. 1st April, 1996. To appreciate the real controversy, it would be useful to reproduce provisions of s. 10(15A) of the Act as originally inserted and substitute....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sp; Government in this behalf. Explanation : For Explanation: For the the purpose of this purpose of this clause, "foreign enterprise" the expression "foreign means a person who is enterprise" means a person a non-resident. who is a non-resident." --------------------------------------------------------- A comparative study of the above provisions shows that payments made for acquisition of an aircraft or an aircraft engine on lease, prior to 1st April, 1996, were exempt from taxation, but from 1st April, 1996, the legislature has excluded the payments made for providin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e reserve, then such liability has to be borne by the assessee only. In view of the above discussion, it is clear that the supplemental rent was paid and kept in the form of reserves only for meeting the expenditure which was to be incurred by the lessee to keep the aircraft in airworthy condition. Therefore, we are in agreement with the contention of the learned senior Departmental Representative that the payment by the lessee by way of supplemental rent was in connection with the operation of the leased aircraft. But, that is not enough for holding that such payment fall within the exclusionary provisions of s. 10(15A) of the Act. In order to fall within the ambit of such exclusionary provisions, there must exist the inextricable link between the expenditure regarding supply of spares or for use of any facility or for rendering of any service by the lessor and operation of the leased aircraft. Art. 13 of the agreement does not provide for utilisation of reserve either for the supply of any spare parts or for utilisation of any facilities or for rendering of any services by the lessor. On the other hand, the terms of the lease clearly provide that it is the absolute responsibilit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er crewmen, providing technicians, etc. in the guise of leased rent. It is this mischief which was suppressed by the substitution of s. 10(15A) w.e.f. 1st April, 1996. This is manifest from the memo explaining the proposed Finance Bill, 1995. The relevant portion is quoted below [(1995) 124 CTR (St) 38 : (1995) 212 ITR (St) 351]. 'Restricting the scope of income-tax exemption on payments to foreign enterprises for acquiring aircraft on lease. Under the existing provisions of cl. (15A) of s. 10 of the IT Act, income-tax exemption is provided on any payment made by an Indian company, engaged in the business of operation of aircraft, to acquire an aircraft on lease from the Government of a foreign State or a foreign enterprise under an agreement approved by the Central Government in this behalf. The provisions of cl. (15A) of s. 10, as at present, are being used for obtaining income-tax exemption not only on payments in respect of lease rental of the aircraft but also on payments for maintenance of leased aircraft, supply of spares therefor, provision of the services of pilots and other members of the crew along with the aircraft and for the training of the pilots and other crew mem....