TaxTMI 
TaxTMI 
2015 (5) TMI 873
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....y clause of Section 9(1)(vii)(b) of the Act and were not, therefore, chargeable to tax at source? 2. The assessee was at the relevant time (in mid 1997), engaged in the business of wet-leasing. It had acquired four old Boeing aircrafts (727-200 Model) from a non-resident company outside India. After registration of the aircraft with the DGCA, the assessee hired the crew, ground engineers and other technical personnel for their operation. It was granted the license by the DGCA to operate these aircrafts on international routes only. The assessee's Boeing 727-200 aircrafts were not used by any other airline in India. Consequently there were no facilities in India for their overhaul repairs. However, according to DGCA directives various components and the aircraft itself had to undergo periodic overhaul repairs before the expiry of the number of flying hours prescribed for such individual components. Such overhaul repairs were permissible only in workshops authorized for the purpose by the manufacturer as well as duly approved by the DGCA. 3. The assessee's all four aircrafts were wet-leased to a foreign company, Lufthansa Cargo AG, Germany (hereafter "LCAG") under an Agreement ....
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....ed operations on international routes only, the aircrafts were not utilized by LCAG for carriage of cargo within India. LCAG had integrated its international air transport business at Sharjah with its worldwide network. The cargo brought from South Asian Countries would be put into wide-body aircrafts and flown from Sharjah to various destinations in Europe and the American continent. The assessee maintained a base at Sharjah where the aircrafts were normally kept and where its crew and engineering personnel were also stationed. The accounts of the branch at Sharjah are duly reflected in the audited Annual Accounts of the Company. 6. The repairs by way of component overhaul in the Technik workshops in Germany and other foreign workshops were in the nature of routine maintenance repairs. No Technik personnel were ever deputed to India for rendering any technical or advisory services to the assessee. Likewise, the assessee's technical personnel did not participate or involve themselves in the overhaul repairs carried out abroad by Technik or other foreign workshops. The services enumerated in attachments 'A' and 'B' of the Technik Contract are described below:- ....
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....eeking any technical or advisory services. The assessee contended that it satisfied the requirements of the DGCA for carrying out prescribed maintenance repairs of the aircraft. These repairs, therefore, do not constitute 'managerial', 'technical' and 'consultancy services as defined under Explanation 2 to Section 9(1) (vii)(b) of the Act. 8. After considering the record, including the agreement with Technik, the Assessing Officer (AO) noticed that no tax was deducted at source on payments to Technik and no application under Section 195(2) was filed. The AO held that payments were in the nature of 'fees for technical services' defined in Explanation 2 to Section 9(1)(vii)(b) of the Act, and were, therefore, chargeable to tax on which tax should have been deducted at source under Section 195(1). The AO rejected the assessee's plea that the payments for repairs were incurred for earning income from sources outside India and therefore, the case fell within the exclusionary clause of Section 9(1)(vii)(b). The AO further rejected the assessee's plea that the business of aircraft leasing was carried on outside India. The assessee's alternate plea ....
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....chment A' of the Agreement dealing with 'Engineering support services' on request including provision of training. b) 'Attachment B' of the Agreement relating to 'Assignment of personnel' on request by Technik, c) 'Attachment C' of the Agreement concerning Repairs and overhauls of the components. Attachments 'A' & 'B' of the Technik Agreement deal with the engineering support services including training and assignment of personnel by the Technik. These are clearly optional services which would be provided by the Technik for the charges specified in the two 'Attachments' only on the specific request of the assessee. The assessee has emphasized that none of these services was availed of and therefore no payment was made on this account. All the invoices raised by the Technik were produced before the lower authorities and no instance of payment for training or other optional support services as per Attachment 'A' and 'B' of the contract has been brought out either by the Assessing Officer or by the CIT(A). Ld. DR has also not cited any instance of payment for any of the optional services enumerated in Attac....
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....eement conditions. A copy of such Loan Agreement is attached hereto as Annex B. 2.4 If specially requested by the Customer and, if Lufthansa Technik's stock permits such supply, Lufthansa Technik shall provide repairable out of its stock on 1.1 basis using Lufthansa Technik's form Exchange 1.1 Agreement Annex A. 3. SHIPPING 3.1 Any shipments of the customer's components to and form the respective Lufthansa Technik Base shall be effected at the Customer's own risk and expense. 4. CHARGES Article 4 For the work performed pursuant to Article 1 hereof, the Customer shall be charged according of Lufthansa Technik's man-hour rates valid at that time as stipulated in Annex A1 of the GTA. For material consumed the Customer shall be charged, with the manufacturer's list prices plus a material handling surcharge of twenty five (25) percent. Subcontracted work in the sense of Article 4 of the GTA shall be charged according to the amount payable by Lufthansa Technik to the subcontractor plus a handling charge of ten (10) percent plus transportation costs, if any. In case of repair work the Customer shall pay a minimum charge per event of DM 1,000,-." Upon an an....
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....uming that the payments for such maintenance repairs were in the nature of fees for technical services, it would not be chargeable to tax. ********* ******* ***** As per this chart the leasing revenues earned in foreign exchange were 100%, 99.79% and 99.86% for the Financial Years 1997-98, 1998-99 and 1999-2000, respectively. This chart also gives the figures of direct operational expenses in foreign exchange on actual payment basis as culled out from the Annual Accounts of the company for three years (at pps. 122, 132, 143 of the Paper Book). As per the annual accounts, the direct expenses are mainly on account of lease rent, travelling and training, foreign office expenses, maintenance, interest on aircrafts acquired under hire-purchase, and depreciation. The aggregate of the direct expenditure incurred outside India works out to 55%, 81% and 67% of the total expenses debited to Profit & Loss Account of each of the three years. It is submitted that remaining indirect expenditure was on account of Head Office expenses in India and expenditure on the ground staff, overnight stay of crew and airport charges etc. When the aircrafts landed in Indian airports for delivering and picki....
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....or technical services as defined in Explanation-2 to Section 9(1) (vii)(b). Further, in any event these payments are not taxable for the reason that they have been made for earning income from sources outside India and therefore fall within exclusionary clause of Section 9(1) (vii)(b). 56. In view of our decision allowing the main ground relating to chargeability of tax, the alternate grounds have become academic. We therefore do not propose to go into them though considerable arguments were advanced on the alternate grounds." 12. Mr. Rohit Madan, learned counsel for the revenue argues that the AO's finding that the assessee used sophisticated technical experience and skills of the personnel of the Technik in the process of repairs and overhaul carried out on the aircraft clearly showed that the services were technical in nature. It was argued that the assessee defaulted in not deducting tax before making payments in accordance with the provisions of Section 195(1) of the Act and therefore, it could not plead that the receipts in the hands of the non-residents is not chargeable to tax under the Act. Counsel also stressed that if the assessee was of the view that no tax was de....
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....9...(2) For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India." It was submitted that any doubts as to whether the assessee was obliged to deduct tax at source, is set at rest by virtue of Section 9 (2) which clarifies that income of a non-resident is deemed to arise in India and "shall be included in the total income of the non-resident" regardless of whether such entity has a place of business or business connection and the situs of services provided. Assessee's contentions 15. Mr. Ajay Vohra, learned senior counsel for the assessee, argued that the findings of the ITAT with respect to the nature of services, i.e they were not technical services is correct and should not be disturbed. It was submitted that the ITAT took pains to analyze the correspondence, invoices raised by Technik an....
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.... provided in clause (b) to Section 9(1)(vii) of the Act. The assessee submits that there is no conflict between the provisions of Explanation to Section 9(2) and clause (b) to Section 9(1)(vii) of the Act; the two provisions operate in different fields. Resultantly, the exception provided in Section 9(1)(vii) (b) of the Act is not taken away by the retrospective insertion of Explanation to Section 9(2) of the Act. 18. The assessee relied on Supreme Court judgment in Sundaram Pillai v. Pattabiraman 1985 (1) SCC 591 to highlight that the object of an Explanation to a statutory provision is to explain the meaning and intendment of the Act itself, where there is any obscurity or vagueness in the main enactment or to clarify the same so as to make it consistent with the dominant object which it seems to sub-serve. It cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming a hindrance in the interpretation of the same. Counsel lastly relied on the recent Supreme Court judgment interpreting Section 9(1)(vii) of the Act in GVK Industries Ltd. v. ITO 371 ITR 453. Explaining the interplay between ....
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....aning of Section 9(1)(vii)(d). 20. This Court is of the opinion that the ITAT was unduly influenced by all the regulatory compulsions which the assessee had to face. Besides international convention and domestic law that mandated aircraft component overhaul, the manufacturer itself - as a condition for the continued application of its warranty, and in order to escape any liability for lack of safety, required periodic overhaul and maintenance repairs. Unlike normal machinery repair, aircraft maintenance and repairs inherently are such as at no given point of time can be compared with contracts such as cleaning etc. Component overhaul and maintenance by its very nature cannot be undertaken by all and sundry entities. The level of technical expertise and ability required in such cases is not only exacting but specific, in that, aircraft supplied by manufacturer has to be serviced and its components maintained, serviced or overhauled by designated centres. It is this specification which makes the aircraft safe and airworthy because international and national domestic regulatory authorities mandate that certification of such component safety is a condition precedent for their airworth....
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....rgo Airlines (UAE) 974,220 -- -- Total 319,128,850 950,128,850 737,425,012 22. It was submitted that the revenue earned from LCAG accounted for 99%, 90% and 89% of the aggregate lease rentals earned by the assessee in A.Y. 1997-98, 1998-99 and 1999-2000 respectively. The balance income was also earned from foreign wet-lease. The Revenue's contention, on the other hand, was that the materials did not show that entire income was earned from sources outside India and consequently, the payment made to Technik could not be excluded. The Revenue also relied on the retrospective amendment to Section 9(2) made in 2010 to say that regardless of the question as to whether the expenditure is towards income earned abroad, the payee is deemed to have earned income in India by virtue of the amendment. 23. Before proceeding to analyse the merits of the rival contentions, it would be essential to extract the stipulations in the contract between LCAG and the assessee. They are as follows: "3.1 Operations The Aircrafts employed shall hold a valid Certificate of Airworthiness issued by the Civil Aviation Authority of India (DGCA) or by any other country should such issuance become necessar....
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....e aforementioned price shall apply to all block hours performed by LCI up to a total of 960 (nine hundred and sixty) Block Hours performed under this Agreement per calendar month. Unless otherwise agreed upon in this Capacity Agreement, LCAG shall guarantee to LCI a payment totaling the amount of 960 (nine hundred and sixty) Block Hours performed under this Agreement per calendar month. Should the number of Block Hours actually performed during a calendar month fall short of the number of Block Hours being in the minimum Block Hours guaranteed by LCAG, the rate (Rate B) for such Block Hours not actually performed for reasons not proved to be under the control of LCI shall be US$ 1,225.00 (US $ One Thousand Two Hundred and Twenty Five) per Block Hour." The explanation to Section 9(2) was inserted by the Finance Act, 2007 with retrospective effect from 1.6.1976. The said Explanations read as under: "For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub- section (1), such income shall be included in the total income of the non-resident, whether or not the no....
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....a source outside India. On a studied scrutiny of the said Clause, it becomes clear that it lays down the principle what is basically known as the "source rule", that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. The Clause further mandates and requires that the services should be utilized in India. ************* ********** *********** 24. The two principles, namely, "Situs of residence" and "Situs of source of income" have witnessed divergence and difference in the field of international taxation. The principle "Residence State Taxation" gives primacy to the country of the residency of the assessee. This principle postulates taxation of world-wide income and world-wide capital in the country of residence of the natural or juridical person. The "Source State Taxation" rule confers primacy to right to tax to a particular income or transaction to the State/nation where the source of the said income is located. The second rule, as is understood, is transaction specific. To elaborate, the source State seeks to tax the transaction or capital within its territory even when the incom....
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....iations and documentations with the lenders, structuring, negotiating and closing financing for the project in a coordinated and expeditious manner. ********** ************* **** 34. In the case at hand, we are concerned with the expression "consultancy services". In this regard, a reference to the decision by the authority for advance ruling In Re. P.No. 28 of 1999[5], would be applicable. The observations therein read as follows: "By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it." 35. In this context, a reference to the decision in C.I.T. V. Bharti Cellular Limited and others 2009 (319) ITR 139 would be apposite. In the said case, while dealing with the concept of "consultancy services", the High Court of Delhi has observed thus: "Similarly, the word "consultancy" has been defined ....