TaxTMI 
TaxTMI 
2018 (5) TMI 808
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....w arises for consideration: "Whether the Tribunal was justified in holding that technical service charges payable to the foreign company in Germany constitute business profit of the foreign company and that the same was not taxable in India." 2. Since the facts leading to the dispute are largely similar in all these appeals, the facts in ITA 772/2004 are set-out for reference. The assessee leased three aircrafts (hereafter, "the aircraft lease agreement") from Deutsche Lufthansa Aktiengesellschaft (hereafter "Lufthansa"). Before the lease agreement (of 18.03.1993), the assessee had, on 15.02.1993 entered into agreement for technical support (hereafter "the technical support agreement"). In addition, another agreement for provision for flight deck crews ("the flight deck agreement" hereafter) was also entered into on 05.08.1993. The aircraft lease agreement dated 18.03.1993 was approved by the Central Board of Direct Taxes (CBDT) under Section 10(15A) of the Income Tax Act, 1961 [hereafter "the IT Act"] by orders dated 08.10.1993, 15.09.1993 and 20.08.1993. 3. The assessee's request for withholding tax certificate in respect of crew lease payments for engineers was declined....
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.... being made must be approved by the Central Board of Direct Taxes (CBDT) for claiming exemption under Section 10(15A) and only the agreement dated 18.03.1993 for lease of aircrafts has been approved by CBDT. Further, the benefit of Section 10(15A) of the Act is available only in respect of payment made to acquire an aircraft on lease and not to any other payments such as payments for provision of services (including technical personnel). Thus, AO held that the above payments were not exempt under Section 10(15A) and therefore, liable to tax as per the provisions of Act. 7. It is submitted that the AO rejected the alternative contention that the payments were not liable to tax as per provisions of DTAA as Lufthansa did not have permanent establishment in India. The AO held that the payments to be made to Lufthansa were liable to tax in India, as per the provisions of the Act as well as DTAA as the same were in the nature of 'Fee for Technical Services' chargeable to tax in India at the rate of 20% on gross basis as per Article VIIIA of the DTAA. 8. The AO also held that for the purpose of computing amount of tax to be deducted and deposited in terms of Section 195 of the Act, ....
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.... any kind to any person (other than payments to an employee of the other person making payments), in consideration for services of managerial, technical or consultancy nature, including the provision of services of technical or other personnel. The payments were made to Lufthansa for provisions of technical services including provision of technical personnel and therefore, clearly fall within the ambit of term 'Fee for Technical Services' as defined in para 4 of Article VIIIA of the DTAA. 14. The revenue argues that the nature of services being technical was not in dispute before the AO. The contention raised by the Modiluft before the AO was that the technical services were being provided to Lufthansa for protecting the leased aircrafts, and not to Modiluft. Reliance in this regard is placed on para 2 of the Order dated 31.10.1995 passed by Assessing Officer being Annexure A to appeal at Page 40 of the appeal being ITA No. 832 of 2006 which read as under: "2.xx In your letter dated 27.10.1995, which has reiterated this position, you have further stated that the engineers leased from Lufthansa do not provide any technical service to your company, but provide service to M/s....
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....levant time did not contain the clause for 'Fee for Technical Services,' and it was in that context it was held by the AAR that the fee for technical services arising out of supply of skilled labour were not liable to tax in India in terms of Article 7 as 'business profits' on the ground that the assessee did not have a permanent establishment in India in terms of Article 5 of the Double Taxation Avoidance Agreement. However, in the facts of the present case in terms of the DTAA, payments made to Lufthansa would not be liable to tax in India in terms of Article III of DTAA, but would still be liable to tax as in terms of Article VIIIA of the DTAA, as there exists a 'Fee for Technical Services' clause in the Agreement. It is therefore, urged that payments made to Lufthansa are in the nature of 'Fee for Technical Services' and would, therefore, be liable to tax in terms of Article VIIIA of DTAA at the beneficial rate of 20% on gross basis (after applying grossing up principle as specified in Section 195A of the Act). 18. The assessee argues, in these appeals that the decision of the Advance Ruling Authority in Tekniskil (Sendirian) Berhard (supra), rendered in the context of DTAA ....
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....d replaced by the following text : (1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. (2) Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall, in each Contracting State, be attributed to that permanent establishment, the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. (3). In the determination of the profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purposes of the business of the permanent establishment....
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....ormula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. (4) The term 'fees for technical services' as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel. (5) The provisions of paragraphs (1) and (2) of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment. In such a case, the provisions of Article III shall apply. (6) Royalties and fees for technical services shall be deemed to arise in a Contracting State....
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....ft on lease from government of the foreign State or a foreign enterprise. Therefore, if the assessee in this case make a composite agreement for lease of aircraft with operational staff, then the provisions of Section 10(15A) of the Act will fully cover the case. However, the assessee in this case entered into a separate agreement and such agreement for provision of technical services having not been approved, we have already rejected the claim of exemption u/s 10(15A) of the Act. The denial of the exemption u/s 10(15A) of the Act in so far as fees for technical services are concerned, does not change the character of the receipt in the hands of the foreign company. Both the lease rent and the fees for technical services are profits of an enterprise of the foreign company for the lease of the aircrafts alongwith operational. staff. It is also not denied that, the foreign company is not having a permanent establishment in India. In such a situation, such profit wouldcame for consideration under Article III of the Indo German DTAA. However para (7) of Article III makes anexception that where such profits include items of income which are dealt with separately in other Articles of ....
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.... which commenced on October 8, 1993, came to a conclusion in Apri1,1994. In an application before the Authority for Advance Rulings, TSB claimed complete exemption on the basis of the provisions of DTAA between India and Malaysia which was entered into with retrospective effect from April 1,1973. TSB claimed that the fees derived by it from Hill arose out of a business in the supply of skilled labour carried on by it; that the taxability of this amount of income is governed by Article 7 of the DTAA which is equivocal with the income, cannot be taxed in. India unless the applicant is found to have a permanent establishment in India and the profits arc attributable to such permanent establishment; that Article 5(1) which defines a permanent establishment for the purpose of DTAA envisaged a fixed place of business in which the business of the enterprise iswholly carried on. According to the assessee, it had no place of business at all in India much less a fixed place of business. The Authority for Advance Ruling considered the provisions of Article 7 of the DTAA between India and Malaysia in that case which corresponds to Article III of the DTAA of India with Federal Republic of Germa....
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....racting State, in which the interest arises, through a permanent establishment situated therein, or performs in that other Start independent personal services from a fixed base situated therein, and the indebtedness in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a cave, the provisions of Article 7 or Article 14, as the ease may be, shall apply." Similar is the provision the Agreement between India and Federal Republic of Germany as contained in Article VIIIA(S) as under: -(5) The provisions of paragraphs (1) and (2) of this Article shall not apply if the beneficial owner of the royalties or fees for technical. services being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment. In such a case, the provisions of Article III shall apply.- The Authority for Advance Ruling held that these provi....