TaxTMI 
TaxTMI 
2021 (5) TMI 478
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.... 1,33,142 Towards cost of three specialists from FAA and VNTSC for 10 days for participating in meeting. 2. US$ 25,800 Towards review of the Aeronautical Information 3. US$ 37,800 Towards analyses of India's future ATFM plan 4. US$ 1,17,300 Towards documentation of the Qualitative Requirement 5. US$ 1,62,000 Towards preparation of the system architecture and specifications 6. US$ 1,51,200 Towards preparation of the road map, Draft implementation plan. US$ 4,94,100 5. The AO treated these amounts paid as fees for technical services (FTS), chargeable to tax @10% + surcharge + cess on the gross amount as per Section 115A of the Income Tax Act, 1961. The reasoning given by the AO is as under: * The contention of the applicant that FAA is a sovereign entity and entitled to immunity from taxation under the Act is not well founded in law and facts. * Sovereign immunity can only be claimed in respect of the acts done in its sovereign capacity (acta jure imperii) but not done in capacity of private law or commercial character (acta jure gestionis). * Any immunity from taxation to any soverei....
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....ments are infact appendices/annexures to the memorandum of agreement number NATT-4407 entered into between the Federal Aviation Administration (FAA) and the applicant. The applicant was asked to produce the copy of memorandum of agreement. The same has been produced and is placed on record. Perusal of memorandum give the following: "This memorandum of agreement (the agreement) establishes the terms and conditions under which the FAA may provide assistance to the MoCA in developing and modernizing the civil aviation infrastructure of India in the managerial, operational and technical areas. For this purpose, the FAA shall, subject to the availability of appropriated funds and necessary resources, provide personnel, resources, and related services to assist the MoCA to the extent called for in the annexures and appendices to this agreement." Thereafter the Attachment-A to Annexure-XX to the memorandum of agreement gives again the objective as under: "The purpose of this effort is for the U.S. Department of Transportation's Volpe National Transportation Systems Center to assist the FAA and the Airport Authority of India (AAI) in the development, justific....
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....and can discuss India's expectations of ATFM; and (c) have good understanding of India's existing air traffic control (ATC) capabilities and future plans. The meeting may be enhanced if participation from air carriers can be obtained, as their automation capabilities may be useful to establishing the initial ATFM system. Travel participants from the U.S. (Volpe and ATCSCC) will be limited to individuals that understand ATFM and will participate in the development of requirements, functional specifications, and roadmap. Obtaining this collective understanding of the current ATM environment will help elicit meaningful and valid qualitative requirements and guide the development of the envisioned ATFM road map........ * Included in this review will be discussion on the issue of training. Traditional air traffic control (ATC) specialists are not typically exposed to the procedures and applications that characterize ATFM. Therefore, as we formulate a plan to bring the ATFM technology to bear on the situation in India, we need to plan how to train personnel to take on the role of Traffic Manager. This plan will involve identifying the types of people within Indi....
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..... 5. The AAI shall pay in advance the sum of one hundred fifty-one thousand two hundred U.S. Dollars (US$ 151,200), which is the estimated cost of Preparation of Road Map Draft Implementation Plan activities (Attachment A, Task 3). Upon receipt of payment from the AAI, the FAA and Volpe Center shall commence activities for this milestone. *...(iii) The above analysis would clearly prove all contentions of the applicant to be incorrect. It is very clear from the analysis of the agreement that it is a integrated contract for providing consultancy by the FAA to AAI for the purpose of upgradation of ATFM capabilities, preparation of detailed system architecture and specification and preparation of a road map for implementation plan with requirements for labour, training and ATFM procedures. The sum and substance of the agreement is that FAA would be providing technical services, which consists of development and transfer of a technical plan/technical design. To this extent the services rendered by FAA fails under the category of fees for technical services as per Section 9(1)(vii) of the Act and also as fees for included services under Article 12(4)(b) of the Indo-US ....
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....ices would be performed in India including visits of technical persons, implementation and training of personnel. Therefore, the territorial nexus condition laid down by the Hon'ble Supreme Court as explained by the Hon'ble AAR in the case of Worley Parsons are satisfied and the full consideration representing fees for technical services u/s. 9(1)(vii) of the Act read with Article 12(4)(b) of Indo-US DTAA is chargeable to tax in India. 6. The matter reached to ld. CIT(A) who considered various submissions of the assessee, quoting various clauses of the agreement between FAA & AAI held that payments made to FAA are indeed in the nature of FIS and taxable in India. 7. The rationale given by the ld. CIT(A) is as under: On the issue sovereignty: "5.2 In the very first place, it has not been established by the appellant that FAA is foreign 'Government and not a commercial entity of the foreign government as AAI is to Indian Government. Nothing is clear from copy of MOA itself. The MOA is signed by Federal Aviation Administration, Department of Transportation, United States of America AND Airports Authority of India, Ministry of Civil Aviation, Governm....
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....aircraft or an aircraft engine on lease from foreign government. Even this section does not exempt payments made for providing spares, facilities or services in connection with operation of leased aircraft. This section 10(15A) does not apply to agreement entered into on or after 01-04-2007. This means that even said exemption has been withdrawn with reference to agreement entered into after prescribed date. Further, Article 265 of Constitution of India says: 'No tax shall be levied or collected except by authority of law'. Thus, constitution gives power to parliament to make laws regarding levy and collection of taxes. Article 285 says that: Exemption of property of the Union from State taxation. (1) The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State. (2) Nothing in clause (I) shall, until Parliament by law otherwise provides, prevent any authority within a State from levying any tax on any property of the Union to which such property was immediately before the commencement of this Constitution liable or treate....
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....on to deduct TDS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 195(1), namely, "chargeable under the provisions of the Act". This principle has been reiterated in case of following judicial decisions: - Maharashtra State Electricity Board v CIT (2004) 90 ITD 793(Mum), - Van Oord ACZ India P. Ltd. v. CIT 230 CTR 365 (Del) and - Prasad Productions 3 ITR (Trib) 58 Chennai (SB) Therefore, we have to see whether the payments made by the appellant to the non-resident FAA are chargeable to tax in India in hands of FAA. The taxability of non-resident is governed by section 5(2) of the act, which is reproduced as below: "Subject to provisions of this act, the total income of any previous year of a person who is non-resident included all income from whatever source derived which- a) Is received or is deemed to be received in India in such year by or on behalf of such person; or b) Accrues or arises or deemed t....
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....ess India's growing air traffic activity while transitioning to a modernized Air traffic Management System to cover all Indian Flight Information Regions, B. In support of this operational requirement, the FAA, in cooperation with Dot's Volpe National transportation System Centre, shall assist AAI in development of: i. detailed qualitative requirements for the proposed ATFM capacity ii. detailed ATFM system architecture and specifications, and iii. draft A TFM implementation plan. C. The FAA shall separately provide the AAI with a detailed project plan, based on parties prior discussion, describing the intended scope and content of FAA's assistance in development of QRs' AFTM system architecture and specifications and a draft AFTM implementation plan. Further, Article III of said Annex says as under: A. Subject to available resources, the FAA and Volpe Centre shall implement this project in three (3) phases as follows: Phase I: Development of detailed qualitative requirements (QRs) to include: I Review of US A TFM capabilities, including operating operations and systems. II Ana....
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.... of the appellant happens to fall within purview of second limb, then there is no requirement of 'make available'. Perusal of various articles of MOA and annexes as reproduced above show that FAA shall be helping AAI in modernization of civil aviation infrastructure of India in the managerial, operational and technical areas and FAA shall after due process of review and analysis of requirements, prepare and deliver a technical plan for the purpose. Thus, the net outcome of services to be provided by FAA is preparation of technical plan which shall be delivered to AAI for carrying out the process of modernization of civil aviation infrastructure in India. The case of the appellant clearly falls within scope of second limb of clause (b) of Article 12(4) and therefore services provided by FAA are in nature of technical services. 5.8 The appellant has contended that MO A, Appendix 2 to Annex 3 to MO A, Annex 4 to MOA and three phases as mentioned in Article IIIA of Annex 4 should be read independently and separately as if these were separate independent agreements as such. This contention of the appellant Is fallacious as there is, in fact only one agreement in form of....
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....A to AAI, though the appellant has referred to phase II and III as mentioned in Annex 4 for this purpose. The contention of the appellant that Article II of Appendix 2 to Annex 3 to MOA and phase I of Article IIIA of Annex 4 to MOA should be severed and read separately from phase II and III of Article IIIA of Annex 4 to MOA is not legally tenable as discussed supra. Therefore, entire payment made to FAA is held to be in nature of FTS. 5.10 Another contention of the appellant is the payments are in nature of reimbursement only and therefore there is no element of income contained in these. The appellant has referred to Article VI of MOA, Article III of Appendix 2 to Annex 3 to MOA and Article V of Annex 4 to MOA which are regarding financial provisions. Here, it is pertinent to see that what for the appellant has made payments. The payments have been made for getting technical services from FAA. From perspective of payer, these are undoubtedly in nature of FTS. Looking from perspective of payee, these are in nature of FTS against which payee had incurred certain expenses and after deducting those expenses, there may not be any profit in hands of payee. But, as per domestic ....
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....nclude reimbursement of expenditure incurred by the assessee for the purpose of computing gross receipts;" The issue in the present case has been resolved by the Hon'ble ITAT in the above mentioned decision. In case of Cochin Refineries vs. CIT [1996] 222 ITR 354 (Ker), same principle has been laid down. Therefore, the contention of the appellant that payments are merely in nature of imbursement and hence not taxable is not correct. 8. In view of discussion supra, the Ld. CIT(A) held that entire payments made by the appellant to FAA are in nature of FTS and hence chargeable to tax in India under DTAA. Accordingly, it was held that the appellant is under obligation to deduct tax from these payments u/s. 195 of the Act." 9. Aggrieved with the order of the ld. CIT(A), the assessee filed appeal before us. 10. During the hearing before us, the ld. AR taken various arguments taken before the ld. CIT(A) (as mentioned in order from page nos. 2 to 15) alternatively and in consonance, the gist of which is as under: * In the first contention, the appellant has submitted that the payments made relate to the cost which the FAA is expected to incur in rendering the....
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....a, the Government of India has entered into a memorandum of agreement with the FAA of the Government of USA. The intent of this agreement was to ensure the broad terms and conditions subject to which FAA will provide assistance to the Indian Government. It has been categorically provided in the agreement that the specific technical assistance to be provided by the FAA for the MoCA shall be delineated by annexes and appendices to this agreement. For the purpose of entering into the annexes and appendices, FAA has been authorized by the Government of USA and Directorate of General Civil Aviation and Airport Authority of India (the assessee) has been authorized by the Govt. of India. * In pursuance of the aforesaid general Memorandum of Agreement (MoA), the assessee entered into agreements with the FAA. The first agreement namely Appendix 2 and Annex 3 to the MoA was entered into between the assessee and the FAA on 25.09.2009. This agreement provides in detail the specific assistance which FAA wilt provide in pursuance of the aforesaid agreement. It has been provided in the agreement that the FAA shall provide three specialists, from the FAA and the Volpe National Transportat....
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.... for each phase. The cost has been identified separately because of the fact that the phases are separately identifiable and in case of termination of the agreement, the assessee shall be liable to pay the cost incurred upto the phases completed. It has been clearly provided in Article V Financial Provisions that the total cost of completing the entire phases would be US$ 4,94,100. * A dispute often arises when the payer of the amount to the non-resident feels that the amount to be remitted by him is not recipient's income chargeable under the Indian Income-tax Act. Should the payer in such a case deduct tax at source? * The ld. AR relied on the following judgments: High Court/AAR * CIT vs Dunlop Rubber Co. Ltd. [142 ITR 493 (Cal)] * Decta vs. CIT [237 ITR 190 (AAR)] * Tata Engineering & Locomotive Company Limited (2000) 245 ITR 823 * Siemens, 310 ITR 320 (Bom) ITAT * Clifford Chance, 82 ITD 106 (Bom) * Raymond Ltd., 86 ITD 791 (Bom) * Modicon Network, 14 SOT 204 (Del) * It was argued that from the judgment of the Hon'ble jurisdictional High Court as well as other Hig....
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....section 196 are clearly applicable in the instant case, and accordingly, no TDS can be deducted on payment made to government. In addition to the aforesaid, during the course of hearing the assessee has submitted as under: "In a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used". In this regard, the assessee has placed reliance on the decision of the Hon'ble Supreme Court in the case of Modi Sugar Mills Limited AIR 1961 SC 1047. * The third contention taken by the appellant is that there are two separate agreements, which the appellant has signed with the FAA, In respect of the first agreement, it was submitted that the assistance by the FAA does not make available any technology to the assessee. Therefore, nothing under this agreement should be held as taxable in India. In respect of the second agreement, it was submitted that the maximum amount which could be held as Fees for Included Services amount to US$ 3,13,200 relating to the ass....
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....es ii. Consist of the development and transfer of a technical plan or technical design. Applicability of first limb This clause provides that the services shall be treated as Fees for included services, if it "make available" the technology or other expertise. The word "make available" has been interpreted in various judgments of the Hon'ble High Court and Authority for Advance Rulings. In the case of Ernest and Young P. Ltd. dated 19.03.2010 and Bharati AXA General Insurance Co Ltd. dated 06.08.2010, the Hon'ble AAR held that "make available" means when the person acquiring the technology is enabled to apply the technology. The phrase 'make available' has been explained in the MOU of the DTAA between India and USA as follows: "Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b)....
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....agreement. It has been provided in the agreement that the FAA shall provide three specialists, from the FAA and the Volpe National Transportation Systems Centre, with background in Air Traffic Flow Management (FATM) to travel to New Delhi, India, to assist the assessee by participating in an Indian National Air Traffic Requirements Meeting on ATFM requirements with the assessee and the industry experts. The aforesaid assistance provided by the FAA does not make available to the assessee any technical knowledge or other things as contemplated in Article 12(4)(b). This is because of the fact that the participation of the specialists in the meeting held in India does not provide the assessee the capability to use the knowledge and experience of the specialists. Therefore, it can be concluded that the first limb of Article 12(4)(b) does not apply in the instant case. The second limb provides that if the services consist of the development and transfer of a technical plan or technical design, then payment for such services shall be treated as fees for included services, In the instant case, it is clear from the agreement itself that no such plan or design will be provi....
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....leting Phase 1, 2 and 3 activities under this Annex is US $ 4,94,100, The assessee shall pay to the FAA all cost incurred in providing services under the Annex, in accordance with the following schedule: US$ 25,800 Towards review of the Aeronautical Information US$ 37,800 Towards analyses of India's future ATFM plan US$ 1,17,300 Towards documentation of the Qualitative Requirement US$1,62,000 Towards preparation of the system architecture and specifications USS 1,51,200 Towards preparation of the road map, Draft implementation plan. US$4,94,100 Therefore, it becomes necessary that the taxability of each of the phases should be examined separately. The first phase involves analysis of the existing ATFM system in India and its comparison with the system in USA and thereafter, documenting the QRs. This assistance neither involves development of any plan or design or it makes available any other technical knowledge. Therefore, the assistance provided by the FAA in the first phase cannot be held as taxable as India. The second and third Phase of assistance preparation of road map and draft implementation.. ....
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....ns as sovereign entities. In case of presence of a treaty or agreements like DTAA, they may take precedence in determination of the taxability of the entities involved. Reference is also invited to the Provisions of Section 10(15A) wherein the payments made to foreign Government are exempt. Article 285 and Article 289 provides for collection of taxes and the exemption of items from the purview of taxation. Thus, we find that wherever the legislature intended to accord exemption, they have been specifically provided for in the Income Tax Act. The words used "The Government" cannot be used to connote "A foreign Government" too. 14. To conclude, we hereby hold that the transactions between the AAI and FAA and the profits arise thereof would be subjected to provisions of Indian Income Tax Act. b. Whether based on the agreements, the payment is in the nature of reimbursement are not? 15. On going through the agreements, we find that the agreement dated 13.11.2006 signed between the Joint Secretary, Ministry of Civil Aviation and the FAA Administrator was primarily on the pedestal of incurring of expenses on reimbursement basis for providing technical assistance. 16. The firs....
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....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: " 23. The Act clearly specifies that the TDS provisions are invited when the payments are chargeable under the provisions of this Act. We are guided by the decision of the Hon'ble Supreme Court in the case of GE India Technology Cen. P. Ltd. vs CIT 327 ITR 456. The Hon'ble Court held that on analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression "sum chargeable under the provisions of the Act" is used only in Section 195. For example, Section 194C casts an obligation to deduct tax in respect of "any sum paid to any resident". Similarly, Sections 194EE and 194F provide for deduction of tax in respect of "any amount" referred to in the specified provisions. In none of the provisions the expression "sum chargeable under the provisions of the Act", which as stated above, is an expression used only in Section 195(1). It follows, therefore, that the obligation to deduct tax arises only when there is a sum chargeable ....
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....ry expenses to the three employees deputed by FAA for assisting the AAI. In this situation, the AAI can pay travelling expenses and salary for the period of 10 days stipulated or FAA can foot the travelling bill expenses, pay salary and get it reimbursed from AAI. In such a situation, FAA doesn't get any benefit nor it is detrimental to AAI do so. It is a matter of convenience for the parties involved. Hence, the payments received by FAA would not involve any element of profit which makes it liable to pay tax in India. 26. Provisions of Section 4(2) reads "In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provisions of this Act." 27. Provisions of Section 195(1) reads "Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest -[***] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" [***]) shall, at the time of 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 b....
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....racting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed: (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in subparagraph (b) of this paragraph]: (i) during the first five taxable years for which this Convention has effect, (a) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company; (b) and (b) 20 per cent of the gross amount of the royalties or fees for included services in all other cases; and (ii) during the subsequent years, 15 per cent of the gross amount of royalt....
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....ontainers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payments; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services). 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be shall apply. 7. (a) R....
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....ovision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. 36. Typical categories of services that generally involve either the development and transfer of technical plants or technical designs, or making technology available as described in paragraph 4(b), include: 1. Engineering services (including the sub-categories of bio-engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering); 2. Architectural services: and 3. Computer software development. Under paragraph 4(b), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for examples, relate to any of the following areas: 1. Bio-technical services; 2. Food processing; 3. Environmental and ecological serv....
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....gramming firm to modify its software for this purpose. Are the fees which the Indian firm pays treated as fees for included services? Analysis: The fees are for included services. The U.S. company clearly performs a technical service for the Indian company, and it transfers to the Indian company the technical plan (i.e. the computer programme) which it has developed. 41. Example 4: Facts: The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol free oil and wishes to market the product worldwide. It hires and American marketing consulting firm to do a computer simulation off the world market for such oil and to adverse it on marketing strategies. Are the fees paid to the U.S. company for included services? Analysis: The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc. nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial ....