TaxTMI 
TaxTMI 
2021 (9) TMI 1400
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....ores. During the course of assessment proceedings, it was observed that M/s. InterGlobe Aviation Ltd. (assessee) had entered into a purchase agreement with Airbus SAS, France, for supply of 100 aircrafts. The assessee had selected V-2500 engines manufactured by IAE International Aero Engines AG, Switzerland (also referred as, "IAE" hereafter) as supplier of engines which are to be fitted in the aircraft. As a consideration for selection of International Aero Engines to be fitted in the aircraft to be purchased by the assessee-company, certain credits were allowable to the assessee-company from International Aero Engines on the delivery of such aircraft. As per the assessee the aircraft had been acquired on operating lease basis consequent to assigning the purchase contract between the assessee-company and respective lessor in favour of leasing/finance company. It is further observed that the assessee-company has received credits from International Aero Engines and others in respect of supplier furnished equipment on the actual delivery of the aircraft during year amounting to Rs. 7,59,39,25,444 which have been spread over the period of lease and the proportionate amount aggregating....
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....national Aero Engines in preference to other engines to be installed in the aircraft being purchased by the assessee from Airbus. Similarly, suppliers of other component of aircrafts also extended credits to the assessee. The suppliers' credits received by the assessee are spread over the aircraft fleet and are amortized and reduced from the operating lease rentals on a straightline basis over the period of lease and the remaining amounts shown as deferred credits. The assessee received a sum of Rs. 759,39,25,444 during the relevant previous year from the suppliers as credit in relation to engines and other components supplied by such suppliers in respect of the aircrafts delivered during the relevant previous year. However, a sum of Rs. 268,91,48,934 being the proportionate amount of credits related to relevant financial year was amortized and reduced from the aircraft lease rentals and included in "other income" in the books of account. The balance of the credits are taken to the balance-sheet of the assessee as deferred incentives and shall be amortized in future years. The agreement with International Aero Engines is reproduced in the assessment order and it was commented u....
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....d made the addition of the same by observing as under : "In the instant case, the assessee has not purchased the aircraft but has hired it on lease from several concerns like Aether, Celestial Aviation Trading Ltd., etc. All these, parties are lessors and are based in Ireland. The assessee-company has been paying lease rent to these parties as per the agreement executed between the company (lessee) and the parties (lessors). The depreciation on these aircrafts where the engines supplied by International Aero Engines are fitted, is claimed by the lessors. The assessee has not claimed depreciation on these aircrafts where the engines are fitted because it is not the owner of the aircrafts. Whatever the lease refit amount decided between the lessors and lessees is being paid by the assessee-company and the same is charged to the profit and loss account as revenue expenditure. If the assessee would have purchased the aircraft directly from Airbus 320 France and would not have routed it through the leasing company then the nature of the receipt would have been treated as capital in nature. But under those circumstances for the purpose of depreciation to be claimed on aircrafts ....
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....lculated with reference to flight hours. According to the Assessing Officer the payments made by the assessee are chargeable to tax in the hands of the recipient. Therefore, the assessee were liable to deduct tax at source under section 195 of the Act. The assessee, however, claimed that payment of supplementary rent is covered within the ambit of exemption under section 10(15A) of the Income-tax Act. The Assessing Officer, however, rejected the contention of the assessee and held that assessee is not entitled to any exemption, since the assessee did not deduct tax on the same, the same were disallowed under section 40(a)(i) of the Income-tax Act and made the addition of Rs. 338,09,64,412 by observing as under : "As can be seen from the lease agreement the basic lease rent is fixed, however supplemental rent mentioned above is calculated with reference to flight hours. The payments made by the assessee are chargeable to tax in hands of recipient and therefore, the assessee was liable to deduct tax at source under section 195 of the Act from such payments made during the year. The assessee explained it as under : '. . . The assesses had taken aircrafts on non-c....
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.... services is paid aircraft, the provision of TDS is not attracted but a plain reading of article 12 shows clearly that supplemental lease rent has no place under the definition of term royalty or fee, the same can only include regular lease rent being paid. No liberal meaning of the statutory provision may be drawn on the ground that the provisions of section 10(15A) and the approval given by the Central Board of Direct Taxes are clear and unambiguous and clearly provide the Act on which these are applicable, It is also settled law that the language used in the statute has to be given its nature meaning while interpreting it. A statutory enactment must ordinarily be construed according to the plain nature, meaning of its language and no words should be added, altered, modified unless it is plainly necessary to do so in order to prevent a provision from being unintelligible, unreasonable, unworkable or totally irreconcilable with the rest of the statute (as decided by the hon'ble Bombay High Court in the case of CIT v. Sterling Foods (Goa) [1995] 213 ITR 851 (Bom) (later on approved and followed by the Bombay High Court in Indian Rayon Corporation Ltd. v. CIT [1998] 231 ITR 26 (....
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.... 1.6. The assessee challenged both the additions before the learned Commissioner of Income-tax (Appeals). It was contended before the learned Commissioner of Income-tax (Appeals) that both the issues are covered by the order of the Income-tax Appellate Tribunal, Delhi Bench in the assessee's own case for the assessment year 2007-08 dated July 18, 2016. It was submitted that fleet introductory assistance is a capital receipt and payment of supplementary rent is exempt under section 10(15A) of the Income-tax Act and an allowable deduction. The Tribunal has applied the "purpose test" for holding that the fleet introductory assistance is a capital receipt. It was submitted that credits are accented as capital after a detailed analysis of the agreements and the applicable law. Similarly, supplementary rent is held to be for the lease of the aircraft and no different from the normal lease rent in respect of which there is no dispute. 1.7. The learned Commissioner of Income-tax (Appeals) noted in his findings that it is a case of capital gains on account of right of assignment of purchase order in favour of the lessor. He has also noted that deduction of the expenditure i....
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....ion for adjournment and in not providing sufficient opportunity to furnish documents/ information asked for at the fag end of the appellate proceedings. 3. That on facts and in law the Commissioner of Income-tax (Appeals) erred in arbitrarily and illegally assuming the power to enhance under section 251. 3.1. That on facts and in law the Commissioner of Income-tax (Appeals) erred in assuming jurisdiction on issues not forming part of the grounds of appeal 4. That on facts and in law the Commissioner of Income-tax (Appeals) erred in holding that entire credit in aggregate of Rs. 759,39,25,444 received by the appellant is exigible to tax in the year under consideration. 5. That on facts and in law the Commissioner of Income-tax (Appeals) erred in making a disallowance under section 37(1) of lease rental payments to the tune of Rs. 268,91,48,934. 5.1. That on facts and in law the Commissioner of Income-tax (Appeals) erred in holding that payment of lease rent attributable to the earning of credits is capital in nature and hence not an allowable expense. 6. That on facts and in law the Commissioner of Income-tax (Appeals) erred in h....
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....ments filed by it in the paper book are in order, there was no refusal by the appellant to furnish copies of agreements without any reduction. (v) not appreciating that payment for supplementary rent was mandatory for use of aircraft. (vi) not appreciating that supplementary rent paid is not refund able and that as per lease agreement, the appellant is entitled to receive reimbursement of costs of specified items upon actual maintenance. 9.1. That on facts and in law the order passed by the Commissioner of Income-tax (Appeals) is vitiated for the reason that it takes into consideration partly relevant and partly irrelevant considerations. I. T. A. No. 2977/Delhi/2017-Assessment year 2012-13 (Revenue grounds) : "1. In the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in holding the incentives received from equipment suppliers to be capital receipts. 2. In the facts and circumstances of the case, the learned Com missioner of Income-tax (Appeals) has erred in holding that no disallowance under section 40(a)(i) of the Act can be made for not deducting tax at source on the supp....
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....followed, However, exceptions to this Rule are : (i) where the decision is patently erroneous either on facts or law or (ii) where the decision has been rendered on incomplete set of facts or wrong facts and the case is thus, distinguishable on facts. In either case, the decision would not and cannot have been a binding precedent. 1.10. Relying on the judgment of the hon'ble Supreme Court in the case of Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC), it was argued that the rule of consistency does not extend to a situation where a patently erroneous view has been taken or where distinguishing facts brought on record lead to a different view. It was highlighted that the order of the Income-tax Appellate Tribunal for the assessment year 2007-08 is patently erroneous because the decisions of the hon'ble Supreme Court in the cases of Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) and Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 (SC) or judgment of the hon'ble High Court in the case of CIT v. Bougainvillea Multiplex Entertainment Centre Pvt. Ltd. [2015] 373 ITR 14 (Delhi) relate to situations where the Gove....
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....receipt arises out of the commercial agreement, therefore, it is a business receipt. As an additional claim, it was contended that the same is chargeable to tax under section 28(iv) of the Income-tax Act, 1961. The primary claim of the Revenue is that the receipt is chargeable as business profit and alternatively the capital gains can be charged where there is a transfer of capital asset. The deduction of lease rent is not allowable under section 37 of the Income-tax Act, 1961. It was submitted that the provisions of section 10(15A) granting exemption to lease rent stand omitted in respect of agreements entered into after April 1, 2007. 1.11. After hearing both the sides, the Division Bench in its wisdom referred the entire issue to the hon'ble President for constitution of a Special Bench by observing as under : "9. We have considered the rival submissions. The core issue involved in the present appeals is whether fleet introductory assistance credit can be treated as subsidy. and whether it is capital receipt or revenue receipt. The claim of the assessee had been that the issue of fleet introductory assistance credit is covered by the order of the Income-tax....
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....n opinion different from the one taken by the earlier Bench, it ought to place the matter before the hon'ble President of the Tribunal, so that, the hon'ble President could have referred the matter to a larger Bench. We rely upon the decision of the hon'ble Gujarat High Court in the case of Sayaji Iron and Engg. Co. v. CIT [2002] 253 ITR 749 (Guj) in which it was held as under (head note) : '(ii) That the Tribunal of fact had no right to come to a conclusion contrary to the one reached by another Bench of the same Tribunal on the same facts. If the Tribunal wanted to take an opinion different from the one taken by an earlier Bench, it ought to place the matter before the President of the Tribunal so that he could have the case referred to a Bench consisting of three or more Members for which there was provision in the Income-tax Act itself.' 9.1. The same view have been taken by the hon'ble Madhya Pradesh High Court in the case of Agrawal Warehousing and Leasing Ltd. v. CIT [2002] 257 ITR 235 (MP) in which it was held that- 'The Tribunal has no power to review its own decision. Judicial discipline and proprietary demands that i....
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....acts from the commentary of Kanga and Palkiwala (10th edition) at page 214 and submitted that the following are immaterial considerations in deciding the question whether a certain item is capital or revenue. (i) Payment measured by estimated profits lump sum and periodic sums (iii) Magnitude of receipt (iv) Name given by parties concerned and treatment in accounts (v) Form of transaction (vi) Income from wasting assets (vii) Payment made out of capital (viii) Disallowance to payer 3.1. Referring to the decision of the Income-tax Appellate Tribunal in assessment year 2007-08, he drew the attention of the Bench to the following (page 37 of PB) : "Appellant's right to receive the credits got triggered when the appellant made a selection of International Aero Engines, giving preference to the engines manufactured by other competitors of International Aero Engines. This right got crystallized when agreement dated October 19, 2005 was executed between Interglobe and International Aero Engines." 3.2, He submitted that the contention of the Revenue that the agreement dated October 19, 2005 is onl....
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....the case of Delhi Development Authority v. Durga Chand Kaushish reported in [1973] 2 SCC 825 submitted that the hon'ble High Court held that while interpreting agreements "the question is not what the parties to a deed may have intended to do by entering into that deed, but what is the meaning of the words used in that deed : a most important distinction in all cases of construction and the disregard of which often leads to erroneous conclusions". 3.6 So far as the argument of the learned special counsel that credits are commercial receipts and hence liable to tax is concerned, he submitted that undisputedly aircraft is a capital asset for the assessee and not part of its stock-in-trade. Even when the advantage is commercial, it still needs to be seen whether this advantage is in the capital field or the revenue field. Therefore, the fact that there is some commercial advantage would not itself override the decision of the Tribunal for the assessment year 2007-08. 4. So far as the issue of applicability of section 28(iv) which has been raised by the Revenue in the additional ground is concerned, he submitted that it is not in dispute that credits received in the ins....
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....d Exports (P.) Ltd. [1989] 176 ITR 155 (SC) (at page 159) He submitted that the Assessing Officer has rightly stated at page 1 of his order that "the assessee-company has been engaged in the business of operating a low cost airline in India. . . ." He submitted that the assessee is not carrying on a business of selection of engines. Therefore it cannot be said that the credits are taxable under section 28(i) of the Act. 5. The learned senior counsel for the assessee submitted that the issue of the credits received whether capital or revenue is no more res integra. The credits have been examined by the Tribunal in the assessment year 2007-08 wherein it was held that the receipts are capital in nature and not liable to tax. He submitted that while opining as such, the Tribunal has considered : (i) Letter of intent dated June 26, 2005 between "A" and Airbus (at page 18) ; (ii) Agreement dated October 19, 2005 between "A" and International Aero Engines (at page 19) ; (iii) Aircraft purchase agreement dated November 18, 2005 between assessee and Airbus (at pages 20 to 22) ; (iv) Sample lease agreement dated December 15, 2006 (at page 23) and ....
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.... put it simply the learned Commissioner of Income-tax (Appeals) views the separate transactions of purchase of air craft and its financing from a third party as a composite transaction. 5.5. The learned counsel for the assessee submitted that the trans actions are separate and not composite. He submitted that it is an undisputed fact that Airbus, International Aero Engines, lessor and assessee are unrelated. Separate transactions were executed by the assessee as under : * With Airbus-for acquisition of 100 new aircrafts * With International Aero Engines-for selection of engines * With lessors-for assignment of the right to acquire aircraft from Air bus and simultaneous lease to the assessee. 5.6. He submitted that there is no allegation that the above transactions are either sham, dubious or colourable. Per contra, the learned Com missioner of Income-tax (Appeals) at paragraph 10 of his order noted that this is the industry norm. There is no allegation also of "tax avoidance". Even the learned Departmental representative has not made out any such use. In such a scenario, separate transactions under separate sets of agreements executed at different p....
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....ion with another party who is ad idem with the assessee as to the terms and conditions". He submitted that the ratio laid down in this decision has been upheld recently by the hon'ble apex court in the case of Mangalore Ganesh Beedi Works v. CIT reported in [2015] 378 ITR 640 (SC). 5.9. He also heavily relied on the decision of the hon'ble Andhra Pradesh High Court in the case of A. V. N. Jagga Row v. CIT reported in [1987] 166 ITR 862 (AP). 6. So far as the argument of the learned special counsel for the Revenue that the co-ordinate Bench decisions for the assessment years 2007-08 to 2009-10 are not binding in the light of the decision of the hon'ble Bombay High Court in the case of H. A. Shah and Co v. CIT [1956] 30 ITR 618 (Bom) is concerned, the learned senior counsel for the Revenue submitted that only some selected portions of this decision were filed. However, if this decision is read as a whole then it is clear that it does not advance the case of the Department. He submitted that in this case it is held by the hon'ble Bombay High Court that to render a view contrary to an existing decision it must first be established that the first decision is either....
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....014-15 and 2015-16 on this issue. Referring to e-mail dated March 17, 2017 annexed with form No. 36, he submitted that there was no refusal to furnish clear copies of the agreements before the Commissioner of Income-tax (Appeals), since the authorised representative representing the assessee before the learned Commissioner of Income-tax (Appeals) conveyed that non-redacted copies were conveyed as not required. 7.1. The learned senior counsel for the assessee submitted that the copies of original agreements were produced before the Tribunal during the course of hearing on January 31, 2018 and it is apparent therefrom that only the amounts stated in the agreements were redacted. There is no redaction vis-a-vis any terms or conditions stated in the agreements. Upon directions of the hon'ble Bench a copy of the chartered accountant certificate was also filed confirming that the amounts recorded in the books of account had been traced to bank statements and that audit was conducted as per settled auditing practices. He submitted that it is undisputed that audit report is "material" which may be relied upon for the purposes of framing assessments. Even the learned Department....
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.... not have assigned its right to select engines because this right got exhausted when agreement dated October 19, 2005 was signed. Only the right to acquire aircraft was assigned to the lessor as by that time the right to receive credits from International Aero Engines had already accrued. 9. So far as the issue relating to availability of lease rent or disallowance of the same under section 37(1) is concerned, the learned senior counsel submitted that there is no connection between payment of lease rent and receipt of credits. Referring to page 31, para 10.1 of the learned Commissioner of Income-tax (Appeals)'s order, he submitted that the learned Commissioner of Income-tax (Appeals) takes into consideration future events to analyse transactions for the financial year 2011-12 and thereafter, an erroneous factual presumption is made (at para 10.3 of the Commissioner of Income-tax (Appeals) order) that "lease rentals are partly attributable to the earning of credits by the appellant from engine manufactures. He submitted that the Tribunal in the assessment year 2007-08 has already held that the assessee's right to receive credits "crystalized when the agreement dated Octob....
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....ITD 11 (Delhi-Trib). The Tribunal further held that "lease agreements are also similar in terminology and intent" (refer page 55-56, para 12.2 of paper book). He submitted that in the case of Sahara Airlines Ltd. (supra), after a detailed analysis of the lease agreement, the Tribunal held that payment of supplementary lease rentals was "in connection with the operation of the leased aircraft". 11.1. He submitted that at page 34, para 10.4 the learned Commissioner of Income-tax (Appeals) disallows supplementary lease rentals under section 37(1) of the Income-tax Act, 1961, alleging that the same are reimbursable from the lessor. He submitted that the learned Commissioner of Income-tax (Appeals) has not taken note of the fact that the lessee has no right over the supplementary lease rent fund once it is paid to the lessor (refer page 461, para 5.4.3-lease agreement in case of Sahara). He sub mitted that the supplementary rent is a mandatory obligation of the asses see under the lease agreements and failure to do so would result in civil consequences wherein the lessor will take back possession of the aircraft (page 239 of paper book, clause 3.4, page 243, clause 3.12 and pag....
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....ome-tax (Appeals) order for the assessment year 2012-13. Therefore, consistently it has been accepted by the Assessing Officer that the supplementary lease rentals expense is an ascertained liability allowable under section 37(1) of the Income-tax Act, 1961. 13. The learned senior counsel for the assessee referring to the following chart submitted that no TDS is deductible on payment of supplementary lease rentals in the assessment year 2012-13 for the following reasons : Nature of supplementary rent payment Amount (Rs.) Submission Payments made under lease agreements executed prior to April 1, 2007 61,81,04,551 Payment exempt in hands of lessor as per section 10(15A). The Income-tax Appellate Tribunal decided this issue in favour of "A" in the assessment years 2007-08, 2008-09 and 2009-10. -Revenue appeal on this issue dismissed by High Court (refer pages 942 and 943 of PB) Payments made under lease agreements executed after April 1, 2007 276,28,59,861 Lessor's income not chargeable to tax in India. Use of aircraft specifically excluded from definition of "royalty" as per article 12 of India-Ireland Double Taxation Avoidance Agreement. However, since ....
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....aintenance, and the disposal of aircrafts after the period of lease. All these are composite activities forming an integral part of business operations and one activity cannot be viewed in isolation benefit of its linkage with the other. 15.1. The learned special counsel for the Revenue drew the attention of the Bench to the following agreements : (1) Letter of intent between Airbus and the assessee dated June 29, 2005. (2) Aircraft purchase agreement between the assessee and Airbus dated November 18, 2005. (3) Agreement dated October 19, 2005 between International Aero Engines and the assessee. (4) Side letter agreement dated March 29, 2007 between the asses see and International Aero Engines. (5) Sample lease agreement between the assessee and lessor. (6) Agreement dated March 30, 2006 for general terms of sale between the assessee and International Aero Engines. (7) Fleet hour agreement dated May 12, 2006 between the assessee and International Aero Engines. (8) Purchase assignment agreement dated March 16, 2012 between the assessee and M/s. Howth Aircraft Leasing Ltd. 15.2. The learned spec....
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....ceipt only, if it can be shown that the amount payable by such entity represents the consideration for transfer of a capital asset which moved from the recipient of the credit to the issuer of the credit. However, no such event has happened in this case. He submitted that the only other way such receipt can assume the character of a capital receipt is, if it is found that it represents a compensation for the loss of a capital asset or the loss of source of income as in the case of Oberoi Hotel Pvt. Ltd. v. CIT reported in [1999] 236 ITR 903 (SC). It is also not an equity, loan or debt. He submitted that it is really incomprehensible that such credits flowing from a commercial agreement being the outcome of the negotiations with regard to the purchase of engines (the agreement dated October 19, 2005 supersedes earlier negotiations clearly indicating that the prices and the discounts were negotiated over a long period of time) is sought to be claimed as a capital receipt. This discount can only be get adjusted with the purchase price of the engine, if the assessee chooses to acquire the aircraft with the engine. This is precisely the treatment given in the accounts. The assessee havi....
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....intent of the parties has to be gathered from the stipulations in the agreement, the conduct of parties to the agreement and surrounding circumstances. Neither the terms of the contract nor the conduct of the parties nor any other circumstance does indicate that this credit given by the engine manufacturer is for a mere choice of engine and not for the actual acquisition of the engine. The agreement dated October 19, 2005 clearly records that the said agreement supersedes all earlier negotiations which further emphasises that negotiations on the pricing of the engine and the discounts was a matter of prolonged negotiation. In such an event, there is hardly any room for debate that the con sideration was in the nature of discount which accrued only at the point of delivery and could not have any other character. This was a business receipt. The question whether it will go to reduce the cost of the capital asset if so acquired would be a factual determination. In the present case the assessee chose not to acquire the aircraft but still appropriate the discount would render the receipts as business profits chargeable to tax. These receipts cannot under any shade be regarded as capital....
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....8(i) as profits and gains of business and can, under no circumstances, be regarded as capital receipts not chargeable to tax as contended by the assessee. 15.14. The learned special counsel for the Revenue submitted that the purpose test advocated by the assessee would be relevant only if the trans action is unilateral [like subsidy/grant] and does not represent consideration for purchase or acquisition by other modes or enjoyment of goods and services. He submitted that International Aero Engines gave the credit as a consideration for bulk purchase/acquisition of aircrafts with International Aero Engines, resulting in bulk sale of 100 engines manufactured by International Aero Engines over a period of time. 15.15. He submitted that the onus lies on the assessee to establish that the receipts are capital in nature, and further that such "capital receipts" are not open for being adjusted against the cost of purchase/ acquisition of capital assets (aircrafts) to which these are linked. This treatment given by the assessee in its accounts is fully in accordance with International Accounting Practice followed by the airlines industry. 15.16 He submitted that ....
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....nue submitted that the business model of the assessee shows an integrated activity of going in for bulk purchases for aircraft to be delivered in future years and in the process earn heavy discounts on engines which were acquired under a lease back arrangement and thereby not incurring the capital cost yet appropriating the benefits of discounts. This benefit was preconceived and was embedded in the business model adopted by the assessee. He submitted that the benefits flowing to the assessee was in the form of credits which was con verted into cash at the option of the assessee as they chose not to go for purchase of the engines but allowed a third party to pay the purchase price and yet appropriate the discount to themselves and pay a higher lease rental. This was a payment to the assessee of any money, but the credits got converted into money. Hence the cases relied upon by the learned counsel for the assessee suggesting inapplicability of the provisions due to payments being made in cash are not applicable to the peculiar facts of this case. It is a case where the benefit in the form of discounts/credits got con verted into money. The provisions of section 28(iv) of the Income-....
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....or not. Therefore, since the assessee purchased aircrafts (embedded with IAE) from Airbus, or acquired these under leasing arrangements, these credits were in the nature of discounts. However, if the assessee contends that these credits were not at all linked to the purchase of the aircraft or the engine, which is what they are seeking to do, the obvious inference would be that the assessee only helped International Aero Engines in making bulk sale of their engines through the aircrafts acquired from Airbus. In that case, this would amount to the assessee facilitating the sale of 100 engines of International Aero Engines without the assessee making any purchase on their own account. The assessee would then need to be regarded as a facilitator to the International Aero Engines for providing the service of getting a bulk order for sale of 100 IAE through Airbus, which would be delivered over a period of time. This was a great service to International Aero Engines and it was fully justified for International Aero Engines to pay the assessee for facilitating such bulk sales of their engines. In such a scenario, the credits from International Aero Engines would assume the nature of comm....
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....y International Aero Engines was in the nature of any incentive or subsidy. He submitted that the decisions of the hon'ble Supreme Court in the cases of Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) or Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 (SC) and decision of the hon'ble Delhi High Court in the case of CIT v. Bougainvillea Multiplex Entertainment Centre Pvt. Ltd. [2015] 373 ITR 14 (Delhi) relate to the situations where Government of the respective states, granted direct/indirect subsidies in the form of reduction of taxes or otherwise. However, a perusal of the order of the Tribunal would show that the assessee itself argues initially that they received a discount from International Aero Engines as recorded at the end of para 6.1, but, in the very next para 6.2 the submission starts on the assumption as if the discount was a grant/incentive/subsidy from International Aero Engines. 17.3. The learned special counsel for the Revenue submitted that the agreement between the assessee and the International Aero Engines was a pure business and commercial arrangement-one proposing to buy 100 engines in bulk and the other proposing to sell 100 engi....
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....by either of the parties, it cannot be suggested that the Tribunal has considered the documents in their entirety. 17.8. He submitted that the business model of the assessee entails the activity of going for bulk purchase of 100 aircrafts, negotiating the price of engines with International Aero Engines, getting huge discounts and then assigning right to title of the aircraft to lessors and appropriating to itself the credits received in the bargain and at the same time bring higher lease rentals represented an integrated activity and cannot be fragmented to suggest that one transaction had no link with the other. The receipts in the process cannot be claimed as capital in nature and the expenses in the process of business in relation thereto as revenue in nature. This is a pre-posterous claim to say the least. The integrated nature of the business venture was not placed before the co-ordinate Bench which proceeded on a very limited information. 17.9. He submitted that the factum of the agreement with the International Aero Engines covering a wide range of commercial benefits being given in the bargain for bulk purchase of engines including deferment of delivery, ....
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.... matter ought to be decided afresh keeping in view the true nature of receipts as evident from the complete set of facts. 17.12. The learned special counsel for the Revenue submitted that the plea of the assessee before the tax authorities goes against the well-recognized matching principle. The receipts, even if it be capital, need to be adjusted against the cost of capital goods or services to which these are related. It goes against the basic grain of taxation that a receipt is kept out of the computation of income on the plea that it is a capital receipt not chargeable to tax, but, the corresponding and matching expenses get charged to the profit and loss account as an item of revenue expense. This can be done only if there is a specific provision in the statute which permits it to be so done. The assessee have not pointed-out any provision to that effect. Further, it is plea of the assessee that the credits from International Aero Engines have been received on exercising the right to choose the engine. However, as stated above, such credits are accruing to the assessee for placing a bulk order for purchase of aircrafts, irrespective of the mode of purchase. The well r....
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....turer of airframe and of the engines, obtains a very substantial amount of discount from the manufacturer of engine (International Aero Engines) and after having attained such discounts assigns its right to the title of the aircraft (together with the engine) to certain lessors/financiers who get the title of the aircraft, then leases it back to the assessee against the payment of certain amount of lease rent. While transferring the right to the title, the assessee does not part with the discount in the form of credits it obtained from the engine manufacturer and opts to get it in cash. It is also important to note that while title to the aircraft was transferred to the lessors/financiers, the delivery of the aircraft was taken by the assessee themselves purportedly acting as the agent of the lessors and undertaking to discharge all obligations relating thereto. In the process, the assessee makes huge profits which is partly set-off against the lease rentals to be paid to the lessors and partly by appropriating it as income from other sources, but only for the purposes of accounting and not for returning the income. 18.4. He submitted that the claim of confidentially canno....
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....en contemplated in the purchase agreement itself and the subsequent financing and leasing arrangements whereby the title to the aircraft remains with the lessors/financier whereas the delivery is taken by the assessee as an agent of the lessors and their appropriation of the amount of discount obtained and the profits made in the process as income from other sources, is an integrated wholesome business activity and it cannot be fragmented into piecemeal arrangements and then to suggest that values shown in the agreements are not relevant for deciding the true nature of credits received. 18.8. The learned special counsel for the Revenue pointed-out that the assessee, in their accounts, for the years under consideration, adjusted certain amounts of credits against the lease rentals. The hon'ble Bench wanted to ascertain the details of the amount of credit and asked the asses see to produce a copy of such adjustment entries in the books of account. Despite promising to file the same the assessee chose not to give copy, or such accounting entries and only filed a chart showing how the adjustment would be made instead of how the adjustment has actually been made. The assess....
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....ount. Therefore, the issue in this case is whether business receipts of this nature can at all be regarded as capital receipts not chargeable to tax. 18.12. The learned special counsel for the Revenue pleaded that a direction needs to be given by the Bench to the assessee to furnish copies of unredacted agreements/documents and also the copies of relevant entries made in the books of account before closing the matter or else the Tribunal may draw adverse inference with regard to the nature of receipts as also the amount to be added back to the total income. 19. The learned special counsel for the Revenue, submitted that the primary claim of the Revenue is that the receipt are chargeable as business profits under section 28 of the Income-tax Act, 1961. Alternatively, if the Tribunal comes to the conclusion that the receipts are capital in nature, then it should be charged to capital gain tax. Hence, it should not be taken to adversely affect any of the primary submissions of the Revenue. He submitted that the learned Commissioner of Income-tax (Appeals) nowhere records that the receipts are capital in nature but as a matter of judicial discipline going by the finding of ....
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....h 10.3 of his order has taken an alternative stand that the lease rentals have a direct nexus with the price of the aircraft that the lessors have to pay for. The higher the sale price, the higher is the amount of lease rentals. The assessee got credit as discount for the purchase of engines and such credits having not been transferred to lessors (which option, they had under the credit arrangement) and appropriated by the assessee on their own amount, the lease rentals got determined at a price higher than the one which would have been determined if the discount on engines was passed on to the lessors. The learned Commissioner of Income-tax (Appeals) holds that the lease rentals paid, thus, are partly attributable to the credits given to the assessee from engine manufacturer and thus, the expenditure incurred for earning a capital receipt assumes the character of a capital expenditure and ought to be disallowed under section 37(1) of the Income-tax Act, 1961. He submitted that the Revenue's primary case is that the credits represent business receipts liable to tax under section 28 of the Income-tax Act. As an alternate contention and only in the event the Bench comes to hold t....
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....t needs to be mentioned that there is an aircraft specific lease agreement in respect of every aircraft acquired under the lease and, therefore, the agreements entered in the year 2005 cannot act as a sample for the agreements entered later with regard to lease of aircrafts acquired at a later point of time. A complete break-up of lease rents paid during the year with reference to each agreement and the date of each such agreement needs to be gone through. 21.2. So far as the argument of the assessee that article 12 of IndiaIreland Double Taxation Avoidance Agreement excludes aircraft from the definition of "Royalty" and, therefore, the lease rentals cannot be taxed in India in the hands of lessors as royalty is concerned, he submitted that the amount, though termed, as supplementary lease rentals, represents cost of maintenance and not a consideration for use of the equipment. 21.3. He submitted that the agreement with the lessors clearly demonstrates that the lessors only took the title of the aircraft and the actual delivery of the aircraft was taken by the assessee, purportedly as an agent of the assignees. The lease agreement clearly provides the formula for ....
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....held on other ground. He submitted that the amount, though termed as supplementary lease rentals, represents cost of maintenance and not a con sideration for use of the equipment. Further, it needs to be ascertained as to how much amount of supplementary lease rentals have direct nexus with the agreements executed after April 1, 2007 since such information has not been made available by the assessee. 21.6 He submitted that the Revenue also, in the alternative, urges that the finding of the Commissioner of Income-tax (Appeals) that the supplementary lease rentals are reimbursable, and these cannot, therefore, be allowed as an expenditure under section 37(1) deserve to be upheld. The action of the Commissioner of Income-tax (Appeals) in disallowing the entire expenditure is also valid in the light of the circumstances stated above. 21.7. He accordingly submitted that in view of the amendment in section 10(15A) and in view of the applicability of article 11 of the Double Taxation Avoidance Agreement, both the issues having not been considered by the co-ordinate Bench, the decision of the co-ordinate Bench for the assessment year 2007-08 is distinguishable both on fac....
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.... is mentioned separately. The assumption is that if they are separate, one of it depends upon the alleged negotiations of Indigo with International Aero Engines. However, the facts clearly establish an agreement between Airbus and International Aero Engines and an agreement for price. Separate reflection as evident from pages 14 to 16 of Revenue paper book is because separate escalation clauses and procedure is envisaged for the two (refer pages 17, 124 to 126 of the Revenue paper book). To term it now, as a "discount" is contrary to Department's own stand in past and later years. Department is adopting criteria of subsidy. To take a factual about turn is impermissible and that too on their own under standing substituting facts and direction of the businessman. 22.3. The learned senior counsel for the assessee reiterated- 1. There were no negotiation for purchase of engines-it was only a choice thereof. 2. Indigo did not at any point of time purchase an engine. The department is right in understanding that discount is relatable to purchase. If there is no purchase, their cannot be a discount. 22.4. He submitted that such is the fervour of the....
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....t and others noted by the learned Departmental representative have no relevance vis-a-vis issue in dispute, i. e., credits paid by International Aero Engines for selection of its engines. No relevant clause from these agreements is cited in support of the case being advanced. He also referred to para-H2 of the assessee's written submission and note filed on January 31, 2018. 23. As far as redaction of amounts stated in the agreements are concerned, the learned senior counsel for the assessee submitted that no adverse inference need be drawn owing to redaction of amounts in agreements. So far as the submission of the learned Departmental representative that redacted amounts are relevant to an adjudication of issue in dispute is concerned, he submitted as under : (i) Department merely intends to conduct a roving and fishing enquiry. (ii) If at all redacted amounts are relevant then nothing stops department from making a direct enquiry from International Aero Engines. The assessee is bound by the confidentially agreement with International Aero Engines and Airbus. However, there is no such limitation to the powers which the Revenue may exercise (refer CIT v. O....
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....e-tax Appellate Tribunal cannot withdraw a benefit which is granted by the Assessing Officer. He submitted that raising the additional ground is an afterthought, probably on advise of the learned Departmental representative, rather than an effort to review the accepted position. 26. The learned senior counsel for the assessee submitted that the question posed by the Department does not truly address the issue. The question itself is misleading and therefore the answer is bound to mislead. The question posed is : "Whether different agreements entered into by the assessee in the course of making bulk purchases of aircrafts, with IAE engines are interlinked or these have to be read independent of each other ?" 26.1. Referring to the various agreements, he submitted that on execution of the letter of Intent affirming intent to purchase aircrafts, and, a part consideration of a substantial amount of 5 million US dollars, the next step was to exercise the option to choose the engine that will be installed in the aircrafts which it intended to purchase. At this stage, the order for purchase of the aircrafts formally was yet to be placed. The aircraft manufacturer, tha....
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....s clause is conveniently ignored by the Revenue. This is the key and determining factor which by itself and by later affirmations, establishes beyond doubt that it is only for the choice of the engine that the credit per engine set is given to Indigo by the engine manufacturer International Aero Engines. Having agreed to give the credit, subsidiary stipulations are entered into to further supplement and support the agreement. 26.2. The learned senior counsel for the assessee submitted that the crucial question which arises is having expressly agreed to provide the credit for choice of the engine, whether the agreements that follow for the purchase of the aircraft (which includes the engine as well), and six years later the informed decision not to purchase the aircraft itself, not to have it under a financial lease, but, to have an agreement for an operating lease, renders the credit paid (for exercise of option) a different purpose, intent or object ? 26.3. The learned senior counsel for the assessee submitted that it is important to note that since inception, i. e., from assessment years 2007-08 to 2018-19, it is accepted and so noted in the orders by all the au....
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....hed and previously accepted to be capital. Even in the impugned year, the learned Com missioner of Income-tax (Appeals) has accepted the incentives to be capital. Once from a plain reading of the agreements and application of correct legal principles, it is established to be capital, to demolish that, the onus shifts to the Revenue. Not discharging that leads to a negation of its allegation. It has been reiterated since time immemorial, that entries and books of account do not govern the ambit of taxation. If the nature of the receipt is different merely because accounting entries have been passed cannot lead to any acquiescence or estoppel. Time and again the Revenue harps upon its adjustment against lease rentals to contend that it is on revenue account. The adjustment against lease rentals only depicts its adjustment against the operational costs in consonance with the dicta applicable broadly to such receipts. The view adopted for accounts can never override the correct application of law. 26.6. So far as the argument of the learned special counsel for the Revenue that the agreements executed by the assessee with Airbus SAS ("Airbus") and that with International Aero E....
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.... be dismissed. 27. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the learned Commissioner of Income-tax (Appeals) and the paper book filed on behalf of the assessee and the Revenue. We have also considered the written synopsis filed by both the sides as well as the various case law cited before us. A. Nature of receipts 28. The first issue to be decided by us relates to the credits received by the assessee from International Aero Engines and others, i. e., nature of credits received by the assessee from International Aero Engines and its taxability. 28.1 It is the submission of the learned senior counsel for the assessee that the receipts are capital in nature and not liable to tax whereas it is the contention of the Revenue that the receipts are taxable as business profits Alternatively, it is also the submission of the Revenue that if the taxability of receipts is adjudicated to be that of capital in nature not liable to tax, then, without prejudice the receipts are taxable as capital gain. Another alternative contention raised by the Revenue is that the lease rentals are disallowable under section 37(1....
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.... CFM IAE Aircraft 6-5B5/P 2522-AS Aircraft 6-5B4/P 2527-AS Aircraft 6-5B3/P 2533-AS The engine selection shall be made no later than the signature of the purchase agreement (if practicable)." 28.3. We find as per this letter of intent as an upfront commitment fee, the assessee is required to transfer an amount of US$50 lakhs to Airbus and is also required to provide a promissory note to Airbus for an amount of US$50 lakhs with maturity on September 30, 2006 or delivery of the first aircraft, whichever is earlier. We find the assessee has committed itself to purchase 100 aircrafts from Airbus under the letter of intent which is evident from clause 8 of this letter of intent where it is mentioned as under : "8. Purchase agreement 8.1 The terms and conditions set out herein merely set forth the main terms on which InterGlobe Aviation will, in principle, be pre pared to proceed to detailed negotiations and finalization of formal purchase agreement between InterGlobe Aviation and Airbus and is not intended to be exhaustive." 28.4. Since, the aircraft cannot be fitted with any and every engine under the letter of....
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....Aero Engines and the assessee, where it is mentioned as under : "Now, therefore, it is agreed as follows : A. Installed engine pricing International Aero Engines is proposing the V2527-A5 Engine for the IndiGo fleet of firm Aircraft. The selection of the 27,000 lb thrust engine provides IndiGo many benefits over lesser ratings : * Higher thrust flexibility for long range missions ; * The availability of significant derates which provide the same net thrust as lesser ratings for short haul missions ; and * Most importantly, highest residual or tradeable value. The V2527-A5 Engine represents the benchmark power plant for the Airbus A320. While our competition offers a 24,000 lb thrust power plant, the very limited numbers of 24k powered A320s in the market will render such combination a far less attractive proposition to leasing companies and financial institutions. For these reasons, International Aero Engines is pleased to provide IndiGo a credit per V2500A5 shipset delivered to IndiGo by Airbus, through the provision of fleet introductory assistance ('FIA') credits. (January 2005 US$), for the....
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...."installed engines". These are the engines which the Airbus is going to install in the aircrafts to be delivered by it to the assessee. 29.2. We find para B of this agreement which deals with engine price escalation gap further cements that even prior to execution of this agreement, there was a prior agreement/arrangement between Airbus and International Aero Engines wherein pricing of "installed" engines was already decided amongst them. Para B of this agreement reads as under :- "B. Engine price escalation cap Through December 31, 2016, in respect of the credits for the installed V2500-A5 Engine ship sets as discussed in Section A above and credits and pricing of the Spare Engines as described in section F5 below, International Aero Engines agrees to cap the escalation as calculated by the formula in Exhibit A at a rate of two and one-quarter per cent. (2.25 per cent.) per annum, provided that any annual escalation exceedance above seven per cent. (7%) shall be shared fifty per cent. (50%) by International Aero Engines and fifty per cent. (50%) by IndiGo. Administratively, International Aero Engines Will invoice Airbus for Engines delivered for installa....
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....oner of Income-tax (Appeals) has also noted that the "suppliers of the engines had an agreement with Airbus SAS France for supply of engines at a certain price which was not known to the appellant". 29.5. So far as the reliance by the learned special counsel for the Revenue on clause "H" of the agreement is concerned, we find the same is also of no relevance. We find clause "H" which relates to financing con sideration reads as under :- "H. Financing considerations International Aero Engines is pleased to incorporate the offer of financing assistance to IndiGo under a separate financing term sheet, (the 'lease facility') attached hereto as exhibit G. in furtherance of this offer International Aero Engines is also pleased to confirm to Indigo as follows : (a) Should Indigo confirm the requirement to utilise the lease facility for any of the aircraft, International Aero Engines will provide to Indigo and Indigo shall, unless as prescribed below, accept V2500Selectâ"c Option 2b on a pay as you go basis, payable monthly, based on utilization of the engine, for each such financed aircraft. International Aero Engines further confirms that....
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....rovide for International Aero Engines to arrange for a lessor (as defined below) to purchase each aircraft from Airbus and lease each aircraft to IndiGo on lease on the terms set out below. This proposal assumes a lease facility. In the event that local law or other advice dictates a preference for a loan facility structure, Inter national Aero Engines would be willing to proceed under such a structure but the terms below will need to be amended to reflect, for example, security granted to International Aero Engines by the owner of the aircraft in the form of mortgages over the aircraft and assignments of lease rentals, rights and insurances. In any case, any changes in structure will be mutually agreed between the parties. For the avoidance of doubt, International Aero Engines will not refuse to agree to a loan facility structure where its rights to the asset (including but not limited to security, title and registration) are equivalent to those under a lease facility structure." 29.7. We, therefore, find that no automatic financing is available under the agreement dated October 19, 2005. The financing from the International Aero Engines was only an offer which w....
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.... The A320 Airframe shall be equipped with a set of two (2) International Aero Engines, (the 'A320 Propulsion Systems') The A321 Airframe shall be equipped with a set of two (2) International Aero Engines, (the 'A321 Propulsion Systems')." 30.1. We find the airframe basic price has been defined in clause 3.1 of the agreement and the propulsion system basic price is defined in clause 3.2 of this agreement. The final price of the aircraft has been defined in clause 3.3 which reads as under : "Final price The final price of each aircraft shall be the sum of (i) the airframe basic price as revised as of the delivery date in accordance with clause 4.1 ; plus (ii) the aggregate of all increases or decreases to the airframe basic price as agreed in any specification change notice or part thereof applicable to the airframe subsequent to the date of this agreement as revised as of the delivery date in accordance with clause 4.1 ; plus (iii) the propulsion systems reference price as revised as of the delivery date in accordance with clause 4,2 ; plus (iv) the aggregate of all increases or decreases to the ....
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....ligations under this agreement 21.2.1. Transfer of rights and obligation upon restructuring In the event that the seller is subject to a corporate restructuring having as its object the transfer of or succession by operation of law. In, all or a substantial part of its assets and liabilities, rights and obligations, including those existing under this agreement, to a person ('the successor') under the control of the ultimate controlling share holders of the seller at the time of that restructuring, for the purpose of the successor carrying on the business carried on by the seller at the time of the restructuring, such restructuring shall be completed without consent of the buyer following notification by the seller to the buyer in writing. The buyer recognises that succession of the successor to the agreement by operation of law, which is valid under the law pursuant to which that succession occurs." 30.3. We find it is pursuant to this option under clause 21 of the purchase agreement that the assessee has thereafter assigned its rights to purchase the aircraft in favour of lessors who have thereafter purchased the aircraft and given them on opera....
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.... The obligations of the assignee to enter into the purchase agreement assignment and the consent and agreement and to pay the lessor's cost in accordance with the terms of the purchase agreement assignment are subject to the conditions that : 2.2.1. on or prior to delivery, the assignor shall have provided to the assignee all conditions precedent required to be provided pursuant to clause 3.1 of the lease agreement (other than the condition precedent at 3.1(c) of the lease agreement) or the same shall have been deferred or waived by the assignee ; 2.2.2. immediately following delivery, the assignor shall be obliged to take the aircraft on lease pursuant to the terms of the lease agreement ;" 30.4 It is relevant to note under this agreement that there is no con sideration flowing from the lessor to the assessee for the assignment of right to acquire the aircraft from Airbus. Post above assignment, the asses see has acquired the aircraft on lease from the lessors. The parties have filed before us copies of lease (i) agreement dated December 15, 2016 with M/s. McR. Aviation Ltd. (ii) agreement dated June 14, 2007 with M/s. Genesis Acquisition Ltd. (....
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....6 is concerned the crux of this agreement is that International Aero Engines shall provide maintenance services for engines fitted in 100 aircrafts manufactured by Airbus. Both these agreements in our opinion have no relevance to the issue of credits which are received for selection of 'installed engines'. Even the learned Commissioner of Income-tax (Appeals) after having called for these two agreements, has not drawn any adverse inference. B. Whether the agreements/transaction are separate or composite 31. The next issue that is to be decided is as to whether the agreement/ transactions are separate or composite. During the course of arguments made by both the sides and in the written submissions filed before us, the main thrust of the submissions made by the learned special counsel for the Revenue is that the business model of the assessee entails the activity of going for bulk purchase of 100 aircrafts, negotiating the price of engines with International Aero Engines, getting huge discounts and then assigning right to title of the aircrafts to lessors and appropriating to itself the credits received in the bargain and at the same time, bring higher lease rent....
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....y material or evidence is essentially one of fact. 31.3. In our opinion, there can never be a presumption that a trans action or agreement is colourable/sham. This is a factual aspect which must be demonstrated. It is trite Law that the onus of proving that the apparent was not real is on the party who claims it to be so. The hon'ble Supreme Court in the case of CIT v. Daulat Ram Rawatmull reported in [1973] 87 ITR 349 (SC), has held that the onus of proving that the apparent was not real is on the party who claims it to be so. Even under sections 91 and 92 of the Evidence Act, no oral evidence may be admitted by the court which is contrary to the averments contained in a written documents and that a written contract cannot be ignored and a different contract between the parties be spelt out by the court. The hon'ble apex court in the case of State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd. [2006] 132 C-C 565 (SC), has held that a document, as is well known, must primarily be construed on the basis of the terms and conditions contained therein. It is also trite that while construing a document the court shall not supply any words which the author thereof d....
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....gs B. V. v. Union of India reported in [2012] 341 ITR 1 (SC), has held that an agreement is to be looked at not by economic sub stance, but, its legal form. The only exception to this is when the trans action is shown to be sham or dubious. The relevant observations of the hon'ble Supreme Court from para 58 to 64 read as under (page 32) : "58. Before coming to Indo-Mauritius Double Taxation Avoidance Agreement, we need to clear the doubts raised on behalf of the Revenue regarding the correctness of Azadi Bachao (supra) for the simple reason that certain tests laid down in the judgments of the English Courts subsequent to Commissioners of Inland Revenue v. His Grace the Duke of Westminster [1935] All ER 259 and W. T. Ram say Ltd. v. IRC [1981] 1 All ER 865 help us to understand the scope of Indo-Mauritius Double Taxation Avoidance Agreement. It needs to be clarified, that, McDowell dealt with two aspects. First, regarding validity of the circular(s) issued by Central Board of Direct Taxes concerning Indo-Mauritius Double Taxation Avoidance Agreement. Second, on concept of tax avoidance/evasion. Before us, arguments were advanced on behalf of the Revenue only regarding t....
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.... saying that the insertion of the entity was effected with the sole intention of tax avoidance. In Craven (Inspector of Taxes) v. White (Stephen) [1990] 183 ITR 216 (HL) ; [1988] 3 All ER 495 it was held that the Revenue cannot start with the question as to whether the transaction was a tax deferment/saving device but that the Revenue should apply the look at test to ascertain its true legal nature. It observed that genuine strategic planning had not been abandoned. 64. The majority judgment in Mcdowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) held that 'Tax planning may be legitimate provided it is within the framework of law' (paragraph 45). In the latter part of paragraph 45, it held that 'colourable devices cannot be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods'. It is the obligation of every citizen to pay the taxes without resorting to subterfuges. The above observations should be read with paragraph 46 where the majority holds 'on this aspect, one of us, Chinnappa Reddy J. has proposed a separate and detailed opinion with which we a....
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....ts engines in preference to others. This fact is also accepted by the Assessing Officer at page 2 of his order when he observes that "as a consideration for selection of the International Aero Engines engines to be fitted in the aircraft to be purchased by the company, certain credited allowable to the assessee-company from International Aero Engines on the delivery of such aircraft. The credits are also agreed to be fleet introductory assistance (FIA). We find, right up to the assessment year 2018-19 which is accepted and so noted in the orders by all the authorities below that the causa causans for the credit is the option to choose an engine. However, for the first time before the Tribunal in the assessment year 2012-13, it is submitted by the learned special counsel for the Revenue that the credits do not relate to the choice of the engine, but, are for the purchase of aircrafts with the engine. It is also submitted that credits are also inextricably linked to the operating lease of aircrafts. It is also the submission of the Revenue in the written synopsis that 'no manufacturer of engine would ever grant any such benefit as given to the assessee, if it was a case of mere e....
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....eft to the wisdom of the businessmen. The agreement dated November 18, 2005 or lease agreements which are executed almost six years after agreement dated October 19, 2005 do not refer to the credits which were granted by the International Aero Engines. The credits received from International Aero Engines, therefore, has nothing to do with the subsequent event of purchase of aircraft or its mode of acquisition. The credits received by the assessee from International Aero Engines has nothing to do with the understanding reached by the assessee with the aircraft manufacturer. These are two independent transactions. One does not affect the other. For acquisition of 100 aircrafts from Airbus and the option to select the engine could have been exercised by the assessee only once and that was done in October, 2005. Thereafter, this right/option got exhausted. We, therefore, hold that the credits received by the assessee from International Aero Engines are for selection of its engines. The credits given by the engine manufacturer had nothing with the mode of acquisition of the aircraft by the assessee. 32.2. The learned special counsel for the Revenue has argued that the ....
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....ed towards fixed capital or circulating capital. We find the hon'ble Supreme Court in the case of CIT v. Vazir Sultan and Sons reported in [1959] 36 ITR 175 (SC) relied on by the learned senior counsel for the assessee has decided the case where the issue was as to whether the sum received as compensation for loss of agency was revenue or capital. We find the hon'ble apex court following the ratio laid down in the case of Van Den Berghs, Ltd. has observed as under (page 186) : "We have, therefore, got to determine whether the agency in question before us was a capital asset of the assessee's business. One of the relevant considerations in the matter of such determination has been whether the asset was in the nature of fixed capital or constituted the circulating capital or stock-in-trade of the assessee's business. This question was thus dealt with by Viscount Haldane in John Smith and Son v. Moore [1921] 12 Tax Cas 266, 282 : 'But what was the nature of what the appellant here had to deal with ? He had bought as part of the capital of the business his father's contracts. These enabled him to purchase coal from the colliery owners at what w....
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....g profits, but they themselves did not yield profits. The profits of the appellants arose from manufacturing and dealing in margarine." 32.6. In view of the above, the nature of the business carried on by the assessee is relevant. The submission of the learned special counsel for the Revenue that since credits were related to the business of operation of air craft and therefore, they are revenue in nature does not carry much force. In our opinion, for becoming part of circulating capital, it is not only necessary that the receipt should relate to the business but it should also be derived or inextricably linked to the business. For the above proposition, the decision of the hon'ble Supreme Court in the case of Hoshiarpur Electric Supply Co. v. CIT reported in [1961] 41 ITR 608 (SC), which was relied upon by the learned special counsel for the assessee is relevant wherein the hon'ble Supreme Court has observed as under (page 610) : "The assessee is a licensee of an electricity undertaking. In the year of account April 1, 1947 to March 31, 1948, the assessee received Rs. 12,530 for new service connections granted to its customers. Out of this amount, Rs. 5,9....
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....eceipt and not liable to tax, because the amount is paid by the consumers towards expenditure to be incurred by the assessee in laying new service lines--an asset of a lasting character. This question falls to be determined in the light of the nature of the receipt irrespective of who remained owner of the materials of the service lines installed for granting electrical connection to new customers. . . The assessee is undoubtedly carrying on the business of distributing electrical energy to the consumers. Installation of service lines is not an isolated or casual act ; it is an incident of the business of the assessee. But if the amount contributed by the consumers for installation of what is essentially reimbursement of capital expenditure, the excess remaining after expending the cost of installation out of the amount contributed is not converted into a trading receipt. This excess--which is called by the Tribunal 'profit element' was not received in the form of profit of the business; it was part of a capital receipt in the hands of the assessee and it was not converted into a trading profit because the assessee was engaged in the business of distribution of ele....
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....ion in Hosiarpur Electric Supply Co. were arising out of a commercial transaction yet the hon'ble apex court applied the above distinction to examine the purpose. Only amounts which are "incidental to the business" were held taxable as business receipts. In the instant case, credits are received for selection of engines and are understood by the parties in the agreement that the credits were fleet introductory assistance (FIA). The purpose is to provide support for aircraft acquisition. Therefore, the credits received are not incidental to or derived from the business of operation of commercial aircraft. 32.9. We find that the hon'ble Supreme Court in the case of CIT v. India Discount Co. Ltd. [1970] 75 ITR 191 (SC) has also decided an identical issue. In this case, the business of the assessee was to deal in shares and securities. It purchased shares and the purchase price of shares included an amount paid for dividend which was not claimed by the previous owner. When dividend was received, the assessee did not adjust the price and it was claimed before the Assessing Officer that the value of the shares which represented the stock-in-trade of the assessee remained....
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....eceivable in respect of them. The existence of a contract binding the vendors to make over to purchaser the arrear dividends clearly implied that the price paid by the purchaser was not only for the value of the share scrips but also for the sum of Rs. 43,925 which was going to be realised in the form of arrear dividends by the purchaser. The High Court held, upon an examination of the evidence, that such an arrangement implied that the value of Rs. 9-8-0 and Rs. 9-4-0 per share as settled into the broker's bills was not the real value of the share scrips alone but also included the element of the arrear dividends agreed to be receivable by the purchaser. The legal position, therefore, is that the arrear dividends were not claimable by the purchaser by virtue of his right as such purchaser and could not become his income from the shares. He was to get the same because the vendor had contracted to pass the arrear dividends on to him. They were the income of the vendors, i. e., the registered holders but they could not become the income of the purchaser. In fact the assessee had purchased the amount of arrear dividends for a price which was included in the total consi deration of....
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....ettled legal principles are taken into consideration, then we have no doubt over the correctness of views expressed by the Division Bench of the Tribunal in the assessee's own case in the assessment year 2007-08. We therefore concur with the view taken by the Division Bench of the Tribunal in the order passed for the assessment year 2007-08, where the Tribunal has observed as under : "9. We have considered the arguments advanced by the parties and have gone through the material available on record as well as the decisions relied upon by both the parties. Since a conclusive finding on merits is being given by the learned Commissioner of Income-tax in the impugned order, it is relevant for us to examine the issue in dispute on the merits. A perusal of the impugned order shows that it is accepted by the learned Commissioner of Income-tax that credits are being received by the appellant from International Aero Engines as a consideration for selection of the International Aero Engines engines to be fitted in aircraft. The learned Commissioner of Income-tax however holds that these receipts are revenue in nature premised upon facts that ultimately the aircrafts were only tak....
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....pose test as laid down in these decisions, the hon'ble Delhi High Court has been pleased to hold as under (page 29 of 373 ITR) : '31. The Revenue, however, argues in the matters at hand that the assessee cannot be allowed to treat the entertainment tax subsidy as capital receipts because the U. P. Scheme leaves it at liberty to utilize the funds in the manner it likes. In this context, it craves reference to following further observations of the Supreme Court (appearing in paragraph 16) in the case of Ponni Sugars (supra) (page 401 of 306 ITR) : "One more aspect needs to be mentioned. In Sahney Steel and Press Works Ltd.'s case (supra) this court found that the assessee was free to use the money in its business entirely as it liked. It was not obliged to spend the money for a particular purpose. In the case of Seaham Harbour Dock Co. v. Crook (H. M. Inspector of Taxes) [1931] 16 TC 333 (HL) the assessee was obliged to spend the money for extension of its docks. This aspect is very important. In the present case also, receipt of the subsidy was capital in nature as the assessee was obliged to utilize the subsidy only for repayment of term loans undertak....
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....y granted through deemed deposit of entertainment tax collected does not require it to be linked to any particular fixed asset or that is accorded "year after year" do not make any difference. The scheme makes it clear that the grant would stand exhausted the moment entertainment tax has been collected (and retained) by the multiplex owner meeting the entire cost of construction (apparatus, interiors, etc., included), even if it were "before completion of five years". 36. As held by the Supreme Court in the case of Sahney Steel (supra), the character of the subsidy is to be determined having regard to the purpose for which it is granted. The "purpose test", referred to in Ponni Sugars (supra) when applied to the case at hand, leaves no room for doubt that the assistance in the form of entertainment tax exemption is shown to have come in the hands of the assessee to enable it to set up the new unit which renders it a receipt on capital account. The periodicity (year to year) of the subsidy, its source (collections from the public at large) and the form (deemed deposit) are irrelevant considerations. 37. The factual matrix in Ponni Sugars (supra) is nearer home to t....
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.... a mere utilization of the receipt. Merely because a capital receipt is utilized for incurring revenue expenditure it will not change the nature of capital receipt into a revenue item. As an example proceeds received, from issuance of shares by a company may be utilized for daily working capital purposes, but the nature of receipts from issuance of shares will still be capital in nature. In the case under con sideration for a better accounting purposes the proportionate credits were netted off against the recurring lease rentals. Acceptably .as pointed out by the appellant the accounting policy followed was in spirit with the Accounting Standard-12 issued by Institute of Chartered Accountants of India. The learned Commissioner of Income-tax after having accepted that the credits were given to the appellant, as a consideration for selection of IAE engines to be fitted in aircrafts manufactured by Airbus, which were also acquired by the appellant, should have held that the receipts are capital in nature. The appellant's right to receive the credits got triggered when the appellant made a selection of International Aero Engines, giving them a preference to the engines manufactured....
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....tax audit report. In reply vide submissions dated December 24, 2009 (copy enclosed at pages 46 to 55 of paper book) appellant relying upon the decisions of the hon'ble Supreme Court in the cases of Sahney Steel (supra) and Ponni Sugar (supra) submitted a detailed reply as under : 'Reverting to the facts of the present case, it is submitted that credit was allowed by International Aero Engines to Interglobe on account of Interglobe preferring the engines manufactured by International Aero Engines to be fitted in the aircrafts being acquired by Interglobe. The credit given by International Aero Engines was meant to reduce the cost of the engine to befitted in the aircraft. The credit, so allowed by International Aero Engines, was not given to the asses see for assisting him carrying out the business operations but was in the capital field, being inextricably linked with the purchase of engines, viz., a capital asset. The credit was not for meeting the recur ring expenses of the assessee but as an incentive for acquisition of the engines to be fitted in the aircrafts ordered from International Aero Engines. At any rate, the manner and method of utilization of an incen....
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....accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word 'erroneous' in section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word 'erroneous' in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct." 14. In the said judgment, the Delhi High Court had referred to earlier decisions of the Supreme Court in Rampyari Devi Saraogi v. CIT [1968] 67 ....
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.... Engines in preference to others. This is the purpose. 32.13 We find the hon'ble Supreme Court in the case of CIT v. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) after considering the decision in the case of Sahney Steel and Press Works Ltd. v. CIT reported in [1997] 228 ITR 253 (SC) has observed as under (page 399 of 306 ITR) : ". . . .The importance of the judgment of this court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect ....
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....is to ascertain the quality and the character that purpose test has to be applied. Purpose test, therefore, remains a valid test for ascertaining the true nature of any receipt, be it unilateral, multilateral, grant of subsidy or otherwise. 32.16. So far as the arguments made by the learned special counsel for the Revenue that the aircraft have been acquired on lease and that the nature of the credit changes when acquisition mode is lease financing are concerned, we find the genesis of credits received is agreement dated October 19, 2005, However, the credits were payable only on delivery of aircraft. The assignment of rights to acquire the aircraft is post vesting of credits. When selection of International Aero Engines engines is done, the lessors were not even in the picture. Therefore, whether to purchase the aircraft or acquire the aircraft on lease is a later decision. Therefore, it will be incorrect to assume that there was preconceived modus decided for air craft acquisition on October 19, 2005 when choice of the engines was made. We therefore find merit in the argument of the learned senior counsel for the assessee that the assignment of rights to acquire the airc....
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.... we find the said decision is distinguishable on facts and not applicable to the case of the asses see. In that case, the amount was received by the assessee from its customers in the course of a trade transaction. Since, over the period of time these amounts were not claimed back by the customers, these amounts were transferred by the assessee to its profit and loss account. The Assessing Officer held that surplus had arisen as a result of trade trans actions. It was an amount having a character of income and had to be added as income. Therefore, the Assessing Officer held that the amount received was revenue in nature. We find the hon'ble Supreme Court first considered the legal principles arising from the case of Morley (Inspector of Taxes) v. Tattersall [1939] 7 ITR 316 (CA), has observed as under (page 347 of 222 ITR) : ". . . In the case of Morley (Inspector of Taxes) v. Tattersall [1939] 7 ITR 316 (CA), it was laid down by Lord Greene that the taxability of a receipt was fixed with reference to its character at the moment it was received and that merely because the recipient treated it subsequently in his income account as his own that did not alter that char ac....
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....e it on a financial lease or on an operating lease. This was a commercial decision which the assessee takes on the delivery date depending upon its capital, market condition and other ground realities. The learned senior counsel for the assessee has filed before the Bench the details of 34 aircrafts which have been purchased by the assessee. The credits received for these air crafts have been reduced from the cost of acquisition in accordance with the provisions of section 43(1). This has been accepted by the Revenue. The nature of receipt for 34 aircrafts is accepted to be capital. The character as capital will thus continue to remain same even when the asset is not purchased but acquired on lease. Subsequent mode of acquisition will not therefore change the nature of taxability. We, therefore, hold that the entire amount of credits of Rs. 7,59,39,25,444 received by the assessee from International Aero Engines in the year under consideration for selection of its engines is a capital receipt. D. Relevance of entries in the books of account : 33. The learned senior special counsel for the Revenue argued that in the books of account, credits proportionate to the period of....
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....owever, pertinent to mention here that in assessment year 2007-08, the Division Bench has not followed Accounting Standard-12 issued by the ICAI to hold that credits are taxable as capital receipts. It was held that "Acceptably as pointed-out by the appellant, the accounting policy followed was in spirit with the Accounting Standard-12 issued by the ICAI." Even we have held above that Accounting Policy followed by the assessee is as per industry norms and practices. However, this is not relevant when we have to examine the nature and taxation of the amount received as per the provisions of the Income-tax Act, 1961. 34.2. We further find the learned special counsel for the Revenue in his written submissions has submitted that accounting entry passed in books presumes connection with aircraft acquisition whereas a contrary claim has been made by the assessee for taxation purposes when it is claimed that credits received from International Aero Engines are consideration for selection of engines. We have already held in the preceding paragraphs that credits were received as consideration for selection of engines only and not for purpose of aircraft acquisition. The learned spe....
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....he books of account have been traced to the bank statements and supporting documents and that audit was conducted as per settled auditing practices. 34.1. However, we would like to decide upon the issue of relevancy of the redacted amounts in the agreements and whether it will make any difference to the nature of receipts from the International Aero Engines. A perusal of the order of the learned Commissioner of Income-tax (Appeals) as well as the arguments advanced by the special counsel for the Revenue before us shows that they have not doubted the total credits received during the year by the assessee from International Aero Engines for selection of engines and that the figure of Rs. 759.39 crores as disclosed in the audited books of account is not correct. The learned special counsel for the Revenue has categorically submitted that "the Revenue has not sought to reject the accounts or to raise doubts over the correctness of the entries in the books of account". We find, the learned Commissioner of Income-tax (Appeals) has held that unredacted copies of agreements were not filed, therefore, an addition is to be made on the entire amount of Rs. 759.39 crores. Although, he....
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.... and lessors are a composite arrangement. There is no redaction of any clause, sentence or any terms or conditions in the agreement. Therefore, we do not find any merit in the argument of the learned special counsel for the Revenue on this issue. The Revenue has not demonstrated the relevancy of redacted amounts especially when the case of the assessee was consistently examined by various Departmental Authorities and none of them have made an issue out of redaction. Further, the agreements dated October 19, 2005 and November 18, 2005 remained the same over the years. Assessments have been framed from assessment years 2007-08 to 2018-19 and the Assessing Officer has examined the nature of transaction without being handicapped by the fact that there is redaction of amounts stated in the agreements. We have also gone through the assessment orders for the assessment years 2015-16 to 2018-19 which have been passed after the order of the learned Commissioner of Income-tax (Appeals) for the assessment year 2012-13 and find that there is no such issue made out of redacted amounts. Even a perusal of the orders of the learned Commissioner of Income-tax (Appeals) for the assessment years 2013....
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....necessary that "business is carried on . . . . . at any time during the previous year". Since, there is no business of selection of engines was carried-on by the assessee-company, therefore, the provisions of section 28(i) are not applicable. 35.3 Further, for applying section 28(iv), the statutory requirement is that the value of any benefit or perquisite, whether convertible into money or not, must arise from the business or exercise of a profession. 35.4. We find, the hon'ble Bombay High Court in the case of Mahindra and Mahindra Ltd. v. CIT reported in [2003] 261 ITR 501 (Bom) has held that capital receipt do not come within the purview of section 28(iv) of the Act. The relevant observation of the hon'ble High Court reads as under (page 509 of 261 ITR) : "At the outset, we wish to clarify that this judgment is confined to the facts of this case. This is because the value of any benefit or per quisite arising from business, as contemplated by section 28(iv), could accrue in numerous ways. The income which can be taxed under section 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. Secondly, sect....
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....er arrangement with KJC to which the assessee was not a party. The waiver of the principal amount was unexpected. In the circumstances, one fails to understand how such waiver would constitute business income." 35.5 We find, the hon'ble Delhi High Court in the case of CIT v. Jindal Equipments Leasing and Consultancy Services Ltd. reported in [2010] 325 ITR 87 (Delhi), following the above decision at paragraph 8 of the order has observed as under (page 91) : "With this, we proceed to examine this aspect on its own merits, viz., whether the provisions of section 28(iv) of the Act are attracted in the given case. Thus, what is to be seen is as to whether the amount written off of Rs. 1,46,53,065 in its books of account by JSPL amounts to the value of any benefit or perquisite whether convertible into money or not and can be treated as 'Profits and gains from business'. The pre-requisites for attracting the said provisions are : (i) Benefit or perquisite arising in the course of business is of the nature, other than cash or money. It is for this reason expression 'whether convertible into money or not' is mentioned in clause (iv). The Bomb....
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....me Court in the case of Empire Jute Co. Ltd. v. CIT reported in [1980] 124 ITR 1 (SC) where it has been held that "a receipt may be revenue in the hands of the payer, but, capital in the hands of the recipients". 35.9. The learned special counsel for the Revenue also made an argument for the first time before us that the term "business" as defined in section 2(13) includes "any adventure or concern in the nature of trade, commerce or manufacture". It was his submission that even a single adventure in the nature of trade, commerce or business would amount to "business" and the profit gained as a consequence of the adventure would be chargeable to tax as business profits. It was accordingly submitted that the activity of the assessee of selecting engines has trappings of an adventure in the nature of trade, commerce or business and, therefore, would fall within the definition of "business" as appearing in section 2(13) of the Income-tax Act, 1961. The learned special counsel for the Revenue drew our attention to paragraph 10.1 of the order of the learned Commissioner of Income-tax (Appeals) wherein he has noted that the assessee has made further aircraft acquisition in the y....
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.... right to purchase, is assessable as capital gains. It is also his submission that by entering into purchase agreement with Airbus, the assessee has acquired a valuable right which would be a capital asset being a commercial right. By the deed of assignment, then assessee transferred such right in favour of lessor amounts paid by lessors represent a consideration as the taking over of the liability amounts to a consideration. It was also submitted in his written submissions as under : "The cost of acquisition would comprise initial money paid to Air bus or engine manufacturer and the total purchase price of the aircraft minus the discounts appropriated by the appellant (and not passed on to the lessors). The balance amount being the difference between the amount paid by the lessors to Airbus (in discharge of the contractual obligation of the appellant) and the cost of acquisition of rights so transferred would represent the amount of capital gains chargeable to tax as rightly explained by the Commissioner of Income-tax (Appeals) in paragraph 10.2.1 on page 33. The capital gains arise not for any assignment of the right to choose engines as contended by the appellant. The a....
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.... consideration as the taking-over of a liability amounts to a consideration". We find in the year under consideration the lease agreements are in the nature of operating lease. The Assessing Officer in the order has also mentioned that the lessors are the owners and are claiming depreciation. Therefore, consideration paid by lessors to Airbus is not on account of the assessee. The transaction of payment of purchase price by lessors to Airbus is a separate transaction, under which, no right to the aircraft is flowing to the assessee. There is, therefore, no "sale consideration" received by the assessee which could be held assessable to "capital gains tax". We, therefore, hold that credits received by the assessee are not taxable as capital gains. H. Disallowance of proportionate lease rental under section 37(1) 38. The next issue that is to be decided is regarding disallowance of pro-portionate lease rentals under section 37(1) of the Act, 1961. We find in the impugned order, the learned Commissioner of Income-tax (Appeals), in para 10.3 has taken an alternative stand that the lease rentals have a direct nexus with the price of the aircraft that the lessors have to pay for. Ac....
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....asset on lease finance basis. The Tribunal, however, held as under : "Nothing has been shown with reference to documents and agreement on record to support the submission that the grant was by way of recoupment or revenue expenditure incurred by the assessee. The Department's case as we see is that since the assessee initially acquired the capital equipment on lease finance basis, the lease rentals were allowed as revenue expenditure to the assessee. The asses see, however, had to pay on account of lease finance Rs. 4.8 crores as against the capital cost of Rs. 3.2 crores. Had the assessee acquired equipment on outright purchase basis, the assessee would have been entitled to the write off of capital costs by way of depreciation as revenue expenditure. If the assessee had borrowed funds for meeting the capital cost of the equipment, the capital cost would have been written off by way of depreciation over a period of years and interest on borrowed funds by way of depreciation over a period of years and interest on borrowed funds would have been allowed revenue deduction. We agree with the learned counsel for the assessee that the accounting or tax treatment of the capit....
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....nclosed a copy of lease agreement dated December 15, 2006 with M/s. McR Aviation Ltd. The Revenue in its paper book has submitted three lease agreements, i. e., agreement dated June 14, 2007 with Genesis Acquisition Ltd., dated July 4, 2007 with Lara Leasing Ltd., and dated August 10, 2010 with Crescent Leasing P. Ltd. Under all these agreements supplementary rent is a mandatory payment required to be made to the lessors for use of aircrafts. Amount payable for supplementary rent is calculated based upon flying hours attributable towards critical parts of the aircraft, i. e., aircraft body, auxiliary power unit, landing gear, etc. We find the Assessing Officer in the assessment order made disallowance under section 40(a)(i) of the Income-tax Act, 1961 alleging that owing to non-deduction of tax, the expenditure is disallowable. However, the learned Commissioner of Income-tax (Appeals) held that payment of supplementary rent is reimbursable and hence the expenditure is not allowable under section 37(1) of the Income-tax Act, 1961. 39.1. We find an identical issue came up before the Division Bench in the assessee's own case in the assessment year 2007-08, wherein the Tri....
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....agreed that such time periods may be extended as determined in the reasonable discretion of lessor, to the extent that lessee notifies lessor at or before the end of such sixty (60) day period that there are still outstanding invoices (which shall be specifically identified for approved maintenance work), an invoice and supporting documentation evidencing performance of and payment for each in reasonable reimbursement shall be made in respect of replacement, repair or overhaul caused by foreign object damage, domestic object damage, operational or other mishandling, family maintenance or any accidental cause or in respect of any cost which is reimbursable by insurance or which relates to convenience, premature or unscheduled shop visits or overhauls or lessee effected operational modifications, Engine QEC, engine accessories, removal/ installation of engines, removal/Installation of APUs removal/installation of landing gear, structural and non-structural components including but not limited to nacelle structures, the thrust reversers, cowlings and engine mounts, or shipping charges, and (ii) no material default or event of default is continuing, promptly pay to lessee the following....
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....g the expiry date, after application of the foregoing provisions, shall be retained by lessor as its sole property, with the exceptions set forth in exhibit H. To the extent any maintenance expenses exceed the amount available in the applicable maintenance supplemental rent account, such expenses shall be for the account of the lessee and the shortfall, if any shall not be carried forward or made the subject of any further claim for reimbursement lessee acknowledges that lessor may commingle the maintenance supplemental rent with its general funds and no interest shall accrue in favour of lessee in respect of maintenance supplemental rent held by lessor. 8.1.1 During the sublease term and until the aircraft is returned to lessor in the condition required by this sublease, lessee alone has the obligation, at its expenses, to timely maintain, service, test, inspect, overhaul and repair the aircraft, engines and all of the parts (a) in accordance with the maintenance program, (b) in accordance with the rules and regulations of the Aviation Authority, (c) in accordance with manufacturer's type design, (d) so as to ensure that the aircraft meets the requirements of its type....
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....the lessor having any role or in the manner as provided in article 3.12 of the lease agreement. It was further submitted that for invoking the exclusionary clause as provided in section 10(15A) of the Act, it is mandatory for the authorities below to demonstrate that either the lessor had supplied certain spares or provided any facility or service in connection with the operation of the lease aircraft. Since no such fact has been brought on record by the learned Commissioner of Income-tax, it was submitted that the impugned action under section 263 be quashed. It was also submitted by the learned senior counsel that recently the hon'ble jurisdictional High Court has upheld the ratio propounded by this Bench of the Tribunal in the case of Sahara Airlines (supra) in orders reported in the name of Jet Lite (India) Ltd. reported in [2015] 379 ITR 185 (Delhi) ; [2016] 236 Taxman 453 (Delhi). It was also submitted by the learned senior counsel that once an assessment order has been passed in consonance with the judicial wisdom of the superior court then the same cannot be termed as erroneous or prejudicial to the interests of the Revenue. In support of this proposition, the learned s....
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....ical issue and had held as under : '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 cost, repair and replacement, losses and other expenditure which were required to keep the aircraft in air-worthy condition. So the lessor was under no obligation to meet any expenditure or bear any loss in respect of the leased aircraft. Complete maintenance of the aircraft was the absolute responsibility of the lessee. The lessor was interested only in receiving the basic lease rent which could be utilised by them in the manner it liked and therefore, was income of the lessor which was exempt under section 10(15A) of the Act. But the supplemental rent was to be reimbursed in accordance with the terms of article 13 of the agreement. The obligation to repair and keep the aircraft in the airworthy condition was that assessee and such obligation could be discharged either by paying directly to the repair agency without involving the lessor or by the manner as provided in article 13 of the agreement. Such agreement was made only to ensure that the leased air....
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....e Finance Bill, 1995, it appears that, after the insertion of section 10(15A) in the statute, it was experienced by the Government that the non-resident companies were receiving payments in consideration of facilities or services provided/ rendered by the lessors such as training to the pilots or other crew men, providing technicians, etc., in the guise of leased rent. It is this mischief which was suppressed by the substitution of section 10(15A) with effect from April 1, 1996. This is manifest from the memo explaining the proposed Finance Bill, 1995. The relevant portion is quoted below (212 ITR (St.). 351) : . . . . 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) that lessor either had supplied the spares or provided any facility or service in connection with operation of the leased already and (ii) the payment has been made by the lessee in consideration of s....
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....ral deficiencies (overhauls) of the airframe, (i. e., the complete V check or equivalent if the aircraft is on a block 'D' maintenance system under the lessee's maintenance programme or V check level structural inspections carried out during a 'C' check if the aircraft is on a phased 'V' check system under lessee's maintenance programme), with any other partial structural overhauls and work performed for all other causes excluded, including those causes set forth in article 13.4. Reimbursement will be made up to the amount in the airframe reserve. 48. The Income-tax Appellate Tribunal has examined the object behind amending section 10(15A) with effect from 1st April, 1996. If any payment had to be brought within the exclusionary portion of section 10(15A) of the Act, then it must be shown (i) that the lessor either had supplied the spares or provided any facility or service in connection with operation of the leased aircraft ; and (ii) the payment has been made by the lessee in consideration of such spares/facilities/ services. The Income-tax Appellate Tribunal has rightly pointed out that the supplement rental was within the ambit of the or....
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....r of assessment for the assessment year 2008-09. Facts of the present case being similar to that of Sahara Airlines (supra), respectfully following the decision of the hon'ble jurisdictional High Court we hold that payment of supplementary lease rent was exempt under section 10(15A) of the Act and the appellant was not required to deduct TDS thereon . . . ." 39.2. Thereafter, this issue again came up before the Tribunal in the assessment years 2008-09 and 2009-10 wherein decision for the assessment year 2007-08 was followed. Being aggrieved, the Revenue filed an appeal before the hon'ble Delhi High Court which has been dismissed vide orders dated July 7, 2017 and October 31, 2017. Aggrieved further, the special leave petition was filed by the Tax Department which has also been dismissed vide order dated July 30, 2018 and September 10, 2018. The issue is therefore no more res integra. 39.3 However, the learned Commissioner of Income-tax (Appeals) in the instant case has held that the expenditure per se is not allowable as per provision of section 37(1). We have perused the relevant agreements filed before us and are unable to uphold the disallowance made by....
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....enance supplemental rent") ; (ii) in respect of the airframe, US$22.50 for each airframe flight hour operated by the aircraft to cover scheduled heavy structural/SC/ 12Y checks of the airframe ("Airframe 8C maintenance supplemental rent") ; (iii) in respect of each engine, an amount determined in accordance with exhibit G attached hereto for each engine flight hour, in each case operated by that engine to cover such engine's overhauls (as to each engine, "engine refurbishment maintenance supplemental rent") ; (iv) in respect of each engine, US$111 for each engine cycle, in each case relating to that engine to cover such engine's LLP replacements (as to each engine, "engine LLP maintenance supplemental rent") ; (v) in respect of the APU, US$20 for each airframe flight hour to cover APU overhauls ("APU maintenance supplemental rent") ; and (vi) in respect of the landing gear, US$2,700 for each calendar month (prorated for partial months) during the sublease term to cover the landing gear overhaul ("landing gear maintenance supplemental rent") The Airframe 40 maintenance supplemental rent, the airframe 80 maintenance supple....
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.... charges, and (ii) no material default or event of default is continuing, promptly pay to lessee the following amounts ("lessors maintenance disbursements") from the respective maintenance supplemental rent account. (i) Airframe 4C/6Y checks : with respect to a scheduled heavy structural 4C/6Y checks of the airframe if it comes due during the sublease term, the lesser of (i) the amount of such invoice and (ii) the net balance of Airframe 4C maintenance supplemental rent received by the lessor at the time of payment ; (ii) Airframe SC/12 Y checks : with respect to a scheduled heavy structural 8C/12Y checks of the airframe if it comes due during the sublease term, the lesser of (i) the amount of such invoice and (ii) the net balance of Airframe 8C maintenance supplemental rent received by the lessor at the time of payment ; (iii) Engine refurbishment : with respect to any overhaul for an engine, the lesser of (i) the amount of such invoice and (ii) the net balance of engine refurbishment maintenance rent received by the lessor in respect of such engine at the time of payment ; (iv) Engine LLP replacement : with respect to any LLP replacement for an....
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....incurring of scheduled maintenance expenditure the assessee is entitled to reimbursement of the expense incurred on maintenance. Amount of reimbursement is lesser of actual expense or the supplemental rent fund maintained by the lessor. Expense incurred for supplemental rent in thus not contingent. It is determinative and due as per lease agreement. Contingency if at all is attached to the expenditure incurred on maintenance of aircraft and its reimbursement from the lessor. 39.6. The assessee has also demonstrated before us that when actual maintenance expenditure is incurred by it then only the net amount, (i. e., net of reimbursement received from the lessor) is debited by it to its profit and loss account and therefore there is no double deduction claimed. This was also demonstrated before the learned Commissioner of Income-tax (Appeals). 39.7. The learned Commissioner of Income-tax (Appeals), in our opinion, has not properly understood the facts of the case. The fact that supplemental rent is determinable as per the terms of the agreement and is mandatory payment demolishes the presumption of the learned Commissioner of Income-tax (Appeals) that it is reimbur....
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....le Taxation Avoidance Agreement between India and Ireland. We find the Assessing Officer has not accepted this the reasons of which has already been reproduced at para 1.5 of the order. 41.1. Cross border leasing of aircraft enjoyed a special exemption under section 10(15A) of the I.T. Act. However, a sunset clause was introduced by Finance Act, 2005 to provide that this exemption shall not be available for agreements entered after 1st April, 2007. In the aftermath of withdrawal of exemption the tax liability of the lessor is to be governed by the provisions of bilateral tax treaties the learned senior counsel for the assessee submitted that as per provisions of section 90 of the Act, provisions of Double Taxation Avoidance Agreement shall apply to the extent they are beneficial. Under the Double Taxation Avoidance Agreement the foremost consideration is whether the non-resident lessor has a permanent establishment (PE) in India as per article 5 of the relevant. According to him, mere leasing of an aircraft which is located in India ought not to result in an existence of permanent establishment and there is also no such allegation made by the lower authorities in the prese....
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....hnical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situate therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment, or fixed base. In such case the provisions of article 1 or article 14, as the case may be, shall apply. 5. Royalties or fees for technical services shall be deemed to arise in a contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a contracting State or not, has in a contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed ba....
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....n India. However, the above figure is subject to verification by the Assessing Officer. 42. The learned special counsel for the Revenue. On the other hand, has filed the following written submission : "The other contention of the appellant is that article 12 of India-Ireland Double Taxation Avoidance Agreement excludes aircraft from the definition of 'royalty' and therefore the lease rentals cannot be taxed in India in the hands of the lessors as royalty. Firstly, the sample agreement with the lessors clearly demonstrates that the lessors only took the title of the aircraft and the actual delivery of the aircraft was taken by the appellant, purportedly as an agent of the assignees. The lease agreement clearly provides the formula for working out the amount of lease rent. This takes into account the pre vailing LIBOR rates. That goes suggest that these are financing arrangements. The credits have also been shown in the accounts as other income. The payment, by whatever name called of finance charges would fall within the definition of 'interest' and would be chargeable to tax in India under article 11 of Indo-Irish Double Taxation Avoida....
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....oss amount of the interest. The competent authorities of the contracting States shall by mutual agreement settle the mode of application of this limitation. . . . 4. The term 'interest' as used in this article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, but does not include any income which is treated as a dividend under article 10. Penalty charges for late payment shall not be regarded as interest for the purpose of this article." 43.1 We are not convinced by the submissions made by the learned special counsel for the Revenue. It is an undisputed fact that the basic lease rent of Rs. 673.42 crores paid under the lease agreement is an allowable expenditure and its nature is that of "Rent". In our opinion, the nature of supplementary lease rent cannot be treated otherwise as both these expenses are payments made under the same agreement for use of aircraft. The learned special coun....