TaxTMI 
TaxTMI 
TaxTMI 
2021 (9) TMI 1400
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...., 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 to Rs. 2,68,91,48,934 relatable to this year has....
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....alled 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 upon by the assessee that the agreement described the fleet intr....
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....e, 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 while determining the actual cost of the aircraft, the amount of subsidy/reimburseme....
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....eable 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-cancellable operating lease from leasing companies (lessor) based in Ireland for period up to six years. In light of the aforesaid, ....
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....n 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 (Bom). In the instant case, the approval granted by the Central Board of Direct Taxes under section 10(15A) specifically excludes the payments made for use of spares, facilitie....
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.... 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 is not allowed under section 37(1) of the Income-tax Act, which is capital expenditure, which was also enhanced by the learned Commissioner of Income-tax (Appeals). The addition made by the Assessing Officer under section 40(a)(i) was howe....
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.... 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 holding that credits of Rs. 258,91,48,934 may also be taxable as income from capital gains. 7. That on facts and in law the Commissioner of Income-tax (Appeals) erred in disallowing deduction of supplementary lease rent of Rs. 338,09,64,412 invoking provisions of section 37(1) of the Act. 8. That on facts and in law, ....
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.... 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 supplementary rent paid to lessors." Additional ground raised by the Revenue was as under : "On the facts and circumstances and in law the learned Commissioner of Income-tax (Appeals) erred in ignoring that the receipts of Rs. 759.39,25.444 constituted receipts from exploitation of valuable commercial rights arising in the course of systematic and real business activity and such receipts would otherwise constitute income liable to tax under the provisions of....
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....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 Government of the respective States granted direct/indirect subsidies in the form of reduction of taxes or other wise. However, the order of the Tribunal, would show that the assessee itself argued initially that they received the discount from International Aero Engines as recorded in the order, but the submission starts on the assumptions as if the discount was grant/incentive/subsidy from International Aero Engines. The agreement between the assessee and International Aero Engines was a pure business commer....
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....ovisions 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 Appellate Tribunal, Delhi Bench in the case of the asses see for the assessment year 2007-08 which is followed in subsequent assessment years 2008-09 and 2009-10 holding the fleet introductory assistance (credit) as a capital receipt and that the lease, supplementary lease rental is allowable expenditure. However, the Revenue has contended that it was an order passed in reference to proceedings under section 263 of the Income-tax Act and also highlighted various features above to plead that the order of the Income-tax ....
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.... 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 if the Tribunal wants to take an opinion different from the one taken by an earlier Bench, it ought to place the matter before the hon'ble President of the Tribunal so that he can refer the matter to a larger Bench.' 9.2. It may also be noted here that it is not a denying fact that receipt of subsidy/discount/incentive or whatever name may be given to it, is prevalent in aviation industry on supply of aircraft engines. Therefore, the question 'whether FIA (fleet introductory assistance) credit is capital or revenue receipt aris....
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....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 only a "tentative arrangement" and the right to receive credits accrued when side letter dated March 29, 2007 was signed is incorrect for the following reasons : (a) In the financial year 2006-07 credits of Rs. 160.66 crores were received by the assessee much before the date of signing of letter dated March 29, 2007. The entire sum of Rs. 160.66 crores was the subject matter of dispute in assessment year 2007-08. (b) Credits are stated to have been provided as a consideration for "Selection of" engines . . . . (refer page-178, Para-A of 19th October 2005 agreement). Acceptance to above offer is specifically noted at page-190, last para. (c) The....
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....rade. 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 instant case are money. He submitted that it is well settled now that section 28(iv) is applicable only when "benefit or perquisite" is received in a non-monetary form. For the above proposition, he relied on the decision of the hon'ble Supreme Court in the case of CIT v. Mafatlal Gangabhai and Co. (P.) Ltd. [1996] 219 ITR 644 (SC) and decision of the hon'ble Delhi High Court in the case of Ravinder Singh v. CIT [1994] 205 ITR 353 (Delhi). 4.1. So far as the decision of the hon'ble Madras High Court in case of CIT v. Ramaniyam Homes (P.) Ltd. reported in [2016] 384 ITR 530 (Mad) ; [2016] 68 taxmann.com 289 (Mad) relied on by the learned special counsel for the Revenue is concerned, he s....
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....tted 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 (v) Side letter dated March 29, 2007 between assessee and International Aero Engines (at page 23) . . . .conclusions at pages 31 to 38, para 9. 5.1. He submitted that the Tribunal noted that the credits were received as a consideration for selection of engines. The Tribunal has analysed the agreement at length especially the nature of credits received vis-a-vis- (a) its characteristics (pages 18 to 23, para 6.1) (b) whether capital or revenue (pages 31 to 38, para 9) (c) whether commission and (Page 38, 8th line from top) (d) link with lease rentals (page 37, 3rd line from top) 5.2. He submitted that the order of the Tribunal for the assessment year 2007-08 was followed by the Income-tax Appellate Tribunal in the assessment years 2008-09 and 200....
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.... 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 points of time are to be respected and should not be consolidated at the whims and fancies of the Tax Department. For the above proposition, he relied on the decision of the Special Bench of the Tribunal in the case of CIT v. Wallfort Shares and Stock Brokers Ltd. [2005] 96 ITD 1 (Mum) [SB] at para 106 upheld in CIT v. Walfort Share and Stock Brokers P. Ltd. [2009] 310 ITR 421 (Bom) and submitted that the issue has not been contested further by the Tax Department before the apex court in CIT v. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC), (2) Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC) at pages 431 to 440, (3) ITO v. Shriram Bearings Ltd. [1987] 164 ITR 419 (Cal) upheld in ITO v. Shriram Bearings Ltd. [1997] 224 ITR 724 (SC). 5.6.1. He submitted that recently the apex court in case of Voda....
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....ns 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 arbitrary or perverse or ignores "material facts". The existence of perversity of "material facts" ignored had to be demonstrated by the Department and the said onus has not been discharged. He submitted that against the orders passed by the Income-tax Appellate Tribunal for the assessment years 2007-8 to 2009-10, the Revenue has filed an appeal under section 260A of the Income-tax Act before the hon'ble Delhi High Court. Referring to the copy of appeal filed before the hon'ble High Court placed at paper book pages 880 to 916, he submitted that there is no question raised therein challenging the factual findings of the Income-tax Appellate Tribunal as perverse. He submitted that even now also before the Tribunal no fresh material has been placed which would render the findings recorded by the Income-tax Appellate Tribunal in earlier yea....
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....as 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 Departmental representative has also not doubted that redacted agreements do highlight the nature of the transactions in dispute. He even did not doubt the correctness of books of account. He submitted that the learned Commissioner of Income-tax (Appeals) is wrong in holding that owing to the redaction the nature as well as quantum of the credits is not verifiable. Referring to pages 19 and 20 of paper book-1, he submitted that the Income-tax Appellate Tribunal in the assessment year 2007-08 has considered the nature at length on a perusal of the same agreements and concluded that receipts from International Aero Engines are capital. 8. In so far as the issue relating to capital gains is concerned, the learned senior counsel submitted that as per article 21 of the aircraft purchase agreement, the assessee is entitled to assign its right to acquire aircraft for pu....
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....f 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 October 19, 2005 was executed". It is further held there is no connection between the transaction of payment of lease rentals and the transaction of receipt of credits from International Aero Engines. He submitted that these are two different transactions. 10. The learned senior counsel for the assessee submitted that subsequent to the passing of the impugned order of the learned Commissioner of Income-tax (Appeals) for the assessment year 2012-13, the learned Commissioner of Income-tax (Appeals) has passed appellate orders for the assessment year 2013-14 dated October 10, 2017 and for the assessment year 2014-15 dated October 10, 2017 in which there is no allegation vis-a-vis : * credits being taxable as capital gains, or * nature of quantum of credits not being verifiable owing to redaction in agreements 10.1 He submitted that in recently concluded assessments for the a....
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.... 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 page 238, clause 3.3). He submitted that the Tribunal in the case of Sahara Airlines (supra) has noted that upon incurring of actual expense for repairs, the lessor will reimburse that actual expense to the lease. The supplementary lease rent is, therefore, a determined liability reimbursement of actual repair expense, if at all, is a future contingent event, but the supplementary lease is a determined expense which is not contingent. The fact that the supplementary lease rent expense can be ascertained is undisputed. Once a business liability, whether contractual or statutory, is ascertained, it has to be allowed as deduction when the mercantile system of accounting is being followed. For the above proposition, he relied on the judgments of the hon'ble Delhi High Court in the cases of Aggarwal and Modi Enterprises (Cinema Project) Co. Pvt. Ltd. v. CIT reported in [2016] 381 ITR 469 (Delhi) (at page 485, para 47) (ii) Jagdish Prasa....
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....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 the issue has not been examined from this specific point of view by lower authorities matter may be remanded back to the Assessing Officer. However issue regarding supplementary rent being an "expense" under section 37(1) of the Act be decided by the hon'ble ITAT. Total 338,09,64,412 14. Referring to the submissions of the learned special counsel for the Revenue wherein it is alleged that since leasing was a financial arrangement, therefore, applicability of article 11 of India-Ireland Double Taxation Avoidance Agreement need be examined. The learned senior counsel for the assessee submitted that subject matter of dispute before the Income-tax Appellate Tribunal is deduction claimed on account of supplementary rent. Deduction claimed for basic rent of Rs. 673.42 crores has been allowed by the Assessing Officer. Referring to the decision of the hon'ble Supreme Court in the case of MCorp Global Pvt. Ltd. v. CIT reported in [2009] 309 ITR 434....
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....ero Engines. (8) Purchase assignment agreement dated March 16, 2012 between the assessee and M/s. Howth Aircraft Leasing Ltd. 15.2. The learned special counsel for the Revenue submitted that as a first step, the assessee goes shopping for 100 aircrafts in bulk, zeroes in on Airbus which has the option of having engines from two competing manufacturers, negotiates with the International Aero Engines, the engine manufacturer, gets a discount from them by way of credits. He submitted that Airbus shows the price of airframe and engine separately in the purchase documents. The assessee passes on the title to lessors, the purchase price being paid by lessors while delivery is being taken by the appellant, formalizes the acquisition by a leaseback transaction, which goes together with assignment of right to the title of the aircraft. This was a wholesome arrangement of purely commercial nature and there was no element of any receipt being capital in nature which can go out of the net of computation of taxable income. 15.3. He submitted that the assessee did not have the financial capability of buying 100 engines or aircrafts in one go and even if they had, the delivery was contempla....
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.... assessee chooses to acquire the aircraft with the engine. This is precisely the treatment given in the accounts. The assessee having not chosen to purchase the aircraft, assigning the right to the lessors who pay the purchase price, the receipts would obviously be pure business receipts adding to the profits of the assessee. 15.6. The learned special counsel for the Revenue submitted that the assessee took the entire amount of credit in the computation of its profits and did not carry any part of such receipts to the balance-sheet directly. For the shareholders and the public at large, being a listed company, this amounts to business profits, but the assessee seeks to advance an absurd claim by withholding vital information that these receipts ought to be kept out of the computation of income and be regarded as capital receipts, not chargeable to tax. 15.7. He submitted that the Revenue has already placed reliance on the principles governing the determination whether a receipt is capital in nature set out by the hon'ble Supreme Court in the case of Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 (SC) (pages 8 and 9) and CIT v. Maheshwari Devi Jute Mills Ltd. [1965]....
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....pts as business profits chargeable to tax. These receipts cannot under any shade be regarded as capital receipts not charge able to tax. 15.10. He submitted that the argument that the amount was received from International Aero Engines and not from lessors who purchased the aircraft with engines is fallacious. The credits having been appropriated directly ; it is immaterial from where it came. The nature has to be judged in the hands of the assessee and not in the hands of the payer (where it is not a receipt). 15.11. The learned special counsel for the Revenue submitted that the other argument of the assessee that the subsequent utilisation of the receipts or the events occurring post the grant of receipt is equally fallacious. In the first place, the business model which generated the receipt has to be viewed as a whole-one transaction cannot be viewed in isolation bereft of its inevitable linkage with the other in the entire chain of trans actions. Reliance on the decision of Wallfort Securities by the assessee is wholly out of context as that was a case of on investment and dividend stripping whereas the present case is of a business receipt and the business operations have....
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....d by the airlines industry. 15.16 He submitted that once the assessee advances the claim that the profit drawn as per the profit and loss account does not represent the "income" for tax purposes, the onus is on the assessee to demonstrate in no uncertain terms that the income appearing in the accounts or the accounting policy followed by it, is not in tune with the provisions of the Act. It is nobody's case that the accounts drawn by the assessee are conclusive for determination of taxable income. However, very strong reasons need to exist to suggest that the profits so drawn are against the provisions of the Act or that an account prepared in accordance with the Income-tax Law would be wholly different. He submitted that this casts a heavy bur den on the assessee and that the assessee has miserably failed to discharge the same. 16. So far as the applicability of provisions of section 28(iv) of the Income-tax Act, 1961 as per additional ground raised by the Revenue is concerned, the learned special counsel for the Revenue submitted that the Revenue's primary submission remains that the credits from International Aero Engines represent business profits liable to tax under....
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....e provisions of section 28(iv) of the Income-tax Act, 1961, would be applicable in such cases. 16.2. The learned special counsel for the Revenue submitted that the assessee has undertaken an adventure in the nature of trade, and profits from such an adventure is chargeable to tax as business income. He sub mitted that the term "Business" as defined in section 2(13) states that it includes any adventure or concern in the nature of trade, commerce or manufacture. The definition is, thus, inclusive and it very specifically includes any adventure which is in the nature of trade, commerce or business. He submitted that it is a settled position that even a single adventure in the nature of trade, commerce or business would amount to "Business" and the profits gained as consequence of the adventure would be charge able to tax as business profits. The assessee, in this case, prepared a scheme for bulk purchase of aircrafts. They went shopping in the international market for these aircrafts which they did not need immediately, but required over a period of time. By haying an offer of firm commitment for purchase of such a huge number of aircrafts, they were in a position to negotiate the ....
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....would assume the nature of commission income in the hands of the assessee. The entire receipts would become chargeable to tax as income received in the course of business operations and would be taxed as such. 17. So far as the argument of the learned senior counsel for the assessee that the issues raised in the appeal are covered by the decision of the Income-tax Appellate Tribunal for the assessment year 2007-08 is concerned, the learned special counsel for the Revenue submitted that the principles relating to the binding nature of judicial precedent, including those in appellant's own case, are well-settled. The decisions rendered by the co-ordinate Benches deserve to be followed. However, exceptions to this rule are (i) Where the decision rendered by the co-ordinate Bench is patently erroneous either on facts or in 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 a binding precedence. Referring to the decision of the hon'ble Supreme Court in the case of Distributors (Baroda) P. Ltd. v. Union of India reported in [1985] 155 IT....
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....100 engines in bulk. Unlike a grant or a subsidy which are unilateral arrangements, this was a bilateral commercial arrangement. It is wholly inconceivable that a buyer/seller would unilaterally grant any kind of subsidy to the other. It can at best give the benefits of discount, post-sale warranties and similar other benefits which can, under no circumstances, be regarded as subsidy. The Tribunal, thus, proceeded on a primary fallacious assumption which was not borne out of the records or the agreements placed before it. 17.4. He submitted that the Revenue referred to the definition of "subsidy" from legal dictionaries to demonstrate that the subsidy flows from the Government or State for broader development purposes and this nature can never be ascribed to a commercial transaction between a buyer and a seller. 17.5 The learned special counsel for the Revenue submitted/that the Tribunal relies upon Accounting Standard-12 to buttress the argument that the receipts were capital in nature, completely ignoring that the Accounting Standard-12 relates only to Government grants and in the present case neither of the two parties were representing Governments of any State. 17.6. He s....
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....luding the offer of financing through their associates and/or SPVs formed for this purpose, discounts in purchase of spare engines, facility of acquiring new engines on the same terms-all these facts were certainly not pointed out to the co-ordinate Bench nor came up for consideration. Exhibit "G" which forms an integral part of the agreement between the assessee and International Aero Engines clearly stipulates that International Aero Engines and the lessor will work together with the lessee to avoid or minimize any potential tax indemnity exposure, taking into account the jurisdictions involved, and will agree to use all reasonable endeavours (...) to mitigate any tax liability that may arise (page 210 of paper book). The co-ordinate Bench had no chance to look at this clause. 17.10. He submitted that the mere fact that the sale of engines could not be done in isolation and had necessarily to be a part of sale of aircraft as a unit does not go to establish that the discount/credits were given for mere choice of engines and not purchase thereof. Irrespective of the model of acquisition adopted, the fact and the essence of the transaction is that the assessee acquired the aircraf....
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....eipt of capital nature having nexus with the cost of the capital asset has got to be adjusted against the latter. Once it is found as a matter of fact that these credits were given to the assessee as a consideration for bulk purchase of aircrafts carrying International Aero Engines, these receipts would need to be adjusted against the cost of the purchase/acquisition of the air crafts which may be the purchase price or the lease rentals, as the case may be. He submitted that the assessee has not made any submission in the oral rejoinder before this Bench on this aspect of the matter and hence the plea of the Revenue stands accepted by the assessee. 18. The learned special counsel for the Revenue submitted that the learned Commissioner of Income-tax (Appeals) calls for copies of unredacted documents (para 8 of his order) and records the non-compliances of the details called for (para 9.3.8) and quotes as under : "The appellant submitted the amounts in agreement filed have been erased due to confidentiality of the information and the said information cannot be furnished." 18.1. He submitted that the learned Commissioner of Income-tax (Appeals) thereafter at paras 12 and 12.1 of ....
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....relating to transactions or a group of transactions. 18.5. The learned special counsel for the Revenue submitted that an attempt was made by the assessee to show the amounts recorded in one of the original agreements and it was suggested that the counsel of the Revenue may also have a look at the same. It was pointed out by the Revenue's counsel that the issues raised in this appeal cannot be addressed by merely having a "Darshan" of the erased portions of the agreement. These erased amounts in different agreements needed to be perused and carefully analysed to determine the true nature of operation and consequential the nature of receipts since these are very much relevant. 18.6. The learned special counsel for the Revenue submitted that as a first step, it is absolutely necessary to ascertain the price of engine and the actual amount of credit/discount that they received from International Aero Engines with reference to different aircrafts (with International Aero Engines). This analysis would show whether the credits were in the form of discounts or by way of any incentive or grant or subsidy as the case was made out before the co-ordinate Bench of the Tribunal in the pr....
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.... learned special counsel for the Revenue submitted that in the course of oral arguments, the assessee has pointed-out that the copies of these agreements have been provided to the Directorate of Enforcement ("DE") with the request that these may not be given to any other agency. This is quite a fair approach. It is difficult to understand as to how the assessee decided to take a totally different approach before the learned Commissioner of Income-tax (Appeals) and declined unequivocally to file the unredacted documents. The documents could have been filed with a similar request and pointing-out the need for maintaining the confidentiality and the tax authority would have certainly taken note of such a request as has been done by the Directorate of Enforcement. However, having taken a different stand, the assessee is now turning around to say that these redactions were not relevant for the deciding the issue. This is a totally, untenable proposition. He submitted that if a taxpayer chooses to withhold a document or some parts of it, the consequences have to follow. It is not open for the taxpayer to dictate that the nature of the credit has to be accepted only with reference to what....
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.....1. The learned special counsel for the Revenue submitted that capital gain can be charged where there is transfer of a capital asset. By entering into purchase agreement with Airbus the assessee acquired a valuable right which would be a capital asset being a commercial right. Since the purchase price was agreed to the assessee was under the obligation to pay such price to Airbus at the time of delivery. By the deed of assignment, the assessee transferred such rights in favour of the lessors. The lessors make the payment and discharge the liability which the asses see had to Airbus. This amount paid by the lessors represents a consideration as the taking over of a liability amounts to a consideration. 19.2. He submitted that there cannot be hardly any room for dispute that right to purchase the title of the aircraft was an intangible asset in the nature of a valuable commercial right, such right was extinguished in favour of the lessors, the consideration in the form of extinguishment of the obligation to pay the purchase price to Airbus flowed from the Lessors and therefore all the elements to chargeability to capital gains are present in the transaction and the findings of the....
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....very logical assumptions and reasoning ought to be upheld. 21. So far as the issue relating to disallowance of the expenditure by way of supplementary lease rental is concerned, the learned special counsel for the Revenue submitted that the Assessing Officer disallowed the amount .of supplementary lease rental under section 40(a)(i) of the Income-tax Act, 1961 for the failure of the assessee to deduct tax under section 195, as according to the Assessing Officer, this amount of supplementary lease rent was chargeable to tax in India in the hands of the lessors. The learned Commissioner of Income-tax (Appeals) follows the order of the Tribunal for the assessment year 2007-08 and the decision in the cases of Sahara Airlines Ltd. [2002] 83 ITD 11 (Delhi-Trib) and Jet Lite (India) Ltd. v. CIT [2015] 379 ITR 185 (Delhi). However, he goes on to observe that the liability of the assessee is limited to reserve account which is created and then the amount is reimbursed out of the said reserve. He records a finding that supplementary lease rentals are reimbursable and the same cannot be allowed as an expenditure in the hands of the assessee. He further goes on to observe that decisions in th....
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....nance lease. The credits have accordingly been shown in the accounts as income from other sources. 21.4. The learned special counsel for the Revenue submitted that 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 Avoidance Agreement. Hence, the tax was liable to be deducted under section 195. The failure to deduct tax has rightly invited the consequence under section 40(a)(i) as held by the Assessing Officer. The objection of the assessee during the course of hearing that article 11 having not been invoked by the Assessing Officer or the learned Commissioner of Income-tax (Appeals), it was not open for the Revenue to urge the application of this article. However, the applicability of section 195 read with section 40(a)(i) of the Income-tax Act, 1961 is in dispute and the issue before the Tribunal is- whether any amount of tax was deductible under section 195 and whether any disallowance under section 40(a)(i) can be made or not ? 21.5. Therefore, the broad question is whether the income of the lessors from lease rentals is chargeable to t....
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.... for the assessee in his rejoinder submitted that at page A, i. e., in a diagrammatic presentation the learned Departmental representative has not correctly portrayed the actual sequence of events. It is erroneously presumed in this flow chart that assessee "negotiates the price of engines with International Aero Engines and, therefore, the same is incorrect. He submitted that the assessee has never negotiated price of engines with International Aero Engines. Airbus has directly negotiated the price of engines with International Aero Engines and International Aero Engines directly raises invoice/or engines on Airbus. Referring to paper book at page 178, para B of the Revenue's paper book, he drew the attention of the Bench to the following : ". . . Administratively, International Aero Engines will invoice Air bus for engines delivered for installation on aircraft in accordance with the terms and conditions of International Aero Engines's contract with Airbus . . ." 22.1. He accordingly submitted that the terms of arrangement between Airbus and International Aero Engines are not known to the assessee as it is not a party interested therein. He drew the attention of the B....
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.... is not alleged to be collusive (because it cannot be). In the absence of such an allegation and its substantiation a different reading is not permissible. 22.5. The learned counsel for the assessee while arguing that the receipts from International Aero Engines are capital in nature referred to page 400 of the paper book and submitted that the unamortised credits are shown in balance-sheet, annexure-2.10 as "other current assets" (page 400 of the paper book). He submitted that it is incorrect to say that the agreements do not show the genesis of the credits. The agreements say that and this is noted by the Tribunal in its order for the assessment year 2007-08. He submitted that the credits are consideration for selection of engines. It will be factually incorrect on part of the Department to submit that receipts are not a consideration for selection of engines. He accordingly submitted that the submission now being made by the learned Departmental representative at page 2, para 10 are not only contrary to the above conclusion of the Tribunal, but also contrary to findings recorded by the learned Com missioner of Income-tax in his order under section 263 of the Income-tax Act, 19....
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....e agreements in his paper book. In none of these agreements there has been an understanding/negotiation between the assessee and International Aero Engines vis-a-vis price of engines. (Refer para 1 above). (iv) In para 8 at page 3 a new argument is being raised conjecturing that may be the aircraft price agreed between the assessee and Airbus differs from the price actually paid by the lessor. There is no basis for this. In facts in paragraph 12 at page 4, the Revenue accepts the correctness of books of account. Nature and quantum are two separate things. Figures would only establish the quantum, nature of transaction has to be gathered from the terminology used in the agreements and on this it is no redaction. 24. So far as the arguments of the learned Departmental representative that the assessee is not willing to furnish the actual entry in books of account for accounting of credits is concerned, he submitted that the Tribunal wanted to know the type of accounting entries passed by the assessee in its books of account, as such the accounting entries was explained with the help of a notional transaction. Thereafter, no further information was called upon by the hon'ble Ben....
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....revalent in the industry and is duly sanctioned by the official document on record of the International Air Travel Association (IATA). He submitted that the time lag between the letter of intent, the agreement with International Aero Engines, and the purchase agreement is evident from para 3 of the Department's counter reply. Letter of intent is dated June 29, 2005, the agreement with the engine manufacturer is October 19, 2005, followed by a purchase agreement with the aircraft manufacturer dated November 18, 2005, he submitted that the agreements are with different parties, each of which, is independent of the other. Rights, obligations, responsibilities and duties flow from each of the agreements and do not overlap. Each party is to dis charge its own obligations independent of what has been contracted with the other party. He submitted that the letter of intent was important, because without the right emanating from the negotiations with the Airbus for purchase of the aircraft, there was no locus standi to exercise a meaningful option for purchase of one out of the pre-approved group of engines for the aircraft manufactured. In lieu of the option exercised in favour of the ....
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....correct. 26.4. He submitted that it is trite that ignoring commercial realities is not within the domain of the Revenue. The Revenue cannot direct, instruct or enforce what it feels is commercially correct. The commercial expediency is best left to the acumen of the businessman without any discretion to interfere given to the Revenue. Inroads had to be statutorily created (like section 40A(2)). No suppositions, no conjectures and no surmises need be or can be substituted. Moreover, despite repeated assertions, both oral and in writing, the Revenue seeks to overlook and ignore the clear law laid down by the jurisdictional court as well as the hon'ble Supreme Court as to how agreements between parties are to be interpreted. He submitted that credits are admittedly given by International Aero Engines. Why would the engine manufacturer given credit for a bulk purchase acquisition of air craft's ? Can the aircraft be purchased without the engine ? If the agreement was only to purchase an aircraft along with the engine embedded therein how can the Department treat the airframe and the engine as separate for the purposes of purchase ? If everything was to be supplied by Airbus-i....
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....ceived from International Aero Engines. Presuming that the agreements are composite, it is then erroneously stated that credits are in nature of "discount". He sub mitted that it was held by the Tribunal in the assessment year 2007-08 credits from International Aero Engines were received for selection of its engines in preference to its competitors. For this, an agreement dated October 19, 2005 was executed between the assessee and International Aero Engines. This fact is also accepted by the Assessing Officer at page 2 of his order wherein he observed that : "As a consideration for selection of the IAE engines to be fitted in the aircraft to be purchased by the company, certain credit allowable to the assessee-company from International Aero Engines on the delivery of such aircraft." 26.7. The learned senior counsel for the assessee drew the attention of the Bench to the written synopsis of the learned Departmental representative where he states that letter of intent is not a purchase agreement, but, only an "Expression of Intent". However, then at same submission he states that the preamble of agreement with International Aero Engines notes that the assessee has agreed to pur....
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....the parties as under :- "Whereas, Airbus is a leading manufacturer of commercial air planes ; Whereas, InterGlobe Aviation has been granted the Initial No Objection Certificate No. AV.13016/1/2004-DT dated April 15, 2004 (copy attached hereto as annexure A) by the Government of India to operate Scheduled Air Transport Services (Passenger) in India and InterGlobe Aviation proposes to launch the commercial operations of an airline in the name and style of "IndiGo". Whereas, InterGlobe Aviation, to enable it to commence its operations of IndiGo at the earliest, desires to purchase from Airbus and Airbus desires to sell to InterGlobe Aviation, in a phased manner, one hundred (100) commercial operations of the A320 family of aircraft, subject to the terms and conditions of this letter of intent. Now therefore this letter of intent witnesses and records the intention of the parties as follows : 1. Scope Airbus herby records its intention to manufacture, sell and deliver one hundred aircraft of the A320 family designated as A319-100 (hereinafter designated the 'A319 Aircraft') or A320-200 (hereinafter designated the 'A320 Aircraft') or the A321-200 (hereinafter....
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.... for purchase of air craft, there was no locus standi to the assessee to exercise a meaningful option for purchase of one out of the pre-approved group of engines for the Airbus aircraft. 28.5 We find after giving a firm commitment to Airbus to acquire 100 aircrafts, the assessee then went on engine shopping and selected International Aero Engines as a preferred choice. We find an agreement dated October 19, 2005 was executed between the assessee and International Aero Engines, the recital clause of which reads as under :- "'IAE International Aero Engines' (IAE) understands that Indigo ('IndiGo') an airline to be operated by InterGlobe Aviation Private Limited has agreed to purchase from. Airbus SAS ('Airbus') one hundred (100) new Airbus A320 aircraft powered by V2527-0-A5 engines (the 'firm Aircraft'), This agreement is intended to provide IndiGo with information to support the purchase of the firm aircraft, to be powered by IAC V2527-A5 engines ('V2527A5 Engines' or 'Engines'). . . . International Aero Engines is confident that the V2527-A5 engine will provide significant benefits to IndiGo, and welcomes the opportunity to ....
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.... Accordingly, shipset pricing is summarized as follows : Aircraft type Engine type Thrust rating q Credit per shipset A320 V25727-A5 27,000 lbs $ A319 V2524-A5 24,000 lbs $ A321 V2533-A5 33,000 lbs $ The credits per shipset set forth above are stated in January 2005." 29. We find from the above agreement entered into with the engine manufacturer that it clearly records that IAE is proposing the V2527-A5 Engine for the IndiGo Fleet Firm Aircraft and therefore "for these reasons" the credits are received by the assessee as consideration for selection of IAE engines. Therefore, the credits are clearly not subsidy. However, the purpose of providing credits is the selection of IAE engines in preference to others and it is only for the choice of the engine that the credit per engine set is given to the assessee by the engine manufacturer International Aero Engines. The benefit provided is termed as fleet introductory assistance (FIA). 29.1 It is one of the submissions of the learned special counsel for the Revenue that under this agreement with International Aero Engines, the assessee has negotiated the price for engines to be manufactured by International Aero Engin....
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....of the agreement, however, it is seen that the credits received in the instant case are for selection of "installed engines" and the only relevant clause under the agreement for this clause is clause A which is already reproduced in the preceding paragraph. We find clause C deals with fleet expansion post 100 aircrafts and clause T' deals with next generation aircraft. Similarly, clause E deals with aircraft model changes/next generation aircraft and clause F deals with spare engine requirements which are not relevant for us for deciding the issue under consideration. The learned special counsel for the Revenue also could not point out as to how these clauses are relevant for deciding the issue of selection of engines as per clause A. Further, it is also to be noted that both the Assessing Officer and the learned Commissioner of Income-tax (Appeals) have not taken this view or support the view as canvassed by the learned special counsel for the Revenue. From perusal of the order of the Assessing Officer at page 2, we find the Assessing Officer in his order has specifically noted as under : "as a consideration for selection of the IAE engines to be fitted in the aircraft to be....
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.... to-the lessor at a lease term of less than ten years, as con templated by V2500SelectTM Option 2a (below), Then International Aero Engines will reimburse the first restoration shop visit rate pay as you go payments made by IndiGo under Option 2b, less the first restoration shop visit rate pay as you go payments that would have been applicable under option 2a, from the actual delivery date of the specific aircraft through to each engines first restoration shop visit, as described in option 2a. In addition, and at each engine's first restoration shop visit, International Aero Engines will credit IndiGo a fixed amount of $ per engine for interest during the period of pay as you go payments to International Aero Engines under Option 2b. This credit may be used by IndiGo for V2500SelectTM payments, or for the purchase of V2527-A5 spare parts, tooling, and services from International Aero Engines. As further clarification, IndiGo may opt not to use the pay as you go option and instead will meet the alternative obligations in the lease facility." 29.6. Similarly, the exhibit-G copy of which is placed at page 206 of the paper book reads as under :- "Lease facility for up to tw....
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....nstalled engines. We find clause 2 of this agreement provides for mechanism in which the fleet introductory assistance (FIA) stipulated in clause "A" of agreement dated October 19, 2005 will be provided to the assessee. The condition stipulated is taking delivery of aircraft. 29.10. We find after having selected the engines, the assessee there after finalized its purchase agreement with Airbus as per purchase agreement dated November 18, 2005, copy of which is placed at pages 1 to 172 of the paper book. As per this agreement, the aircraft is designated as under : "Aircraft means either an Airbus A319-100 or an Airbus A320-200 or an Airbus A321-200 aircraft including the airframe, the propulsion systems, and any party, component, furnishing or equipment installed on the aircraft on delivery under the terms and conditions of this agreement." 29.11. The basic price has been defined as under : "Basic price means the sum of the airframe basic price and the pro pulsion systems basic price." 30. We find article 1 of this agreement records an understanding of purchase and sale wherein Airbus shall sell and deliver and the assessee shall buy and take delivery of 100 aircrafts on th....
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....been given an option to assign its right to purchase the aircraft for the purpose of availing of finance. For this purpose 21 of the agreement which is relevant reads as under :- "21. Assignments and transfers 21.1 Assignments by buyer Except as hereinafter provided, the buyer may not sell, assign, novate or transfer its rights and obligations under this agreement to any person without the prior written consent of the seller, which shall not unreasonably be withheld. 21.1.1. Assignments for pre-delivery financing The buyer shall be entitled to assign its rights under this agreement at any time in order to provide security for the financing of any pre-delivery payments subject to such assignment being in form and sub stance acceptable to the seller. 21.1.2. Assignment for delivery financing The buyer shall be entitled to assign Its rights under this agreement at any time In connection with the financing of its obligation to pay the final price subject to such assignment being inform and sub stance acceptable to the seller. 21.2. Assignments by seller The seller may at any time sell, assign, novate or transfer its rights and obligations under this agreement to any p....
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....the assignment of the right of the assignor to take title to the aircraft pursuant to the manufacturer purchase agreement on the terms and conditions in this agreement, the purchase agreement assignment and the consent and agreement ; and (C) the assignee has agreed to lease, and the assignor has agreed to take on lease, the aircraft on the terms and conditions set out in an aircraft lease agreement between the assignee and the assignor dated the same date as this agreement (the lease agreement). . . . 2. Agreement to assign 2.1 Agreement 2.1.1 Upon and subject to the terms and conditions of this agreement and in consideration of the assignee agreeing to pay the lessor's cost in accordance with the terms of the purchase agreement assignment, the assignor agrees to assign to the assignee the assignor's right to take title to the aircraft by executing the purchase agreement assignment and the consent and agreement. 2.1.2. Upon and subject to the terms and conditions of this agreement, the assignee agrees to execute 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 a....
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....). The Assessing Officer also in his order accepts that the ownership of the aircraft is with the lessor and that the depreciation on these aircrafts, where the engine supplied by the International Aero Engines is fitted, is claimed by the lessor. We find the learned Commissioner of Income-tax (Appeals) has also not disputed this fact and have held that "since, the delivery schedule of aircraft spread-over a very long period, the appellant normally replaces its old fleet with new fleet, after the expiry of the 'lease period' which is usually six year". 30.5. We find the learned special counsel for the Revenue has also drawn our attention towards agreement dated March 30, 2006 for general terms of sales executed between International Aero Engines and the asses see (paper book pages 257 to 386). A perusal of the agreement shows that "International Aero Engines will supply to IndiGo V2500 engines, modules, spare parts, special tools, ground equipment and product support services for the support and operation of V2500 engines". Purpose of this agreement is therefore provision of spare engines, spare parts and support services. Similarly, as regards fleet hour agreement dated ....
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....e agreement with Airbus which is dated November 18, 2005. The agreements are with different parties each of which is independent of the other. The rights, duties obligations and responsibilities flow from each of the agreements and do not overlap. We find, as per the agreement, each party is to discharge its own obligations independent of what has been contracted with other party. A perusal of the agreement shows that International Aero Engines cannot sue Airbus under agreement dated November 18, 2005 and similarly, Airbus cannot sue International Aero Engines under agreement dated October 19, 2005. We find, neither, there is any allegation nor any material brought before us that the agreements or trans actions are either sham, dubious or colourable. 31.2. We find the hon'ble Delhi High Court in the case of Bhagat Construction Co. (P.) Ltd. v. CIT reported in [2001] 250 ITR 291 (Delhi), has held that a colourable transaction is one which is seemingly valid, but a feigned or counterfeit transaction entered into for some ulterior purpose. A conclusion about the nature of a transaction, i. e., whether it is colourable or otherwise, if supported by material or evidence is essenti....
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....-settled of law that in revenue matters, when the authorities are called upon to construe the terms of a contractor of a grant or any disposition of property, the parties cannot be permitted to resale from the terms of the contract and introduce oral evidence in derogation of the terms thereof. Where the words in a disposition or contract or grant are free from ambiguity, it is always to be construed according to the strict, plain an common meaning of the words them selves. Evidence de hors the instrument for the purpose of explanation it according to the surmised or suppose intention of the parties to the instrument is inadmissible or impermissible to be brought on record. Extrinsic evidence is inadmissible for vary the meaning of the words used in a document. The intention of the parties to a document must be gathered from the terms thereof and the surrounding circumstances attending the execution of the document, but the subsequent conduct of the parties cannot be permitted to show that the intention was different" 31.6. We find, the hon'ble Supreme Court in the case of Vodafone International Holdings B. V. v. Union of India reported in [2012] 341 ITR 1 (SC), has held that....
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....d not discard Westminster but read it in the proper context by which 'device' which was colourable in nature had to be ignored as fiscal nullity. Thus, Ramsay lays down the principle of statutory interpretation rather than an over-arching anti-avoidance doctrine imposed upon tax laws. 62. Furniss (Inspector of Taxes) v. Dawson [1984] 1 All ER 530 (HL) dealt with the case of interpositioning of a company to evade tax. On facts, it was held that the inserted step had no business purpose, except deferment of tax although it had a business effect. Daw son went beyond Ramsay. It reconstructed the transaction not on some fancied principle that anything done to defer the tax be ignored but on the premise that the inserted transaction did not constitute 'disposal' under the relevant Finance Act. Thus, Dawson is an extension of Ramsay principle. 63. After Dawson, which empowered the Revenue to restructure the transaction in certain circumstances, the Revenue started rejecting every case of strategic investment/tax planning undertaken years before the event saying that the insertion of the entity was effected with the sole intention of tax avoidance. In Craven (Inspector ....
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....preciate the submissions made by the learned special counsel for the Revenue that the agreements executed by the assessee with Airbus, International Aero Engines and lessors are composite transactions. Following the legal position narrated above, we have to respect the agreements and the rights and obligations flowing out of it. The terms and conditions in a particular contract/agreement in our opinion cannot be ignored. We, therefore, are of the opinion that the present agreements and transactions thereunder are, not composite, but, have to be viewed and examined individually. C. Purpose and nature of credits received by the assessee and its taxability 32. The next issue to be decided by us is the purpose and nature of credits received by the assessee and their taxability. We have already analysed the relevant agreements above and have come to the conclusion that from clause-A of agreement dated October 19, 2005, it is clear that credits have been received by the assessee from International Aero Engines as a consideration for selection of its 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 c....
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....ed on a current purchase. Whether the credit is more accurately considered related to the current or future purchase needs to be evaluated. Credits may also be offered on future maintenance or other services, in these situations reducing the price of the aircraft may not be the appropriate treatment The contract terms offered should be reviewed and the sub stance of the transaction considered to determine the appropriate accounting. Credits may be monetary, such as a discount or reduction to the purchase price or non-monetary, such as services or future maintenance and both forms should be considered and recognised. Non-monetary credits are typically harder to value and allocate to components. How to allocate credits is discussed further in the Identification of individual components section." 32.1.1. The Tax Department in our opinion cannot ignore commercial realities and that too premised only upon conjectures or surmises. It is not within their domain to do so. The commercial expediency should be best left 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 n....
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.... it is relevant to first consider the business carried on by the assessee. In the case of Van Den Berghs, Ltd. v. Clark (H. M. Inspector of Taxes) reported in [1935] 3 ITR (E.C.) 17 (HL), which was relied on by the learned special counsel for the assessee, it has been held that nature of a receipt may vary according to the nature of the trade in connection with which it arises. It was held in that case that the price of the sale of a factory is ordinarily a capital receipt, but it may be an income receipt in the case of a person whose business it is to buy and sell factories. In the instant case, the assessee before us is engaged in the business of running a low cost airline. Its source of revenue is deriving income from passenger and cargo transportation. The assessee is not engaged in either business of trading of aircraft or business of receiving credits. 32.4. Once, this is made clear, the next question that requires for our examination is as to whether the credits were received 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 couns....
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....employ his circulating capital in buying under them. I am accordingly of opinion that though they may have been of short duration, they were none the less part of his fixed capital'." 33.5. It is an admitted fact that the assessee in the instant case is in the business of operating a low cost airlines. Therefore, the aircrafts are capital assets and not circulating capital. It uses the aircraft to earn revenue. The credits received are not derived from its business activity which is to earn revenue from passenger and cargo transportation, which is a vital fact. Distinction is crucial as highlighted by the hon'ble Supreme Court in the case of Van Den Berghs, Ltd. wherein it has been observed as under : "The agreements formed the fixed framework within which their circulating capital operated ; they were not incidental to the working of their profit-making machine but were essential parts of the mechanism itself. They provided the means of making 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....
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.... charges. In the year of account, the assessee gave 229 new connections and received Rs.12,530 out of which Rs. 5,929 have been regarded as taxable income. In the forms of account prescribed under the Indian Electricity Rules framed under section 37 read with section 11 of the Indian Electricity Act, the asses see credited service connection receipts to the revenue account and debited the corresponding cost of laying service lines to the capital account. But the classification of the receipts in the form of accounts is not of any importance in considering whether the receipt is taxable as revenue. 32.7. The assessee in this case claimed that the amount received by it for service connection from its customers was capital receipt and the hon'ble Supreme Court accepted the contention of the assessee by observing as under : "The assessee contended that the amount paid by the consumers for new connections is capital receipt 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 ....
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....d and to be rendered, but for installation of capital equipment under an agreement for a joint venture. The total receipts being capital receipts, the fact that in the installation of capital, only a certain amount was immediately expended, the balance remaining in hand, could not be regarded as profit in the nature of a trading receipt. On that view of the case, in our judgment, the High Court was in error in holding that the excess of the receipts over the amount expended for installation of service lines by the assessee was a trading receipt." 32.8. In view of the ratio laid down by the hon'ble Supreme Court in the case cited (supra), it is clear that there is a clear distinction between the amounts received which are "related to the business" and amounts received which are "incidental to the business". It is relevant to note that the amounts received as part of service connection 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 ....
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....es or accruing thereon, including the voting rights. In the present case there was a contract between the assessee and the registered shareholders to sell the shares to the assessee with arrear dividends. In other words, the assessee entered into the contract with the registered shareholders not only to purchase share scrips but the dividends which had been declared but not collected by them or paid over to shareholders. As the dividends had been declared long ago there was no uncertainty as to the exact amount receivable in respect of them. It is, therefore, clear that both the purchaser and the vendor knew exactly what sum of money would come to the vendor by way of such dividend. In other words, the purchase consideration included the amount of the arrear dividends and, as the dividends had been declared long ago, there was no uncertainty as to the exact amount receivable 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....
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...., it has been held to be revenue receipt whereas the compensation attributable to a negative/restrictive covenant is held to be a capital receipt as held in Guffic Chem. (P.) Ltd. v. CIT reported in [2011] 332 ITR 602 (SC). Therefore, in order to determine the true nature and taxability of the receipt, we have to take into consideration the nature of business and agreements between the parties and then examine the purpose/object of receipt. It is only then that we examine whether a particular receipt is incidental to the main business or not. In effect, we have to see the purpose/ object for which the payment is received. In our opinion, purpose test is to be applied in the hands of the recipient when taxability of receipt is in dispute and when allowability of expenditure is in dispute, the test is to be applied in the hands of the payer. Once these settled 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 ye....
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....account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form or the mechanism through which the subsidy is given are irrelevant.' 9.1 The learned senior counsel Shri Syali in his arguments has relied upon the decision of the hon'ble Delhi High Court in the case of CIT v. Bougainvillea Multiplex Entertainment Centre Pvt. Ltd. (supra). The importance of this judgment is that in this case after considering the hon'ble Supreme Court's decisions in the cases of Ponni Sugars (supra) and Sahney Steel (supra) and after applying the purpose 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....
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.... is also possible that a multiplex owner may not be able to muster enough viewership to recover all his investments in the five-year period. 34. Seen in the above light, we are of the considered view that it was unreasonable on the part of the Assessing Officer to decline the claim of the assessee about the subsidy being capital receipt. Such a subsidy by its very nature, was bound to come in the hands of the assessee after the cinema hall had become functional and definitely not before the commencement of production. Since the purpose was to offset the expenditure incurred in setting up of the project, such receipt (subject, of course, to the cap of amount and the period under the scheme) could not have been treated as assistance for the purposes of trade. 35. The facts that the subsidy 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, inter....
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....2006. Ironically these agreements were also on records of the authorities below, however, the learned Commissioner of Income-tax instead of appreciating and giving importance to the purpose for which the credits were granted to the appellant, has given undue importance to the fact that ultimately the aircrafts were only taken on lease by the appellant and that the appellant itself credited these receipts by deducting the same from the expense of 'aircraft lease rental' in its profit and loss account decision of Bougainvillea Multiplex Entertainment (supra) clearly holds that subsidy need not be linked to a particular asset Similarly netting off of the proportionate credits with the amount of lease rentals in the profit and loss account of the appellant is 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....
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....come-tax in the impugned order and hold that the credits received by the appellant from International Aero Engines are capital in nature. 9.2. The learned Commissioner of Income-tax (Departmental representative) in his submissions has placed reliance on the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi) to hold that proper enquiries had not been made and, therefore order was erroneous inasmuch as prejudicial to the interests of the Revenue. However, this judgment is wholly inapplicable since, as is evident from facts of present case, wherein the learned Assessing Officer specifically directed the appellant to justify its claim for receipts being capital in nature considering the disclosure made by the appellant in clause 13(e) of the 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 ....
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....ecision of Tara Devi Aggarwal (supra) relied upon by the Commissioner of Income-tax (Departmental representative) is also irrelevant We may make a reference here to the decision of the hon'ble jurisdictional High Court in the case of ITO v. DG Housing Projects Ltd. reported in [2012] 343 ITR 329 (Delhi) wherein the hon'ble High Court has been pleased to hold as under (page 335 of 343 ITR) : '13. The Delhi High Court in Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi), has observed as under (page 386) : "The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be 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....
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....ngs under section 263 of the Act. Action under section 263 is therefore held to be bad in law. Ground Nos. 1 to 1.5 are therefore allowed in favour of the appellant." 32.12 As held above, the lower authorities accept that the assessee is engaged in the business of operating of low cost airline and its source of revenue is to earn income from passenger/cargo transportation. We have already held in the preceding paragraphs that the credits received are not derived from the business activity which is to earn revenue from passenger/ cargo transportation. Therefore, the credits are fleet introductory assistance (FIA) and were received as a consideration for selecting engines of Inter national Aero 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 a....
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..... (supra), that purpose is to be seen for which the amount is received and not the manner or form in which money is provided. 32.15. The doctrine of precedent also requires us to follow the statement of principles in law as laid down by the higher courts. It is the settled proposition of law that under the provisions of the Act all receipts are not taxable. Whether a particular receipt is income or not depends on the nature/purpose of that receipt and the true scope and effect of the relevant taxing provisions. It is trite law that it is the quality of the receipt that is decisive of the character of the payment and not the method of the payment or its measure. It 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 da....
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....has been called may be relevant in determining its true nature, because this gives an indication of how the person who paid the money and the person who received it viewed it in the first instance. The periodicity of the payment does not make the payment a recurring income because periodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain period." 32.19. So far as the decision in the case of CIT v. T. V. Sundaram Iyengar and Sons Ltd. reported in [1996] 222 ITR 344 (SC) relied upon by the learned special counsel for the Revenue is concerned, 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 As....
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....income of the assessee." 32.21. Therefore, in that case, the amounts received to start with was of the Revenue character but not an income at the stage of receipt. However, the subsequent event was of such that a different quality was imprinted on the receipt. In the present case, the assessee is engaged in the business of providing aircraft passenger services. It has already been held by us in preceding paragraph that the aircrafts are part of its fixed capital. At the time of acquisition of aircraft there were options available to the assessee. It may purchase the aircraft out rightly or it may acquire 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....
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....erroneously credited it to the profit and loss account". Similar view has been taken by the hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT reported in [1997] 227 ITR 172 (SC). We, therefore, find merit in the argument of the learned senior counsel for the assessee that accounting policy followed by the assessee is as per industry norms and practices and we, therefore, do not find any merit in the argument made by the learned senior special counsel for the Revenue on this issue. It is, however, 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 s....
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....me-tax (Appeals). However, the learned senior counsel for the assessee submitted that the unredacted copies of agreements were available in the court room, for examination by the Bench, and same were also produced before the Division Bench at the time of hearing of the matter of assessment year 2007-08. However, he requested that such confidential data be protected. We find, the assessee before the Division Bench had also filed a certificate from the chartered accountant confirming that the amounts recorded in the 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 ....
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.... the finding of the learned Commissioner of Income-tax (Appeals) regarding the relevancy of these redactions are concerned, we have already held in the preceding paragraphs that there is no agreement between the assessee and International Aero Engines for purchase of "installed engines" and that credits, are not in the nature of "discount". We have also rejected the argument of the learned special counsel for the Revenue that the transactions between the assessee, International Aero Engines, Airbus 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 ....
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.... 35.2. Once a receipt is capital it is not an income which arises from business. The Assessing Officer in the instant case has also noted in the order of assessment that the assessee-company has been engaged in the business of operating of lowcost airline in India. The assessee is neither a trader of aircrafts nor its engines and is also not engaged in any business of selecting aircraft engines. For the applicability of provisions of section 28(i), it is 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....
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....tion relating to capital asset. The toolings were in the nature of dies. The assessee was a manufacturer of heavy vehicles and jeeps. It required these dies for expansion. Therefore, the import was that of plant and machinery. The consideration paid was for such import. In the circumstances, section 28(iv) is not attracted. Lastly, we may mention that, in this case, AMC agreed to forego the principal amount of loan as a part of takeover 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....
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....bsence of any services being provided by the assessee to International Aero Engines, we do not find any merit in the argument of the learned special counsel for the Revenue on this issue. Moreover, the nature of the receipt is to be examined in the hands of the assessee and not International Aero Engines. For the above proposition, we rely on the decision of the hon'ble Supreme 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,....
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....ned order, the learned Commissioner of Income-tax (Appeals) has held that credits received from International Aero Engines are taxable as income from "capital gains" as per paragraph 10.2.1 of his order which was heavily relied on by the learned special counsel for the Revenue. According to the learned special counsel, the consideration for assignment less cost of 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 contract....
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....d senior counsel for the assessee that under the purchase agreement the assessee was under an obligation to only take delivery of aircrafts. There was no compulsion on the assessee to mandatorily purchase the aircraft. The learned special counsel for the Revenue, in our opinion, has erroneously presumed that "amount paid by the lessors represents a 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....
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....The authorities below did not accept the contention of the assessee that the grant was a capital receipt. Since the capital equipment was acquired by the assessee initially on lease finance basis, the authorities below held that the grant was given to recoup the revenue expenditure incurred by the assessee on acquiring the 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 h....
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....at during the year under consideration, the assessee had incurred an expenditure of Rs. 338,09,64,412 as supplementary rent paid to lessors for air-crafts acquired on operating lease. We have perused the lease agreements enclosed in the paper books filed before us. The assessee in its paper book has enclosed 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) ....
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....e related lessor obligation here under. 3.12.4 Lessor maintenance disbursements (1) If lessee submits to lessor, within sixty (60) days after the completion of the applicable approved maintenance work (except if otherwise agreed between lessor and lessee, it being 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 ....
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....ll moneys due and owing pursuant to section 14.3.2 (ii) as expressly provided in this section 3.12.4 and (in) as expressly provided in exhibit H, and any remaining balances of the maintenance supplemental rent following 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 p....
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....as submitted that the Interglobe's obligation to repair and keep the aircraft in worthy condition could have been discharged by it by either paying directly to the repair agency without 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 conso....
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....rvices being rendered by the lessor in the pre sent case. A co-ordinate Bench of Delhi Income-tax Appellate Tribunal in the case of Sahara Airlines (supra) had considered identical 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 ....
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....e Legislature by amendment made by the Finance Act, 1995 with effect from April 1, 1996. From the perusal of the memorandum explaining the provisions of the 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 provid....
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....see from the airframe reserves for the actual cost of the completed scheduled major structural inspection and rectification of structural 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....
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....ed by the learned Commissioner of Income-tax in the impugned order or by the Assessing Officer in his order 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 perus....
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....ructural/4C/6Y checks of the airframe ("airframe 4C maintenance 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 mai....
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....shipping 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 engine that is repl....
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....he 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 reimbursable. Reimbursement of actual maintenance expenditure if at a....
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.... 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 present case. It is his submission that the definition of royalty under the In....
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....dependent 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 base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or betwe....
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....e 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 Avoidance Agreement. Hence, the tax was liable to be deducted under section 195. The failure to deduct tax has rightly invited the consequence under section 40(a)(i) as hel....
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....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 counsel for the Revenue has filed copies of three lease agreements before us in his paper book. However, from none of these agreements he has been able to demonstrate that the nature of lease is financial leas....