Aircraft overhaul expenses continue to be "Fees for technical services" but not taxable absent source in India
In DIT vs. M/s. Lufthansa Cargo India: TS- 299-HC-2015, the Delhi High Court held that payment made by assessee (an Indian company) to German company for carrying out overhaul repairs to aircrafts was fees for technical services ("FTS") under section 9(1)(vii) of the Income Tax Act, 1961 ("the IT Act") but was not taxable in India as it did not have its source in India in view of clause (b) thereto.
In this case, the assessee, engaged in the business of wet-leasing of aircrafts, had acquired four old Boeing aircrafts from a non-resident company outside India. The assessee was granted the license by the DGCA to operate these aircrafts on international routes only and was obliged to keep the aircraft in flying condition. The assessee's Boeing aircrafts were not used by any other airline in India and there were no facilities in India for their overhaul repairs. According to DGCA directives, various components and the aircraft itself had to undergo periodic overhaul repairs before the expiry of the number of flying hours prescribed for such individual components. Such overhaul repairs were permissible only in workshops authorized for the purpose by the manufacturer as well as duly approved by the DGCA, therefore, assessee's all four aircrafts were wetleased to a foreign company, Lufthansa Cargo AG, Germany (hereafter "LCAG").
The assessee maintained a base at Sharjah where the aircrafts were normally kept and where its crew and engineering personnel were also stationed. The assessee's engineering department tracked the flying hours of every component; and before the expiry of flying hours, the component needing overhaul/repairs or needing replacement was dismantled by the assessee's engineers and flown to Lufthansa Technik's (a German company, hereafter "Technik") workshops in Germany. The parts were supplied by Technik under separate agreement of sale, loan or exchange. In due course, the overhauled component was dispatched by Technik along with airway bill for which the freight was paid by the assessee. The overhauled component were fitted into aircrafts by the assessee's own personnel. Technik carried out maintenance repairs without providing technical assistance by way of advisory or managerial services.
LCAG utilized the aircrafts wet-leased to it for transporting cargo.
The assessing officer held that payments were in the nature of "Fees for technical services" as defined in Explanation 2 to Section 9(1) (vii) (b) of the IT Act, and were, therefore, chargeable to tax on which tax should have been deducted at source under Section 195(1) of the IT Act. The assessing officer further rejected the assessee's plea that the business of aircraft leasing was carried on outside India and the payments made to residents of USA, UK, Israel, Netherlands, Singapore and Thailand could be taxed as business profits only and not as fees for technical services keeping in view the relevant provisions of the Double Taxation Avoidance Agreements ("DTAAs") with those countries.
On appeal, the CIT (A) rejected the assessee's contention that the payments made to the various non-residents for carrying out overhaul repairs were not chargeable to tax. The payments made to Technik were treated as the model for considering the question of taxability of payments made to all other foreign companies. CIT (A) held that such repairs required knowledge of sophisticated technology and trained engineers which were employed by the non-residents for carrying out the overhaul repairs and therefore, constituted "fees for technical services", liable to TDS. With reference to payments made to residents of UK and USA, the CIT (A) held that they were not in the nature of "fees for technical or included services? under Article 12 of the DTAA read with the Memorandum of Understanding with USA which equally applied to the UK Treaty, but business profits not chargeable to tax in the absence of any PE in India. The Revenue went in appeal against the order of the CIT (A) on that point; the assessee appealed against other findings adverse to it, to the Tribunal.
Upon consideration of the wet leasing activity of the assessee and the agreements it entered into with foreign companies, the Tribunal noted that:
- The assessee had to maintain the crew and keep the aircrafts in airworthy state.
- The assessee company earned rental income on block-hours basis.
- The assessee could not wet-lease the aircrafts to a third party without a written permission from the LCAG
- In case of non-utilisation of aircrafts by the LCAG, it had to pay minimum guaranteed rental 240 block-hours per month in accordance with the terms of the contract
- The amount of leasing revenues depended on the number of flying hours utilised by LCAG and not on the value of freight earned by the LCAG
- The assessee was also assured of minimum rental income in the event LCAG does not actually use the aircrafts.
Considering the aforesaid facts, the Tribunal concluded that the sources from which the assessee had earned income was outside India as the income earning activity was situated outside India. Since it was towards the income earning activity that the payments for repairs were made outside India, such payments therefore fell within the purview of the exclusionary clause of Section 9(1) (vii) (b) of the IT Act.The Tribunal thus held that even assuming that the payments for such maintenance repairs were in the nature of "fees for technical services", the same were not chargeable to tax.
On further appeal at the instance of the Revenue, the High Court observed that since the level of technical expertise and ability required in aircraft maintenance and repairs was specific in nature, so much so that the aircraft supplied by manufacturer had to be serviced and its components maintained, serviced or overhauled by designated centres to ensure safe and airworthy aircrafts, therefore, such exclusive nature of services would be regarded as "technical services" falling within the purview of Section 9(1)(vii) of the IT Act.
In respect of the issue regarding taxability in India of payments made by the assessee (i.e., the payments made) towards its activities outside India, the High Court affirmed the view of the Tribunal that since the overwhelming or predominant nature of the assessee's activity was to wet-lease the aircraft to LCAG, i.e., to earn income from operations abroad, the said payment did not have its source in India and was hence not taxable in India for that reason and no TDS was required therefrom.
Liaison and/ or soliciting business services does not fall within the ambit of "Consultancy services"
In the case of CIT vs. M/s Group ISM P. Ltd. : ITA No. 325/2014 (Del), the assessee had made payments to two UAE based companies, namely, CGS International, UAE ("CGS") and M/s Marble Arts & Crafts LLC, UAE ("MAC"), without any deduction of tax at source. The assessing officer disallowed the said expenditure under section 40(a) (i) of the IT Act as the assessee failed to deduct tax at source. On appeal before CIT (A), it was noted that assessee was awarded project management consultancy by the Works Department of the Emirate of Abu Dhabi pursuant to which assessee was required to act as consultant for project management of marble works for Shaekh Zayed Bin Sultan Al Nahyan mosque at Abu Dhabi. The contract required the assesse to organize procurement of marble from India and supervise the processing at Abu Dhabi.
On analysis of the agreements, the CIT(A) noted that MAC received consideration for assistance in documentation, guidance and liaison with various departments towards assisting assessee in its work in UAE and thus were in nature of "liaison services in Abu Dhabi", while payments to CGS International were made to procure clients and market assessee's services as "agent in UAE work" and thus, held that the payments made by assessee to the two UAE entities would not fall within the purview of "technical services", as defined in Explanation 2 to Section 9(1)(vii). The CIT(A) agreed with assessee's contention that Article 14 of DTAA with UAE relating to Independent Personal Services was applicable and that the benefit available under the said treaty cannot be denied on the sole premise that the two UAE entities were companies. The CIT(A) further held that since such remittances to non-resident entities was liable to be taxed in UAE, therefore, no TDS was required therefrom.
On appeal by the Revenue, the Tribunal upheld CIT(A)'s order. Aggrieved by the order of Tribunal, Revenue preferred an appeal before the High Court. Before the High Court, the primary issue raised for consideration was regarding interpretation of the phrase "fees for technical services" as defined in Explanation 2 to Section 9(1) (vii) which defined the same as managerial, technical or consultancy services and whether the so called "consultancy services" rendered by CGS and MAC would fall under the ambit of the said phrase or not. The High Court noted that CGS and MAC, being UAE entities, were not having PE in India, and accordingly, the payments to said entities could only be taxed under section 9 of the Act. The High Court further observed that actual nature of services rendered by CGS and MAC needs to be examined for determination of the requirement of withholding tax. The High Court held that since CGS and MAC acted as agents of assessee for liaison services and/or soliciting business for assessee, such services cannot be said to be included within the meaning of "consultancy services", as that would amount to unduly expanding the scope of the term "consultancy"".
In so far as the applicability of Article 14 of DTAA with UAE relating to Independent personal Services was concerned, the High Court noted that the said Article applied to resident of a contracting state and that "resident of a contracting state" as per UAE Treaty is any person under the laws of that state who is liable to tax therein. It was noted that Article 3(e) of the India–UAE Treaty included a company and that the payee companies were liable to tax under Article 14 or Article 22 of the DTAA in respect of amounts paid by the assessee. It was thus held that Article 14 of the DTAA was applicable.
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