Income Tax Appellate Tribunal - Mumbai
Airline Rotables Ltd, Mumbai vs Department Of Income Tax on 4 September, 2013
आमकय अऩीरीम अधधकयण "L" न्मामऩीठ भुंफई भें ।
IN THE INCOME TAX APPELLATE TRIBUNAL "L" BENCH, MUMBAI
श्री फी. आय. मभत्तर, न्मायमक सदस्म एवुं श्री डी. करूणाकय याव, रेखा सदस्म के सभक्ष ।
BEFORE SHRI B.R. MITTAL, JM AND SHRI D. KARUNAKARA RAO, AM
आमकय अऩीर सुं./I.T.A. No.6973/M/2011 (AY: 1998-1999)
आमकय अऩीर सुं./I.T.A. No.6974/M/2011 (AY: 1999-2000)
आमकय अऩीर सुं./I.T.A. No.6975/M/2011 (AY: 2000-2001)
आमकय अऩीर सुं./I.T.A. No.6976/M/2011 (AY: 2001-2002)
DDIT (IT)-1(1), फनाभ/ M/s. Airline Rotables Limited,
R.No.117, Scindia House, 1 s t Vs. C/o. M/s. Bharat S. Raut & Co.,
Floor,Ballard Est ate, N.M. Road, Lodha Excelus Apollo Mills
Mumbai - 400 038. Compound, N.M. Joshi Marg,
Mumbai - 400 011.
स्थामी रेखा सुं ./ PAN : AADCA 8054 G
(अऩीराथी /Appellant) .. (प्रत्मथी / Respondent)
अऩीराथी की ओय से / Appellant by : Mrs. Neeraja Pradhan, DR
प्रत्मथी की ओय से/ Respondent by : Mr. F.V. Irani
सनवाई की तायीख /Date of Hearing : 4.9.2013
घोषणा की तायीख /Dat e of Pronouncement : 20. 9.2013
आदे श / O R D E R
PER D. KARUNAKARA RAO, AM:
There are four appeals under consideration. All the four appeals are filed by the Revenue against the different orders of the CIT (A)-10, Mumbai commonly dated 29.7.2011 for the Assessment Years 1998-1999 to 2001-2002 respectively. Since, the issues involved in all the four assessment years are identical, therefore, for the sake of convenience these four appeals are clubbed, heard combined and being disposed of in this consolidated order.
2. As the grounds raised in all the four appeals are identical, the an effective ground raised in ITA No.6973/M/2011 for the AY 1998-1999, which is common for the AYs, under consideration reads as under:
2"1. On the facts and in the circumstances of the case and in law, the Ld CIT (A) has erred in holding that the income is not taxable as royalty as the explanation under which it is taxable is introduced w.e.f. 1.4.2002 which is not applicable for the year under consideration, ignoring the fact that the assessee‟s income is otherwise taxable as per the existing provisions in clause (b) of Sec. 9(1)(vi) of I.T. Act, 1961"
3. Briefly stated relevant facts of the case are that the assessee is a non- resident incorporated in United Kingdom (UK) with the main business object of providing spares and component support for aircraft to aircraft operators. The assessee-company entered into an agreement for providing rotables (aircraft components) to Jet Airways (India) Pvt. Ltd (JA). The assessee-company delivers the consignment stock at the designated location from time to time as provided in the agreement and Jet Airways takes the delivery as a bailee. Assessee filed the return of income declaring the total income of Rs. NIL. After the scrutiny assessment u/s 143(3) of the Act, the total income was determined at Rs. 2,41,26,040/-. In the assessment, AO held that assessee has a PE in India within the meaning of Article-5 of Indo-UK DTAA and held that the 10% of the „global turnover‟ of the assessee from Indian operations is taxable as „business income‟ of the assessee. Matter travelled to the Tribunal on the issues relating to the PE in India and also about the quantification of the income applying the 10% as rate of profit. The ITAT, Mumbai passed an order vide ITA No.3254/M/2006 (AY 1998-1999) dated 21.5.2010. In the order, the Tribunal held that the assessee has no PE in India within the meaning of Article-5 of Indo-UK DTAA. In this regard, Tribunal examined the PE issue from the angles of physical location, subjective criterion and functional criterion etc. Referring to the judgment of the Hon‟ble High Court of Andhra Pradesh in the case of CIT vs. Vishakhapatnam Port Trust (144 ITR 146) and the decision of the Special Bench in the case of Motorola Inc. vs. DCIT (95 ITD 269) (SB), the Tribunal held that the assessee does not have any PE in India. As per the discussion given in para 16, the Tribunal held that "there is no material whatsoever to establish, or even indicate, that Jet Airways or its staff constitutes dependent agent of the assessee company".
4. Further, Tribunal ruled out the applicability of Article 5(5) of the Treaty to the instant case. Thus, the Tribunal‟s conclusions were given in para 17 which read as under:
3"17. In view of the above discussions, we are of the considered opinion that the assessee company did not have any PE in India, and, accordingly, the entire income attributable to the India operation could not have been taxed in India. The grievances raised against qualification of income attributable to the PE, under Article 7(1), are thus rendered in fructuous. To that extent, we uphold the grievance of the assessee and vacate the orders of the authorities below."
5. However, on the taxability of the impugned payments, Tribunal observed that the absence of PE in India and consequently, the inapplicability of Article-7(1) of the Treaty, is not the end of the road. Thus, on the aspect of the absence of PE, Tribunal granted the relief to the assessee. However, before parting with the order, the Tribunal opined that it is possible while the consideration for use or right to use the consignment stock of equipment may become taxable under Article-7(1) read with Article-13. The Tribunal underlined the lacunas qua the applicability of the provisions of Article-13(3)(b) of the Treaty. In this regard, relevant opinions of the Tribunal are significant here and same read as under:
"18. We may, however, add that while the consideration for use of right to use the consignment stock of equipments is taxable under Article 7(1) read with Article 13(6). In a situation when the assessee has a PE in the other contracting state, even when the assessee does not have a PE, its taxability is still required to be considered in the light of Article 13(3)(b) on gross basis. Therefore, our finding is that the assessee did not have a PE in India, by itself, would not take the assessee out the ambit of taxability in India. Having held that the assessee had a PE in India, the authorities below were not required to give a finding on that aspect of the matter because even if a part of receipts of the assessee company was found to be for use of or right to use of, any "industrial, scientific or commercial equipment"
covered by the Article-13(3)(b). In a situation in which PE can be said to exist, such consideration was taxable, on net basis, under Article-7 as was done in the present case."
6. Finally, for the purpose of examining the applicability of the provisions of Article-13 in general and Article-13(3)(b) in particular, the matter was remitted to the files of the CIT (A) for limited adjudication on this aspect of the matter. The specific directions in this regard are containing in prara 20 of the Tribunal‟s order which read as under:
"20. For the reasons set out above, we are not inclined to uphold the orders of the authorities below on the issue of existence of the Permanent Establishment and for quantification of taxable income. The matter, is however, remitted to the file of the CIT (A) for adjudication on the question of taxability, if any, of consideration for use, or right to use, of industrial, scientific or commercial equipment contained in the payments made by the airlines to the assessee-company. We make it clear that our above observations should not influence the decision of the CIT (A) on merits of this 4 issue and that the CIT (A) will decide the matter in accordance with the law, by way of a speaking order and after giving due and fair opportunity of hearing to the parties. We direct so."
7. Subsequently, against the above directions of the Tribunal, assessee filed a Miscellaneous Application vide MA No.471/M/2010 dated 23.7.2010. Vide the Tribunal‟s order dated 28.2.2011 the MA was dismissed. During the Miscellaneous Application proceedings, it was contended that "the consideration for use of replacement of components is distinct and separate is in contradiction with our direction to the CIT (A) to consider the matter afresh for taxability under Article-13, and in not limiting such an examination for taxability under Article 13 in respect of such consideration for use of replacement components". The Tribunal dismissed the same. In the set aside proceedings, the CIT (A) heard the assessee as per the procedure laid down and passed the order dated 29.7.2011. During the proceedings, CIT (A) restricted its adjudication to the directions of the Tribunal i.e., if the consideration involved is taxable as "royalty" under the provisions of Article- 13 of the Indo-UK Treaty. During the proceedings before the CIT (A), assessee submitted as under:
"3. Appellant‟s contentions: The AR stated that the receipts of the appellant re composite in nature, in that they cover both the repairs & overhaul as also the replacement of components. A bifurcation on these two counts would not be possible as the entire income of the appellant should be categorized as „business income‟. Hence, treatment of a part of the said income pertaining to use of replaced components cannot be treated as "royalty" under Article 13(3)(b) of the DTAA. She further contended that the observation of the Hon‟ble Tribunal about non-consideration of the royalty matter by the AO would not be factually correct, as the details submission was stated to have been filed before the AO in this regard, a copy of which has now been filed before me.
3.1. Insofar as royalty is concerned, it has indeed been defined as payment of any kind received as consideration for the use of or the right to use, any industrial, commercial or scientific equipment‟ as per Article-13(3)(b) of the DTAA. However, the AR pointed out that the issue of chargeability under the DTAA, comes into picture only after the issue of chargeability under the Income Tax Act, 1961 has been decided against the appellant. She pointed out that there was no equivalent provision in the Act applicable to the assessment year under consideration. Clause (iva) of Explanation- 2 of the second proviso to section 9(1)(vi) of the Act would be the relevant provision in this context. Explanation-2 to section 9(1)(vi) of the Act defines „royalty' exhaustively under several clauses of the said Explanation. Clause (iva) of the said Explanation speaks of „the use or right to use any industrial, commercial or scientific equipment‟. However, as further pointed out by the AR, the said clause has been inserted with effect from 1st April, 2002 and is as such not applicable to AY 2001-2002 which is the assessment year under consideration. In other words, according to her, 5 the said payments made by the JA to the appellant cannot be charged to tax as royalty in the absence of an enabling provision to this effect in the Act."
8. From the above, it is the argument of the assessee that the impugned consideration pertaining to the use of replaced components cannot be treated as "royalty" under the Article-13(3)(b) of the DTAA with UK. Further, it submitted that these profits may or may not attract the provisions of section 9(1)(vi) of the Act where the expression "royalty" was defined exhaustively. However, it is clarified that these provisions of Explanation-2 are inserted w.e.f. 1.4.2002 and therefore, they are not relevant for the AY 2001-2002 and earlier AYs. It is the claim of the assessee that the assessee has not preferred the provisions of the IT Act, 1961. After hearing the assessee and analyzing the provisions of the said Explanation-2 to section 9(1)(vi) of the Act and also the explanatory amendment in respect of the said Explanation-2, CIT(A) held that the said Explanation is not applicable to the AY under consideration. Further, he opined that the provisions of the act shall apply to the extent that they are more beneficial to the assessee, provided, there is a Treaty between the countries involved. At the end, the CIT (A) allowed the appeal of the assessee as per the discussion given in para 4.6 and 4.7 of his order which read as under:
"4.6. It is thus, clear chargeability under the Act is a fundamental pre-requisite for invoking the provisions of section 90 and consequently those of the relevant DTAA. If a certain amount is not chargeable under the Act, it cannot be simply charged under the DTAA. A similar view has been taken by the Hon‟ble Delhi Tribunal in the case of "Intelsat Corporation vs. ADIT-1(2), New Delhi (2011-44-ITAT-Delhi-Intl). It has already been held that the impugned payments cannot be charged to tax under the Act. It is now clear that they can hence not be charged to tax solely under the DTAA.
4.7. In view of the discussion in the preceding sub-paragraphs, I hold that the impugned payments made to the appellant by JA cannot be charged to tax for use, or right to use, of industrial, scientific or commercial equipment under Article- 13 of the DTAA. The sole issue on which the matter had been restored back to my file thus gets decided in favour of the appellant."
9. Aggrieved with the above directions of the CIT (A), Revenue raised the above mentioned grounds questioning the decision of the CIT (A) on the issue of taxing the said consideration as "royalty" under Article-13(3)(b) of the Treaty. The limited issue raised in the ground relates to the applicability of the provisions of clause (b) (it is mentioned as clause (c) in the grounds of appeal which was orally rectified by the Ld 6 DR during the hearing proceedings before us) to section 9(1)(vi) of the IT Act, 1961.
10. During the proceedings before us, Mrs. Neeraja Pradhan, Ld DR brought our attention to the provisions of section 9(1)(vi) of the Act and mentioned that the CIT (A) has not examined the issue in the light of the provisions. Referring to the order of the Tribunal, Ld DR asserted that the CIT (A) should have examined from the point of view of the applicability of all the clauses of Article-13 of the DTAA and took objection to the fact that the CIT (A) examined the directions of the Tribunal only from the angle of the applicability of the Article-13(3)(b). Considering the lacunas allowed by the CIT (A), it is the prayer of the Ld DR that the issue may be remitted once again for adjudication of this issue from the angles of the applicability of all the provisions of Article-13 of DTAA with UK.
11. Per contra, Mr. F.V. Irani, Ld Counsel for the assessee brought our attention to the contents of para 18, where the Tribunal discussed in particular the applicability of the provisions of Article-13(3)(b) of the Treaty. Reading the direction embedded in para 13 to 20 together, the direction of the Tribunal is restricted to the applicability of the Article-13(3)(b) only and not extended to the provisions of the Article-13(3)(a) of the Treaty. Further, Ld Counsel brought our attention to the expressed used in the clause (a) of the Article-13(3) of the Treaty and mentioned that the said clause refers to the payments "for information" concerning industrial, commercial or scientific experience. Referring to the facts of the present case, which involves the payment of consideration for use and right to use of spares and components for aircraft operators in the light of the agreement between the assessee and the Jet Airways Pvt Ltd (JA), Ld Counsel mentioned that the said provisions of Article-13(3)(a) prima facie irrelevant to the facts of the present case. Referring to the contents of the clause-4(a) to explanation-2 to section 9(1)(vi), Ld Counsel mentioned that it is a decided issue for the said amendment made by the Finance Act, 2001 w.e.f., 1.4.2002 i.e., AY 2002-2003. Therefore, it is the prayer of the Ld Counsel that the order passed by the CIT (A) is reasonable and it should not call for any changes. It is also the prayer of the Ld Counsel that the treaty between 7 the India and UK, assessee is under statutory obligation to avail the benefits of the Treaty in preference to the provisions of Income Tax Act, 1961. It is the claim of the assessee that who availed the treaty benefits through the provisions of section 9(1)(vi) should not have thrust on the assessee.
Conclusion:
12. We have heard both the parties on this issue and perused the order of the Revenue and the relevant provisions of the Treaty. It is the case of Ld DR and of course, not of AO / CIT (A) that the impugned payments may be taxable as per the existing provisions of clause (b) of section 9(1)(vi) of the Act. In alternate, it is the claim of the Ld DR that the CIT (A) failed to examine the applicability of Article- 13(3)(a) of the Act too. Therefore, the issue requires revisiting of the file of the CIT (A) for one more round of the first appellate proceedings. On the other hand, It is the case of the assessee that the payments are not taxable under the domestic law for all the four AYs and therefore, the Treaty provisions do not apply. As such, assessee prefers the Treaty provisions as they are beneficial qua the provisions of the domestic law. Further, it is the case of the assessee that the provisions of clause (b) of Article-13(3) does not relate to the facts of the present case as they deal with the use or right to use of the information relating to industrial, commercial or scientific experience. Further, it is mentioned that the CIT (A) has rightly examined the issue as directed by the Tribunal only i.e., from the angle of Article- 13(3)(b) of the Treaty. Paras 18 to 20 of the order of the Tribunal dated 21.5.2010, which is confirmed in the Miscellaneous Application proceedings, is relevant. Therefore, there is no need for revisiting or remanding the matter to the files of the CIT (A).
13. On perusal of the said paragraphs 18 and 20 of the order of the Tribunal in first round of the proceedings, we find the Tribunal is categorical in making a reference to Article-13(3)(b) of the Treaty in a restricted sense. We find Tribunal correctly opined the same considering the special provisions applicable to the impugned payments. Relevant portions from the said paragraphs are extracted as follows:-
8"18. We may however, add that while the consideration for use or right to use the consignment stock of equipments is taxable under Article 7(1) read with Article 13(6). In a situation when the assessee has a PE in the other contracting State, even when the assessee does not have a PE, its taxability is still required to be considered in the light of Article 13(3)(b) on gross basis. Therefore, our finding that the assessee did not have a PE in India, by itself, would not take the assessee out of ambit of taxability in India. Having held that the assessee had a PE in India, the authorities below were not required to give a finding on that aspect of the matter because even if a part of receipts of the assessee company was found to be for use of or right to use of any "industrial, scientific or commercial equipment"
covered by Article 13(3)(b), in a situation in which PE can be said to exist, such consideration was taxable, on net basis, under Article-7 as was done in the present case.........."
19.........In this view of the matter, non-taxability under Article 7 will still mean that application of Article 13 is to be considered and adjudicated upon. However, since the above aspect of matter has not been heard by any authorities below, we deem it fit and proper to remit the matter to the file of the CIT (A) for limited adjudication on this aspect of the matter."
14. From the above, it is clear that the Tribunal‟s direction is restricted to the examination of the applicability of the provisions of Article 13 of the Treaty, in general, and Article 13(3)(b), in particular. Prima facie, we find that the provisions of section 13(3)(a) shall not apply to the case of the assessee as the said clause
(a) deals with situation of payment "for information concerning industrial, commercial or scientific experience". It is also not the case of the Tribunal that the provisions of section 9(1)(vii) should also be examined. Therefore, the scope of remitting the matter to the files of the CIT (A) is restricted to in the said order of the Tribunal. Thus, we find the order of the CIT(A) is reasonable and it does not call for any interference. Accordingly, grounds raised by the Revenue in all the four appeals are dismissed.
15. In the result, all the four appeals of the revenue are dismissed.
Order is pronounced in the open court on 20th September 2013.
Sd/- Sd/-
(B.R. MITTAL) (D. KARUNAKARA RAO)
न्मायमक सदस्म / JUDICIAL MEMBER रेखा सदस्म / ACCOUNTANT MEMBER
भुंफई Mumbai; ददनाुंक Dated 20.9.2013
9
व.यन.स./ OKK , Sr. PS
आदे श की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to :
1. अऩीराथी / The Appellant
2. प्रत्मथी / The Respondent.
3. आमकय आमक्त(अऩीर) / The CIT(A)-
4. आमकय आमक्त / CIT
5. ववबागीम प्रयतयनधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai
6. गाडड पाईर / Guard file.
सत्मावऩत प्रयत //True Copy// आदे शानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीऱीय अधिकरण, भुंफई / ITAT, Mumbai