Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income Tax vs Sahara Airlines Ltd. on 12 April, 2005
Equivalent citations: (2005)96TTJ(DELHI)969
ORDER
N.V. Vasudevan, J.M.
1. ITA No. 142/Del/2001 and ITA No. 1143/Del/2001 are appeals by the Revenue against the common order dt. 5th Dec., 2000, of CIT(A)-V, New Delhi, relating to asst. yrs. 1998-99 and 1999-2000, respectively. The assessee has filed cross-objections which are merely supportive of the said order of CIT(A).
2. The ground of appeal of the Revenue in both their appeals, which is a common ground, reads as follows :
"On the facts and circumstances of the case, the learned CIT(A) has erred in directing the AO to exclude the payments of AMTEC, MAS and Lufthansa during financial years 1997-98 and 1998-99 amounting to Rs. 2,19,55,198 from the computation of short deduction."
3. The facts and circumstances under which the aforesaid ground of appeal arises are as follows :
The assessee is a company incorporated in India, which is engaged in the business of running aircrafts for carriage of passengers. Some of the aircrafts, run by it are owned by it whereas the others are taken by it on lease from various non-residents. The assessee had taken two aircrafts on lease for a period of 6 years from ILFC and separate agreements were entered into in respect of each aircraft. The terms and conditions of these agreements are identical. According to Article 1.6 read with Article 5.3 of the agreement, the assessee was required to pay the lease rent @ US $ 2,40,000 per month w.e.f. 31st Dec., 1995, and US $ 2,41,000 per month w.e.f. 1st Jan., 1995. According to Article 1.7 read with Article 5.4, the assessee was also required to pay supplemental rent in the form of reserves @ US $ 234 per flight hour. According to Article 5.4, the supplemental rent is based on the use of the aircraft by the lessee during the lease term. These reserves have been categorised as "airfreight reserves", "engine reserves" and "landing gear reserves". These reserves are created to meet the cost of expenditure incurred by the lessee in respect of the deficiencies and work specified in arts. 13.1 and 13.2. According to Article 13.3, the assessee is entitled to reimbursement from such reserves after the work is completed and the airframe or engine has left the repair agency by submitting invoices and proper documentation in respect of the same. The lessor is required to reimburse within 45 days within the receipt of all the necessary information. According to Article 13.5, the assessee is responsible for payment of all costs in excess of the amounts of reserve. If on any occasion, the balance in the airframe reserve or in engine reserve, is insufficient to satisfy the claim for reimbursement in respect of airframe or the engine, the shortfall is not to be carried forward or made the subject to any further claim for reimbursement. According to Article 13.6, on the termination date of the agreement, if any balance remains in the reserve after meeting the claims of lessee, the same shall be retained by the lessor. In view of these covenants, the AO was of the view that payments made by assessee by way of supplemental rent related to running or operating of the aircraft and not for acquisition of the aircraft and consequently, such payments made after 1st April, 1996, fell within exclusionary provisions of Section 10(15A) of the Act effective from 1st April, 1996, and consequently, such payments were chargeable to tax in the hands of recipient and, therefore, the assessee was liable to deduct tax at source under Section 195 of the Act from such payments made by it under the head "Reserves". However, it was also held by him that no deduction was required to be made by assessee in respect of lease rent since such payment was not chargeable to tax in the hands of recipient in view of Section 10(15A) of the Act. The stand of the assessee before the AO was that even the payments under the head "reserves" were not chargeable to tax in view of Section 10(15A) of the Act inasmuch as such payments did not fall within the ambit of the words "other than a payment for providing spares, facilities or services in connection with the operation of leased aircraft" in definition clause (15A) of Section 10 as substituted by the Finance Act, 1995, w.e.f. 1st April, 1996. However, the AO did not accept this stand of the assessee since he was of the view that the payments by the assessee were for running/operating the aircraft and not for acquiring it. The relevant observations made by AO in paras 10 and 11 are being reproduced as under:
"In the international aviation industry, it is a common practice to provide for such reserves in the agreement. An aircraft is required to undergo some statutory checks after running particular number of flight hours, 'C' check and 'D' check are two such mandatory checks. The aircraft will not be provided with necessary airworthiness certificate by aviation authorities of respective country if such checks are not carried out. These checks are quite expensive, especially, 'D' check. The lessor wants to ensure that the lessee will carry out such check on its aircraft when it falls due. In order to avoid any default by the lessee, the lessor creates a separate reserve, charges some amount from lessee on per flight hour basis and keeps depositing this amount in that reserve. Whenever a mandatory check falls due, the lessee is required to get the respective check done and claim, as reimbursement, the amount spent by the lessee on such check. The reimbursement is limited upto a maximum of the amount lying in that reserve. If the lessee defaults in getting any check carried out in time, then the lessor can call back the aircraft and get the respective check done out of the reserves lying with the lessor. The same is the logic for all types of reserves.
11. From the foregoing, it is very clear that the reserves are meant for maintaining the aircraft and for keeping it in running condition are under no circumstances meant for acquiring it."
Further, he agreed that prior to 1st April, 1996, assessee was not required to deduct the tax at source from any payment made under the agreement, since such payments were not chargeable to tax in the hands of the recipient under the unamended provisions of Section 10(15A) of the Act. He also referred to the provisions of Double Taxation Avoidance Agreement (in short DTAA) with USA. After considering the definition of royalties in Article 12(3) and the definition of "fees for included services" under Article 12(4) of DTAA, he was of the view that recipient was taxable in respect of basic rent as well as the payment of supplemental rent in the form of reserve. Hence, it was concluded by him that since it was disadvantageous for the recipient to be taxed under the provisions of DTAA, the liability to pay the tax should be considered under the provisions of IT Act. In view of such discussion, it was held by him that payments by way of supplemental rent were chargeable to tax under the Act and consequently, assessee was liable to deduct the tax at source under Section 195 of the Act. The alternate stand of the assessee was that AO himself had issued NOC under Section 195 of the Act permitting the assessee to remit the payment without deduction of tax at source. However, this stand of the assessee was rejected by the AO on the ground that AO, who issued the NOCs had no jurisdiction to issue such NOCs since such authority vested only in TDS officer and, therefore, such NOCs were null and void. It was also observed by him that the type of NOCs issued by AO were being normally issued by the Department as per the requirements of the RBI given in their exchange control manual for allowing anyone to remit money outside India and, therefore, such NOCs could not be considered as orders under Section 195(2) of the Act. In view of the above discussions, the AO concluded that assessee had failed to deduct the tax at source which it was liable to deduct under Section 195 of the Act from the payment made by it to ILFC in asst. yrs. 1996-97 to 1998-99. Accordingly, he treated the assessee in default as per the provisions of Section 201(1) of the Act.
4. For the same reasons as given above, the AO considered the appellant as an assessee in default under Section 201(1) of the Act in respect of payment of supplemental lease rent to AMTEC, MAS and Lufthansa vide paras 65 and 66 of order dt. 10th May, 2000. On appeal by the appellant, the CIT(A) cancelled the order of the AO observing as follows :
"As far as the payments to Malaysian Airlines, Lufthansa and Amtech are concerned, I find that the submission of the appellant that the agreements with these parties were approved by the CBDT after 1st April, 1996, is correct. The Dy. CIT has made no discussion in the order under appeal with regard to payments to these parties. From the copy of the orders of the CBDT it is seen that the following have been approved :
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Sl. Name of the Party Date of Amounts as per CBDT Date of No. agreement order CBDT order
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1. Amtec Jet Inc 31.12.1996 US $ 39,000 per month 23.04.1997 US $ 90 per cycle hour 28.10.1997
2. Malaysian Airline 24.11.1995 US $ 4,300 per month 26.07.1997 US $ 90 per flight hour 11.09.1997
3. Lufthansa Technik 26.06.1995 US $ 980 per day 16.12.1996 US $ 145 per cycle hour 14.05.1997
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As the payments are fully covered by the CBDT approvals to all the agreements the same are clearly exempt under Section 10(15A). The Dy. CIT is directed to exclude the same from the computation of short deduction. Appellant gets relief as below :
Financial year 1997-98 (Rs.) 3,67,601 (Amtec)
75,23,420 (MAS)
1,13,28,008 (Lufthansa)
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1,92,19,038
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Financial year 1998-99 27,36,160
5. Aggrieved by the order of CIT(A), the Revenue is in appeal before us. It is not in dispute before us that identical issue had arisen for consideration in respect of supplementary lease charges paid to M/s ILFC and the Tribunal in ITA Nos. 950 to 954/Del/2001 [reported as Sahara Airlines Ltd. v. Dy. CIT (2003) 79 TTJ (Del) 268) in respect of the very same order of the CIT(A) had held that these supplementary lease charges are not taxable in the hands of the recipient and, therefore, there was no obligation on the part of the appellant to deduct tax at source in respect of such payment. The relevant portion of the order of the Tribunal is as follows :
"On merits, the submissions of the rival parties as well as the material placed before us have been considered carefully. A bare reading of Section 201(1) of the Act clearly shows that a person can be said to be an assessee in default if such person does not deduct the tax at source or after deducting fails to pay such tax as required by or under the Act. The provisions for deducting the tax at source are incorporated in Chapter XVII of the Act. In the present case, we are concerned only with the provisions of Section 195 of the Act, relevant portion of which, for the benefit of this order, is being reproduced as under:
'195 (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries') shall, at the time of the credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
(2) Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities and salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the AO to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under Sub-section (1) only on that proportion of the sum which is so chargeable.' The perusal of the above section shows that obligation to deduct the tax at source under this section arises only if the payment is chargeable to tax under the provisions of the Act. So, the crucial question is whether the payments made by assessee to ILFC as supplemental rent under the agreement are chargeable to tax under the provisions of the Act. The stand of the assessee is that such payments are exempt from taxation under the provisions of Section 10(15A) of the Act, while the stand of the Revenue is that such payments fall within the exclusionary provisions of Section 10(15A) of the Act as substituted w.e.f. 1st April, 1996. To appreciate the real controversy, it would be useful to reproduce provisions of Section 10(15A) of the Act as originally inserted and substituted thereafter. The relevant portion of the same are being reproduced as under:
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As originally inserted w.e.f. 24-1-1989 As substituted w.e.f. 1-4-1996
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Any payment made, by an Indian Any payment made, by an Indian
company engaged in the business of company engaged in the business
operation of aircraft, to acquire an of operation of aircraft or an aircraft
aircraft on lease from Government of a the engine (other than a payment
foreign State or a foreign enterprise for providing spares, facilities or
under an agreement approved by the services in connection with the
Central Government in this behalf. operation of leased aircraft) on
lease from the Government of a
foreign enterprise under an
agreement approved by the Central
Government in this behalf.
Explanation : For the purpose of this Explanation : For the purpose of
"foreign enterprise" means a person this clause, the expression "foreign
who is a non-resident enterprise" means a person who is
a non-resident."
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A comparative study of the above provisions shows that payments made for acquisition of an aircraft or an aircraft engine on lease, prior to 1st April, 1996, were exempt from taxation, but from 1st April, 1996, the legislature has excluded the payments made for providing spares, facilities or services in connection with the operation of the leased aircraft from the ambit of Section 10(15A) of the Act. If the facts of the case are to be brought within the exclusionary provisions of Section 10(15A) of the Act, then it must be shown that payments are not only in connection with the operation of the aircraft but also such payments relate to the supply of spares or provisions of facility or service provided by the lessor. In our considered opinion, there must exist inextricable link between the above two requirements. Therefore, in order to resolve the controversy before us, it would be useful to go through the relevant terms and conditions of the agreement between the assessee and ILFG which are being reproduced as under: ...."
After analysing the terms of the agreement between the parties, the Tribunal further concluded as follows :
"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 airworthy 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 it in the manner it liked and, therefore, (it) 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 of the assessee and such obligation could be discharged either by paying directly to the repair agency without involving the lessor or by the manner as provided in Article 13 of the agreement. Such agreement was made only to ensure that the leased aircraft is kept in airworthy condition. If the lessee fails to maintain the aircraft in good condition, then the lessor, in such cases, could get the aircraft repaired out of the reserves. Further, the quantum of reserve depends upon the period of use of the aircraft and the right of reimbursement is only limited to the extent of reserve only. If the cost of repair exceeds the reserve, then such liability has to be borne by the assessee only.
In view of the above discussion, it is clear that the supplemental rent was paid and kept in the form of reserves only for meeting the expenditure which was to be incurred by the lessee to keep the aircraft in airworthy condition. Therefore, we are in agreement with the contention of the learned senior Departmental Representative that the payment by the lessee by way of supplemental rent was in connection with the operation of the leased aircraft. But, that is not enough for holding that such payment fall within the exclusionary provisions of Section 10(15A) of the Act. In order to fall within the ambit of such exclusionary provisions, there must exist the inextricable link between the expenditure regarding supply of spares or for use of any facility or for rendering of any service by the lessor and operation of the leased aircraft. Article 13 of the agreement does not provide for utilisation of reserve either for the supply of any spare parts or for utilisation of any facilities or for rendering of any services by the lessor. On the other hand, the terms of the lease clearly provide that it is the absolute responsibility of the lessee to bear all the expenses and the losses during the operation of the leased aircraft. It is not the case of the Department that the lessor provided any spares to the lessee against such payments. Further, there is no material/evidence to suggest that the lessor ever provided for any of facility or service to the lessee against such payments. Merely because that the payment of supplemental rent was to meet certain types of operational cost, it cannot be said that such payment was attributable to any facility or service by the lessor.
At this stage, we may like to mention that Section 10(15A) of the Act, as originally inserted, exempted from taxation the payments made for acquiring the aircraft on lease from Government of a foreign State or a foreign enterprise under an agreement approved by the Central Government. Admittedly, the agreement in question dt. 30th Sept., 1994, was approved by the Central Government under Section 10(15A) of the Act. It is also not in dispute that prior to 1st April, 1996, the entire payment including the supplemental rent under the agreement was exempt and the assessee was not required to deduct any tax at source under Section 195 of the Act from such payment. This is also apparent from the observations of the AO in para 15 of his order to the following effect :
'However, the effect of taxation of payments made by the assessee to ILFC changed materially after the said amendment. Under the same agreement which was approved by CBDT, whereas all payments were covered under Section 10(15A) before 1st April, 1996, the payments made on account of 'Reserves' became taxable thereafter.' So, it is clear from the above discussion that the supplemental rent was covered by the provisions of Section 10(15A) of the Act as originally inserted and, therefore, it can be said that such rent was connected with the acquisition of aircraft on lease.
So, the question that arises is as to what was intended to be excluded by the legislature by amendment made by the Finance Act, 1995, w.e.f. 1st April, 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 crewmen, providing technicians, etc. in the guise of leased rent. It is this mischief which was suppressed by the substitution of Section 10(15A) w.e.f. 1st April, 1996. This is manifest from the memo explaining the proposed Finance Bill, 1995. The relevant portion is quoted below [(1995) 212 ITR (St) 351].
'Restricting the scope of income-tax exemption on payments to foreign enterprises for acquiring aircraft on lease.
Under the existing provisions of Clause (15A) of Section 10 of the IT Act, income-tax exemption is provided on any payment made by an Indian company, engaged in the business of operation of aircraft, to acquire an aircraft on lease from the Government of a foreign State or a foreign enterprise under an agreement approved by the Central Government in this behalf. The provisions of Clause (15A) of Section 10, as at present, are being used for obtaining income-tax exemption not only on payments in respect of lease rental of the aircraft but also on payments for maintenance of leased aircraft, supply of spares therefor, provision of the services of pilots and other members of the crew along with the aircraft and for the training of the pilots and other crew members. The payments for the aforesaid services provided by the foreign enterprises would normally have been liable to income-tax, if these services were not provided under the lease agreement. The tax avoidance, as aforesaid, needs to be checked.
The Bill, therefore, seeks to substitute Clause (14A) of Section 10 by a new clause. The new Clause (15A) seeks to restrict the scope of the aforesaid income-tax exemption by excluding therefrom payments made for providing spares, facilities or services in connection with the operation of the leased aircraft.
The proposed amendment will take effect from 1st April, 1996, and will, accordingly, apply in relation to asst. yr. 1996-97 and subsequent years.' From the above, it is crystal clear that the intention of the legislature was to tax the payment made for spares, facilities or services provided by the recipient. Therefore, the change in the law has to be understood in that context. So, if any payment has to be brought within the exclusionary portion of Section 10(15A) of the Act, then it must be established (i) that lessor either had supplied the spares or provided any facility or service in connection with operation of the leased aircraft; and (ii) the payment has been made by the lessee in consideration of such spares/facilities/services. Once it is agreed that the supplemental rent was within the ambit of original provisions of Section 10(15A), then the onus is on the Revenue to establish that such supplemental rent fell within the ambit of such exclusionary provisions. The learned senior Departmental Representative has not been able to point out any of the terms of the agreement on the basis of which it can be said that lessor was required to provide for spares, facility or services in connection with the operation of the leased aircraft. He has also not brought any material or evidence to suggest that lessor in fact supplied any spare or provided any facilities or service whatsoever in connection with the operation of the leased aircraft. Therefore, we are in complete agreement with the contention of the learned counsel for the assessee that the supplemental rent did not fall within the ambit of the exclusionary provisions of Section 10(15A) of the Act. Since prior to 1st April, 1996, such payments were covered by the main provisions, as originally inserted, it can be said that such payments continued to be exempt under Section 10(15A) of the Act. Consequently, the same was not chargeable to tax and, therefore, there was no obligation on the assessee to deduct the tax at source under Section 195 of the Act. The question of holding the assessee as an assessee in default under Section 201(1) of the Act, therefore, does not arise. Accordingly, we set aside the orders of CIT(A) on this issue and delete the demands raised for financial years 1996-97 to 1998-99 with reference to the payments made to ILFC.
Before parting with this issue, we may like to mention that the learned counsel for the assessee has also advanced arguments to the effect (i) that even assuming that payments to ILFC were chargeable to tax, no tax was payable in view of the provisions of Double Taxation Avoidance Agreement (in short DTAA) between India and USA; (ii) that even assuming that the payment on account of supplemental rent was not exempt under the provisions of DTAA, no demand could be raised against the assessee since the AO himself had issued NOC under Section 195(2) and permitted the assessee to remit the payment without deducting the tax at source; and (iii) that if any tax was leviable, the AO had grossly erred in grossing up the rate of tax. The learned senior Departmental Representative has also advanced counter-arguments in respect of such contentions. Since the assessee has succeeded on the main contention, it is not necessary for us to express any opinion with reference, to the above contentions of the parties."
6. The above line of reasoning will apply to the payments by the assessee to AMTEC, MAS and Lufthansa also, as the terms of the agreement with these parties and the nature of payments to these parties are also identical. Respectfully following the order of the Tribunal referred to above, we uphold the order of CIT(A) and dismiss this appeal by the Revenue though for reasons stated hereinabove.
7. The cross-objections are only supportive of the order of CIT(A) and, therefore, they are dismissed as such.
8. In the result, the appeal as well as the COs are dismissed.