Income Tax Appellate Tribunal - Delhi
Sahara Airlines Ltd. vs Deputy Commissioner Of Income Tax on 12 February, 2002
Equivalent citations: [2002]83ITD11(DELHI), (2003)79TTJ(DELHI)268
ORDER
K.C. Singhal, J.M.
1. All these appeals were heard together and are being disposed of by the common order for the sake of convenience. The disputes arising out of these appeals relate to demands raised against the assessee under Section 201(1) of IT Act, 1961 (in short 'Act'), pertaining to financial years 1994-95 to 1998-99. The issue arising out of these appeals is whether the assessee was liable and failed to deduct the tax at source under Section 195 of the Act from the various payments made by the assessee to various non-resident parties and consequently, whether the assessee could be considered as assessee-in-default under Section 201(1) of the Act.
2. First, we take up the payments made by assessee to International Leasing Finance Corporation (in short ILFC). 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 r/w Article 5.3 of the agreement, the assessee was required to pay the lease rent @ US 1$ 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 r/w 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 aircraft by the lessee during the lease term. These reserves have been categorised as "air freight 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 payments for providing spares, facilities or services in connection with the operation of leased aircraft" in definition Clause (15A) of Section 10 as substituted by 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 aircarft 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 amounts 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."
3. 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 was chargeable to tax under the Act and consequently, assessee was liable to deduct the tax at source under Section 195 of the Act.
4. 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 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.
5. 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 and raised the demand of tax by grossing up the rate of tax as under:
f.y.
US$ Rate of tax INR Rate of tax Short deduction 1996-97 9,67,015 38 3,67,46,570 55% (122.2% after grossing up) 4,49,11,658 1997-98 8,87,838 40 3,55,13,520 48% (92.3% after grossing up) 3,27,78,979 1998-99 9,25,455 43 3,97,94,505
-do-
3,67,30,384 The above action of AO has been confirmed by the CIT(A).
6. The learned Senior counsel for the assessee Mr. Dastur has vehemently assailed the orders of the CIT(A) as well as the AO by raising various submissions. Firstly, it was contended by him that before an assessee is considered as an assessee-in-default under Section 201 of the Act, it must be shown by the Revenue that assessee was under obligation to deduct the tax at source under Section 195 of the Act which it had either failed to deduct the same or after deducting, failed to pay the same to the Government. He drew our attention to the provisions of Section 195 of the Act to point out that an assessee cannot be held liable to deduct the tax at source unless payment made by the assessee is chargeable to tax under the Act in the hands of the recipient. So it was pleaded by him that if such payments are not chargeable to tax under the Act then the question regarding the liability of assesses to deduct the tax at source would not arise and consequently, provisions of Section 201 of the Act would not apply. He then drew our attention to the provisions of Section 10(15A) of the Act as originally inserted in the statute by the IT (Amendment) Act, 1989, w.e.f. 24th Jan., 1989, which provided that 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 enterprises under an agreement approved by the Central Government, is not to be included in computing their total income. Proceeding further, it was submitted that the agreement between assessee and ILFC, dt. 30th Sept., 1994, was duly approved by the Government of India as required by Section 10(15A) of the Act. He then pointed out that there is no dispute between the assessee and the Department of the fact that all payments made by the assessee under this agreement upto 31st March, 1996, fell within the ambit of the provisions of Section 10(15A) of the Act and, therefore, the assessee was not liable to deduct the tax at source. This is apparent from the order of assessment as demand under Section 201 of the Act has 'been raised with reference to the financial year 1996-97 to 1998-99 only. Proceeding further, it was stated by him that Section 10(15A) of the Act was substituted w.e.f. 1st April, 1996, by the Finance Act, 1995 according to which the payments made for providing spares, facilities or services in connection with the operation of leased aircraft were excluded from the ambit of the main provision of Section 10(15A) of the Act. It was, therefore, conceded by him that payments made after 31st March, 1996, for spares, facilities or services in connection with the operation of the leased aircraft became chargeable to tax in computing the total income of non-resident and consequently, the payer would be liable to deduct tax at source against such payments. But it was strongly contended by him that payments under the agreement as supplemental rent did not fall within the exclusionary provisions of Section 10(15A) of the Act. He took us through the relevant clauses of the agreement and contended that it was the total responsibility of the lessee to keep the leased aircraft in good running condition and the lessor was not required either to provide for spares or to provide any facility of service in connection with the operation of leased aircraft. According to him, a reserve was created only to ensure that lessee keeps the aircraft in goods airworthy condition. Therefore, it was pleaded that the payment was in fact in connection with the acquisition of the leased aircraft and, therefore, AO was not justified in holding that such payment was not connected with acquisition of the aircraft on lease but only for running/operating of the aircraft. If such payment was not for acquiring the leased aircraft then, according to him, the AO should have held the assessee in default for earlier years also. It was further stated by him that the word "acquire" has been used by the legislature with reference to the use of the aircraft and not with regard to the ownership as understood by the AO. It was further submitted by him that there was no material or evidence to suggest that any service or facility was ever provided by the lessor to the lessee. According to him, as and when the lessee incurred the expenditure regarding D-check or C-check etc., the same was reimbursed by the lessor out of the reserve kept with it. In case, if the expenditure incurred by the assessee exceeded the reserve, it was to bear such expenses since the ultimate liability was of the lessee. Therefore, it was pleaded by him that such payments could not be considered towards any facility or service. He also gave an example to the effect that is a hangar is provided by the lessor for parking of the aircraft by the lessee and any payment is made for the same then it can be said that payment was towards the facility provided by the lessor. But according to him, neither such facility nor any service was provided to the assesses by the lessor. Accordingly, it was concluded by him that payments made by assesses as supplemental rent did not fall within the exclusionary provisions of Section 10(15A) of the Act and such payments were still under the main provisions of such section.
7. On the other hand, the learned Departmental Representative Mr. Manoj Mishra has vehemently supported the orders of the lower authorities. It was contended by him that the words "supplemental rent" are misleading in as much as the payments under this head is directly connected with the operation of the aircraft and not for acquiring the same. According to him, the name or label given to a particular payment or entry is not relevant and it is the true nature of the payment which is relevant. In this connection, he relied on the decision of the Supreme Court in the case of CIT v. Durga Prasad More (1971) 82 ITR 540 (SC) and the decision of Andhra Pradesh High Court in the case of CUT v. J.D. Italia (1983) 141 ITR 948 (AP) it was also submitted by him that the Department can always look into the surrounding circumstances to determine the exact nature of the payment. He drew support from the decision of the Supreme Court in the case of Sumati Dayal v. CTT (1995) 214 ITR 801 (SC). According to him, if the expenditure falls within the ambit of exclusionary portion of Section 10(15A) of the Act, then it is immaterial whether the payment is made directly by the lessee or it is reimbursed by the lessor from the reserves. He also drew our attention to the decision of the Supreme Court in the case of K.P. Verghese v. ITO (1981) 131 ITR 597 (SC) for the proposition that in interpreting the provisions of a statute, the speech of the mover of the bill is relevant and, therefore, the speech of the Finance Minister would be relevant in finding out the mischief which was taken care of while substituting the provisions of Section 10(16A) of the Act. In this regard, he also took us through the notes explaining the provisions of Finance Bill, 1995. It was further submitted by him that the words "facility or service" have very wide connotations and would include the expenditure incurred on the operation of the aircrafts. According to him, the creation of reserve was merely a devise to circumvent the provisions of Section 10(15A) of the Act. He drew our attention to the relevant clauses of the agreement to point out that the payment to reserve depended upon the flying hours and, therefore, it was rightly connected with the operation of the aircraft. No payment was to be made if the aircraft was not operated. Therefore, it was concluded by him by submitting that whatever was paid in the guise of supplemental rent was nothing but the payment for the facility or services in connection with the operation of the leased aircraft and, therefore, the case of the assessee would fall within the exclusionary portion of Section 10(15A) of the Act. Consequently, such payment would be chargeable to tax and assessee was, therefore, rightly held as assessee-in-default under Section 201(1).
8. Before adjudicating upon the real issue before us, we may like to mention that AO had acted arbitrarily in raising the demand by applying the rate of tax after grossing up the same. Grossing up of the rate of tax is an alternate method of applying the correct rate of tax which is done only when tax is to be determined with reference to net payment i.e. payment after deducting the tax at source. For example, where rate of tax at which deduction is to be made under Section 195 is 55 per cent then the net payment to the recipient after deduction of tax would be Rs. 45 only out of gross payment of Rs. 100. In such case, the AO may determine the liability of the payer either by applying the rate of tax of 55 per cent against gross payment of Rs. 100 or by applying grossed up rate of 122 per cent against net payment of Rs. 45. By applying either of the methods, the tax liability would be the same i.e. Rs. 55. But in the present case, admittedly, no tax was deducted at source by the assessee and, therefore, the question of grossing up did not arise. But the AO has determined the liability of the assessee by applying the grossed up rate of 122 per cent against the gross payment of Rs. 100 where the rate of tax was 55 per cent. Such arbitrary action of the AO has resulted in illegal demand in crores which tantamounts to harassment to the assessee and, therefore, must be deplored. Surprisingly enough, the CIT(A) also has not corrected such patent mistake of law. These observations are being made so that such arbitrary action is not repeated in future.
9. 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 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 be determined, 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 action 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(15) 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 :
As originally inserted w.e.f. 24-1-1989 As substituted w.e.f. 1-4-1998 Any payment made by an Indian company engaged in the business of operation of aircraft, to acquire an aircraft on lease from Government of a foreign state or a foreign enterprise under an agreement approved by the Central Government in this behalf. Explanation : For the purpose of this clause, "foreign enterprise "means a person who is a non-resident.
Any payment made, by an Indian company engaged in the business of operation of aircraft or an aircraft the engine (other than a payment for providing spares, facilities or service in connection with the operation of leased aircraft) on lease from the Government of foreign enterprise under an agreement approved by the Central Government in this behalf. Explanation : For the purposes of this clause, the expression "foreign enterprise" means a person who is a non-resident.
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 of 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 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 ILFC which are being reproduced as under ;
"The subject-matter of this lease is one (1) used Boeing B-737-400 aircraft which lessee desires to lease from lessor and lessor is willing to lease to lessee.
In consideration of and subject to the mutual covenants, terms and conditions contained in this lease, lessor hereby agrees to lease to lessee and lessee hereby agrees to lease from lessor the aircraft for the lease term and the parties further agree as follows :
5.3 Rent 5.3.1. Lessee will pay lessor the following amounts monthly in advance as rent from the aircraft ("rent"):
Period of lease term Amount of Monthly rent From delivery thru 31st Dec., 1994 Two hundred forty thousand US Dollars (US $ 2,40,000) From 1st Jan., 1995 Two hundred forty-one thousand US Dollars (US $ 2,41,000) 5.4 Reserves 5.4.1 lessee will pay to lessor supplemental rent, based on lessee's use of the aircraft during the lease term, in the form of the following reserves in the following amounts per flight hour (individually, "Airframe Reserves"; "Engine Reserves" and "Landing Gear Reserves", A total of US $ 234, as follows:
Airframe Reserve US $ 80 Engine Reserve US $ 77 per engine per hour Landing Gear Reserve US $ 10 per flight hour commencing on the fifth (5th annual anniversary of the delivery date).
5.4.2. Such reserves will be paid on or before the 10th day of the calendar month next following the month in which the delivery date occurs and on or before the 10th day of each succeeding calendar month for flying performed during the calendar month prior to payment. All reserves for flying performed during the month in which the termination date occurs will be paid on the termination date, unless otherwise agreed by the parties.
5.4.3. No interest will accrue or be paid at any time to lessee on such reserves and, subject to lessor's obligations under art, 13, lessor will have complete and unrestricted use of the reserves (including earning of interest thereon for lessor's account).
5.5. Increased rent for hour/cycle ratio : In the event in any calendar month of the lease term the aircraft is operated at an hour/cycle ratio less than 3 hours to 1 cycle, lessee will pay lessor US I 55 for each cycle the aircraft operated during such month in excess of 3 hours to 1 cycle. Such additional rent will be due and payable by lessee on the date on which the next reserve payment is due (in accordance with Article 5.4.2) following such hour/cycle calculation period.
8.6. No lessor liability for losses : lessee agrees that lessor will not be liable to lessee, any sub-lessee or any person, whether in contract or tort and however arising, for any unavailability, loss of use or service, cost, loss (consequential or otherwise), liability, damage or delay of or in connection with the aircraft, any person or property whatsoever, whether on board the aircraft or elsewhere and irrespective of whether such occurrences arise from any act or omission or the active or passive negligence of lessor or of any other direct, incidental or consequential damages, including strict or absolute liability in ton.
8.7. No liability to repair or replaced : lessor will not be liable for any expense in repairing or replacing any item of the aircraft or be liable to supply another aircraft or any item in lieu of the aircraft or any part thereof if the same is lost, confiscated, damaged, destroyed or otherwise rendered unfit for use.
10.1. Costs of operation : lessee will pay all costs incurred in the operation of the aircraft during the lease term, for profit or otherwise, including the costs of flight crews, cabin personnel, fuel, oil, lubricants, maintenance insurance, storage, sanding and navigation fees, airport charges, passenger directly or indirectly, in connection with or vated to the use, movement and operation of the aircraft. The obligations, covenants and liabilities of lessee under this paragraph arising prior to return of the aircraft to lessor will continue in full force and effect, notwithstanding the termination of this lease or expiration of the lease terms.
12.1. general obligation During the lease term and until the aircraft is returned to lessor in the condition required by this Lease, lessee alone has the obligation, at its expense, to maintain and repair the aircraft, engine and all of the parts (i) in accordance with the maintenance programme, (ii) in accordance with the rules and regulations of the Aviation Authority, (iii) in accordance with any other regulations or requirements necessary in order to both (a) maintain the full certificate of airworthiness for the aircraft and eligibility at all times during the lease term for a UK CAA certificate of airworthiness except to the extent there is a direct conflict in which case lessee will follow the requirements of the Aviation Authority during the lease term and upon return of the aircraft to lessor on the termination date and for a certificate of airworthiness issued by the FAA in accordance FAR Part 21 and (b) enable the aircraft to be placed on the operating certificate of a US. airline in accordance with Para 121 of the FARs (except during these periods when the aircraft is undergoing maintenance or repairs as required by this lease and except to the extent that the aircraft was delivered to lessee deficient in this regard) and (iv) in the same manner and with the same care as used by lessee with respect to similar aircraft and engines operated by lessee and without in any way discriminating against the aircraft.
12.2. Specific obligations : Without limiting Article 12.1, lessee agrees that such maintenance and repairs will include but will not be limited to each of the following specific items :
(a) Performance in accordance with the maintenance programme of all routine and non-routine maintenance work, including on-line maintenance on the aircraft.
(b) Incorproation in the aircraft of all airworthiness directives of the FAA and the Aviation Authority and all alert service bulletins of manufacturer, engine manufacturer and other vendors or manufacturers of parts incorporated on the aircraft.
(c) Incorporation in the aircraft of all other service bulletins of manufacturer, the engine manufacturer and other vendors which lessee schedules to adopt within the lease term for the rest of its 737-400 aircraft fleet. It is the intent of the parties that the Aircraft will not be discriminated from the rest of lessee's fleet in service bulletins compliance or other maintenance matters. Lessee will not discriminate against the engines with respect to overhaul build standards and disc replacements.
(d) Incorporation in the maintenance programme for the aircraft of a full corrosion prevention and control programme as recommended by manufacturer, the Aviation Authority and the FAA (but in any event no less frequently than at the "C" check or equivalent), including periodic inspection by penetration of fuel tanks, periodic inspection and clean up under galleys and lavatories and the correction of any discrepancies in accordance with the recommendations of Manufacturer and the Structural Repair Manual.
(e) If lessee at its option chooses to comply with Aviation Authority or the maintenance programme requirements by means of sampling within its fleet, performance of all such inspections and tasks on the aircraft.
(f) Maintaining in English and keeping in an upto date status all Aircraft Documentation.
(g) Maintaining historical records, in English, for condition monitored, hard time and life limited parts, the hours and cycles the aircraft and engines operate and all maintenance and repairs performed on the aircraft.
(h) Properly documenting all repairs, modifications and alternations and the addition or removal of equipment, systems or components in accordance with the rules and regulations of the Aviation Authority and reflecting such items in the Aircraft Documentation. In addition, all repairs, modifications and alteration to the aircraft will be accomplished in accordance with manufacturer's Structural Repair Manual (and, if outside the scope of Manufacturer's Structural Repair Manual, then accomplished in accordance with FAA approved data).
12.3. Replacement of parts :
12.3.1 Lessee, at its own cost and expense, will promptly replace all parts which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever. In the ordinary course of maintenance, service, repair, overhaul or testing, lessee replaces such part as promptly as practicable. All replacement parts will (i) be free and clear of all security interests (except permitted liens) of any kind or description, (ii) be in airworthy condition and of at least equivalent model and modification status and have a value and utility at least equal to the parts replaced, assuming such replaced parts were in the condition and repair required to be maintained by the terms thereof and (iii) have a current "serviceable tag" of the manufacturer or maintenance facility providing such items to lessee, indicating that such parts are new, serviceable or overhauled. Solong as a substitution meets the requirements of the Maintenance Programme and Aviation Authority, lessee may substitute for any part a part that does not meet the requirement of the foregoing sentence if a complying part cannot be procured or installed within the available ground time of the aircraft and as soon as practicable the non complying part is removed and replaced by a complying part.
12.3.2. All parts removed from the airframe or any engine will remain the property of lessor and subject to this lease no matter where located, until such time as such parts have been replaced by parts (which have been incorporated or installed in or attached to the airframe or such engine) which meet the requirements for replacements parts specified above and title to such replacement parts has passed to lessor under the laws of the state of Registration and lex situs. To the extent permitted by the laws of the state of Registration and the lex situs it is the intent of the lessor and lessee that without further act and immediately upon any replacement part becoming incorporated, installed or attached to the airframe or an engine as above provided, (i) title to the removed part will thereupon vest in Lessee, free and clear of all rights of lessor, (ii) title to the replacement part will thereupon vest in lessor free and clear of ail rights of lessee, and (iii) such replacement part will become subject to this lease and be deemed to be a part hereunder to the same extent as the parts originally incorporated or installed in or attached to the airframe or such Engine.
13.1. Airframe reserves : Lessor will reimburse lessee from the Airframe Reserves for the actual cost of the completed schedule major structural inspection and rectification of structural deficiencies (overhauls) of the airframe (i.e. the complete 'D' Check or equivalent if the aircraft is on a block 'D' maintenance system under lessee's maintenance program or 'D' check level structural inspections carried out during a 'C' check if the aircraft is on a phased 'D' 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.
13.2. Engine reserves : Lessor will reimburse lessee from the Engine Reserves for the actual cost of completed engine shop visits (i.e. heavy maintenance visits) requiring off-wing teardown and or disassembly to the extent the work performed during such engine shop visit consisted of the replacement of life/time limited components, with work performed for all other causes excluded, including those causes set forth in Article 13.4. Reimbursement will be made upto the amount in the Engine Reserve applicable to such Engine.
13.3. Reimbursement : Lessee will be entitled to reimbursement from the reserves, after the work is completed and the airframe or engine has left the repair agency, by submitting invoices and proper documentation in support of the invoices to lessor. Lessor will reimburse lessee within forth-five (45) days of receipt of all necessary information.
13.4. Reimbursement Adjustment : By way of example, among the exclusions from reimbursement are those items resulting from repairs covered by lessee's or a third party's insurance, (deductibles being for the account of lessee) or required as a result of an airworthiness directive, manufacturer's service, bulletin, non-routine or non-scheduled maintenance faulty maintenance or installation, improper operations, misuse, neglect, accident, ingestion or other accidental cause. Reimbursement from the reserves will not be available for the APU, thrust reverses, landing gear or any of their associated components. It is also the intent of the parties that all invoices subject to reimbursement from lessor will be reduced (by adjustment between lessee and lessor retroactively if necessary) by the actual amounts received by lessee on account of such work from other sources, including but not limited to insurance proceeds, manufacturer's warranties, guarantees and concessions or any other responsible third parties.
13.5. Costs in excess of reserves : Lessee will be responsible for payment of all costs in excess of the amounts reimbursed hereunder. If on any occasion the balance in the airframe or an engine reserve is insufficient to satisfy a claim for reimbursement in respect of the airframe or such engine, the shortfall may not be carried forward or made the subject of any further claim for reimbursement.
13.6. Reimbursement after termination date : Lessee may not submit any invoice for reimbursement from the reserves after the termination date unless on or prior to such date lessee has notified lessor in writing that such outstanding invoice will be submitted after the termination date and the anticipated amount of such invoice. So long as lessee has provided such notice to lessor, lessee may then submit such outstanding invoice at any time within nine (g) months after the termination date. Subject to be foregoing, any balance remaining in the airframe and engine reserves on the termination date, including termination on account of a total loss of the aircraft, will be retained by lessor."
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 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 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 of 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.
11. 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 Sr. 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 part 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.
12. 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 19th 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.
13. So the question that arises is as to what was intended to be excluded by the legislature by amendment made by Finance Act, 1995, w.e.f. 1st April, 1996. From the perusal of the memorandum explaining the provisions of 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 payment 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) or 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 (15A) 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, facility or services provided by the recipient. Therefore, the change in the law has to be understood in that context. So if any payment has to be brought within the exclusionary portion of Section 10(15A) of the Act, then it must be established (i) that lessor either had supplied the spares or provided any facility or service in connection with operation of the leased 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 Sr. 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 facility 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.
14. 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 Sr. 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.
15. Similar payments on account of supplemental leased rent were also made by the assessee to other non-resident foreign companies i.e. AMTEC, Malaysian Airlines System (MAS) and Lufthansa during the financial years 1997-98 to 1998-99. Such payments are discussed by AO in paras 65 and 66 of his order. The following demands have been raised by the AO under Section 201(1) of the Act :
F. years AMTEC MAS Lufthansa 1997-98 3,67,601 75,23,429 1,13,28,008 1998-99 NIL 27,36,160 NIL The above demands have been raised by AO for the reasons given by him in the case of ILFC and the same have been confirmed by the CIT(A). Accordingly, following our own decision in the case of ILFC, we also set aside the orders of CIT(A) on this issue and delete the aforesaid demands raised by AO and confirmed by CIT(A).
16. Similar payments were also made by assessee to ELFC. However, the assessee had deducted the tax at source at 11.11 per cent treating the same as royalty. According to the AO, the assessee should have deducted the tax at source @ 48 per cent (92.31 per cent after grossing up). Accordingly, he created additional demand of Rs. 83,64,982 and Rs. 45,91,644 for financial years 1996-97 and 1997-98 respectively (Paras 67 and 68) of the assessment order). It is not necessary for us to decide the issue regarding rate of tax since, in our view, such payments are not chargeable to tax for the reasons given by us in the earlier part of the order. Therefore, we set aside the orders of CIT(A) on this issue also and delete the additional demand raised by the AO and confirmed by the CIT(A).
17. Now we take up the issue relating to payments made to M/s AAR Aviation for lease of spare parts. The assessee had made two payments of US $ 1,99,370 each on 22nd April, 1994 and 14th Nov., 1994 to it as lease rent under the terms of the lease agreement dt. 24th Aug., 1993, appearing at page Wo. 325 of the paper book. The assessee had not deducted the tax at source from the above two payments though it had deducted, the tax at source against the payments made by it subsequently. The assessee was asked by the AO to explain as to why the tax was not deducted on these payments vide office letter dt. 22nd Sept., 1999. The assessee vide reply dt. 15th Oct., 1999, submitted that no tax was deducted in respect of these two amounts on the basis of the NOG issued by the IT Department. This explanation was not accepted by AO for the following reasons :
(a) The jurisdiction to issue NOCs lies with TDS Officers in Delhi However, it is seen that these NOCs were obtained by the assessee from his respective "AO" and not from the "TDS Officer". Since they were obtained from an officer who had no Jurisdiction over the matter, hence these NOCs are null and void ab initio.
(b) The format of such NOC, as produced before me, by the assessee is reproduced below :
NO OBJECTION CERTIFICATE P.A. No. of the person remitting money Dated____ P.A. No. of the person to whom money is remitted____ (if available) I have no objection to M/s____________________________ (give name and address of remitter) remitting_____________________________________ (give amount in words and figures stating currency) to M/s_______________________________________ (give name & address of the person to whom remitted) being the_______ for the period_______. The remitter (in this capacity as a representative assessee) and the person to whom money is remitted have * no liabilities outstanding.
*made satisfactory arrangements for payment of taxes due under the IT Act, 1961, IT Act, 1922, Excess Profits Tax Act, 1940, Business Profits Tax Act, 1947, WT Act, 1957, Expenditure Tax Act, 1957, and Company's (Profits) Surtax Act, 1964 in respect of the remittance(s) referred to above.
Signature (Name and address of the issuing Authority) (Stamp) 'Strike out which is not applicable.
These types of NOCs are issued by IT Department as per requirements of RBI given in their Exchange Control Manual for allowing anyone to remit money outside India. These NOCs are not orders under Section 195(2). It does not prescribe any rate and materially enable the assessee to remit the amount in accordance with the RBI requirements. These NOCs have no legal sanctity under the IT Act. Hence, the contention of the assessee that the remittance was done in accordance with the NOG obtained from the Department has no significance.
(c) In any case, these payments were taxable and have been admitted to be taxable in subsequent years by the assessee. Hence, the said NOCs were faulty to that extent.
Accordingly, the demand of Rs. 15,15,212 was raised by the AO under Section 201(1) of the Act pertaining to financial year 1994-95. The same has been confirmed by the CIT(A). Aggrieved by the same, the assessee is in appeal before the Tribunal on this issue.
18. The learned counsel for the assessee, Mr. Dastur, has raised various contentions. The first contention is that no objection certificate (NOCs) were issued by the AO, who had the jurisdiction over the non-resident assessees. Our attention was invited to the copy of such certificate appearing at p. 345 of the paper book. Therefore, it has been contended that assessee could not be treated as an assessee-in-default under Section 201(1) of the Act. We are unable to accept this contention of the learned counsel for the assessee for the reason that the NOCs issued by the AO cannot be considered as an order under Section 195(2) of the Act as such certificates are entirely different from the certificates issued with reference to the payments made to ILFC inasmuch as in that case a specific order was passed under Section 195 of the Act and the assessee was allowed to remit the money after deducting the tax. at source at nil rate. But in the present case, no such order was passed by the AO. The perusal of the NOC simply shows that the AO had declared to the effect that no liability was outstanding against AAR Aviation under any of the Acts mentioned therein on the date of payment and, therefore, he had no objection if foreign exchange is remitted to that company. There is also no evidence before us to suggest that assessee ever applied under Section 195(2) of the Act. If any such application is made then AO is required to determine whether any portion of payment to be made is chargeable to tax or not. The copy of NOC appearing at p. 345 of paper book does not show that any such exercise was made by him. Therefore, in our considered view, such certificate cannot be equated with and are not in conformity with the order under Section 195(2) of the Act. Hence, this contention of the assessee is rejected.
19. The second contention raised by Mr. Dastur is that agreement in question is not merely agreement of lease but it is an agreement of purchase of spares by way of hire purchase. He drew our attention to the terms of the agreement appearing at p. 325 of the paper book and the particular attention was drawn to p. 337 to point out that the terms of the agreement provides option to the assessee to purchase the spare part at the end of the agreement. According to him, this option was in fact exercised and therefore, the transaction should be considered as transaction of purchase of the spares. Hence, such transaction would be out of the ambit of the provisions of IT Act. We are unable to accept this contention also. In law, there is a difference in the lease agreement and hire-purchase agreement. In hire-purchase agreement, the intention from the very beginning is to purchase the item and the payment is treated as capital expenditure for all purposes and consequently, depreciation also can be claimed by hirer. In fact, it is a sale on instalment basis with the element of interest added thereto. The option to purchase at the end is only against a normal amount, say Re. 1. The person who gives on hire can take back the same only if the payment is not made as per the terms of the agreement. But in the case of the lease, the lessor is the owner for all purposes and depreciation also can be claimed by him. Further the payment made in respect of lease rent in normally considered as a revenue expenditure in the hands of lessee and revenue receipt in the hands of lessor. Lessee is only a bailee and has to return the goods after the termination of the agreement. The transaction of lease cannot be considered as a transaction of purchase merely because at the end of the lease period, the option is given to the lessee to purchase the same. In the present case, the perusal of the agreement clearly shows that intention of the parties was to enter into an agreement of lease only. As per Clause 4C, the lessee cannot even repair the parts without prior permission of the lessor. According to Clause 8B, if during the warranty period, any defect is found, the lessor is required to replace or repair the same. It is also not the case of the assessee that the lease rental paid by the assessee was considered as capital expenditure. There is nothing to indicate that parties intended to treat it as transaction of sale. The option to purchase at the end of the lease period can be exercised only after paying a quite substantial amount i.e., US 0 50,000 which appears to have been fixed considering the price of the spares at the end of the lease term. Merely because the assessee exercised the option, the agreement, in our opinion, cannot be considered as hire-purchase agreement. It was not necessary for assessee to exercise such option and could even refuse to exercise such option since it involved huge amount In our considered opinion, it was only a lease agreement and, therefore, the aforesaid contention of the assessee's counsel is rejected.
20. The third contention of the learned counsel for the assessee is that even if it is payment of lease rent for spares, it could only be considered as business profits taxable under Section 9(1)(i). Further, since there was DTAA between India and USA, no tax was payable by non-resident company in view of Article 7 of DTAA which appears at p. 586 of the paper book. According to this article, no tax is payable unless the non-resident has permanent establishment in India. According to the learned counsel for the assessee, there is no permanent establishment of the lessor and, therefore, it was not liable to pay tax and consequently the question of deducting tax at source by the assessee did not arise. This contention may be a plausible one but we find that such contention was neither raised before AO nor before the CIT(A). Further, the question whether the lessor had a permanent establishment in India, is a question of fact which requires verification. Therefore, in the interest of justice, we would have restored the matter to the file of AO but for our legal finding in the later part of the order wherein we have held that order for financial year 1994-95 could not legally be passed after a period of 5 years from the end of financial year. In view of the same, the demand raised by AO in this regard stands quashed.
Now, we take up the issue relating to payments on account of payments to various parties of United Kingdom (UK). The assessee had entered into agreements with various parties of UK, namely, British Caledonia, Hughes Flight Training, Speed Wing, Raytheon and GE Capital Aviation for training of its personnels. According to the AO, such payments amounted to fee for technical services as defined in Expln. 2 to Section 9(1)(vii) of the Act as well as Article 13(4) of DTAA with UK. Accordingly, he held that assessee had failed to deduct the tax at source and consequently, the assessee was declared an assessee-in-default under Section 201(1) of the Act. He created the following demand after applying the rate of 25 per cent after grossing up the rate of 20 per cent :
FY.
Amount paid Exchange rate INR Short deduction (@25% i.e.. 20%grossed up! USD GBP USD GBP 1994-95 21,346 1,12,644 38 70 86,96,228 21,74,057 1995-96
-
83,202 38 70 58,24,140 14,56,035 1996-97
-
65.324 38 70 38,72,680 9,68,170 1997-98
-
42,727 40 70 29,90,890 7,47,723 1998-99
-
25,368 43 70 17,75,760 4,43,940 The CIT(A) has confirmed the order of the AO after observing as under:
"The submissions of the appellant are considered. The payment in question was incurred for providing training to the crew of the appellant. As per the protocol to the DTAA with USA referred to by the AO as well as by the appellant; the fee for technical services refers to technical or consultancy services that may maKe available to the person acquiring the services technical knowledge, skill know-how or process. For these purposes the person acquiring the services shall be deemed to include an agent nominee or transferee of such person. The pilots who are employees of the appellant company are her nominees and as such the technical, knowledge, experience and skill provided to the pilots will fall within the ambit of fee for technical services s per the Expln. (ii) to Clause (vii) of Sub-section (1) of Section 9. The judgment in the case of Carborandum Co. relied upon by the appellant was delivered under the 1922 Act. As per Section 9(1)(vii) of the present a payment made outside India will be excluded from the ambit of fee for technical services only if the same is utilized in a business or profession carried in India or is to earn income from a source located outside India. The place of payment or training would not be relevant. The AO has rightly held the appellant liable for tax deduction at source on the payments made on account of training. The appeal on this ground is dismissed."
Aggrieved by the same, the assessee is in appeal before the Tribunal.
21. The main contention of the learned counsel for the assessee is that such payments do not fall within the definition of fees for technical services either under Section 9(1)(vii) of the Act or Article 13 of DTAA with UK. He took us through the agreement with Hughes Flight Training appearing at p. 347 of the paper book. According to him, the agreement in fact was not for training but for the use of a simulator only. He drew our attention to p. 350 of the paper book to point out that charging for use of the simulator without instructor was only 171 pound per hour, while it was 256 pound per hour with instructor. He then drew our attention to p. 359 of the paper book to point out that assessee was charged @ 171 pound per hour only which shows that only use of simulator was provided to assessee's personnels. Therefore, it was pleaded by him that mere use of simulator cannot be said as providing of technical service as defined in Section 9(1)(vii). Proceeding further, it was submitted by him that even presuming that payment was for technical services, it did not fall within the definition of fee for technical services in Article 13 of DTAA with U.K. Since such definition is restricted in its scope than the definition in Section 9(1)(vii) of the Act. According to him, Article 13(4)(c) is applicable which includes making available of technical knowledge, experience, skill, know-how or process, etc. Since only use of simulator was allowed, no technical knowledge was made available to assessee's personnel. Proceeding further, it was submitted that if such payment does not fall within Article 13(4) of DTAA then it cannot be taxed even under the treaty in view of the Calcutta High Court decision reported as CIT v. Davy Ashmore India Ltd (1991) 190 ITR 626 (Cal). Further it cannot be taxed as fee for technical services, then it can be considered only as business profits under Section 9(1)(i) and consequently, such business profits cannot be taxed unless the payee has permanent establishment in India. It was pleaded by him that none of the U.K. parties had any permanent establishment in India and, therefore, these payments were not chargeable to tax. Finally, it was pleaded that AO was not justified in grossing up the rate of tax.
22. On the other hand, the learned Departmental Representative has strongly opposed the submissions of the learned counsel for the assessee by submitting that the agreements with U.K. parties were only for training of assessee's personnels. He drew our attention to Clause 14 of the agreement appearing at p. 354 of the paper book which provides :
"Instructor Training : The company will provide up to four (4) hours free of charge simulator time with a Company Instructors in the safe and efficient operation of the machine."
In view of the above clause, it was pleaded by him that it cannot be said that mere use of simulator was provided to assessee's personnel. It was strongly argued that no machine can be operated by person unless requisite technical knowledge or experience is provided to such person. Instead of giving knowledge to each trainee, it was provided to assessee's instructors, who in turn, provided the same to its personnels. It was also submitted by him that such training falls within the ambit of "fee for technical services" as defined in Section 9(1)(vii) of the Act as well as Article 13(4) of the DTAA. Regarding grossing up, he left the issue to the Bench.
23. After considering the rival submissions of the parties, we do not find merit in the main contention of the learned counsel for the assessee. We have gone through the entire agreement entered into by the assessee with M/s Hughes Flight Training of U.K. After considering the same, we are of the view that it was an agreement for training of assessee's personnels and not for mere use of simulator. Training can be given to the trainees either directly or through customer's instructors. Clause 14 of the agreement clearly provides for free training to assessee's instructors, who, in turn, had provided the same to its personnels. Since training to assessee's instructors was free of charge, the payment in the invoice was shown for use of simulator alone but that does not mean that technical knowledge was not provided by U.K. company. The simulator is such a highly sophisticated machine which cannot be operated unless requisite technical knowledge is given to the user of the machine. Therefore, we are unable to accept the main contention of assessee's counsel that no technical knowledge was given. Apart from this, Hughes Flight Training personnels are experts and experienced persons, who have shared their experiences with the assessee's instructors, and, therefore, on this account also, it would fall within the definition of technical services as provided in Article 13 of DTAA with U.K. inasmuch as it not only includes making available of technical knowledge but also the experience. Therefore, it is held that the agreement was for providing of training to assessee's personnels and consequently, the payment for the same was fee for technical services and, therefore, chargeable to tax in the hands of the recipient under Section 9(1)(vii) of the Act as well as under the provisions of DTAA with U.K.
24. As far as issue of grossing up the rate of tax is concerned, we have already expressed our comments on this issue in the operative part of our order while disposing of the issue regarding the payments to ILFC. In view of the same, it is held that AQ was not justified in grossing up the rate of tax.
25. In view of the above discussion, orders of CIT(A) for all the financial years i.e., 1994-95 to 1998-99 are modified and AO is directed to recompute the tax liability by applying the rate of tax at 20 per cent.
26. Now we take up the issue relating to payments made to Sochata of France. The assessee-company had made payments of US $ 8,04,002 and 8,63,719 to Sochata of France for repairs of engine. The AO was of the view that such payments were in the nature of fees for technical services as envisaged in Expln. 2 to Section 9(1)(vii) of the Act inasmuch as repair of an engine requires technical inputs. He was also of the view that definition of fee for technical services as defined in Article 13 of the DTAA is also the same as defined in Section 9 of the Act. He also referred to various decisions of the Court, namely, in the case of CBDT v. Oberoi Hotels (I) P. Ltd (1998) 231 ITR 148 (SC), in the case of G.V.K. Industries Ltd v. ITO and Anr. (1997) 228 ITR 564, in the case of Cochin Refineries Ltd. v. CJT (1996) 222 ITR 354 (Ker) and the decision of the Tribunal in the case of Mannesmann Demag Lauchhamer v. CIT (1988) 26 ITD 198 (Hyd) to strengthen his view. Accordingly, it was held by him that assessee was required to deduct the tax at source under Section 195 of the Act. It is to be noted that in the course of proceedings before the AO, the assessee had furnished an opinion of Mr. A.S. Thind, an advocate, according to whom the payments were in the nature of business profits and the same could not be taxed since the payee had no permanent establishment in India. This opinion was not accepted by the AO. Ultimately, he created a demand of Rs. 1,66,77,217 by applying the rate of tax of 25 per cent after grossing up the rate of 20 per cent. This view has been confirmed by the CIT(A) by observing as under:
"The submissions of the appellant are considered. Whereas the appellant has contested that to qualify as technical services there has to be a transfer of technical knowledge of skills to the person making the payment, the Dy. CIT has held that the rendering of repair works constitutes technical services. In the present case the appellant has not made payment for ordinary repair works. She is not going for piecemeal repair but has a comprehensive contract for rendering of services which involve inspection, modifications to render the aircraft to be fit for flying by international standard, etc. These services require a technical and competent consultancy. The services of technical and skilled personnel are utilized which require not only labour but also intellectual inputs. In these circumstances, it is difficult to exclude the payment from the ambit of fee for technical services as provided in Expln. 2 to Section g(1)(vii). The Tribunal Hyderbad judgment in the case of Mannesman Demag v. CIT (1988) 26 ITD 198 (Hyd) is on almost identical facts and would be applicable to the case of the appellant. Appeal on these grounds are dismissed."
27. The learned counsel for the assessee has assailed the order of the CIT(A) by submitting that since the agreement is for repair and replacement of parts, the price component for supply of parts for replacement cannot fall within the ambit of technical services. According to him, the definition of fee for technical services in Section 9fl)(vii) includes any consideration for pure services and not services coupled with any other obligation. He also drew our attention to the copy of invoice to point out that the consideration consisted of not only for repairs but also for spare parts. He also referred to p 624 of the Commentary on Income-Tax Law by Pithisaria and Chaturvedi, 5th Edn. Vol. 1. So in any case, it would only include charges for repairs only. Accordingly, the payment for spares would fall within the provisions of Section 9(1)(i) and since the payee does not have any permanent establishment in India, the same could not be taxed in the hands of payee and, therefore, the question of deducting tax at source did not arise. It was also submitted that case law referred to by the AO are distinguishable on facts. On the other hand, the learned Sr. Departmental Representative has contended that provisions of Section 9(1)(vii) are independent and clouded by the provisions of Section 9(1)0). Repairs, according to him, is purely technical job and would fall within the definition of "technical services". He also relied on the decisions referred to in the order of AO.
28. Rival submissions of the parties have been considered carefully. We have also examined the agreement between the assessee and Sochata of France appearing at p. 363. The relevant portion of the preamble of the agreement reads as under :
"Whereas, Sahara India Airlines has expressed its desire to have Sochata perform modification and/or repair services and/or refurbishment services and/or refurbishment services (hereinafter referred to collectively as the "Services") on SAHARA CFM 56 services engines, engine modules, engine shop modules and engine parts, which engines, engine modules, engines shop modules, engine parts and controls and accessories are hereinafter sometimes referred to respectively as the "Engines "Modules", "Shop Modules", "Parts" and "Controls and Accessories" and collectively as the "Equipment".
29. The scope of the word "repair" has been defined in Article 1 (T) as under:
"Repair" shall mean the disassembly, inspection repiar, parts replacement where necessary, and reassembly and test when applicable of the subject equipment in accordance with the applicable CFM56 shop manual and or other documents approved and authorized by the JAA/FAA and Sahara."
30. The nature of services to be carried out are specified in Article 11 reproduced below :
"During the term of this agreement, Sochata at SAHARA instructions, agrees to provide the following services for Sahara's equipment :
A. Furnish direct labour, repair engineering coordination, facilities, special tooling/equipment, and overall material coordination to accomplish the repair, or modification of SAHARA'S Equipment within the scope of Sochata's "Quality Manual".
B. Subject to the provisions of Article X of this agreement:
1. Provide new or used serviceable replacement parts incorporated into equipment in the course of repair pursuant to this agreement.
2. Provide as available, parts or Exchange Shop Modules or Modules in Exchange for SAHARA'S trade in parts or Shop Modules or Modules, during the repair of engines to meet the Tum around items specified in Article VIII.
C. Keep and maintain current files on all published CFM56 engineering specifications, applicable repair and refurnishment and modification documents, as well as service bulletin data and their application and introduction.
D. Provide warehousing and inventory control for SAHARA inventory generated at Sochata facilities during the performance of this agreement.
E. Reserve the right to sub-contract any part of the repair of the equipment normally subcontracted to a source outside Sochata. Any such subcontract repair shall be controlled to the requirement of applicable JAA/FAA directives.
F. Provide historical part repair, configuration tracking and management of Sahara's Life Limited Parts Equipment located at Sochata's facilities for configuration changes resulting from workscope performance.
G. Provide transportation co-ordination for Sahara's Equipment from/to Sahara's facilities to/from Sochata famility.
H. Designate to SAHARA a specific customer service manager whose primary responsibility will be to maintain the liaison necessary for a successful programme, and provide Sahara with engine status reports on a weekly basis.
I. Report immediately to Sahara any unusual airworthiness related defect.
J. Provide the Engineering Management Programme, CFM56 Engineering Support and training at Sochata facilities.
Article 111(A) provides as under:
"During the term of this agreement, Sahara agrees to :
(A) Deliver to Sochata for services under this agreement, all equipment from the fleet of CFM56 engines owned and/or operated by Sahara, which require repair or maintenance."
31. Article V deals with the prices and the relevant portion of which is reproduced as under:
"Services performed by Sochata under the terms of this agreement shall be invoiced on a time and material basis.
A. Labour
1. Direct labour'time utilized by Sochata in performing services at Sochata's facility under the terms of this agreement on a time and material basis, shall be invoiced at forty-eight US Dollars (US$ 48) per man hour.
2. The conditions for working away of Sochata's facility (on-site technical assistance services) will be discussed on a case by case basis.
B. Parts \. Sochata furnished new parts, materials, and supplies will be invoiced at then current list price plus ten point five percent (10.5%) handling charge.
2. Sochata furnished non-Life Limited used serviceable parts will be invoiced at eighty-five per cent (85%) of the then current catalogue list price of the latest procurable replacement part.
3. Sochata furnished Life Limited used serviceable parts will be invoiced at a price based on the then current catalogue list price of the latest procurable replacement part adjusted to the value of the cycles remaining. The price of Life Limited used serviceable part will be determined as follows :"
The perusal of the above shows that the predominant object of the agreement between the parties was to keep the engine and other equipments as well as spare parts repaired as and when required. Replacement of parts, if any, was to be made in furtherance of the above object i.e. repair. Merely because some replacement of part was involved in execution of the repair job, in our opinion, it does not mean that agreement invoiced the element of purchase or sale of spare parts. In our considered view, the agreement was only for repair of engine and other equipments. Further, considering the nature of services involved, we are also of the view that consideration for such job amounted to fee for technical services as defined in Section 9(1)(vii). This view is fortified by the decision of the Tribunal, Hyderabad Bench in the case of Mannesmann Demag, Lauchhamer (supra) wherein it has been held that payment for repair job whether small work or large construction work amounts to fee for technical services liable to tax under Section 9(1)(vii). Accordingly, the contention of the assessee's counsel that value of the parts supplied in execution of the contract should be excluded, cannot be accepted. In our view, the entire amount paid by the assessee amounts to fee for technical services under Section 9(1)(vii). The view taken by us is also fortified by the decision of the Hon'ble Supreme Court in the case of Hindustan Aeronautics Ltd. v. State of Karnataka AIR 1984 SC 744 wherein it has been held that the nature of the contract has to be determined with reference to the predominant or primary intention of the parties. If the intention of the parties is to get the aircraft repaired then such contract would be contract of work not involving sale even though some spare parts might have been used in the execution of such repair job. In that case, the assessee was a manufacturer of spare parts and accessories of various aircrafts and also established facilities for assembling, servicing, repairing, overhauling of aircrafts, their instrument and accessories. The assessee had entered into a contract with Indian Air Force for servicing, assembling, repairing and overhauling of airforce planes. According to Clause 3 of the agreement, the necessary spares and materials were to be provided by the Indian Air Force. However, where there was delay in supply of the essential items, the assessee was required to provide such spare parts for which it could charge the price equivalent to the cost plus 10 per cent where items were manufactured by the assessee and the cost plus 5 per cent where such spares were purchased from outside. The question before the Court was whether there was any sale of spare parts or whether the contract was contract of work only not involving sale. After examining the agreement, it was held by the Hon'ble Supreme Court that the primary intention of the parties was to keep the aircrafts repaired and not for sale or purchase of the spare parts. Vide para 18 of the order, their Lordships held as under:
"It cannot be said as a general proposition that in every case of works contract, there is necessarily implied the sale of the component parts which go to make up the repair. That question would naturally depend upon the facts and circumstances of each case. Mere passing of property in an article or commodity during the course of performance of the transaction in question does not render the transaction to be transaction of sale. Even in a contract purely of works of service, it is possible that articles may have to be used by the person executing the work and properly in such articles or materials may pass to the other party. That would not necessarily convert the contract into one of sale of those materials. In every case, the Court would have to find out what was the primary object of the transaction and the intention of the parties while entering into it. It may in some cases be that even while entering into the contract of work or even service, parties might enter into separate agreements, one of work and service and the other of sale and purchase materials to be used in the course of executing the work or performing the service. But, then in such cases the transaction would not be one and indivisible, but would fall into two separate agreements, one of work of service and the other of sale."
The perusal of the above observations clearly shows that if the primary intention of the parties is to carry out a job work and any spare part is supplied or used in execution of the contract then it will be a contract of work and not involving transaction of any purchase or sale.
32. Similar issue also arose before the Hon'ble Supreme Court in the case of Asstt. STO v. B.C. Kame 39 STC 237 (SC). In that case, the assessee was a photographer who undertook to develop the negative or do other photographic work and, thereafter supply the prints to his clients. The question was whether the contract was the contract of work or contract for sale of the goods. Their Lordships held that the contract was for use of the skill and labour and did not involve the sale of goods.
33. In view of the above discussion, we are of the view that in the present case, the agreement entered into by the assessee with Sochata, France was agreement for repair of the aircraft or engine or instrument thereof not involving sale or purchase of spare parts.
34. The alternate plea has been raised by assessee's counsel for the first time that in view of Clause 7 of the protocol between India and France appearing at p. 582, the rate of tax and scope of fee for technical services should be understood in the manner in which it is provided in the DTAA with USA. In this contention, he drew our attention to the above clause which reads as under:
"In respect of arts. 11 (dividends), 12 (interest) and 13 (royalties, fee for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1st Sept., 1989, between India and a third state which is a member of the OECD, India limits its taxation at source on dividends, investment, royalties, fees for technical services, payments for the use of equipment to a rate lower or a scope more restricted that the rate of scope provided for in this Convention, Agreement or Protocol on the said items of income shall also apply under this Convention, Agreement or Protocol enters into force, whichever enters into force later."
Proceeding further, it was submitted that the DTAA with USA was signed after the date specified in the above clause and accordingly, it was contended that payments made by assessee under the agreement would not fall within the definition of fee for technical services as provided in Article XII(4) of DTAA with USA and consequently, should be understood as business profits under Section 9(1)(i). Proceeding further, it was submitted that as the payee does not have any permanent establishment in India, the same cannot be taxed as income. Since this plea has been raised for the first time, we, in the interest of justice, restore the matter to the file of AO, who shall adjudicate this aspect of the matter afresh in the light of the above submissions after giving reasonable opportunity of being heard to the assessee.
35. Now we take up the payments made by assessee to various parties of foreign countries on account of exchange of spare parts. The assessee had made total 39 payments to various parties, list of which has been given by the AO in para 69 of his order. The AO was of the view that payment was in fact on account of repair of the spare part as is apparent from para 17 of the letter dt. 29th Dec., 1999, issued to the assessee, which is being reproduced as under
"You have been making payments to various parties on account of exchange of parts. Under this mechanism you give your defective part to the foreign party and in return the foreign party gives back an overhauled/repaired old part back to you. This is an international practice and it is resorted to avoid time lag on account of time that would have occurred, if in normal course, the part would have been given for repair. Hence, the exchange price paid to the foreign party on account of exchange of part is nothing but meant for repair of the same. This is nothing but 'fee for technical services'."
36. The reply of the assessee dt. 14th Jan., 2000, was to the effect that the payments represented the price of the parts and did not represent fee for technical services as alleged by the AO. Consequently, the assessee was not required to deduct the tax at source. It has been observed by the AO in para 71 that the purported invoices were never filed by the assessee despite reminders. Finally, it was held by him that the payments was for repair of the parts and not for purchases of the new parts and accordingly, such payments amounted to fee for technical services. Accordingly, he created the demand of Rs. 1,77,84,663 by applying the rate of 25 per cent (after grossing up of 20 per cent).
37. The matter was carried before the CIT(A) before whom the assessee furnished some invoices to show that the payments were for purchases. However, it was further observed that it was not ruled out that payments included some amounts pertaining to the repair. It was further held by him that in respect of purchases, the assessee was not required to deduct the tax at source. Accordingly, he directed the AO to examine the invoices and then exclude the payments relating to such purchases and tax only the payments relatable to service or repair charges. Still aggrieved, assesses is in appeal before the Tribunal on this issue.
38. After hearing both the parties, we do not find any merit in the ground taken by the assessee on this issue. Even the learned counsel for the assessee could not seriously challenge the directions given by the CIT(A). Accordingly, we uphold the order of the CIT(A) on this issue.
39. The next issue relates to the payments made to Jeppson ,& Co. The assessee had been taking navigational date from the above company of the Germany. According to the AO, the payment for supply of data amounted to royalty within the meaning of Expln. 2(iv) of Section 9(1)(vi) which says "the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill". He also referred to the definition of royalty given in Article XII of DTAA with Germany. According to the AO, such payments were in the nature of information concerning industrial, commercial or scientific experience and, therefore, were in the nature of royalty as defined in the Act as well as DTAA. Accordingly, he created the demand of Rs. 6,95,208 by applying 11.11% rate of tax (after grossing up of 10 per cent).
40. The matter was carried before the CIT(A) before whom it was contended that the payment was for acquisition of navigational data in the form of software which is loaded in the aircraft and it was similar to acquiring microsoft windows, 98. Accordingly, it was the payment for purchase of an article for its own use and, therefore, could not be considered as payment for royalty. According to the CIT(A), the payment made by the assessee for procurement of navigational data was payment for information of industrial and commercial experience and, therefore, it was difficult to exclude the same for the ambit of taxation either under the IT Act or under the provisions of DTAA with Germany. Accordingly, the contention of the assessee that payment was for purchase was rejected. However, the AO was directed to adopt the correct rate of exchange as prevailing at that time when the payment was made. Aggrieved by the same, the assessee is in appeal before the Tribunal.
41. The learned counsel for the assessee has submitted that payment made by assessee was for acquiring the information by way of purchases and there was no obligation to return the same. According to him, the payments were made outside India in each year for updating and not for the same material. Reference was made to p. 390 of the paper book (Article VIB r/w Article 111A-1). However, it was admitted by the learned counsel for the assessee that this aspect of the matter though raised before the CIT(A) has not been dealt with by him and, therefore, the matter may go back to him for fresh adjudication. On the other hand, the learned Sr. Departmental Representative has relied on the order of the CIT(A) as far as merits are concerned but he has no objection if the matter is restored to the file of CIT(A) for considering the aspect argued before the. Tribunal. Accordingly, we restore the matter to the file of CIT(A) for fresh adjudication on this aspect of the matter after giving reasonable opportunity of being heard to the assessee. As far as the issue regarding grossing up of rate of tax is concerned, it is held that the lower authorities were not justified in grossing up the same for the reasons given by us in the earlier part of the order. To that extent, the order of CIT(A) stands modified.
42. The last issue arising out of these appeals is whether the orders of AO under Section 201 of the Act were passed within the period of limitation. It has been admitted by the learned counsel for the assessee that no period of limitation is prescribed for passing of such orders but it was contended by him that such orders must be passed within the reasonable period. In this connection, he relied on the decision of the Calcutta High Court in the case of Dunlop Rubber (I) Co. Ltd. (supra) and the decision of the Tribunal in the case of Raymond Woollens Mills Ltd. v. ITO (1996) 57 TTD 536 (Bow) wherein it has been held that period of 4 years is a reasonable period and, therefore, any order passed after that period should be held to be invalid.
43. On the other hand, the learned Sr. Departmental Representative has submitted that no period of limitation is provided under Section 201(1) and no Court can import anything into the statute. In this connection, he relied on various decisions reported as Dy. CIT and Ors. v. Central Concerte & Allied Products Ltd. (1999) 236 ITR 595 (Cal), Laxman Das Pran Chand and Ors. v. Union of India & Ors (1998) 234 ITR 261 (MP) and AIR 1990 SC 993, It was further submitted that the issue is covered directly by the decision of Calcutta High Court in the case of CIT v. Blackwood Hauz (I) (P) Ltd. (1971) 81 ITR 807 (Cal) and, therefore, such orders cannot be quashed if the order is passed after 4 years.
44. Rival contentions of the parties have been considered carefully. No doubt, the decision of the Calcutta. High Court relied upon by the learned Sr. Departmental Representative helps the case of the Revenue since it has been held that order under Section 18(7) of IT Act, 1922 corresponding to Section 201 of the Act can be passed at any time. However, the said decision is contrary to the decision of the Supreme Court in the case of S.B. Gurbax Singh v. Union of India AIR 1976 SC 1115 wherein it has been held that the revisional authority should initiate proceedings within the reasonable time even in the absence of a time-limit for initiation of revisional proceedings in the statute. Relying on this decision of the Supreme Court, the Tribunal has held in the case of Raymond Woollen Mills Ltd. (supra) that the orders under Section 201 of the Act should be passed within a period of 4 years from the end of assessment year. Accordingly, we would prefer the decision of the Tribunal since it has been delivered after taking into consideration the aforesaid decision of the Supreme Court. Respectfully following the same, it is held that order under Section 201 of the Act must be passed within a period of 4 years from the end of the assessment year. In the present case all the orders have been passed on 10th May, 2000. Four years from the end of assessment year means 5 years from the end of financial year. In the present case, the orders have been passed with reference to financial years. Therefore, it is held that the order under Section 201 of the Act for the financial year 1994-95 was barred by limitation. Other orders for the financial years 1995-96 to 1998-99 are within the period of limitation. Accordingly, the order under Section 201(1) for financial year 1994-95 is quashed while other orders are held to be passed within reasonable period.
45. In the result, appeal for financial year 1994-95 is allowed while appeals for financial years 1995-96 to 1998-99 are partly allowed.