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Facts
The Revenue filed two appeals against the CIT(A)'s orders for AY 2020-21 and 2021-22, which deleted additions made by the Assessing Officer for disallowance of supplementary rent/maintenance reserve under Section 40(a)(i) of the Income Tax Act. The CIT(A) had followed previous decisions of the ITAT in the assessee's own case.
Held
The Income Tax Appellate Tribunal (ITAT) dismissed both appeals filed by the Revenue, upholding the CIT(A)'s orders. The ITAT reiterated that the issue regarding the taxability of supplementary rent/maintenance reserve, treated as royalty, has been consistently decided in favour of the assessee in earlier assessment years, relying on the Special Bench decision in Interglobe Aviation Ltd. which held such payments are not chargeable to tax in India, especially considering the DTAA provisions. The Tribunal found no material change in facts or legal position to deviate from previous rulings.
Key Issues
1. Whether supplementary rent/maintenance reserve constitutes royalty liable for disallowance under Section 40(a)(i) of the Income Tax Act. 2. Whether such payments are exempt from tax in India under DTAA provisions.
Sections Cited
250, 40(a)(i), 10(15A), 90, Article 12, Article 8, Article 5
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Income Tax Appellate Tribunal, DELHI BENCH ‘D’: NEW DELHI
Before: SHRI ANUBHAV SHARMA & SHRI MANISH AGARWAL
2. Since both the appeals the issues raised by revenue are common, therefore, they are taken together for consideration and disposed off by a common order.
4. The Revenue has raised the following grounds of appeal: “1. The order of Ld. CIT(A) is not correct in law and facts.
2. That on the facts and circumstances of the case, Ld. CIT(A) has erred in deleting addition of Rs. 1,16,32,302/- made by AO on account of disallowance of supplementary rent/maintenance reserve u/s 40(a)(i).
3. That on the facts and circumstances of the case, Ld. CIT(A) has erred in deleting addition of Rs. 11,66,32,06,064/- on account of disallowance of supplementary rent being royalty u/s 40(a)(i).
4. The appellant craves leave to add, amend any/all the grounds of appeal before or during the course of hearing of the appeal.”
5. Before us, the ld. CIT-DR vehemently supposed the order of ld. AO and submit that though ld. CIT(A) has followed the order of the coordinate bench of the tribunal in assessee’s own case in preceding assessment years however, the issue has not attained finality and revenue has not accepted the orders of the tribunal therefore, she requested for confirmation of the order of the AO.
6. On the other hand, the ld. AR for the assessee submits that the issues raised by the revenue have already been decided by this coordinate bench of ITAT, Delhi in assessee’s own case for AY 2006-07 to AY 2018-19 by various orders deleting the disallowances made and thus, both the issues are squarely covered in favour of the assessee. He further submits that there is no material change in the facts and circumstances of the case, therefore, the order of ld. CIT(A) deleting the disallowance made by the AO deserves to be upheld.
7. Heard both the parties and perused the material available on record. Admittedly, the facts in the year under appeal are identical to the facts in previous years and there is no material change in the circumstances where the coordinate bench of the tribunal by following the judgement of special bench of &4597 /Del/2024 DCIT vs. Spicejet Limited ITAT, Delhi Benches in the case of Interglobe Aviation Ltd. Vs. ACIT reported in 191 ITD 1 has deleted the disallowances made. The relevant observations as contained in para 20 & 21 of coordinate bench of the tribunal’s order for AY 2011-12 for revenue’s appeal in has made following observations: “20. On perusal of the order of the Tribunal in assessee’s own case for the assessment years 2006-07 to 2010-11 which is placed at pages 1 to 41 of the Paper Book we observe that the Tribunal by order dated 28.12.2022 decided the issue in favour of the assessee 14 M/s Spice Jet Ltd. holding that supplemental rent/maintenance reserve would be exempt from tax in the hands of lesser in India as per Section 10(15A) of the Act and hence, no disallowance u/s 40(a)(ia) can be made observing as under: - “36. In ground no. 3(a), the revenue has challenged deletion of addition of Rs.26,22,21,942/- made under section 40(a)(i).
37. Briefly the facts are, in course of assessment proceeding the Assessing Officer noticed that the assessee had debited various expenses amounting to Rs.28,55,97,487/- under the head aircraft maintenance cost. After calling for necessary details and examining them the Assessing Officer found that an amount of Rs.26.88 crores was paid towards supplemental lease rent to the lessor of the aircrafts. He observed, the supplemental rent is towards usage of life limited parts of auxiliary power unit, and part of engines which are not covered by the approval of CBDT under section 10(15A). Alleging that the asses see had failed to deduct tax at source while making the payment, the Assessing Officer disallowed the amount under section 40(a)(i) of the Act. Similarly, for the very same reason of nondeduction of tax at source, the Assessing Officer disallowed various other expenses under section 40(a)(i) of the Act. The assessee contested the disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) deleted the disallowance made by the Assessing Officer.
38. We have considered rival submissions and perused the materials on record. The expenditures, which have been subjected to disallowance under section 40(a)(1) are as under: i. Supplemental Rent /Maintenance Reserve of Rs.26,88,07,231/- ii. Engine Guarantee Availability Fee of Rs.5,24,155/- iii. Repair of Rotables of Rs.3,75,556/- iv. Logo Printing of Rs.25,15,000/- 39. As far as supplemental rent/maintenance reserve is concerned, it is observed, learned Commissioner (Appeals) after analyzing the lease agreement has recorded a factual finding that the supplemental rent was paid for acquisition of aircraft. He has observed that the basic lease rent is fixed for month, whereas, the supplemental rent is calculated with reference to flight hours which signifies the lessor would incur a fixed cost for month in respect of aircraft. The lessor would incur further cost on account of wear and tear on the aircraft on the basis of flight hours. Therefore, supplemental rent is ascertained with reference to flight hours. As per the agreement, responsibility of &4597 /Del/2024 DCIT vs. Spicejet Limited the assessee is only to carry out minor repair works which are required to be done in the normal course of operation. All major repairs like replacement, overhauling etc. are the responsibility of the lessor. It has been factually found that the cost incurred in respect of normal repairs and replacement of routine spares etc. is not included in the supplemental rent. Thus, as rightly observed by the first appellate authority, for payments which are covered in the exceptional clause of section 10(15A) of the Act, it is not the assessee who is making the payment. On the contrary, it is the lessor who is making such payment to the lessee. It is relevant to observe, in a recent decision rendered in case of Inter Globe Aviation Ltd. Vs. DGIT, vide order dated 18.07.2016, the Special Bench of the Tribunal has held that since, the supplemental rent was determined taking into consideration a number of flying hours and had character of basic rent, said payment would be exempt from tax in the hands of lessor in India as per section 10(15A) of the Act, hence, no disallowance under section 40(a)(i) can be made. The aforesaid decision of the Special Bench of the Tribunal clinches the issue in favour of the assessee: Therefore, no disallowance under section 40(a)(i) can be 16 M/s Spice Jet Ltd. made in respect of supplemental rent of Rs.26.88 crores.”
We further observe that the Special Bench of the Delhi Tribunal in the case of Inter Globe Aviation Ltd. (Indigo) vs. Addl. CIT (supra) considered the lease rental pursuant to agreements executed after 01.04.2007 and its chargeability to tax in the hands of lesser under Article 12 of DTAA between India and Ireland and the Special Bench held that supplementary rent paid for lease agreements executed after 01.04.2007 are not chargeable to tax in India. While holding so the Special Bench observed as under: - “42. For Lease Agreements executed after 1st April, 2007, a claim was made by the assessee before 1 'Mower authorities that the income is not chargeable to tax in hands of Lessor under Article 12 of the DT7 between India and Ireland. We find the AO has not accepted this the reasons of which has already be reproduced at para 1.5 of the order. 42.1 Cross border leasing of aircraft enjoyed a special exemption under section 10(15A) of the I.T. A However, a sunset clause was introduced by Finance Act, 2005 to provide that this exemption shall not available for agreements entered after 1st April, 2007. In the aftermath of withdrawal of exemption the liability of the lessor is to be governed by the provisions of bilateral tax treaties. Learned Senior counsel for the assessee submitted that as per provisions of section 90 of the Act, provisions of DTAA shall apply to the extent they are beneficial. Under the DTAA the foremost consideration is whether the non-resident lessor has a permanent establishment (PE) in India as per Article 5 of the relevant. According to him, m leasing of an aircraft which is located in India ought not to result in an existence of PE and there is also such allegation made by 17 M/s Spice Jet Ltd. the lower authorities in the present case. It is his submission that the definition of royalty under the Income-tax Act and Tax Treaty includes a consideration for use and right to use any commercial, scientific and industrial equipment and aircraft do arguably fall within this category equipment and therefore the corresponding lease rentals may be characterized as royalty. However, certain tax treaties which India has entered into notably with Ireland it has explicitly excluded aircraft from scope of Royalty. He &4597 /Del/2024 DCIT vs. Spicejet Limited drew our attention to the relevant provision of DTAA between India and Ireland (Article 12) which are as under:- "1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other contracting State may be taxed in that other State.
Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3.(a) The term "royalties" as used in this Article means payments of any kind received £ consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph film or films or tapes for radio or television broadcasting, patent, trade mark, design or model, plan, secret formula or process or for the use of or the r to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience; (b) The term "fees for technical services" means payment of any kind in consideration for rendering of any managerial, technical or consultancy services including the provision 18 M/s Spice Jet Ltd. services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention.”
The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 1 or Article 14, as the case may be, shall apply.
Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to &4597 /Del/2024 DCIT vs. Spicejet Limited arise in the State in which the permanent establishment or fixed base is situated.
Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical 19 M/s Spice Jet Ltd. services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the lastmentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention." 42.2 In Para-41 above we have examined the nature of Supplementary Rent and it is held that payment of Supplementary Rent is nothing different than the character of basic rent. We find that Supplementary Rent is not a payment made for use of spares, facilities or any services. Supplementary Rent is, therefore, a payment made for use of Aircraft. As per provisions of Section 90 of the Income-tax Act, the provisions of a bilateral Tax Treaty will apply to the extent it is more beneficial to the tax payer. We find under Article 12(3)(«) of India-Ireland DTAA, the term "Royalty" is specifically defined to exclude from its scope payment of any kind for use of "Aircraft". We further find the tax treaty also incorporates a separate provision in Article-8 .on profits from shipping and air transport.-Article 8(1) reads as under: "Profits derived by an enterprise of a contractor state from the operation of rental of ships or aircraft in international traffic and the rental of containers and related equipment which is incidental to the • operation of ships or aircraft in international traffic shall be taxable only in that contractor State." 42.3 This Article states that profits from rental of Aircrafts is taxable only in state of residence of Lessor. We, therefore, find merit in the arguments of the Learned Senior Counsel for the Assessee that as per Articles 12 and 8 of the Tax Treaty with Ireland, profits derived by an enterprise of a contracting State from rental of Aircraft are taxable "only" in Ireland. 20 M/s Spice Jet Ltd. Supplementary Rent of Rs. 276,28,59.821/- paid for Lease Agreements executed after 1-4-2007 are, therefore, not chargeable to tax in India. However, the above figure is subject to verification by the A.O.”
In view of the above, respectfully following the decision of the coordinate bench of the Tribunal in assessee’s own case and also the decision of the Special Bench of Delhi Tribunal in the case of Inter Globe Aviation Ltd. (Indigo) vs. Addl. CIT (supra), we uphold the order of the Ld. CIT(Appeals) and reject the grounds raised by the Revenue.
The above order is followed by the coordinate bench of the tribunal in assessee’s own case for other assessment years. In view of above and considering &4597 /Del/2024 DCIT vs. Spicejet Limited the facts that there is no change in the circumstances and legal positions thus, by respectfully following the aforesaid judgements of coordinate bench of tribunal all the grounds taken by the revenue are dismissed.
The appeal of the revenue is dismissed in ITA No. 4595/24. 10.
2021-22] – Revenue’s appeal 11. The revenue has raised following grounds of appeal: “1. The order of Ld. CIT(A) is not correct in law and facts.
2. That on the facts and circumstances of the case, Ld. CIT(A) has erred in deleting addition of Rs. 643,80,46,168/- on account of disallowance of supplementary rent being royalty u/s 40(a)(i). The appellant craves leave to add, amend any/all the grounds of appeal before or during the course of hearing of the appeal.”
12. The issue involved in revenues appeal is identical to the issue in AY 2020- 21 wherein the appeal of the revenue is dismissed by following the decision of the coordinate bench of the tribunal in assessee’s own case of AY 2011-12 which is mutatis mutandis applied to the present appeal of the revenue. Accordingly, the appeal of the revenue for AY 2021-22 is also dismissed.
13. In the results, both the appeals of Revenue in and 4597/Del/2024 are dismissed. Order pronounced on 18.06.2025.