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Before: MS SUCHITRA KAMBLE & SHRI PRASHANT MAHARISHI
PER SUCHITRA KAMBLE, JM
These appeals are filed by the Assessee and the Revenue for A.Y. 2007- 08 and 2008-09 against the orders dated 26.04.2012 passed by the CIT(A)- XXIX, New Delhi.
The grounds of appeal are as under :
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ITA No. 3253/Del/2012 (A.Y. 2007-08) Assessee’s appeal “1.1 That learned CIT(A) has grossly erred in law and on the facts and in the circumstances of the appellant’s case in confirming the assessing officer View for treating the assessee in default for non deduction of Tax at Source in respect of reimbursement of expenses Rs. 2,16,962/- i.e. (Rs. 147,766/- payment made to Super Potato Company Ltd, Japan and Rs. 69,196/- to Creative Kitchen Planet Intt, Malaysia) made by the assessee company to various non resident recipients by holding that “ Payment made by the appellant to Super Potato Co. Ltd (SPC, Japan) & Creative Kitchen Planners Intl. Malaysia were in the nature of Fees for Technical Services and therefore chargeable to tax in India. The appellant was required to withhold tax on these payments u/s 195” 1.2 That the learned CIT(A) has failed to appreciate that the payment is in the nature of reimbursements made to Super Potato (SPC) & Creative Kitchen Planners Intl. (CKP) (the non resident service provider) on account of actual expenses incurred by the non resident like air fare charges, travelling, boarding & lodging etc in India in pursuance of the respective agreements with the concerned parties, on the basis of back up invoice/ supports of third parties and there is no element of income present in such remittance which may be chargeable to tax under the provisions of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). 1.3 That the learned CIT(A) has grossly erred in law in applying section 9(l)(vii) of the I.T. Act, 1961 by treating the payment made by the. appellant company to these non residents recipients in nature of fees for technical service and chargeable to tax in India without appreciating that this section is not applicable to the present case as the payments made by the appellant company are of nature of reimbursement of expenses etc and are not chargeable to tax in India since they either do not fall within the ambit of section 4 read with section 5(2) read with section 9(1) of the I.T. Act are not Covered as per the relevant DTAA of Indian with the other country and that the machinery provisions of section 195 do not apply to the said payment. 1.4 That the order passed by the learned CIT(Appeals) is bad in law as well as wrong on facts and erroneous in point of law and right is reserved to assail the same on such other ground or grounds as may be advanced at the time of hearing for which the appellant craves leave to amend, vary or add to the ground herein before appearing.” ITA No. 3487/Del/2012 (A.Y. 2007-08) Revenue’s appeal 1. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deleting the additions made by the AO, by holding that the payments made by the assessee towards hiring of aircraft does not
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constitute the nature of royalty. Further, holding that as per the definition of Royalty in section 9(i)(vi), the payment does not fall into the category of Royalty but failing to appreciate that such payments would fall under the clause (iva) of explanation 2 to section 9(l)(vi) of the Act read with Article 12 of the DTAA 2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made to ‘White & Case’, the consultancy firm, is not in the nature of FTS but failing to appreciate Article 15(1) of the Indo-UK Treaty, deals with payments to individuals and does not apply to partnership firms. Further failing to appreciate that such payments would be covered under Article 13 of the Treaty as fee for technical services. 3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made for survey of aircraft and routine service are not in the nature of FTS since ‘make available’ condition is not fulfilled, but failing to appreciate the fact the receipt was not required to make such a knowledge or technical expertise available on a permanent basis and the services were provide in connection with review of aircraft- records and condition survey to DLF Ltd and enable it to purchase a second hand aircraft. 4. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made for aircraft maintenance are not in the nature of FTS, since ‘make available’ condition is not fulfilled but at the same time failing to appreciate the fact that the recipient was not required to make such a knowledge or technical expertise available on a permanent basis and the services were provided in connection with maintenance or aircraft. 5. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made for crew support services are not in the nature of FTS, since ‘make available’ condition is not fulfilled but at the same time failing to appreciate that it was not intended by the assessee to have such service in the form of training or transferring permanent expertise. 6. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made for advertisement rights of the circlet ground cannot be characterized as Royalty but at the same time failing to appreciate that the assessee used such ground rights for finding sponsors for the India- Pakistan friendly match and such payment would fall within the precincts of section 9(i)(vi) of the Act and the Article 12 of the Indo-UAE DTAA.
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On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made as a security deposit and that the such amount was received back by the assessee in the subsequent year, accordingly it is not an expenditure on the part of the assessee whereas it is found from records that this claim is not factually correct with regard to the receiving back the security deposit and hence it is an expenditure entry. 8. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made towards business and personnel security consultancy services did not fulfilled the criteria of ‘make available’ clause as per the treaty with Singapore but at the same time failing to appreciate as the services were provided to the assessee to improve its security profile along with the security profile of other important persons of the company. 9. The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal. ITA No. 3254/Del/2012 (A.Y. 2008-09) Assessee’s appeal 1.1 That learned CIT(A) has grossly erred in law and on the facts and in the circumstances of the appellant’s case in confirming the assessing officer view for treating the assessee in default for non deduction of Tax at Source in respect of reimbursement of expenses Rs.18,15,961/- i.e.(Rs. 12,51,250/- payment made to Super Potato Company Ltd, Japan, Rs. 1,00,622/- to Creative Kitchen Planet Intt, Malaysia & Rs. 4,64,089/- to Small, Wood, Reynolds Stewart .Singapore) made by the appellant company to various non resident recipients by holding that “ Payment made by the appellant to Super Potato Co. Ltd (SPC, Japan), Creative Kitchen Planners Intl. Malaysia & Small, Wood, Reynolds Stewart Singapore were in the nature of Fees for Technical Services and therefore chargeable to tax in India. The appellant was required to withhold tax on these payments u/s 195” 1.2 That the learned CIT(A) has failed to appreciate that the payment is in the nature of reimbursements made to Super Potato (SPC), Creative Kitchen Planners Intl. (CKP) & Small, Wood, Reynolds Stewart .Singapore (the non resident service provider) on account of actual expenses incurred by the non resident like air fare charges, travelling, boarding & lodging etc in India in pursuance of the respective agreements with the concerned parties, on the basis of back up invoice/ supports of third parties and there is no element of income present in such remittance which may be chargeable to tax under the provisions of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). 1.3 That the learned CIT(A) has grossly erred in law in applying section9(1
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)(vii) of the I.T. Act, 1961 by treating the payment made by the appellant company to these non residents recipients in nature of fees for technical service and chargeable to tax in India without appreciating that this section is not applicable to the present case as the payments made by the appellant company are nature of reimbursement of expenses etc and are not chargeable to tax in India since they either do not fall within the ambit of section 4 read with section 5(2) read with section 9(1) of the I.T. Act are not covered as per the relevant DTAA of India with the other country and that the machinery provisions of section 195 do not apply to the said payment. 1.4 That the order passed by the learned CIT(Appeals) is bad in law as well as wrong on facts and erroneous in point of law and right is reserved to assail the same on such other ground or grounds as may be advanced at the time of hearing for which the appellant craves leave to amend, vary or add to the ground herein before appearing.” ITA No. 3488/Del/2012 (A.Y. 2008-09) Revenue’s appeal 1. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deleting the additions made by the AO, by holding that the payments made by the assessee towards hiring of aircraft does not constitute the nature of royalty. Further, holding that as per the definition of Royalty in section 9(i)(vi), the payment does not fall into the category of Royalty but failing to appreciate that such payments would fall under the clause (iva) of explanation 2 to section 9(l)(vi) of the Act read with Article 12 of the DTAA 2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made to ‘White & Case’, the consultancy firm, is not in the nature of FTS but failing to appreciate Article 15(1) of the Indo-UK Treaty, deals with payments to individuals and does not apply to partnership firms. Further failing to appreciate that such payments would be covered under Article 13 of the Treaty as fee for technical services. 3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made for survey of aircraft and routine service are not in the nature of FTS since ‘make available’ condition is not fulfilled, but failing to appreciate the fact the receipt was not required to make such a knowledge or technical expertise available on a permanent basis and the services were provide in connection with review of aircraft- records and condition survey to DLF Ltd and enable it to purchase a second hand aircraft. 4. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment
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made for aircraft maintenance are not in the nature of FTS, since ‘make available’ condition is not fulfilled but at the same time failing to appreciate the fact that the recipient was not required to make such a knowledge or technical expertise available on a permanent basis and the services were provided in connection with maintenance or aircraft. 5. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made for crew support services are not in the nature of FTS, since ‘make available’ condition is not fulfilled but at the same time failing to appreciate that it was not intended by the assessee to have such service in the form of training or transferring permanent expertise. 5. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made for advertisement rights of the circlet ground cannot be characterized as Royalty but at the same time failing to appreciate that the assessee used such ground rights for finding sponsors for the India- Pakistan friendly match and such payment would fall within the precincts of section 9(i)(vi) of the Act and the Article 12 of the Indo-UAE DTAA. 6. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made as a security deposit and that the such amount was received back by the assessee in the subsequent year, accordingly it is not an expenditure on the part of the assessee whereas it is found from records that this claim is not factually correct with regard to the receiving back the security deposit and hence it is an expenditure entry. 7. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO, by holding that payment made towards business and personnel security consultancy services did not fulfilled the criteria of ‘make available’ clause as per the treaty with Singapore but at the same time failing to appreciate as the services were provided to the assessee to improve its security profile along with the security profile of other important persons of the company. 8. The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal.
The assessee engaged in the business of real estate. During the assessment year 2007-08, the assessee company has made payment to non- resident and deducted TDS where ever required in accordance with the
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provision of Income Tax and has also made some payment without deducting TDS as these payments are generally in the nature of reimbursement, hiring of aircraft etc. as per the assessee. Thus the assessee submitted before the ITO that these payments are covered under the exemptions available under DTAA not chargeable to tax u/s 5(2) read with Section 9 of the Income Tax Act, 1961. Further they are taxed with the relevant country. Therefore, provisions of Section 195 are not attracted. The Assessing Officer after considering the submissions of the assessee, made demand of Rs. 5,45,45,170/- u/s 201 of the Act vide order dated 29.03.2010 by treating the assessee company as an assessee in default for non deduction of Tax at Source in respect of payment of Rs. 36,85,48,449/- for the A.Y. 2007-08 & 2008-09 made by the assessee company to various non residents recipients which are in the nature of Royalty/FTS and is chargeable to tax in India as per the Assessing Officer. The items identified by the Assessing Officer for treating the assessee in default u/s 201 in respect to remittances made to the non-resident payees for different assessment years have been tabulated as under: Issue Party Name / Country AY 2006-07 AY 2007-08 AY 2008-09 Payee Hiring / Chartering of Aircraft Air Partner Inc. USA 37,22,865 - - 1. Air Partner PLC UAE - 53,84,363 - Net Jets UK Ltd. UK - - 1,10,86,070 - London Air UK - 6,92,145 Charter Center Ltd. Legal Consultancy Services 2. White & Case UK 2,35,00,341 88,10,931 - Reimbursement of expenses Creative Kitchen Malaysia 69,169 1,00,622 3. Planners Intl. Super Potato Japan - 1,47,766 12,51,250 Co. Ltd. Smallwood, Singapore - - 4,64,089 Reynolds, Steward 4. Annual Membership Fee of the Club Loch Lomond UK - 50,25,025 2,52,200 Golf Club
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Payment for aircraft/records and condition survey 5. General USA - 40,52,559 3,03,617 Dynamic Aviation Payment for aircraft maintenance 6. Gulf Stream UK - - 1,81,95,077 Aerospace Ltd. Payment for crew support services 7. ACASS Canada Canada - - 7,99.728 Ltd. Payment for sponsorship/advertisement 8. Percept D’Mark UAE - 32,58,44,025 - Gulf LLC Payment - security deposit 9. Dallas Airmotive USA - - 97,56,000 Inc. Payment for Risk Assessment 10. Control Risk Singapore - 38,33,029 - Group (S) PTE Ltd. Total 37,22,865 36,85,48,422 5,10,19,584
Being aggrieved by the order under Section 201 of the Income Tax Act, 1961, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the Assessee.
The Ld. AR submitted that as regards to assessee’s appeals are concerned, the CIT(A) was not right in confirming the Assessing Officer’s view for treating the assessee in default for non deduction of Tax at Source in respect of reimbursement of expenses of Rs. 2,16,962/- (i.e. Rs. 1,47,766/- payment made to Super Potato Company Ltd., Japan and Rs. 69,196/- to Creative Kitchen Planet Intt., Malaysia) for A.Y. 2007-08 made by the assessee company to various non-resident recipients by holding that “payment made by the appellant to these company were in the nature of Fees for Technical Services and therefore, chargeable to tax in India. The appellant was required to withhold tax on these payments u/s 195.” The Ld. AR submitted that these expenses were actually incurred and from the perusal of the invoice it can be seen that there is no element of income present in such remittance. The Ld. AR
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further submitted that Section 9(1)(vii) of the Act does not apply to the present case as the payments made by the assessee company are of nature of reimbursement of expenses and not chargeable to tax in India since they either do not fall within the ambit of Section 4 read with Section 5(2) read with Section 9(1) of the Act and also not coming under the purview of relevant DTAA of India with the other country and that the machinery provisions of Section 195 do not apply to the said payment. The Ld. AR relied upon the decision of the Tribunal in case of Pernod Ricard India Pvt. Ltd. vs. ITO (TDS) ITA No. 6640/DEL/2013 order dated 08.01.2019 wherein the reliance was made on the decisions of the Hon’ble Delhi High Court in case of Industrial Engineering Projects Pvt. Ltd. 202 ITR 1014 and the Hon’ble Bombay High Court in case of Krupp Udhe GmbH 354 ITR 173.
The Ld. DR relied upon the order under Section 271 of the Act as well as the order of the CIT(A) on this issue.
We have heard both the parties and perused all the relevant records. It is pertinent to note that payments made to non residents in the present case the payments made to them are purely of reimbursement in nature and does not fall within the remuneration at all. The findings given by the CIT(A) that whether the payments are made directly to non-residents or part of their expense is reimbursed by the assessee has same effect, is not correct. In fact actual expenses in the nature of airfare charges, courier charges, telephone charges and local travelling expenses etc are paid by the non-residents and it is only reimbursement which was not an income of the non residents. The reliance upon the decision of Pernod Ricard India Ltd. (supra) by the Ld. AR is apt. Therefore, the findings of the CIT(A) to this extent is set aside. Since the appeals of the assessee filed for A.Y. 2007-08 and 2008-09 are on identical issues both the appeals of the assessee are allowed.
Now we are taking up the appeals filed by the Revenue. The Ld. DR
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submitted that as regards to Ground No. 1, the CIT (A) erred in deleting the additions made by the Assessing Officer by holding that the payments made by the assessee towards hiring of aircraft does not constitute the nature of royalty. Further, holding that as per the definition of Royalty in section 9(i)(vi), the payment does not fall into the category of Royalty but failing to appreciate that such payments would fall under the clause (iva) of explanation 2 to section 9(l)(vi) of the Act read with Article 12 of the DTAA.
The Ld. AR relied upon the order u/s 201 of the Act and the order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. The CIT(A) held as under: “3.4 Finding The appellant has made payments to following non-resident Airlines for hiring aircraft on chartered basis: (i) Air Partners Inc (USA) (ii) Air Partner PLC (UAE) (iii) Net Jets UK Ltd. (UK) (iv) London Air Charter Centre Ltd. (UK)
The chartered plane has been utilized by the appellant for travelling overseas for a few days as mentioned supra. Issue involved is whether the appellant (payer) is under obligation to deduct tax at source (TDS) on these payments u/s 195 of the act. ……………….. It is not the case of the AO that payments made by the appellant are received or deemed to be received by the non-resident airlines in India. Therefore, section 5(2)(a) is not applicable. The AO’s case is that such payments are deemed to accrue or arise in India and are in nature of royalty under explanation 2 (iva) to section 9(1)(vi) r w section 5(2)(b) of the act. It is undisputed fact that these payment are not taxable as business receipts under Article 7 of the relevant DTAA because the recipients Airlines do not have PE in India, as this is not the case of the AO even. Now, the issue involved is whether such payments can be characterized as royalty as provisions of Explanation 2 (iva) to section 9(1)(vi) of the Act. Section 9(1)(vi) provides the source rule and its clause (b) says that income by
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way of royalty paid by Indian resident shall be deemed to accrue or arise in India. This clause also provides an exception to this rule, which is however not applicable in case of appellant. For applicability of this source rule, the nature of income should be ‘royalty’. The term royalty has defined in Explanation 2 to section 9(1)(vi) and its clause (iva): ……………….. The appellant has hired aircraft on chartered basis from non-resident airlines. ………………The appellant is engaged in business of real estate and is not in aviation business. Therefore, it can not be inferred that the aircraft taken on hire by the appellant has been used in its business for producing goods or providing services in any manner. If at all it is to be inferred that air craft is in nature of equipment, then if the appellant hires a taxi, may be on chartered basis, that will also be an equipment for the appellant who is engaged in real estate business. This will give an absurd result. From the nature of ‘royalty’ itself, it can be inferred that equipment should be of industrial, commercial or scientific nature and the appellant should use it in its business for earning income. This is not the case here. ………………… It says that where a ship or aircraft is leased on charter fully equipped and manned/crewed basis, it is covered by Article 8 of DTAA. However, if it is a bare boat lease, then it is covered by Article 7 or if DTAA contains clause of equipment royalty, then by Article 12. The logic is very simple. ………………… In present case, the appellant is not in business of flying aircraft and it has taken fully equipped and manned /crewed aircraft on charter basis, therefore payment of hire charges can not be in nature of royalty. ………………………. The AO has relied upon West Asia Maritime Ltd. vs. ITO, Chennai (2008) 111 ITD 155 and Poompuhar Shipping Corp. Ltd. vs. ITO (2008) 297 ITR (A.T.) for arriving at conclusion that aircraft hired by the appellant is in nature of equipment. The basic fact in case of both these cases was that the assessee was in business of operating ships. This is a vital and deciding factor. As per definition of equipment as discussed supra an asset is equipment if it is used in business of an enterprise. In present case, the appellant is not at all engaged if it is used in business of an enterprise. In present case, the appellant is not at all engaged in operating aircraft, Therefore, by no stretch of imagination, aircraft can be equipment for the appellant. Without prejudice to this finding, even if aircraft is equipment for appellant, it has taken on fully manned / crewed chartered basis, then according Klaus Vogel commentary, the hire charges can not be in nature of royalty.
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Further, the AO has held that payment made to Air Partners Inc (USA) is in nature of royalty as per Article 12(3)(b) of Indo-USA treaty. The said article is reproduced as below: ………………. This article itself provides an exception that if payment is covered by Article 8, then it shall not be treated as royalty. The payment for aircraft taken on fully equipped, crewed chartered basis is covered by Article 8 as per Klaus Vogel’ commentary as discussed supra, therefore this payment falls outside purview of Article 12(3)(b) and hence it is not in nature of royalty. ……………………. As per discussion supra, it is seen that the hire charges for chartered fully equipped aircraft is, not in nature of royalty as per definition of royalty as contained in 9(1)(vi) of the Act, because such aircraft shall not be an industrial, commercial or scientific equipment for the appellant. The payment is not in nature of royalty even as per relevant DTAA as discussed supra. In view this finding, I hold that since the payment is not chargeable to tax in India, there is no obligation cast on the appellant to withhold tax on it. This issue is decided in favour of the appellant. This disposes off relevant portion of ground no. 2.1 for AY 2006-07, 2007-08 & 2007-08 which are allowed.” From the perusal of the above findings given by the CIT(A) and from the records produced before the Assessing Officer at the time of the proceedings under Section 201 of the Act, it can be seen that the assessee company entered into an agreement with London Air Charter Centre Ltd. (UK) and Air Partner PLC (UAE) both non-resident and made payments during the relevant assessment years towards the hiring of aircraft. The payment made by assessee company to the non-resident by availing a standard facility offered by the payee i.e. non- resident company. All transactions entered into by the assessee company with the non-resident payees are of similar character and cannot classified as Royalty as held by the Assessing Officer. The payment is for chartered plane hire outside India paid to non-resident outside India. Thus, the said income does not deemed to have accrued or arise in India and hence not liable for tax in India. Therefore, there is no need to interfere with the findings of the CIT(A). Ground No. 1 of the Revenue’s appeal is dismissed.
The Ld. DR submitted that as regards Ground No. 2, the CIT(A) erred in
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deleting the addition made by the Assessing Officer, by holding that payment made to ‘White & Case’, the consultancy firm, is not in the nature of FTS but failing to appreciate Article 15(1) of the Indo-UK Treaty, deals with payments to individuals and does not apply to partnership firms. Further failing to appreciate that such payments would be covered under Article 13 of the Treaty as fee for technical services.
The Ld. AR relied upon the order u/s 201 of the Act and order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. The CIT(A) held as under:
“4.4 Finding: The appellant has made payment to White & Case, a partnership firm of UK for seeking consultancy services in respect of issue of IPO. The said firm provided technical inputs regarding contents to be included in prospectus in accordance with regulatory provisions of law applicable. The services provided by White & Case are undisputedly in nature of Fee for technical services as per section 9(1)(vii) of the Act. Even the appellant has not disputed it. The issue involved is whether the services provided by White & Case constitute FTS under relevant Indo-UK DTAA also. ……………. Now, in present case, White & Case, a partnership firm resident of UK has rendered legal services in UK to the appellant. The services are covered in the definition of professional services as given in Article 15(3). But, since the services are rendered in UK only and conditions of (a) and (b) are not satisfied, therefore as per Article 15(1), such payment shall be taxable only in UK. The AO’ case is that since the payment has been made to a partnership firm and not to the individual, Article 15 does not apply. This argument of AO is not correct in view of first sentence of Article 15(1) which talks about the
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income derived by an individual, whether in his own capacity or as a member of a partnership. The partnership firm can provide services through its members and collect payment through its members. The words ‘partnership’ appearing in the Article is not without any meaning. Further, in case of partnership firm, stay of a specific individual member of partnership is not relevant for counting the period of 90 days as is clear from provisions of Article 15(2), which say that stay of any member of partnership shall be relevant. A similar interpretation has been given in case of Clifford Chance, UK vs. DCIT (2003-TII-53-ITAT-MUM-INTL), wherein Indo-UK treaty was involved as in the present case. In view of the discussion, it is clear that in present case, the payment made to White & Case is taxable in UK and not in India because the services were rendered in UK and the firm or its member did not have a fixed base in India or their stay in India did not exceed 90 days. Now, it is seen that exception to Article 13(4) as provided by Article 13(5)(e) brings the payment made by the appellant within the purview of Article 15 wherein such payment becomes taxable in UK and not in India. Without prejudice to this finding, even if it is assumed that payment is covered by Article 13(4), then criterion of ‘make available’ has to be satisfied before the payment can be characterized as FTS. The meaning attached to the term ‘make available’ has been explained in various judicial decisions. …….. ………………….. The AO has relied upon Intertek Testing Services India Pvt. Ltd. [2008] 307 ITR 418 (AAR), but has drawn a conclusion different from what has been drawn by Hon’ble Special Bench, ITAT Mumbai in case of Mahindra & Mahindra case. Thus, reliance of AO on the said decision of AAR is misplaced. From the discussion supra, it is seen that unless ‘make available’ clause is satisfied, services cannot be characterized as FTS under Indo-UK Treaty. Thus, even if it is assumed that the services provided by White & Case to the appellant are covered under Article 13(4) and not under Article 15 by virtue of
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exception clause contained in Article 13(5)(3), such services shall not be in the nature of FTS as the AO has not established how ‘make available’ clause has been satisfied. The appellant has not been trained by the firm White & Case for dealing with legal matters in future. In view of these findings, I hold that the payment made by the appellant to White & Case is not in nature of FTS and is therefore not chargeable to tax in India. Hence the appellant is not liable to deduct tax on such payment. The issue is decided in favour of the appellant. This disposes off relevant portion of ground no. 2.2 for AY 2007-08 and 2008-09, which are allowed.” From the perusal of the evidences produced by the assessee company during the proceedings under Section 201 of the Act and from the findings of the CIT(A), it can be seen that the assessee company entered into an agreement with M/s White & Case for professional service rendered as international counsel to DLF Ltd. in connection with IPO issue and made a payment. The payment made to White & Case fall under the ambit of Article 15 of the DTAA between India and UK and is not subjected to tax in India as the said White & Case is partnership firm. The firm is a resident of UK which does not have any fixed base regularly in India and aggregate stay in India during the period April, 2006 to March 2007 does not exceed 90 days. Hence TDS will be not applicable as per Article 15 of the DTAA agreement in between India and UK. The Assessing Officer overlooked the vital fact that the payment is covered under Article 15 and not under Article 13 since the remittance has been made to a non-resident partnership firm, as is also evident from the invoice of the payee produced by the assessee company. The benefit of exemption under Article 15 are available to an individual as well as to a partnership firm and thus, tax is not required to be withheld on the concerned payment. Thus, the findings given by the CIT(A) is correct and there is no need to interfere with the same. Hence, Ground No. 2 is dismissed.
The Ld. DR submitted that as regards to Ground No. 3, the CIT(A) erred in deleting the addition made by the Assessing Officer, by holding that
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payment made for survey of aircraft and routine service are not in the nature of FTS since ‘make available’ condition is not fulfilled, but failing to appreciate the fact the receipt was not required to make such a knowledge or technical expertise available on a permanent basis and the services were provide in connection with review of aircraft- records and condition survey to DLF Ltd. and enable it to purchase a second hand aircraft.
The Ld. AR relied upon the order u/s 201 of the Act and order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. The CIT(A) held as under: “7.4 Finding: The appellant wanted to buy an old aircraft and entered into an agreement with General Dynamics Aviation Services, USA for making a survey report of said aircraft. It has made payment to General Dynamics Aviation Services, USA for the services provided which are in nature of review of maintenance history and records, review of required aircraft documentation, review of required flight manuals and supplements etc. The services are highly technical in nature and could be rendered by only an expert or professional person. The appellant has not disputed the highly technical nature of the service. The AO has treated these services as FTS under Article 13(4) of Indo-USA DTAA. However, the appellant has contended that its case is not covered by source rule as contained in section 9(1)(vii)(b) of the act, which reads as below: ……………. According to appellant, it has received services in the nature of review of maintenance history and records, review of required aircraft documentation, review of required flight manuals and supplements etc. from GDAS which was later presented to DLF in the form of a report. Since the appellant has
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utilized the services outside India, they would fall outside the purview of section 9(1)(vii) and shall not be held to be income deemed to accrue arise outside India by the virtue of exclusion in the ‘Clause b’ to section 9(1)(vii). This argument of the appellant is fallacious because exclusion shall be available only if services are utilized for business or profession carried on by the payer outside India or for the purposes of making or earning any income from any source outside India. Admittedly, the appellant is engaged in business of real estate and it is not in business of operating aircraft outside India. The aircraft has been brought by the appellant just for its travelling purpose, in the same way as a businessman buys a vehicle for his travelling purpose. The aircraft was not meant to be a source of income situated outside India for the appellant. Therefore, case of the appellant does not fall out of purview of provisions of section 9(1)(vii)(b) of the act. The services provided by non-resident squarely fall within definition of technical services under the domestic act. Now, we have to examine the position under Indo-USA DTAA. Article 13(4) of said DTAA defines technical services and it contains ‘make available’ clause. The meaning attached to ‘make available; by different judicial authorities have been discussed supra in issue no.2. Therefore, unless the appellant has been enabled by the non-resident service provider to apply the said service in future on its own without resorting to the non-resident service provider, it cannot be said that the service has been made available. Hon’ble Bombay High Court in case of Diamond Services International (P) Ltd. Vs. Union of India [2008-TOIL-268-HC-MUM-IT], has reiterated the same principle. The AO has not established that the appellant has been trained by General Dynamics Aviation Services, USA in the field of survey of old aircraft so that that the appellant could in future generate such report on its own. In view of this, I hold that the payment made by the appellant to General Dynamics Aviation Services, USA is not in nature of FTS and is therefore not chargeable to tax in India. Hence the appellant is not liable to deduct tax on such payment. The issue is decided in favour of the appellant.”
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From the perusal of records it can be seen that the assessee company entered into an agreement with M/s General Dynamic Aviation Service (USA) and made a payment. As per the agreement between the assessee company and General Dynamic Aviation Services (GDAS), the latter has rendered Aircraft/Records and Condition Survey services to the assessee company. GDAS only exercises its skill and knowledge in conducting the survey of the aircraft and issues a report to the assessee company expressing its opinion on the basis of the survey. The said company does not transfer or make available the skill or knowledge required for conducting the survey and generating the report to assessee company. Thus, the concerned remittance cannot be termed as “Fees for Technical Services” as per the relevant DTAA and is exempt from withholding of taxes. The payments made to GDAS are towards the reports to be issued by them to the assessee company. The reports so issued do not involve any transfer of commercial interest or the right to use its experience to the assessee company. There is also no transfer of my skill or knowledge of GDAS to assessee company in the issuance of reports. The payments received is not the one for the use or the right to use experience, but is instead one for the application of experience by the non-resident payee The payments cannot be classified to be in the nature of Fees for technical services as per the Act or under Article 12 of the relevant DTAA. Therefore remittance to GDAS, USA is exempt from withholding of tax as per Article 7 of the DTAA with USA and India. There is no need to interfere with the findings of the CIT(A) as the CIT(A) has taken correct cognizance of these facts. Hence Ground No. 3 is dismissed.
The Ld. DR submitted that as regards to Ground No. 4, the CIT(A) erred in deleting the addition made by the Assessing Officer, by holding that payment made for aircraft maintenance are not in the nature of FTS, since ‘make available’ condition is not fulfilled but at the same time failing to appreciate the fact that the recipient was not required to make such a knowledge or technical expertise available on a permanent basis and the services were provided in connection with maintenance or aircraft.
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The Ld. AR relied upon the order u/s 201 of the Act and order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. The CIT(A) held as under: “8.4 Finding: The appellant has made payment to Gulf Stream Aerospace Ltd., UK for aircraft maintenance which is in the nature of routine repair and maintenance and includes labour and material charges. The AO has taken a view that the non-resident has provided FTS to the appellant. The nature of job done by Gulf Stream Aerospace Ltd., UK is like another repair job, which included both men and material. The AO has not pointed out any special feature of this repair job so as to label it as technical service within the meaning of sec 9(1)(vii) of the Act and Article 13(4) of Indo-UK DTAA. If it is to be a technical service, then any kind of repair of a motor vehicle shall be in nature of technical service, which appears to be absurd. The appellant contention is supported by ratio of decision in case of Lufthansa Cargo India Pvt. Ltd. Vs. DCIT [2005] 274 ITR 20 (Delhi). The services provided by non-resident does not qualify to be called technical services u/s 9(1)(vii) of the Act. Without prejudice to it, even if it is assumed that the services can be called technical services u/s domestic act, it needs to be examined whether these constitute technical services under Indo-UK DTAA. Article 13(4) of the treaty which deals with FTS contains ‘make available’ clause, which has to be satisfied before a service can be called technical service. The AO has not made out a case that the appellant has been got trained by the non-resident service provider to do such repair job on its own in future. Thus, ‘make available’ requirement is not satisfied without which the services can not be labeled as technical service under Indo-UK DTAA. The meaning attached to ‘make available’ clause has been discussed in detail supra in issue no. 2. In
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view of these findings, I hold that the payment made by the appellant is not in the nature of FTS and is therefore not chargeable to tax in India. Hence the appellant is not liable to deduct tax on such payment. The issue is decided in favour of the appellant.” From the perusal of the records it can be seen that the assessee company made payments to Gulf Stream Aerospace Ltd., UK (GAL) for aircraft maintenance which is in the nature of routine repair and maintenance and includes labour and material charges. The same is in the form of a work contract as it is a composite contract for supply of labour, material and services. All these contracts are in the nature of work contracts only and does not involve any managerial or consultancy service. Besides the assessee company did not pay any remittance in the nature of ‘Fees for managerial, consultancy or technical services’ as defined in Explanation 2 to Sec. 9(1) and not liable to TDS. Thus, the CIT(A) rightly held that the payment made by the appellant is not in the nature of FTS and is therefore not chargeable to tax in India. Hence the appellant is not liable to deduct tax on such payment. There is no need to interfere with the findings of the CIT(A). Hence Ground No. 4 is dismissed.
The Ld. DR submitted that as regards to 5, the CIT(A) has erred in deleting the addition made by the Assessing Officer, by holding that payment made for crew support services are not in the nature of FTS, since ‘make available’ condition is not fulfilled but at the same time failing to appreciate that it was not intended by the assessee to have such service in the form of training or transferring permanent expertise.
The Ld. AR relied upon the order u/s 201 of the Act and order of the CIT(A).
We have heard both the parties and perused all the relevant material
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available on record. The CIT(A) held as under: “9.3 Finding: The appellant has made payment to ACASS Canada Ltd., Canada, in respect of crew support services for its aircraft for a short duration of time. The AO has taken a view that it is in the nature of FTS. The appellant has hired service of a pilot for a short duration and it is analogous to engaging a driver for one’s car. It is not understandable how the services provided by a driver are in nature of technical service. Such kind of services are not meant to be covered under provisions of section 9(1)(vii) of the Act. Without prejudice to it, even if it is assumed that the services can be called technical services u/s domestic act, it needs to be examined whether these constitute technical services under Indo-Canada DTAA. Article 12(4) which deals with FTS contains ‘make available’ clause, which has to be satisfied before a service can be called technical service. The appellant has argued that though some degree of training has been provided, still it can not be said that the appellant has been trained to fly the aircraft on its own. The argument of the appellant carries weight. Flying of aircraft is not like learning how to drive a vehicle. For this, DGCA guidelines have to be observed and only after having experience of flying an aircraft for certain hours, licence to fly an aircraft is given. The AO has not established that the appellant has been trained to such an extent that it has become entitled to obtain flying licence. Thus, ‘make available’ requirement is not satisfied without which the services can not be labeled as technical service under Indo-Canada DTAA. In view of these findings, I hold that the payment made by the appellant is not in nature of FTS and is therefore, not chargeable to tax in India. Hence the appellant is not liable to deduct tax on such payment. The issue is decided in favour of the appellant.” As per the facts of the present case, the crew services obtained by the assessee to fly aircraft as the said crew member has not rendered any knowledge, skill or know – how that may enable DLF to fly the aircraft on its own in future. Therefore, the CIT(A) has rightly held that such services do not fall under the
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definition of make available as per clause (b) to Article 12(4) of the DTAA between India and Canada. Thus, there is no need to interfere with the findings of the CIT(A). Hence Ground No. 5 is dismissed.
The Ld. DR submitted that as regards to Ground No. 6, the CIT(A) has erred in deleting the addition made by the Assessing Officer, by holding that payment made for advertisement rights of the circlet ground cannot be characterized as Royalty but at the same time failing to appreciate that the assessee used such ground rights for finding sponsors for the India- Pakistan friendly match and such payment would fall within the precincts of section 9(i)(vi) of the Act and the Article 12 of the Indo-UAE DTAA.
The Ld. AR relied upon the order u/s 201 of the Act and order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. The CIT(A) held as under: “10.3 Finding: ……….. ……….. I have carefully considered various submissions made by the appellant and the order of the AO. The agreement between the appellant and Percept D Mark Gulf LLC shows that the appellant has taken sponsorship of India-Pakistan Friendship Series cricket matches played in UAE and the Malaysia Tri Series played in Malaysia. The appellant has got nothing to do with cricket ground. The term equipment has neither been defined in the Act nor in the DTAA. The Oxford Concise dictionary defines “Equipment” as – Things needed for a particular purpose”. MacMillan Dictionary defines it as Machine or Tools needed for a job. The Merriam Websters dictionary defines an equipment as “All fixed assets other than land and building” used in a
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business enterprises. A fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. [ICAI Accounting Standard (AS), 10, Accounting for fixed assets, para 6.1]. From these definitions, a reasonable guidance can be taken that an equipment is an asset other than land and building and which is used in a business enterprises. Now, a cricket ground is a fixed asset but it is ‘land and building’. Further, it is not used in business of the appellant, who is engaged in real estate business. In any case, the appellant is not supposed to do anything with cricket ground under agreement with Percept D Mark Gulf LLC. Therefore, by no stretch of imagination, cricket ground fits into definition of equipment and even if by definition, it is equipment, it is not equipment for the appellant as appellant is not using it in its business. Further, even assuming that cricket ground is equipment, the appellant had no right to use it. The principle use of cricket ground is to play the cricket. The appellant was not allowed to use the ground for playing cricket. Only brand name of the appellant was to be focused on certain things in the ground, which amounts to advertisement and nothing else. So, there is no use or right to use available to the appellant, even if it is assumed that cricket ground is a equipment. …….. Since cricket ground can not be described as equipment nor there is use or right to use of it, the payments made by the appellant for taking sponsorship of cricket series can not be characterized as royalty under both domestic act and the tax treaty. The cricket ground is an immovable property and therefore the appellant has taken an argument that Article 6 of relevant DTAA comes into play instead of Article 12. The Article 6 talks about the income derived from immovable property. Here, in present case, Percept D Mark Gulf LLC has earned income which is derived from his marketing rights which it has got for cricket series. By virtue of its marketing right, Percept D Mark Gulf LLC has given sponsorship to the appellant. Obviously, the income is not derived from
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immovable property and hence in my considered view, Article 6 of DTAA does apply. The income earned by Percept D Mark Gulf LLC is in nature of business receipt in its hands and it would be taxable in state of residence of Percept D Mark Gulf LLC under Article 7 of the treaty because admittedly, it has no PE in India. Since the payment made by the appellant to non-resident Percept D Mark Gulf LLC is not chargeable to tax in India, I hold that the appellant is under no obligation to withhold tax on such payments. The issue is decided in favour of the appellant.” It is pertinent to note that the assessee company entered into an agreement with Percept D Mark Gulf LLC (Percept) for obtaining the ground rights in respect of the India-Pakistan Friendship Series Cricket Matches played in UAE. The assessee company was to make payment to the said company for securing the ground rights of the matches from Board of Cricket Control of India. The assessee company made payment to Percept D Mark Gulf LLC towards publicity expenses during the year which was for securing the ground rights which enabled it to find any other sponsors for the event. Thus, the payment in this respect does not come under the purview of the definition of Royalty as provided under Section 9(1)(vi) of the Act. The payment made by the assessee company merely enabled it to find a sponsor for the event in order to share the ground. Thus, no income was received or deemed to be received in India or accrues or arises or is deemed to accrue or arise in India to the Non-Resident payee in terms of Section 5(2) read with Section 9 of the Act. There is no income chargeable to tax within the scope of total income as per Section 4 and Section 5 of the Act. Thus, tax cannot be deductible, since payee is resident of UAE and does not have PE in India. Therefore, the CIT(A) was right in deleting the said addition. There is no need to interfere with the findings of the CIT(A). Hence, Ground No. 6 is dismissed.
The Ld. DR submitted that as regards to Ground No. 7, the CIT(A) has erred in deleting the addition made by the Assessing Officer, by holding that
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payment made as a security deposit and that the such amount was received back by the assessee in the subsequent year, accordingly it is not an expenditure on the part of the assessee whereas it is found from records that this claim is not factually correct with regard to the receiving back the security deposit and hence it is an expenditure entry.
The Ld. AR relied upon the order u/s 201 of the Act and order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. The CIT(A) held as under: “11.4 Finding: The appellant has argued that the payment was made to Dallas as security deposit. This being an item of balance sheet is not an expenditure on part of the appellant. There can not be any income in hands of non-resident, which is further evidenced by the fact that entire amount has been received back in subsequent year. Accordingly, I hold that there is no obligation on part of appellant to withhold tax on such remittance. The issue is decided in favour of the appellant.” It is pertinent to note that the payment made to Dallas Airmotive Inc., USA was in the nature of security deposit and for hiring the aircraft engine during the period the original engine of DLF had gone for overhauling to Dallas. However, in the next year the assessee received back the entire amount which was earlier extended to Dallas in the form of a security deposit and rental for engine. Therefore, the CIT(A) has rightly deleted this addition and there is no need to interfere with the findings of the CIT(A). Hence, Ground No. 7 is dismissed.
The Ld. DR submitted that as regards to Ground No. 8, the CIT(A) has erred in deleting the addition made by the Assessing Officer, by holding that payment made towards business and personnel security consultancy services
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did not fulfilled the criteria of ‘make available’ clause as per the treaty with Singapore but at the same time failing to appreciate as the services were provided to the assessee to improve its security profile along with the security profile of other important persons of the company.
The Ld. AR relied upon the order u/s 201 of the Act and order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. The CIT(A) held as under: “12.4 Finding: The services provided to the appellant are in nature of technical services within the meaning of section 9(1)(vii) of the Act. This is not disputed by the appellant even. However, Article 12(4) of Indo-Singapore treaty contains ‘make available’ clause. The meaning attached to this clause has been discussed supra in issue no. 2 and it has been held that unless the services provided by non-resident equip the recipient of services with adequate expertise to the extent that the recipient is in a position to utilize those services own their own, the services can not be characterized as FTS. In present case, the AO has not established how the risk control report given by M/s Control Risk Group(S) PTE Ltd., Singapore to the appellant has enabled the appellant to do such job on its own in future without taking help of M/s Control Risk Group(S) PTE Ltd, Singapore. There is nothing in the agreement which shows that appellant has been given any training in this regard by M/s Control Risk Group(S) PTE Ltd, Singapore. In view of this, It can not be said that requirement of ‘make available’ has been satisfied. Hence, I hold that the services provided by M/s Control Risk Group(S) PTE Ltd, Singapore can not be characterized as FTS and hence not chargeable to tax in India. The appellant is not under obligation to withhold tax on such payment. The issue is decided in favour of the appellant.”
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From the perusal of records it can be seen that the assessee company entered into an agreement with M/s Control Risk Group PTE, Singapore. The assessee company was to make payment outside India to control risk for securing the business & personnel security services in IPO. Thus, the assessee company made payment during the relevant assessment years towards providing business & personnel security consultancy services for IPO. Thus, income cannot be deemed to have accrued or arise in India and hence the same is not liable for tax in India as M/s Control Risk Group PTE, Singapore does not have any PE in India. Thus, the CIT(A) rightly deleted this addition. There is no need to interfere with the findings of the CIT(A). Hence, Ground No. 8 is dismissed.
Facts of the case for A.Y. 2008-09 are similar therefore, no separate findings are given here and the findings given for A.Y. 2007-09 are applicable in totality for each issues contested by the Revenue.
In result, both the appeals of the assessee are allowed and both the appeals of the Revenue are dismissed.
Order pronounced in the Open Court on 10th October, 2019.
Sd/- Sd/- (PRASHANT MAHARISHI) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 10/10/2019 *Binita* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT
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ASSISTANT REGISTRAR ITAT NEW DELHI
Date of dictation 07.08.2019 Date on which the typed draft is placed before the 07.08.2019 dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr. PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk