ITO (TDS), NEW DELHI vs. M/S. DLF LTD., NEW DELHI

PER SUCHITRA KAMBLE, JM

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.” (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 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.

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.

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 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. (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 )(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.” (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 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.

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

4. 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.

8. Now we are taking up the appeals filed by the Revenue. The Ld. DR 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 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 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.

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.

“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 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 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.

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.

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.

Order pronounced in the Open Court on 10th October, 2019.