ACIT CIRCLE- 10(1), NEW DELHI vs. GLOBAL VECTRA HELICORP LTD, NEW DELHI

The dispute in the present appeal is confined to computation of book profit under section 115JB of Income-tax Act, 1961 (in short ‘the Act’).

Briefly the facts are, the assessee, a resident corporate entity, is stated to be engaged in the business of flying, operating, letting on hire, lease and charter hire of helicopters and providing aviation services in respect of helicopters. For the assessment year under dispute, the assessee filed its return of income on 30.11.2015 declaring NIL income under the normal provisions of the Act and book-profit of Rs.10,72,11,670/- under section 115JB of the Act. In course of assessment proceedings, while examining the book-profit computed by the assessee, the 2 | P a g e & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17 Assessing Officer noticed that the assessee has reduced an amount of Rs.43,60,42,388/-, being the lower of the brought forward loss or unabsorbed depreciation, in terms of clause (iii) under Explanation 1 to section 115JB of the Act. Noticing this, the Assessing Officer called upon the assessee to furnish a detailed working. In response, the assessee furnished its reply, stating that the deduction has been incorrectly computed and the correct figure of deduction should be Rs. 51,20,83,841/-. In this context, the assessee furnished a detailed working of deduction.

Before us, learned counsel appearing for the assessee submitted that the difference between the revised deduction claimed by the assessee of Rs.51,20,83,841/- and the deduction allowed by the Assessing Officer of Rs. 32,29,19,988/- is Rs.18,91,63,853/-. He submitted, the differential figure of Rs. 18,91,63,853/- comprises of following:

He submitted, the difference arose on account of miscalculation by the Assessing Officer and there was no legal basis to reconsider the additions/deductions made by the assessee in its return of income for preceding years while calculating book profits for the current year as per section 115JB of the Act. He submitted, as per section 115JB of the Act, calculation of book profits must relate to the entries made in the books for the relevant year and such calculation must start from the profit as shown in P&L account. Thereafter, the amount of loss brought forward or unabsorbed deprecation, whichever is less, as per the books of account, must be considered in terms of clause (iii) under Explanation 1 to section 115JB of the Act. Thus, he submitted, the disallowance made by the Assessing Officer is unjustified as the adjustments made to the deduction claimed are not in terms with section 115JB read with clause (iii) of Explanation 1. To buttress his submission, learned counsel furnished the following Chart showing revised calculation of allowable deduction under clause (iii) of Explanation 1 to section 115JB of the Act as well as the book profit after deduction: 5 | P a g e & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17

Thus, he submitted, assessee’s claim can be factually verified by the Assessing Officer and the book profit can be computed accordingly.

Learned Departmental Representative agreed for restoration of the issue to the Assessing Officer for factually verifying assessee’s claim.

Having considered rival submissions and perused the materials on record, we are of the view that assessee’s claim of deduction for computing book profit under section 115JB of the Act requires fresh verification in the light of the Chart furnished 6 | P a g e & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17 by the assessee, which has been reproduced in the order.

The common issue arising in all these appeals relates to disallowance made under section 40(a)(i) of the Act. Of course, in pertaining to assessment year 2011-12, there is additional issue of deletion of disallowance of Rs. 62,62,516/-, being advances written off.

As far as the issue of disallowance of Rs.13,48,32,835/- under section 40(a)(i) of the Act are concerned, briefly the facts are, as discussed earlier, the assessee is engaged in the business of providing helicopter services in India for offshore transportation, exploration of oil and gas etc. by adhearing to the guidelines issued by the Director General of Civil Aviation (DGCA). 7 | P a g e & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17 In terms with the said guidelines, the assessee was required to keep the helicopters owned/operated by it in airworthy condition.

Without prejudice, the assessee submitted that non-resident companies to whom payments were made are residents of other countries with whom India had entered into Double Taxation Avoidance Agreements (DTAAs). It was submitted by the assessee that as per the provisions of relevant DTAAs, in absence of Permanent Establishment (PE) of such non-resident companies in India, business profit cannot be taxed in India. It was further submitted, even if, the payments are for technical services, since, all the DTAAs, except DTAA with UAE, require technical services to be made available to the service recipient, which has not happened in case of the assessee, payments cannot be treated as FTS. Insofar as payments made to UAE entities, it was submitted, in absence of a specific provision dealing with FTS under the treaty, no tax can be levied at the hands of the UAE entities in absence of PE in India, either under Article 7 or 22 of the treaty provision. Therefore, there was no statutory requirement upon the assessee to deduct tax at source.

The Assessing Officer, however, did not find merit in the submissions of the assessee. He held that activity of repair and maintenance of helicopters constituted consultancy, technical & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17 and managerial services, hence, qualifies as FTS under Section 9(1)(vii) of the Act. Accordingly, he completed the assessments for all the assessment years under dispute by treating the payments made to the foreign entities as FTS and thereby disallowing payments under section 40(a)(i) of the Act. Against the additions so made, assessee preferred appeals before learned Commissioner (Appeals). Being convinced with the submissions of the assessee, learned Commissioner (Appeals) deleted the additions in all the assessment years.

While doing so, learned Commissioner (Appeals) observed that the repair and maintenance activities are undertaken on helicopter parts and not on the helicopters per se and those parts were sent outside India for repairs and after repairing the repaired parts were sent to India. He further held that make available condition as available in the relevant DTAAs remained unfulfilled.

Before us, learned Departmental Representative strongly relied upon the observations of the Assessing Officer and submitted that certain services rendered by the assessee to non- resident entities are technical in nature, hence, payments made are to be treated as FTS.

Learned counsel for the assessee submitted, in respect of the payments made to residents of USA, UK, Canada and Singapore, in terms with the provisions contained in DTAAs entered by India with these countries, to treat the payment as FTS/FIS, make available condition has to be satisfied. He submitted, the Assessing Officer has failed to demonstrate that in course of rendition of services, the non-resident entities have made available technical knowledge, know-how, skill, etc. to the assessee to use them independently without the aid and assistance of the non-resident service providers. Thus, he submitted, the payments made to the residents of the aforesaid countries, under no circumstances, can be treated as FTS/FIS.

Insofar as payment made to residents of UAE, learned counsel submitted, India - UAE DTAA does not contain any provision for FTS. Thus, he submitted, the receipts can either be & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17 taxed as business income or as other income in terms of Article 7 or 22 of the treaty, respectively. He submitted, the receipts cannot be treated as business income in terms of Article 7 as the residents of UAE did not have any PE in India. He submitted, even the receipts cannot be assessed as other income in India in terms of Article 22. As per the said provision, it can only be taxed in the country of residence, i.e., UAE. However, he fairly submitted, payments were also made to residents of Spain, Netherlands and France with whom, though, India has entered into DTAAs, however, the definition of FTS under the respective treaties are much wider in scope and does contain the make available condition. He submitted, though, learned first appellate authority has applied the make available condition by relying upon the Most Favoured Nation (MFN) clause in the Protocol, however, in view of the ratio laid down by the Hon’ble Supreme Court in case of Assessing Officer (International Taxation) Vs. Nestle SA [2023] 458 ITR 756 (SC), the make available condition contained in other DTAAs cannot be imported into the treaties with Spain, Netherlands and France without specific notification by the Government. & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17

Without prejudice, he submitted that even payments made to the residents of Spain, Netherlands and France cannot fall into the category of FTS as they are not in the nature of technical, consultancy or managerial services. He submitted, the services are for repair/overhaul of parts of the helicopters sent to those countries and no part of the service was rendered in India. He submitted, the services are in the nature of routine maintenance and repair of helicopter parts and, as such, are standardized services. Thus, he submitted, they cannot fall in the definition of FTS, either under Section 9(1)(vii) of the Act or the respective treaty provisions. In support of such contention, he relied upon a decision of the Hon’ble Supreme Court in case of CIT Vs. Kotak Securities Ltd. [2016] 383 ITR 1 (SC). He also relied upon a decision of Madras High Court in case of Skycell Communications Ltd. Vs. DCIT [2001] 251 ITR 53 (Mad.).

We have considered rival submissions in the light of decisions relied upon and perused the materials on record.

On a careful reading of section 195(1) of the Act, it is very much clear that the provision gets triggered only when the & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17 payment made to the non-resident entity is chargeable to tax under the provisions of the Act. Thus, what is required to be examined is whether the payments made by the assessee to non- residents are chargeable to tax under the provisions of Act. As discussed earlier, in the assessment years in dispute the assessee has made payment to entities resident in USA, UK, UAE, Australia, Canada, Singapore, Spain, Netherlands and France.

Insofar as taxability of FTS is concerned, treaties can be classified in the following categories:

Insofar as the countries falling in the first category, such as, USA, UK, Australia, Canada and Singapore, admittedly, the treaty provisions have make available clause. Therefore, to treat a particular receipt to be in the nature of FTS, it has to be demonstrated that in course of rendition of services, the service provider had made available technical knowledge, know-how, skill etc. to the service recipient so as to enable him to perform such services in future independently without any assistance of the service provider.

In the facts of the present appeal, the Assessing Officer has failed to demonstrate with cogent evidence that the make available condition enshrined in the concerned treaties are satisfied. In fact, learned first appellate authority has recorded a categorical factual finding that in course of rendition of service technical knowledge, know-how, skill, etc. has not been made available to the service recipient by the service provider. Thus, in 17 | P a g e & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17 absence of any contrary material brought on record by the Revenue, we concur with the view expressed by learned first appellate authority. Once the payments do not qualify as FTS under the respective treaty provisions, in terms with section 90(2) of the Act, treaty provisions being more beneficial would override the provisions contained in the domestic law. That being the legal position, in our view, the payments made to the residents of USA, UK, Australia, Canada and Singapore, being not chargeable to tax in India, section 195 is not applicable. Accordingly, we hold that the assessee was not required to deduct tax at source while making payment to residents of the aforesaid countries.

Insofar as the payments made to entities in UAE, admittedly, in India – UAE treaty, there is no provision concerning taxability of FTS. Thus, in absence of any such provision, the payments made to the residents of UAE can either be taxed as business income or as other income in terms with Article 7 or 22, respectively. On reading of Article 7 it becomes clear that business profits can be taxed in the source country only if the resident of other country has a PE in the source country. In the facts of the present appeal, admittedly, none of the entities had & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17 any PE in India. Therefore, the payments made to them cannot be taxed in India as business profits. Even, they cannot be taxed as other income in India as Article 22 of India – UAE treaty makes it clear that the other income can only be taxed in the country of residence. Thus, in our view, the payments made to the entities in UAE are not taxable in India as per the treaty provisions, hence, there is no requirement for deduction of tax at source on the payments made.

The only countries that are left now is the second category comprising of Netherlands, Spain and France. Admittedly, the definition of FTS in the treaty provisions with these countries are wider in scope and do not contain the make available clause.

The only other surviving issue is in respect of ground no. 2 of ITA No. 1482/Del/2020. In the said ground, the Revenue has challenged deletion of disallowance of Rs.62,62,516/- representing advances written off.

Briefly the facts are, in the financial year relevant to assessment year 2011-12, the assessee has written off an amount of Rs.63,27,447/- as bad debts and debited to its profit and loss & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17 account. Noticing this fact, the Assessing Officer called upon the assessee to furnish the details of bad debts. After examining the details furnished by the assessee, the Assessing Officer held that an amount of Rs.62,62,516/-, being advances written off, cannot be allowed as deduction as the assessee failed to furnish evidence to indicate that they were part of income of the assessee for earlier year. While deciding the issue in appeal, learned Commissioner (Appeals) allowed the claim with a finding that the amount represents advances given earlier by the assessee in the normal course of its business for the purchase of spares & consumables, helicopter maintenance & overhaul, freight & clearing forwarding charges, lodging boarding charges, etc. He also found that the amount had become irrecoverable owing to non-fulfillment of certain conditions. Thus, he held that it represented the business loss of the assessee, which is allowable as deduction under section 37 of the Act.

We have considered rival submissions and perused the materials on record. Undisputedly, the Assessing Officer has disallowed assessee’s claim primarily for the reason that the assessee failed to furnish adequate evidence in support of its & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17 claim. However, learned Commissioner (Appeals) after examining the facts and materials on record has recorded the following factual findings:

The Revenue has not brought any contrary materials on record to disturb the aforesaid factual finding of learned Commissioner (Appeals). Therefore, we do not find any infirmity in the decision of learned first appellate authority. Ground raised is dismissed.

In the result, all the appeals of Revenue are dismissed. & 1482 to 1487/Del/2020 AYs: 2011-12 to 2016-17

To sum up, assessee’s appeal is allowed for statistical purposes and Revenue’s appeals are dismissed.