DCIT, CENTRAL CIRCLE-1, NEW DELHI vs. SPICEJET LIMITED, GURGAON

On appeal, the Ld.CIT(A) sustain the action of the Assessing Officer.

Before us, the Ld. Counsel for the assessee reiterated the submissions made before the Ld. Assessing Officer. The Ld. Counsel also referring to page 82 of the PB which is the fixed assets schedule submits that the schedule does not contain any aircrafts owned by the assessee. Ld. Counsel submits that all the aircrafts were sold in the year 2007 and the gain on sale of aircrafts was also offered to tax. All these facts were not appreciated by the Assessing Officer in rejecting the claim of the assessee and the Ld.CIT(A) has simply sustained the order of the Ld. Assessing Officer and, therefore, the Ld. Counsel submits that the issue requires reexamination by the Ld. Assessing Officer with reference to the decision of the Hon’ble Supreme Court in the case of Woodward Governor India Limited (supra) and also taking into consideration all the facts on record. 9. On the other hand, Ld. DR has no serious objection in restoring the matter to the file of the Assessing Officer for denovo adjudication on appreciation of facts and contentions of the assessee. 10. On hearing both the parties, considering the submissions made before the Assessing Officer as well as before us we feel it appropriate to restore the issue to the file of the Ld. Assessing Officer for examining the issue afresh taking into consideration all the facts and contentions of the assessee and to decide the issue in accordance with law after providing adequate opportunity of being heard to the assessee. Thus, we restore ground no. 1 and 1.2 of grounds of appeal of the assessee to the file of the Assessing Officer for deciding afresh in accordance with law.” 4.1 Ld. AR has not added anything to differ. Therefore following the aforesaid the issue, in respective appeals, is restored to the files of Ld. AO to follow the directions rendered by Co-ordinate Bench in assessee’s own case & Or. Spicejet Ltd. 6 for AY 2011-12. Accordingly grounds in respective appeals are decided in favour of assessee/appellant for statistical purposes.

Briefly the facts are, in course of assessment proceeding the Assessing Officer noticed that the assessee had debited various expenses amounting to Rs.28,55,97,487/- under the head aircraft maintenance cost. After calling for necessary details and examining them the Assessing Officer found that an amount of Rs.26.88 crores was paid towards supplemental lease rent to the lessor of the aircrafts. He observed, the supplemental rent is towards usage of life limited parts of auxiliary power unit, and part of engines which are not covered by the approval of CBDT under section 10(15A). Alleging that the asses see had failed to deduct tax at source while making the payment, the Assessing Officer disallowed the amount under section 40(a)(i) of the Act. Similarly, for the very same reason of nondeduction of tax at source, the Assessing Officer & Or. Spicejet Ltd. 7 disallowed various other expenses under section 40(a)(i) of the Act. The assessee contested the disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) deleted the disallowance made by the Assessing Officer.

We have considered rival submissions and perused the materials on record. The expenditures, which have been subjected to disallowance under section 40(a)(1) are as under: i. Supplemental Rent /Maintenance Reserve of Rs.26,88,07,231/- ii. Engine Guarantee Availability Fee of Rs.5,24,155/- iii. Repair of Rotables of Rs.3,75,556/- iv. Logo Printing of Rs.25,15,000/- 39. As far as supplemental rent/maintenance reserve is concerned, it is observed, learned Commissioner (Appeals) after analyzing the lease agreement has recorded a factual finding that the supplemental rent was paid for acquisition of aircraft. He has observed that the basic lease rent is fixed for month, whereas, the supplemental rent is calculated with reference to flight hours which signifies the lessor would incur a fixed cost for month in respect of aircraft. The lessor would incur further cost on account of wear and tear on the aircraft on the basis of flight hours. Therefore, supplemental rent is ascertained with reference to flight hours. As per the agreement, responsibility of the assessee is only to carry out minor repair works which are required to be done in the normal course of operation. All major repairs like replacement, overhauling etc. are the responsibility of the lessor. It has been factually found that the cost incurred in respect of normal repairs and replacement of routine spares etc. is not included in the supplemental rent. Thus, as rightly & Or. Spicejet Ltd. 8 observed by the first appellate authority, for payments which are covered in the exceptional clause of section 10(15A) of the Act, it is not the assessee who is making the payment. On the contrary, it is the lessor who is making such payment to the lessee. It is relevant to observe, in a recent decision rendered in case of Inter Globe Aviation Ltd. Vs. DGIT, vide order dated 18.07.2016, the Special Bench of the Tribunal has held that since, the supplemental rent was determined taking into consideration a number of flying hours and had character of basic rent, said payment would be exempt from tax in the hands of lessor in India as per section 10(15A) of the Act, hence, no disallowance under section 40(a)(i) can be made. The aforesaid decision of the Special Bench of the Tribunal clinches the issue in favour of the assessee: Therefore, no disallowance under section 40(a)(i) can be made in respect of supplement rent of Rs. 26.88 crores.”

We further observe that the Special Bench of the Delhi Tribunal in the case of Inter Globe Aviation Ltd. (Indigo) vs. Addl. CIT (supra) considered the lease rental pursuant to agreements executed after 01.04.2007 and its chargeability to tax in the hands of lesser under Article 12 of DTAA between India and Ireland and the Special Bench held that supplementary rent paid for lease agreements executed after 01.04.2007 are not chargeable to tax in India. While holding so the Special Bench observed as under: - “42. For Lease Agreements executed after 1st April, 2007, a claim was made by the assessee before 1 'Mower authorities that the income is not chargeable to tax in hands of Lessor under Article 12 of the DT7 between India and Ireland. We find the AO has not accepted this the reasons of which has already be reproduced at para 1.5 of the order. 42.1 Cross border leasing of aircraft enjoyed a special exemption under section 10(15A) of the I.T. A However, a sunset clause was introduced by & Or. Spicejet Ltd. 9 Finance Act, 2005 to provide that this exemption shall not available for agreements entered after 1st April, 2007. In the aftermath of withdrawal of exemption the liability of the lessor is to be governed by the provisions of bilateral tax treaties. Learned Senior counsel for the assessee submitted that as per provisions of section 90 of the Act, provisions of DTAA shall apply to the extent they are beneficial. Under the DTAA the foremost consideration is whether the non-resident lessor has a permanent establishment (PE) in India as per Article 5 of the relevant. According to him, m leasing of an aircraft which is located in India ought not to result in an existence of PE and there is also such allegation made by the lower authorities in the present case. It is his submission that the definition of royalty under the Income-tax Act and Tax Treaty includes a consideration for use and right to use any commercial, scientific and industrial equipment and aircraft do arguably fall within this category equipment and therefore the corresponding lease rentals may be characterized as royalty. However, certain tax treaties which India has entered into notably with Ireland it has explicitly excluded aircraft from scope of Royalty. He drew our attention to the relevant provision of DTAA between India and Ireland (Article 12) which are as under:- "1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other contracting State may be taxed in that other State.

Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall exceed 10 per cent of the gross amount of the royalties or fees for technical services.

The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 1 or Article 14, as the case may be, shall apply.

Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention." 42.2 In Para-41 above we have examined the nature of Supplementary Rent and it is held that payment of & Or. Spicejet Ltd. 12 Supplementary Rent is nothing different than the character of basic rent. We find that Supplementary Rent is not a payment made for use of spares, facilities or any services. Supplementary Rent is, therefore, a payment made for use of Aircraft. As per provisions of Section 90 of the Income-tax Act, the provisions of a bilateral Tax Treaty will apply to the extent it is more beneficial to the tax payer. We find under Article 12(3)(«) of India-Ireland DTAA, the term "Royalty" is specifically defined to exclude from its scope payment of any kind for use of "Aircraft". We further find the tax treaty also incorporates a separate provision in Article-8 on profits from shipping and air transport.-Article 8(1) reads as under: "Profits derived by an enterprise of a contractor state from the operation of rental of ships or aircraft in international traffic and the rental of containers and related equipment which is incidental to the operation of ships or aircraft in international traffic shall be taxable only in that contractor State." 42.3 This Article states that profits from rental of Aircrafts is taxable only in state of residence of Lessor. We, therefore, find merit in the arguments of the Learned Senior Counsel for the Assessee that as per Articles 12 and 8 of the Tax Treaty with Ireland, profits derived by an enterprise of a contracting State from rental of Aircraft are taxable "only" in Ireland. Supplementary Rent of Rs. 276,28,59.821/- paid for Lease Agreements executed after 1-4-2007 are, therefore, not chargeable to tax in India. However, the above figure is subject to verification by the A.O.”

In view of the above, respectfully following the decision of the coordinate bench of the Tribunal in assessee’s own case and also the decision of the Special Bench of Delhi Tribunal in the case of & Or. Spicejet Ltd. 13 Inter Globe Aviation Ltd. (Indigo) vs. Addl. CIT (supra), we uphold the order of the Ld.CIT(Appeals) and reject the grounds raised