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

PER ANUBHAV SHARMA, JM: The appeals have been preferred by the Assessee and Revenue against the order dated 29.06.2022 of CIT(A)-23, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) arising out of an appeal before it against the order dated 14.06.2019 (ITA No. 1803 & 2183/Del/2022) and 11.06.2021 (ITA no. 1802 & 2182/Del/2022) passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the DCIT, Central Circle-1, New Delhi (hereinafter referred as the Ld. AO).

3.1 Ld. DR could not dispute the aforesaid contention though relied the order of Ld. AO.

“3. At the outset, Ld. Counsel for the assessee submits that ground no.2 and 2.1 of the grounds of appeal are not

ITA No. 1802 & Or. Spicejet Ltd. 3

pressed. In view of the submissions of the Ld. Counsel these grounds are dismissed as not pressed. The only ground for adjudication of assessee’s appeal is whether the Ld.CIT(Appeals) erred in sustaining the action of the Assessing Officer in denying Forex unrealized loss on account of Foreign Exchange amounting to Rs.11,72,81,379/- as not allowable deduction and at the same time the gain on Foreign Exchange fluctuation amounting to Rs.82,56,666/- is taxable. 4. Briefly stated the facts are that the Assessing Officer while completing the assessment noticed that assessee has debited an amount of Rs.93,41,17,888/- as exchange fluctuation loss in profit and loss account. The assessee was required to justify the allowability of this loss. The assessee submitted that the transactions entered into foreign currency are required to be reported in Indian Rupees following the accounting treatment prescribed in the Accounting Standard-11 issued by Institute of Chartered Accountants of India (ICAI). The loss arising on account of difference in the Foreign Exchange rates prevailing on the date of transaction and the closing rate on the date of balance sheet (when the transaction is settled for the subsequent year) on account of restatement of outstanding loss for Revenue transactions on the balance sheet date is Revenue loss eligible for deduction u/s 37(1) of the I.T. Act. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. (312 ITR 254). 5. The Assessing Officer observed that loss under this head is arising on account of revaluation of liability payable in Foreign Exchange and it includes liability is in respect of External Commercial Borrowings (ECB) and Foreign Currency Convertible Bonds (FCCB). The Assessing Officer noticed that these have been treated as long term foreign currency mandatory items and the revaluation on account of foreign exchange fluctuation has been debited as notional loss in profit and loss account. The assessee was again asked to explain the nature of expenditure made under ECB and FCCB and why they should be allowed as an expenditure on Revenue account and why it should not be treated as a capital expenditure in

ITA No. 1802 & Or. Spicejet Ltd. 4

accordance with Section 43A of the Act. The assessee made submissions that it had entered in agreement with Royal Holdings Services Limited on 03.01.2005 in respect of ECB loans and took loan to part finance commencement of Air line operations and the amount was borrowed for the purpose of meeting working capital requirement. Part of the loan was utilized towards deposits for operating lease of aircrafts and the other part was utilized towards other expenses. Assessee contended that during the year the loan was repaid with interest to Royal Holdings Services Ltd. on 23.11.2010 and furnished copy of ECB return submitted to RBI to HSBC Bank Limited. In so far as the FCCB are concerned the assessee contended that the bonds were initially used for financing non- refundable pre-delivery payments for acquisition of 10 aircrafts. Assessee made an offer through an offer letter dated 07.12.2005 for issue of US dollars, 80 million 0 coupon secured convertible bonds due for redemption in 2010 comprising of 800 bonds at the issue price of US dollars 1,00,000/- per bond to the foreign investors and the proceeds were utilized towards advance payment for acquisition of 10 aircrafts. Assessee submitted that after obtaining the possession of 8 aircrafts out of 10 upto September, 2007 were sold to the lessors and taken back on operating leases. The remaining two aircrafts were sold and were not taken back on lease. The assessee therefore submitted that the profits on sale of 10 aircrafts were offered for taxation in the year in which the aircrafts were sold. 6. Not convinced with the submissions of the assessee, the Assessing Officer treated the unrealized Foreign Exchange loss is on capital account, a notional loss and not allowable as deduction. At the same time the Assessing Officer has held that the unrealized Forex gain due to deduction in liability in Foreign Exchange fluctuation is with respect to various sundry creditors pursuant to repair and maintenance of aircraft parts and components was only on Revenue account and liable to be taxed. Thus, the Assessing Officer denied the claim for unrealized Forex loss as deduction and brought to tax the Foreign Exchange gain at the same time.

ITA No. 1802 & Or. Spicejet Ltd. 5

ITA No. 1802 & Or. Spicejet Ltd. 6

for AY 2011-12. Accordingly grounds in respective appeals are decided in favour of assessee/appellant for statistical purposes.

“20. On perusal of the order of the Tribunal in assessee’s own case for the assessment years 2006-07 to 2010-11 which is placed at pages 1 to 41 of the Paper Book we observe that the Tribunal by order dated 28.12.2022 decided the issue in favour of the assessee holding that supplemental rent/maintenance reserve would be exempt from tax in the hands of lesser in India as per Section 10(15A) of the Act and hence, no disallowance u/s 40(a)(ia) can be made observing as under: - “36. In ground no. 3(a), the revenue has challenged deletion of addition of Rs.26,22,21,942/- made under section 40(a)(i). 37. Briefly the facts are, in course of assessment proceeding the Assessing Officer noticed that the assessee had debited various expenses amounting to Rs.28,55,97,487/- under the head aircraft maintenance cost. After calling for necessary details and examining them the Assessing Officer found that an amount of Rs.26.88 crores was paid towards supplemental lease rent to the lessor of the aircrafts. He observed, the supplemental rent is towards usage of life limited parts of auxiliary power unit, and part of engines which are not covered by the approval of CBDT under section 10(15A). Alleging that the asses see had failed to deduct tax at source while making the payment, the Assessing Officer disallowed the amount under section 40(a)(i) of the Act. Similarly, for the very same reason of nondeduction of tax at source, the Assessing Officer

ITA No. 1802 & 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. 38. We have considered rival submissions and perused the materials on record. The expenditures, which have been subjected to disallowance under section 40(a)(1) are as under: i. Supplemental Rent /Maintenance Reserve of Rs.26,88,07,231/- ii. Engine Guarantee Availability Fee of Rs.5,24,155/- iii. Repair of Rotables of Rs.3,75,556/- iv. Logo Printing of Rs.25,15,000/- 39. As far as supplemental rent/maintenance reserve is concerned, it is observed, learned Commissioner (Appeals) after analyzing the lease agreement has recorded a factual finding that the supplemental rent was paid for acquisition of aircraft. He has observed that the basic lease rent is fixed for month, whereas, the supplemental rent is calculated with reference to flight hours which signifies the lessor would incur a fixed cost for month in respect of aircraft. The lessor would incur further cost on account of wear and tear on the aircraft on the basis of flight hours. Therefore, supplemental rent is ascertained with reference to flight hours. As per the agreement, responsibility of 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

ITA No. 1802 & 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, ITA No.2202/Del/2012, 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.” 21. 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

ITA No. 1802 & 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. 2. 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.

ITA No. 1802 & Or. Spicejet Ltd. 10

3.(a) The term "royalties" as used in this Article means payments of any kind received £ consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph film or films or tapes for radio or television broadcasting, patent, trade mark, design or model, plan, secret formula or process or for the use of or the r to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience; (b) The term "fees for technical services" means payment of any kind in consideration for rendering of any managerial, technical or consultancy services including the provision services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention.” 4. 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.

ITA No. 1802 & Or. Spicejet Ltd. 11

ITA No. 1802 & 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.” 22. 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

ITA No. 1802 & 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 by the Revenue.” 6. Thus as there is no distinction of facts and counter legal proposition, following the aforesaid, grounds raised by the Revenue are rejected. 7. Consequent to aforesaid events, the appeals of assessee are allowed for statistical purposes and the appeals of Revenue are dismissed. Order pronounced in the open court on 23rd August, 2023.

Sd/- Sd/- (G.S.PANNU) (ANUBHAV SHARMA) PRESIDENT JUDICIAL MEMBER Date:- 23 .08.2023 *Binita, SR.P.S* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT AR, ITAT New Delhi