Technical services utilized for making a source of income outside India is not taxable in India

Brief of the case:

• The Hon’ble Delhi HC in the case of Lufthansa Cargo India held that the fee for technical services would not be taxable in India where such services are utilized forearning income from any sources outside India.
• Thus, where the assessee has paid overhauling and other charges paid for maintaining the aircraft in the flying condition asper the guidelines of DGCA to possess a valid airworthiness certificate, such charges are not subject to TDS u/s 195 because the aircrafts were wet leased to non-resident operating outside the same India.

Facts of the case:

• The assessee company Lufthansa Cargo India is engaged in the business of wetleasing (leasing aircraft along with crew in flying condition) of aircrafts toforeign companies. It has wet leased four aircraft to Lufthansa Cargo AG,Germany.
• The assessee was obliged to maintain the aircraft in the flying condition asper the guidelines of DGCA to possess a valid airworthiness certificate. Tocomply with such guidelines, assessee entered in to overhaul agreementwith Technik a German Co. for periodic overhaul repairs and made paymentfor the same without deduction of TDS.
• AO assessed that no TDS was deducted by the assessee on the paymentmade to Technik (foreign German Co.) and also no application was filedu/s. 195(2). AO argued and rejected the assessee’s contention and passedthe orders u/s 201 for non-deduction of TDS u/s 195.
• CIT(A) held that the payment made for overhaul repairs to bepayment for “fees for technical services” and hence subject to TDS.On further appeal to ITAT it was upheld on the careful analysis of the variousterms of agreement that the amount received as a routine business receiptand not technical fee and also that payment falls under the exclusionaryclause of Section 9(1)(vii)(b).
  

Contention of Assessee:

• The source of its income is wet-leasing activity to non-resident companies and consequently the source of income is outside India. The payments to Technik for maintenance and repairs was essential and crucial for earnings from the wet-leasing activity. As such the payments made for overhauling expenses are for purpose of services utilized to make source of income outside India which squarely covered under exception clause (b) of Sec 9(1)(vii)
• Further, the services are not technical in nature because these are performed independently by Technik without involvement of assessee.
  

Contention of Revenue:

• The services rendered by Technikwere specialized and sophisticated services which fell squarely within the ambit of “fees for technical services” as envisaged under Explanation 2 to Section 9(1)(vii) of the Act.
• The services do not fall within the excluded category of Section 9 (1) (vii) (b) because the aircraft were wet leased to German company as well as otherentities. Since the entire income was not from sources outside India and consequently, the payment made to Technik could not fall under exclusionary clause (b).
  

Held by Hon’ble Delhi HC:

• Component overhauling and maintenance services cannot be rendered by all entities and only the entities authorized by DGCA (regulatory body) can provide such services.
• Such services make the aircraft safe and airworthy because international and national domestic regulatory authorities mandate that certification of such component safety is a condition precedent for their airworthiness.
• There is a use of technical expertise in providing such services which is that much unique and specific that the regulator has designated selected service centres for that.
• Therefore, the findings of tribunal that the overhauling of components are not in nature of technical services erroneous.
• However, clause (b) of Sec 9(1)(vii) cut an exception that when fee is payable in respect of services utilized for business or profession carried out by an Indian payer outside India or for the purpose of making or earning of income by the Indian assessee , then income from such technical services shall not be deemed to accrue or arise in India.
• Since the payment for overhauling expenses are made to earn income from a source outside India (which is wet leasing of aircrafts to foreign companies operating outside India) , such payments is very well covered by exception carved out by clause (b) of Sec 9(1)(vii).