Case Law Details

Case Name : Airports Authority of India Vs ITO (TDS) (ITAT Delhi)
Appeal Number : ITA No. 5162/Del/2012
Date of Judgement/Order : 04/05/2021
Related Assessment Year : 2010-11

Airports Authority of India Vs ITO(TDS) (ITAT Delhi)

Conclusion: TDS under section 195 was not applicable on payments made by company to the Federal Aviation Administration, USA (FAA), for providing technical assistance to AAI by way of providing its personnel and meeting on ATFM requirements and assisting AAI in connection with ATFM by development of detailed quantitative requirements, detailed ATFM system architecture and draft ATFM implementation plan as the “make available” clause contained in article 12(4)(b) had not been satisfied in the facts and circumstances of the present case and the payment made by assessee could not be regarded as for the purpose of “fees for included services” (FIS).

Held: Airport Authority of India (AAI) had entered into Memorandum of Agreement with Federal Aviation Administration, USA (FAA), for providing technical assistance to AAI by way of providing its personnel and meeting on ATFM requirements and assisting AAI in connection with ATFM by development of detailed quantitative requirements, detailed ATFM system architecture and draft ATFM implementation plan. AO treated these amounts paid as fees for technical services (FTS), chargeable to tax at the rate of 10%, surcharge and cess on the gross amount as per Section 115A.CIT(A) held that entire payments made by assessee to FAA were in nature of FTS and hence chargeable to tax in India under DTAA. Accordingly, it was held that assessee was under obligation to deduct tax from these payments u/s 195. It was held that the concept of make available requires that the fruits of the services should remain available to the service recipient in some concrete shape such as technical knowledge, experience, skills, etc. The assistance provided by FAA in preparation of QRs and development of ATFM system were neither any licensed product of FAA nor exclusive patents of FAA. The assistance rendered on reimbursable basis was based on the agreement between MoCA and FAA of US. The ATFM technology per se had not been made available to the AAI for any perpetual use. The provision of assistance to MoCA in developing and modernization of civil aviation structure, review analysis and documentation of a traffic flow management system was a dynamic process requiring further development of the process by MoCA, India. This was a case of assistance and technical cooperation between FAA and AAI sans any commercial interest by the rendering party. Therefore, based on the manner of transacting, agreements, services provided, reimbursement received, it was held that as the “make available” clause contained in article 12(4)(b) had not been satisfied in the facts and circumstances of the present case, the payment made by assessee could not be regarded as for the purpose of “fees for included services” (FIS).

FULL TEXT OF THE ITAT JUDGEMENT

ORDER

Per Dr. B. R. R. Kumar, Accountant Member:

The present appeals have been filed by the assessee against the orders of ld. CIT(A)-XXIX, New Delhi dated 03.07.2012 and 03.08.2012.

2. Since, the issues involved in both the appeals are common, they were heard together.

TDS on payment to Federal Aviation Agency FAA -USA:

3. The Airport Authority of India (AAI) has entered into Memorandum of Agreement with Federal Aviation Administration, USA (FAA), for providing technical assistance to AAI by way of providing its personnel and meeting on ATFM requirements and assisting AAI in connection with ATFM by development of detailed quantitative requirements, detailed ATFM system architecture and draft ATFM implementation plan.

4. The consideration to be paid was as under:

1. US$ 1,33,142 Towards cost of three specialists from FAA and VNTSC for 10 days for participating in meeting.
2. US$ 25,800 Towards review of the Aeronautical Information
3. US$ 37,800 Towards analyses of India’s future ATFM plan
4. US$ 1,17,300 Towards documentation of the Qualitative Requirement
5. US$ 1,62,000 Towards preparation of the system architecture and specifications
6. US$ 1,51,200 Towards preparation of the road map, Draft implementation plan.
US$ 4,94,100

5. The AO treated these amounts paid as fees for technical services (FTS), chargeable to tax @10% + surcharge + cess on the gross amount as per Section 115A of the Income Tax Act, 1961. The reasoning given by the AO is as under:

♦ The contention of the applicant that FAA is a sovereign entity and entitled to immunity from taxation under the Act is not well founded in law and facts.

♦ Sovereign immunity can only be claimed in respect of the acts done in its sovereign capacity (acta jure imperii) but not done in capacity of private law or commercial character (acta jure gestionis).

♦ Any immunity from taxation to any sovereign State can only be tested against the Constitution of India. There would be no immunity from taxation to any sovereign State unless specifically provided either by the Constitution of India or any other enactment. Article 285 and Article 289 of the Constitution of India specifically provide that properties of the Union of India shall be immune from State taxation on one hand and properties and income of the State shall be immune from union taxation unless otherwise provided by the Parliament.

♦ The concept of general immunity from taxation to a sovereign is not available.

♦ There is no immunity from tax to a sovereign unless it is specifically, granted. If there is no immunity to Government of India the question of availability of such automatic immunity to a foreign sovereign does not arise.

The AO relied on the Section 10(15A) to exemplify the stated immunities Viz.

“any payment made, by an Indian company engaged in the business of operation of aircraft, to acquire an aircraft or an aircraft engine (other than a payment for providing spares, facilities or services in connection with the operation of leased aircraft) on lease from the Government of a foreign State or a foreign enterprise under an agreement [not being an agreement entered into between the 1st day of April, 1997 and 31st day of March, 1999] and approved by the Central Government in this behalf:

[Provided that nothing contained in this clause shall apply to any such agreement entered into on or after the [1st day of April, 2007]

♦ The Article 28 of Vienna Convention, which has been referred by the embassy, had been incorporated by way of Section 1 0(6)(ii) of the Act, which provides that remuneration to diplomats and embassy officials engaged in service in such capacity would be exempt from tax. There also the principle of reciprocity is embodied and excludes the business or professional activities of such persons.

♦ It is well settled legal position that the Act is a self contained code. In the case of Rao Bahadur Ravulu Subba Rao vs CIT [1956] 30 ITR 163 (SC)

♦ Although the applicant has presented a picture that the two agreements are separate and, therefore, each has to be viewed in isolation to the other, However, the crucial fact that the applicant failed to mention initially is that these agreements are infact appendices/ annexures to the memorandum of agreement number NATT-4407 entered into between the Federal Aviation Administration (FAA) and the applicant. The applicant was asked to produce the copy of memorandum of agreement. The same has been produced and is placed on record. Perusal of memorandum give the following:

“This memorandum of agreement (the agreement) establishes the terms and conditions under which the FAA may provide assistance to the MoCA in developing and modernizing the civil aviation infrastructure of India in the managerial, operational and technical areas. For this purpose, the FAA shall, subject to the availability of appropriated funds and necessary resources, provide personnel, resources, and related services to assist the MoCA to the extent called for in the annexures and appendices to this agreement.”

Thereafter the Attachment-A to Annexure-XX to the memorandum of agreement gives again the objective as under:

“The purpose of this effort is for the U.S. Department of Transportation’s Volpe National Transportation Systems Center to assist the FAA and the Airport Authority of India (AAI) in the development, justification, and definition of a plan that will address India’s growing air traffic activity and need for a modernized ATM system to cover all Indian Flight Information Regions (FIRs); provide a global concept of operations; define qualitative requirement in sufficient detail to obtain a common understanding between governments on the capabilities needed; prepare a system architecture and system specifications; and lay out a road map to incrementally develop the services, products, technologies, with a focus on (he air traffic flow management (ATFM), necessary to make India’s air traffic management system a reality. The work covered in this proposal is the necessary foundation to set-up ATFM in India.”

♦ This memorandum also defines the scope of work, which mentions as under:

“The scope of work will primarily include the following:

1. Development of Detailed Qualitative Requirement (QRs) for the proposed ATFM system.

2. Preparation of a Detailed System Architecture and Specifications – hardware (Services/ Operating system, display units), software, various ATFM tools, baseline data requirements, interface with internal and external systems, communication system requirements, and protocols and other associated systems, etc.

3. Preparation of a Draft Implementation Plan with time frame alongwith requirement of manpower, training and ATFM procedures.”

♦ Thereafter the statement of tasks gives the further breakup of individual activities and their objective which would be performed for the purpose of achieving the main objective. In respect of participation in an Indian air traffic management requirement meetings it is mentioned as under:

“To ensure a common and collective understanding of the requirements with respect to functions, data, equipment, tools, and people, a meeting will be organized in Delhi with participants from AAI, the FAA Air Traffic Control System Command Center (ATCSCC), and Volpe Center. Discussions will be organized around a description of the existing ATM system in India, development of user needs, analysis of requirement, and consideration of future directions. This meeting will include only participants from AAI that (a) have basic understanding of ATFM provided at the October 20-21, 2008 ATFM Seminar hosted by the US/ India Aviation Cooperation Program (ACP); (b) understand and can discuss India’s expectations of ATFM; and (c) have good understanding of India’s existing air traffic control (ATC) capabilities and future plans. The meeting may be enhanced if participation from air carriers can be obtained, as their automation capabilities may be useful to establishing the initial ATFM system. Travel participants from the U.S. (Volpe and ATCSCC) will be limited to individuals that understand ATFM and will participate in the development of requirements, functional specifications, and roadmap.

Obtaining this collective understanding of the current ATM environment will help elicit meaningful and valid qualitative requirements and guide the development of the envisioned ATFM road map

♦ Included in this review will be discussion on the issue of training. Traditional air traffic control (ATC) specialists are not typically exposed to the procedures and applications that characterize ATFM. Therefore, as we formulate a plan to bring the ATFM technology to bear on the situation in India, we need to plan how to train personnel to take on the role of Traffic

Manager. This plan will involve identifying the types of people within India’s ATC organization who are candidates for Traffic Manager and summarizing their backgrounds. We expect to accomplish this task, at least to the level to start planning a training program, during the team visit to India mentioned previously. Working with the FAA Academy in Oklahoma City, Oklahoma and using the personnel data, we will formulate lesson plans, hands-on training, and timing for a comprehensive Traffic Management training curriculum similar to that provided by Volpe Center for FAA Traffic Managers.”

♦ The financial provisions are provided in Article-V to the memorandum of agreement, which mentions as under:

A. The AAI shall reimburse the FAA for ail costs incurred in providing services under this Annex.

B. The estimated cost of the related services for completing Phase 1, 2 and 3 activities under this Annex is four hundred and ninety four thousand one hundred U.S. Dollars (US$ 494,100). Payment by the AAI under this Annex shall be made in accordance with the following schedule:

1. The AAI shall pay in advance the sum of twenty five thousand eight hundred U.S. Dollars (US$ 25,800) which is the estimated cost for review of Aeronautical Information AAI (Attachment A, Task 1, Paragraph 1.1). Upon receipt of payment from the AAI, the FAA and Volpe Center shall commence activities for this milestone.

2. The AAI shall pay in advance the sum of thirty-seven thousand eight hundred U.S. Dollars (US$ 37,800), which is the estimated cost for analysis of India’s Future Plans (Attachment A, Task 1, Paragraph 1.3). Upon receipt of payment from the AAI, the FAA and Volpe Center shall commence activities for this milestone.

3. The AAI shall pay in accordance with the sum of the one hundred seventeen thousand three hundred U.S. Dollars (US$ 117,300), which is the estimated cost of Documentation of Qualitative Requirements activities (Attachment A, Task 1, Paragraph 1.4). Upon receipt of payment from the AAI, the FAA and Volpe Center shall commence activities for this milestone.

4. The AAI shall pay in advance the sum of one hundred sixty-two thousand U.S. Dollars (US$ 162,000), which is estimated cost of preparation of system architecture and system specifications (Attachment A, Task 2). Upon receipt of payment from the AAI, the FAA and Volpe Center shall commence activities for this milestone.

5. The AAI shall pay in advance the sum of one hundred fifty-one thousand two hundred U.S. Dollars (US$ 151,200), which is the estimated cost of Preparation of Road Map Draft Implementation Plan activities (Attachment A, Task 3). Upon receipt of payment from the AAI, the FAA and Volpe Center shall commence activities for this milestone.

♦ … (iii) The above analysis would clearly prove all contentions of the applicant to be incorrect. It is very clear from the analysis of the agreement that it is a integrated contract for providing consultancy by the FAA to AAI for the purpose of upgradation of ATFM capabilities, preparation of detailed system architecture and specification and preparation of a road map for implementation plan with requirements for labour, training and ATFM procedures. The sum and substance of the agreement is that FAA would be providing technical services, which consists of development and transfer of a technical plan/ technical design. To this extent the services rendered by FAA fails under the category of fees for technical services as per Section 9(1)(vii) of the Act and also as fees for included services under Article 12(4)(b) of the Indo-US DTAA. It need to be also mentioned that Clause (b) of Article 12(4) has two limbs and “make available” condition applies to first limb comprising technical knowledge, experience, skill, know-how or process. Whereas second limb consists of development and transfer of a technical plan or technical design. The present services consist of development and transfer of technical plan. Therefore, the judgments and arguments in respect of “make available” qualification are of no use. In the present case since the nature of services including the provision of services of technical or other personnel is for the purpose and consists of development and transfer of technical plan namely the ATFM plan for Indian operations. The conditions of the DTAA are satisfied.

(iv) The apparent watertight division between the two contracts,-which the applicant has tried to present, Is not correct, In fact it is part and parcel of same memorandum of agreement with an integrated objective. In this background each and every payment for a sub task or an activity cannot be viewed in isolation when it is part of series of transaction taking place for a crystallized objective.

(v) Coming to the aspect of rendering of services outside India and the reliance placed on the decision of Ishikawajima-Harima Heavy Industries Co. Ltd. (supra), the first and foremost it is to be appreciated that the Hon’ble Supreme Court in the said case had analyzed the provisions of Section 9(1)(vii)(c) of the Act, whereas for the present purpose it is Section 9(1)(vii)(b), which will be applicable, because the payer in the present case AAI is a resident The wordings of Section 9(1)(vii)(b) and 9(1)(vii)(c) are different, therefore, the ratio of the decision would have limited applicability for present purpose. In fact the decision of Hon’ble Supreme Court and the territorial nexus doctrine has been analyzed in detail by the

Hon’ble Authority for Advance Rulings (“AAR”) in the case of WorleyParsons Services Pty. Ltd. [312 ITR 273]. In the said case the Hon’ble Authority has held that even if the part of the services are rendered in India that is sufficient to constitute territorial nexus and thereby the taxability would be in respect of whole of such services no limited to the part being performed in India. In the present case clearly under the memorandum of agreement several services would be performed in India including visits of technical persons, implementation and training of personnel. Therefore, the territorial nexus condition laid down by the Hon’ble Supreme Court as explained by the Hon’ble AAR in the case of Worley Parsons are satisfied and the full consideration representing fees for technical services u/s 9(1)(vii) of the Act read with Article 12(4)(b) of Indo-US DTAA is chargeable to tax in India.

6. The matter reached to ld. CIT (A) who considered various submissions of the assessee, quoting various clauses of the agreement between FAA & AAI held that payments made to FAA are indeed in the nature of FIS and taxable in India.

7. The rationale given by the ld. CIT (A) is as under:

On the issue sovereignty:

“5.2 In the very first place, it has not been established by the appellant that FAA is foreign ‘Government and not a commercial entity of the foreign government as AAI is to Indian Government. Nothing is clear from copy of MOA itself. The MOA is signed by Federal Aviation Administration, Department of Transportation, United States of America AND Airports Authority of India, Ministry of Civil Aviation, Government of India. From it, it appears that status of FAA is the same as that of AAI. Therefore, it cannot be said that FAA is foreign government.

5.3 The argument of the appellant is that Government In clause (i) above should be read as any government whether Indian or foreign. This contention is fallacious because the section has to be read as whole and then harmonious interpretation has to be made. The word ‘Government’ has not been defined in Income tax Act. As per section 3(23) of general Clauses Act, 1897, the word ‘Government’ has been defined as to include both central and state governments of India. Though the word ‘Government’ in the section is unqualified, yet it finds itself In company of other three entities which are RBI, Indian corporation and Indian mutual fund. Therefore, applying the principle of Noscitur a socitis, the word ‘Government’ has to be given a meaning with reference to other entities mentioned at sr. no. (ii) to (iv) above, which are nothing but Indian entities. This rule of interpretation has been advocated by Hon’ble Supreme Court in its recent decision in case of CIT vs Bharti Cellular Ltd. (2010-TII-05-SC-INTL). Applying this rule of interpretation, the word ‘Government’ as mentioned in clause (i) above would mean Indian Government which includes both central and state governments. By no stretch of Imagination, it can be deemed to include foreign government also.

5.4 It is also to be seen all the entities mentioned from sr. no. (i) to (iv) are exempted from paying income tax. Therefore, section 196 makes sense that there should not be any requirement of deducting tax at source on income pertaining to these exempted entities, this section cannot be made applicable to any entity which is not exempted under Income tax act. No general immunity from tax has been provided to a foreign sovereign in Indian IT Act, 1961. It has been held in case of DCIT vs Royal Jordanians Airlines (ITAT, Del-SB) 98 ITD 1 that no immunity from tax is available to a sovereign unless it has been specifically granted. In section 10 of the Act, which deals with various incomes which are exempted from tax, certain incomes accruing to foreign govt. has been made exempt. For example, section 10(15A) exempts any payment made by Indian company engaged in business of operation of aircraft, to acquire an aircraft or an aircraft engine on lease from foreign government. Even this section does not exempt payments made for providing spares, facilities or services in connection with operation of leased aircraft. This section 10(15A) does not apply to agreement entered into on or after 01-04-2007. This means that even said exemption has been withdrawn with reference to agreement entered into after prescribed date. Further, Article 265 of Constitution of India says:

‘No tax shall be levied or collected except by authority of law’.

Thus, constitution gives power to parliament to make laws regarding levy and collection of taxes. Article 285 says that:

Exemption of property of the Union from State taxation.

(1) The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State.

(2) Nothing in clause (I) shall, until Parliament by law otherwise provides, prevent any authority within a State from levying any tax on any property of the Union to which such property was immediately before the commencement of this Constitution liable or treated as liable, so long as that tax continues to be levied in that State.

Article 289 says that:

Exemption of property and income of a State from Union taxation.

(1) The property and income of a State shall be exempt from Union taxation.

(2) Nothing in clause (1) shall prevent the Union from imposing, or authorizing the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith.

(3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of Government.

The combined reading of above Articles of Constitution of India reveals that even Union and/or state governments do not enjoy blanket immunity from taxes. Therefore, it is not legally tenable to presume that foreign government is exempt from income tax without any such specific exemption provided under the Act. In view of discussion supra, it is clear that provisions of section 196 are not applicable to present case.

On the issue of reimbursement

5.5 The contention of the appellant is that payments made by it are just reimbursements and since there is no income element in it, these are not chargeable to tax in India and consequently not subject to withholding of tax u/s 195. It s seen that as per provisions of section 195(1), liability to deduct tax at source arises when sum payable to a non-resident is chargeable to tax in India. The law on this issue has been laid down by Hon’ble Supreme Court in its decision in case of GE India Technology Centre Pvt. Ltd. v. CIT (2010) 327 ITR 456 (SC). The relevant observations of the Hon’ble SC are reproduced below:

7. “It may be noted that Section 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TDS in respect of such composite payments. The obligation to deduct TDS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 195(1), namely, “chargeable under the provisions of the Act”.

This principle has been reiterated in case of following judicial decisions:

    • – Maharastra State Electricity Board v CIT (2004) 90 ITD 793(Mum),
    • – Van Oord ACZ India P. Ltd. v. CIT 230 CTR 365 (Del) and
    • – Prasad Productions 3 ITR (Trib) 58 Chennai (SB)

Therefore, we have to see whether the payments made by the appellant to the non-resident FAA are chargeable to tax in India in hands of FAA. The taxability of non-resident is governed by section 5(2) of the act, which is reproduced as below:

“Subject to provisions of this act, the total income of any previous year of a person who is non-resident included all income from whatever source derived which-

a) Is received or is deemed to be received in India in such year by or on behalf of such person;

or

b) Accrues or arises or deemed to accrue or arise to him in India during such year”

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 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 FTS under explanation 2 to section 9(1)(vii) r.w. section 5(2)(b) of the act. It is not the case of AO that non-resident has business connection and PE in India.

On the issue of FIS

5.6 Even, appellant has not disputed the nature of services provided by FAA as technical services within the meaning of explanation 2 to section 9(1)(vii) of the Act. The appellant has contended that services are not technical services as per Article 12(4) of Indo-USA DTAA because ‘make available’ clause is not satisfied and moreover, payments represent just reimbursement of expenses incurred by FAA and hence there is no income element involved. Article 1(A) of MO A dated 13-11-2006 entered into between Department of transportation, USA and Ministry of Civil Aviation, Government of India says that:

“This Memorandum of Agreement establishes the terms and conditions under which FAA may provide assistance to MoCA in developing and modernizing the civil aviation infrastructure of India in the managerial, operational and technical areas. For this purpose, FAA shall, subject to the availability of appropriated funds and necessary resources, provide personnel, resources and related services to assist the MoCA to the extent called for in the annexes and appendices to this agreement.”

There is a Appendix 2 to Annex 3 to MOA entered into on 25-09-2009, Article II of which says that:

A. “The FAA. shall provide three (3) specialists, from the FAA and the Volpe National Transportation Systems Centre, with background in Air Traffic Flow Management (FATM) to travel to New Delhi, during the fourth quarter of Fiscal year 2009 for a period of appox. 10 days including travel.

B. The specialists shall assist the AAI by participating in Indian National Air traffic Requirements meeting on AFTM requirements with AAI and Industry representatives.”

There is another Annex 4 to MOA dated 25-09-2009, Article II of which says that:

A. “The AAI plans to implement operational ATFM services to address India’s growing air traffic activity while transitioning to a modernized Air traffic Management System to cover all Indian Flight Information Regions,

B. In support of this operational requirement, the FAA, in cooperation with Dot’s Volpe National transportation System Centre, shall assist AAI in development of:

i. detailed qualitative requirements for the proposed ATFM capacity

ii. detailed ATFM system architecture and specifications, and

iii. draft A TFM implementation plan.

C. The FAA shall separately provide the AAI with a detailed project plan, based on parties prior discussion, describing the intended scope and content of FAA’s assistance in development of QRs‘ AFTM system architecture and specifications and a draft AFTM implementation plan.

Further, Article III of said Annex says as under:

A. Subject to available resources, the FAA and Volpe Centre shall implement this project in three (3) phases as follows:

Phase I: Development of detailed qualitative requirements (QRs) to include:

I Review of US A TFM capabilities, including operating operations and systems.

Ii Analyses of India’s future ATM plan, and

Ii Documentation of QRs

Phase II: preparation of detailed system architecture and specifications that will satisfy the detailed QRs elicited in the previous task,

Phase III: preparation of a road map draft implementation plan to include a time frame along with requirements for labour, trainees and ATFM procedures.

5.7 Perusal of these above referred clauses of MOA and annexes show that nature of services to be provided by FAA squarely fall within purview of explanation 2 to section 9(1)(vii) of the Act. Even, appellant has not denied it. The appellant has taken two arguments, on basis of which it has contended that payments are not chargeable to tax in India:

(a) The services provided by FAA though technical services as per definition under domestic act are not technical services under Article 12(4) of DTAA because ‘make available’ clause is not satisfied.

(b) The payments are purely in nature of reimbursement and therefore there is no element of income contained in these payments.

In order to deal with these arguments, Article 12(4) of Indo-USA DTAA is reproduced as under:

“For purposes of this Article, “fees for included services ” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received / or

(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.”

The case of the appellant falls within purview of Clause (b) of Article 12(4). It is pertinent to note that said clause (b) consists of two limbs; make available technical knowledge, experience, skill, know-how, or processes OR consist of the development and transfer of a technical plan or technical design. The requirement of ‘make available5 goes with first limb only and not with second limb. This has been held so by Hon’ble ITAT Kolkata in case of Gentex Merchant (P) Ltd. vs DDIT (2005-TII-07-ITAT-KOL-INTL). Therefore, if case of the appellant happens to fall within purview of second limb, then there is no requirement of ‘make available’. Perusal of various articles of MOA and annexes as reproduced above show that FAA shall be helping AAI in modernization of civil aviation infrastructure of India in the managerial, operational and technical areas and FAA shall after due process of review and analysis of requirements, prepare and deliver a technical plan for the purpose. Thus, the net outcome of services to be provided by FAA is preparation of technical plan which shall be delivered to AAI for carrying out the process of modernization of civil aviation infrastructure in India. The case of the appellant clearly falls within scope of second limb of clause (b) of Article 12(4) and therefore services provided by FAA are in nature of technical services.

5.8 The appellant has contended that MO A, Appendix 2 to Annex 3 to MO A, Annex 4 to MOA and three phases as mentioned in Article IIIA of Annex 4 should be read independently and separately as if these were separate independent agreements as such. This contention of the appellant Is fallacious as there is, in fact only one agreement in form of MOA dated 13-11-2006. Other two annexes are just in continuation of said MOA. Article IIIA of Annex 4 is regarding stages in which services will be provided by FAA. By no stretch of imagination, it can be said that all these are independent and separate agreements. This is particularly so after decision of Hon’ble Apex Court in case of Vodafone International Holdings BV Netherlands vs UOI 345 ITR 1 (SC), wherein principle of look at and not look through’ has been prescribed. The ratio of said decision of Hon’ble Supreme Court has been followed by AAR in following recent decisions:

    • – Roxar Maximum Reservoir Performance WLL (2012-TII-24-ARA- INTL)
    • – Alstom Transport SA vs DIT (2012-T1I-28-ARA-INTL)

Similarly, Hon’ble ITAT Kolkata has followed the said ratio in case of Dongfang Electric Corporation (2012-TII-66-ITAT-KOL-INTL) wherein it has been held that:

“While one may have legitimate issues as to whether these observations regarding “looking at the transactions as a whole and not adopting dissecting approach” can indeed be applied in all cases in which separate contracts are entered into for offshore supplies and onshore services, in our considered view, these observations are certainly applicable in the cases in which the values assigned to the onshore services are prima facie unreasonable vis-a-vis values assigned to the offshore supplies, which make no economic sense when viewed in isolation with offshore supplies contract. To that limited extent, our views are the same as of the learned Authority for Advance Ruling.”

Thus, Hon’ble ITAT Kolkota has a gone a step further and observed that principle of ‘look at’ can be applied even where there are two separate contracts for offshore supplies and onshore services but values assigned to onshore services are unreasonable vis-a-vis values assigned to offshore supplies. In present case, there is only one MOA which cannot be dissected in any case because it is about provision of services for one goal only which is modernization of civil aviation infrastructure in India.

In view of this, the contention of the appellant that MOA and its annex should be separated out and read independently is not legally tenable.

5.9 Now, even appellant has accepted that there is development and transfer of technical plan by FAA to AAI, though the appellant has referred to phase II and III as mentioned in Annex 4 for this purpose. The contention of the appellant that Article II of Appendix 2 to Annex 3 to MOA and phase I of Article IIIA of Annex 4 to MOA should be severed and read separately from phase II and III of Article IIIA of Annex 4 to MOA is not legally tenable as discussed supra. Therefore, entire payment made to FAA is held to be in nature of FTS.

5.10 Another contention of the appellant is the payments are in nature of reimbursement only and therefore there is no element of income contained in these. The appellant has referred to Article VI of MOA, Article III of Appendix 2 to Annex 3 to MOA and Article V of Annex 4 to MOA which are regarding financial provisions. Here, it is pertinent to see that what for the appellant has made payments. The payments have been made for getting technical services from FAA. From perspective of payer, these are undoubtedly in nature of FTS. Looking from perspective of payee, these are in nature of FTS against which payee had incurred certain expenses and after deducting those expenses, there may not be any profit in hands of payee. But, as per domestic act and DTAA both, where there is no PE in India, FTS are taxable on gross basis on certain rate and no deduction whatsoever is allowed from the FTS. Therefore, these payments are in nature of FTS which are taxable on gross basis @ 10% as per DTAA. Reliance is placed on recent decision given by jurisdictional Hon’ble ITAT, Delhi in case of CSC technology Singapore Pte. Ltd., (2021 -TII-35-ITAT-DEL-INTL), wherein it has been held that:

“however, the position of reimbursement of traveling expenses is quite different, These expenses have been incurred in connection with technical services agreement. Therefore, the expenditure has been incurred for earning royalty/FTS. In spite of the fact that the agreement provides inter-alia for adequate level of support and posting its personnel, the expenses for which will be reimbursed, the fact remains that the expenditure has been incurred for earning the royalty/FTS. The expenditure is that of the assessee and not that of the Indian subsidiary company. Article 12 provides for taxation of royalty/FTS in the source country on gross basis at a concessional rate of tax. This means that the expenditure incurred for earning royalty/FTS is not deductible in computing gross royalties or gross FTS received by the assessee company. The assessee has found that taxation under the Income Tax Act, 1961 is not more beneficial to it. Therefore, the receipts have been offered for taxation under Article 12 of the DTAA, It is clear from the language that this article taxes royalty/FTS on gross basis and does not permit deduction of expenses. Therefore, it is held that the alleged reimbursement of expenses for traveling or the expenses of the assessee-company are its expenses, liable to be included in its gross receipts. Although the decision in the case of CIT & Another Vs. Halliburton Offshore Services Inc. was rendered under section 44BB, yet, it deals with the amounts received by the assessee in India on account of provision of services and facilities in connection with, or supply of plant and machinery on hire, used or to be used, in the prospecting for, or extraction or production of mineral oils. It has been held that the reimbursements will have to be included in the receipts for arriving at the presumptive income, being 10% of the receipts. This decision does support our aforesaid conclusion that gross receipts will include reimbursement of expenditure incurred by the assessee for the purpose of computing gross receipts;”

The issue in the present case has been resolved by the Hon’ble ITAT in the above mentioned decision. In case of Cochin Refineries vs. CIT [1996] 222 ITR 354 (Ker), same principle has been laid down. Therefore, the contention of the appellant that payments are merely in nature of imbursement and hence not taxable is not correct.

8. In view of discussion supra, the Ld.CIT(A) held that entire payments made by the appellant to FAA are in nature of FTS and hence chargeable to tax in India under DTAA. Accordingly, it was held that the appellant is under obligation to deduct tax from these payments u/s 195 of the Act.”

9. Aggrieved with the order of the ld. CIT (A), the assessee filed appeal before us.

10. During the hearing before us, the ld. AR taken various arguments taken before the ld. CIT (A) (as mentioned in order from page nos. 2 to 15) alternatively and in consonance, the gist of which is as under:

♦ In the first contention, the appellant has submitted that the payments made relate to the cost which the FAA is expected to incur in rendering the services. The payments are simply reimbursement of cost which does not include any element of profit therein. The appellant has made detailed submission on this ground which is as under:

♦ The Ministry of Civil Aviation (MoCA) of the Government of India has entered into a memorandum of agreement with the Federal Aviation Administration (FAA) of the Department of Transportation of the United States of America vide agreement dated 13.11.2006. The agreement has been entered into with an object that the FAA may provide assistance to the MoCA in developing and modernizing the civil aviation infrastructure of India in the managerial, operational and technical areas.

♦ The first para of the preamble to the MoA states as under:

WHEREAS, the Federal Aviation Administration (FAA) of the department of Transportation of the United States of America is directed to encourage the development of civil aeronautics and the safety of air commerce, and is authorized to furnish on a reimbursable basis to foreign governments certain technical assistance to that end;

♦ Thus, it is clear from the preamble to the MoA that the FAA is Department of Transportation of the Government of USA. The FAA has been organized by the Government of USA with a view to encourage the development of civil aeronautics and the safety of air commerce.

Further, the FAA has been authorized that it may provide technical assistance to a foreign government on a reimbursable basis.

Article VI- Financial Provisions of the MoA clearly provides that the MoCA shall reimburse the FAA, in accordance with the provisions set forth in this agreement and its annexes and appendices, for all costs associated with the technical assistance provided by the FAA. (Refer page no 4 of the Paper Book)

♦ In other words, the FAA has been established by the Government of USA for the purpose of ensuring the safety of air commerce. Further, to achieve the aforesaid objective, it has been further authorized to render assistance to a Government of Foreign Country. However, it has been specifically provided that such assistance should be provided by FAA on a cost reimbursable basis. In other words, the intent of the FAA is not to earn any profit out of the assistance rendered by it.

♦ In view of the above and to encourage the safe and orderly growth of civil aviation of India, the Government of India has entered into a memorandum of agreement with the FAA of the Government of USA. The intent of this agreement was to ensure the broad terms and conditions subject to which FAA will provide assistance to the Indian Government. It has been categorically provided in the agreement that the specific technical assistance to be provided by the FAA for the MoCA shall be delineated by annexes and appendices to this agreement. For the purpose of entering into the annexes and appendices, FAA has been authorized by the Government of USA and Directorate of General Civil Aviation and Airport Authority of India (the assessee) has been authorized by the Govt. of India.

♦ In pursuance of the aforesaid general Memorandum of Agreement (MoA), the assessee entered into agreements with the FAA. The first agreement namely Appendix 2 and Annex 3 to the MoA was entered into between the assessee and the FAA on 25.09.2009. This agreement provides in detail the specific assistance which FAA wilt provide in pursuance of the aforesaid agreement. It has been provided in the agreement that the FAA shall provide three specialists, from the FAA and the Volpe National Transportation Systems Centre, with background in Air Traffic Flow Management (FATM) to travel to New Delhi, India, to assist the assessee by participating in an Indian National Air Traffic Requirements Meeting on ATFM requirements with the assessee and the industry experts, In other words, the specialists from the FAA will simply provide their inputs in the meetings at the time of discussion. It is clear that the three specialists will not make available any technical know-how or other related things to the assessee during the course of the meetings.

♦ The financial provisions for the aforesaid assistance are contained in Article III of the appendix/ annex. It provides that the estimated cost for the three specialists for the reference period is US$ 1,33,142, which includes salary and benefits, transportation, per diem and FAA support. In other words, it has specifically been provided in the appendix / annex that the assessee shall be responsible to pay the cost which FAA would incur in sending their specialists to India.

♦ The second agreement has been entered into by the assessee with the FAA on 25.09.2009 namely Annex 4 to the MoA. This appendix / annex provides that the FAA shall assist the assessee in the following activities:

i. Development of detailed qualitative requirements for the proposed A TFM capacity

ii. Development of detailed ATFM system architecture and specifications, and

iii. Development of draft implementation plan.

It has been provided in the agreement that the FAA shall provide the aforesaid assistance to the assessee in the following three separate phases:

Phase I: Development of detailed qualitative requirements (QRs) to include:

i. Review of US ATFM capabilities, including operating operations and systems.

ii. Analyses of India‘s future A TM plan, and

iii. Documentation of QRs

Phase II: preparation of detailed system architecture and specifications that will satisfy the detailed QRs elicited in the previous task

Phase III: preparation of a road map draft implementation plan to include a time frame along with requirements for labour, trainees and ATFM procedures.

♦ The cost which FAA would incur in providing the aforesaid services has been detailed in Article V Financial Provisions. The article contains in detail the separate cost for each phase. The cost has been identified separately because of the fact that the phases are separately identifiable and in case of termination of the agreement, the assessee shall be liable to pay the cost incurred upto the phases completed. It has been clearly provided in Article V Financial Provisions that the total cost of completing the entire phases would be US$ 4,94,100.

♦ A dispute often arises when the payer of the amount to the non-resident feels that the amount to be remitted by him is not recipient’s income chargeable under the Indian Income-tax Act. Should the payer in such a case deduct tax at source?

♦ The ld. AR relied on the following judgments:

High Court/AAR

    • CIT vs Dunlop Rubber Co. Ltd. [142 ITR 493 (Cal)]
    • Dectavs CIT [23 7 ITR 190 (AAR)]
    • Tata Engineering & Locomotive Company Limited (2000) 245 ITR 823
    • Siemens, 310 ITR 320 (Bom)

ITAT

    • Clifford Chance, 82 ITD 106 (Bom)
    • Raymond Ltd., 86 ITD 791 (Bom)
    • Modicon Network, 14 SOT 204 (Del)

♦ It was argued that from the judgment of the Hon’ble jurisdictional High Court as well as other High Courts that the reimbursement of expenses under no circumstances can be regarded as income. Therefore, in the instant case, what has been paid by the assessee to the non-resident, i.e. FAA is nothing but the reimbursement of expenses which the FAA would incur in providing such services. Therefore, the sum paid by the assessee to the nonresident is not chargeable to tax in India.

♦ Under the aforesaid circumstances, if the sum paid to the FAA is not chargeable to tax in India, then the provisions of section 195 cannot be applied. Therefore, we respectfully submit that the sum paid by the assessee to the FAA may kindly be allowed to be remitted without any deduction of TDS.

♦ The second contention of the appellant is that it is a payment to the Government; therefore, the provisions of section 196 shall apply. And accordingly, no TDS is required to be deducted in the instant case on the payments made by the assessee. In this regard, the appellant has submitted as under:

Section 196 of the Income-tax Act provides as under:

Notwithstanding anything contained in the foregoing provisions of this chapter, no deduction of tax shall be made by any person from any sums payable to..

i. the Government, or

ii. the Reserve Bank of India, or

iii. ……….

iv. ……….

Where such sum is payable to it by way of interest or dividend in respect of any security or shares owned by it or in which it has full beneficial interest, or any other income accruing or arising to it.

It is clear from the aforesaid reproduced provision that the provision of TDS shall not apply in case payment is to be made to a Government. In the instant case, the assessee is making payment to the Government. Therefore, the provisions of section 196 shall apply. Provisions of 196 override the provisions contained in section 195. Therefore, we respectfully submit that applying the provision of section 196, no TDS should be deducted in the instant case.

The Ld. AO in its assessment order at page 2 to 4 of order has observed that no immunity from taxation has been granted by referring to various provisions of the Income-tax

Act and some of the decisions of the courts. However, the Ld. AO has not made any reference to the provision of section 196. Therefore, we respectfully submit that the provisions of section 196 are clearly applicable in the instant case, and accordingly, no TDS can be deducted on payment made to government.

In addition to the aforesaid, during the course of hearing the assessee has submitted as under:

“In a taxing Act, one has to look merely at what is clearly said. There is no room for any intendement. There is no equity about a tax. There is no presumption to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used”.

In this regard, the assessee has placed reliance on the decision of the Hon’ble Supreme Court in the case of Modi Sugar Mills Limited AIR 1961 SC 1047.

♦ The third contention taken by the appellant is that there are two separate agreements, which the appellant has signed with the FAA, In respect of the first agreement, it was submitted that the assistance by the FAA does not make available any technology to the assessee. Therefore, nothing under this agreement should be held as taxable in India. In respect of the second agreement, it was submitted that the maximum amount which could be held as Fees for Included Services amount to US$ 3,13,200 relating to the assistance mentioned In phase II and III of the agreement. The appellant has filed detailed submission in this regard, which is as under:

♦ It is clear from the aforesaid details that in pursuance of the general MoA entered into between Govt. of USA and Govt. of India, the assessee has entered into two different and separate agreements for the purpose of achieving the general purpose of encouraging safety in air traffic. The agreements contain in detail the purpose for which the agreement has been entered into by the assessee with the FAA. Further, the cost which the FAA would incur in providing the assistance mentioned in the agreement, has been detailed in the each of the agreements.

♦ In this respect, it was submitted that the taxability of the FAA will be subject to the provisions of Double Taxation Avoidance Agreement which India has signed with USA. It is a well settled and internationally accepted principle that in case of conflict between DTAA and the domestic law, the provisions of DTAA will prevail. Provisions of domestic law may be given effect only in case they are more beneficial to the assessee. Reference in this connection may be made to Supreme Court decision in case of Azadi Bachao Andolan 263 ITR 706.

♦ Fees for included services has been defined in Para 4 of Article 12. The arguments of the ld. AR are as under:

“For purposes of this Article, “fees for included services ” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.”

It is clear from the definition that if payment has been made in respect of any of the services prescribed in clause (a) or (b) of the above reproduced Article, then the sum paid shall be treated as paid for Fees for Included Services.

Clause (b) of the Article provides two limbs, viz:

i. Make available technical knowledge, experience, skill, know-how or processes

ii. Consist of the development and transfer of a technical plan or technical design.

Applicability of first limb

This clause provides that the services shall be treated as Fees for included services, if it “make available” the technology or other expertise. The word “make available” has been interpreted in various judgments of the Hon’ble High Court and Authority for Advance Rulings. In the case of Ernest and Young P. Ltd. dated 19.03.2010 and Bharati AXA General Insurance Co Ltd dated 06.08.2010, the Hon’ble AAR held that “make available” means when the person acquiring the technology is enabled to apply the technology.

The phrase ‘make available’ has been explained in the MOU of the DTAA between India and USA as follows:

“Generally speaking, technology will be considered “made available” when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of product which embodies technology shall not per se be considered to make technology available.”

Therefore, in order to be covered by this provision, it is a necessary condition that the service provided should make available the technology which enables the person acquiring the service to apply the technology.

Applicability of second limb

This clause provides that if services consist of the development and transfer of a technical plan or technical design, then payment for such services shall be treated as fees for included services. In the instant case, the assessee has entered into two separate agreements with the FAA. And the agreements define separately the reimbursement amount which the assessee will be liable to pay for the various assistances. Therefore, the applicability of the aforesaid clauses has to be checked with reference to each agreement individually.

The Ld AO at page 7 and 8 of the order has observed that the activity cannot be considered in isolation when it is a part of series of transactions taking place for a crystallized objective. And thereafter, the Ld. AO has decided the applicability of the TDS considering both the agreements together without considering the individual transactions as detailed in the agreement.

In this respect, we respectfully submit that the Hon’ble Authority for Advance Rulings in the case of Rotem Company, In re, 279 ITR 165 has held that where the agreement provides for various services, and contains break-up of the contract price with reference to the services, then each service has to be examined individually for the purpose of determining the applicability of taxability in India.

In the instant case also, the agreements contain break up of each of the assistance which the FAA would provide to the assessee. Therefore, applying the decision of the AAR, we contend that each agreement should be examined separately and further, each phase in the agreement should also be examined separately for the purpose of examining the taxability in India.

Accordingly, we hereby submit our agreements on the taxability of different agreements:

Analysis of the First Agreement (Appendix 2 and annexe 3 to the  MoA)

This agreement provides in detail the specific assistance which FAA will provide in pursuance of the aforesaid agreement. It has been provided in the agreement that the FAA shall provide three specialists, from the FAA and the Volpe National Transportation Systems Centre, with background in Air Traffic Flow Management (FATM) to travel to New Delhi, India, to assist the assessee by participating in an Indian National Air Traffic Requirements Meeting on ATFM requirements with the assessee and the industry experts.

The aforesaid assistance provided by the FAA does not make available to the assessee any technical knowledge or other things as contemplated in Article 12(4)(b). This is because of the fact that the participation of the specialists in the meeting held in India does not provide the assessee the capability to use the knowledge and experience of the specialists. Therefore, it can be concluded that the first limb of Article 12(4)(b) does not apply in the instant case.

The second limb provides that if the services consist of the development and transfer of a technical plan or technical design, then payment for such services shall be treated as fees for included services, In the instant case, it is clear from the agreement itself that no such plan or design will be provided by the specialists who will visit India, therefore, this limb of the article is also not applicable in the instant case.

Therefore, the assistance provided by the FAA in the first agreement by no stretch of imagination can be said to fall within the definition of the FTS as contained in Article 12 of the Indo-USA DTAA. Under the circumstances, such assistance can at the most fall within the meaning of Business Profits as contained in Article 7 of the DTAA. However, Article 7 provides that the sum will be taxable in India only in a case where the non-resident (i.e. the FAA) has any permanent establishment in India. In the instant case, it has already been submitted before the Ld. AO that the FAA does not have any permanent establishment in India and this fact has also not been doubted by the AO. Therefore, we respectfully submit that the cost reimbursed towards the first agreement amounting to USD 1,33,142 is not taxable in India.

Analysis of the Second Agreement (Annexe 4 to the MoA)

The second agreement has been entered into by the assessee with the FAA on 25.09.2009 vide Annex 4 to the MoA. This appendix/ annex provides that the FAA shall assist the assessee in the following activities:

a. Development of detailed qualitative requirements for the proposed A TFM capacity

b. Development of detailed ATFM system architecture and specifications, and

c. Development of draft implementation plan.

It has been provided in the agreement that the FAA shall provide the aforesaid assistance to the assessee in the following three separate phases:

Phase I: Development of detailed qualitative requirements (QRs) to include:

i. Review of US ATFM capabilities, including operating operations and systems,

j. Analyses of India’s future ATM plan, and

k. Documentation of QRs

Phase II: preparation of detailed system architecture and specifications that will satisfy the detailed QRs elicited in the previous task

Phase III: preparation of a road map draft implementation plan to include a time frame along with requirements for labour, trainees and ATFM procedures.

The agreement vide Article V – Financial Provisions provides for the phase wise cost, which the FAA would incur in completion of the different phases, It provides that the estimated cost of completing Phase 1, 2 and 3 activities under this Annex is US $ 4,94,100, The assessee shall pay to the FAA all cost incurred in providing services under the Annex, in accordance with the following schedule:

US$ 25,800 Towards review of the Aeronautical Information
US$ 37,800 Towards analyses of India’s future ATFM plan US$ 1,17,300 Towards documentation of the Qualitative Requirement
US$1,62,000 Towards preparation of the system architecture and specifications
USS 1,51,200 Towards preparation of the road map, Draft implementation plan.
US$4,94,100

Therefore, it becomes necessary that the taxability of each of the phases should be examined separately.

The first phase involves analysis of the existing ATFM system in India and its comparison with the system in USA and thereafter, documenting the QRs. This assistance neither involves development of any plan or design or it makes available any other technical knowledge. Therefore, the assistance provided by the FAA in the first phase cannot be held as taxable as India. The second and third Phase of assistance preparation of road map and draft implementation..

11. Heard the arguments of both the parties and perused the material available on record.

12. The parties mainly argued on three issues with regard to liability of deduction TDS,

a. Whether the payment is made to a sovereign state (FAA) by another sovereign state (AAI) is not taxable and hence no TDS is deductible or not ?

b. Whether based on the agreements, the payment is in the nature of reimbursement are not ?

c. Whether the services rendered are in the nature of FTS chargeable to tax under DTAA or not ?

Whether the payment is made a sovereign state (FAA) by another sovereign state (AAI) is not taxable and hence no TDS is deductible or not ?

13. We have gone through the entire factum of the case. The argument of the appellant that since payment is made to FAA which is a US Government organization, it cannot be subjected to TDS as per Section 196 cannot be accepted. We find that AAI is a Government organization under Ministry of Civil Aviation is a Mini Ratna, category-1, Public sector undertaking running organization under commercial terms, earning profit and paying taxes to the Government of India which is a part of consolidated fund of India. Similarly, the FAA is an organization involved in Airport management, Aircraft certification, Advisory and Consultancy. The main sources of income are grants, Airport and Airways Trust Fund (AATF). Thus, it can also be considered as an organization under the Government with budgetary support of the state and recourses of its own but not a Government unto itself. The employees of both the organizations namely AAI and FAA are called Government employees for the convenience of implementation agreements. The agreement between AAI and FAA is of a commercial character (acta jure gestionis) and state is not liable for the actions or contracts entered between the parties which is different from acts of state and its sovereign capacity (acta jure imperii). Hence, the payments are not excluded from the purview of Section 196 on this ground. FAA per se cannot be treated as a foreign sovereign Government. There is no general immunity from taxation unless specified which is found absent by going through the agreements entered between the two organizations. That leads to a conclusion that the taxability is determined based on the law of the land and the treaties entered between two nations as sovereign entities. In case of presence of a treaty or agreements like DTAA, they may take precedence in determination of the taxability of the entities involved. Reference is also invited to the Provisions of Section 10(15A) wherein the payments made to foreign Government are exempt. Article 285 and Article 289 provides for collection of taxes and the exemption of items from the purview of taxation. Thus, we find that wherever the legislature intended to accord exemption, they have been specifically provided for in the Income Tax Act. The words used “The Government” cannot be used to connote “A foreign Government” too.

14. To conclude, we hereby hold that the transactions between the AAI and FAA and the profits arise thereof would be subjected to provisions of Indian Income Tax Act.

b. Whether based on the agreements, the payment is in the nature of reimbursement are not ?

15. On going through the agreements, we find that the agreement dated 13.11.2006 signed between the Joint Secretary, Ministry of Civil Aviation and the FAA Administrator was primarily on the pedestal of incurring of expenses on reimbursement basis for providing technical assistance.

16. The first para reads as under:

1) WHEREAS, the Federal Aviation Administration (FAA) of the department of Transportation of the United States of America is directed to encourage the development of civil aeronautics and the safety of air commerce, and is authorized to furnish on a reimbursable basis to foreign governments certain technical assistance to that end.

17. Article VI reads as under:

2) Article VI- Financial Provisions

The MoCA shall reimburse the FAA, in accordance with the provisions set forth in this agreement and its annexes and appendices, for all costs associated with the technical assistance provided by the FAA. In the event of a termination by either party under Article XI of this Agreement, the MoCA shall pay:

1. All costs incurred by the FAA prior to the date of such termination; and

2. All termination costs incurred by the FAA during the 120 day close out period.

18. The MoA between FAA and AAI dated 02.08.2009 signed between Assistant Administrator- FAA and Executive Director-AAI, Article III – Financial Provisions provides for deputing three specialists from FAA for participating in Air Traffic Flow Management (ATFM) and AAI shall reimburse the FAA for all costs incurred by FAA in providing the services. The amounts are paid to FAA account of US treasury, Federal Reserve Bank of New York.

19. Article VI- Termination of costs. This Article provides that the AAI shall pay the costs incurred by the FAA in case the agreement is terminated.

20. On going through the above, we find that FAA is providing assistance in developing and modernizing civil aviation infrastructure in India in the managerial, operational and technical areas. The agreement did not specify any mark up amounts or percentage or service charges but it only talks about reimbursement of expenses incurred by FAA.

21. Thus, we find that the agreement mainly revolves around specification of assistance, its costing and reimbursement thereof. Having said that, the provisions of the Income Tax Act with regard to TDS on reimbursements are being examined.

22. Section 195 of the Act reads as under:

“Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum

chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force: ”

23. The Act clearly specifies that the TDS provisions are invited when the payments are chargeable under the provisions of this Act. We are guided by the decision of the Hon’ble Supreme Court in the case of GE India Technology Cen. P. Ltd vs CIT 327 ITR 456. The Hon’ble Court held that on analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression “sum chargeable under the provisions of the Act” is used only in Section 195. For example, Section 194C casts an obligation to deduct tax in respect of “any sum paid to any resident”. Similarly, Sections 194EE and 194F provide for deduction of tax in respect of “any amount” referred to in the specified provisions. In none of the provisions the expression “sum chargeable under the provisions of the Act”, which as stated above, is an expression used only in Section 195(1). It follows, therefore, that the obligation to deduct tax arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non- resident. Therefore, Section 195 has to be read in conformity with the charging provisions, i.e., Sections 4, 5 and 9. This reasoning flows from the words “sum chargeable under the provisions of the Act” in Section 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of tax even in a case where an amount paid is not chargeable to tax in India at all. The moment there is remittance the obligation to deduct tax doesn’t arise automatically. Doing so, would mean obliteration of the expression “sum chargeable under the provisions of the Act” from Section 195(1). While interpreting a Section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections. As held in the case of C.I.T. Vs. Eli Lilly & Co. (India) (P.) Ltd. [312 ITR 225] the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the I.T. Act form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are “chargeable to tax” under the I.T. Act applies only to those sums which are chargeable to tax under the I.T. Act.

24. The law has been laid down clearly that no TDS is required on the amounts paid are not chargeable under the provisions of the Income Tax Act. This leads us to an issue as to whether reimbursements are liable to TDS or not?

25. The word “reimbursement” in general economic parlance is to be understood as “payback” as it has not been defined specifically in the Indian Income Tax Act. The Cambridge English dictionary reimbursement means “to pay back money to someone who has spent it for you or lost it because of you”. Reimbursement is neither reward nor compensation nor income for Income Tax purpose. Since, it doesn’t include payment for services over and above, it cannot be treated as royalty or fees. There has been no mark up of expenses here. In the instant case, AAI has to incur the travelling, salary expenses to the three employees deputed by FAA for assisting the AAI. In this situation, the AAI can pay travelling expenses and salary for the period of 10 days stipulated or FAA can foot the travelling bill expenses, pay salary and get it reimbursed from AAI. In such a situation, FAA doesn’t get any benefit nor it is detrimental to AAI do so. It is a matter of convenience for the parties involved. Hence, the payments received by FAA would not involve any element of profit which makes it liable to pay tax in India.

26. Provisions of Section 4(2) reads “In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provisions of this Act.”

27. Provisions of Section 195(1) reads “Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest -[***] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” [***]) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force: ”

28. A concurrent reading of Section 4(2) and Section 195(1), denotes that the liability to deduct tax arise only when the payee is a non-resident and the amount payable to him is chargeable to tax in India.

29. From the perusal of the agreement, since the payments are on cost to cost basis which do not involve any element of profit, the reimbursement is not liable for any Income Tax payable and accordingly the provisions of TDS are not to be attracted.

30. The Hon’ble Calcutta High Court in the case of Dunlop Rubber Company Ltd. 142 ITR 493 held that reimbursement of actual expenditure from an Indian company cannot be treated as taxable. Reimbursement by the vary definition doesn’t include income element and hence provisions of TDS are not attracted. Reliance is being placed on the judgment of Hon’ble Jurisdictional High Court in the case of CIT Vs Industrial Engineering Projects 202 ITR 1014 (Del.) wherein it was held that reimbursement expenses cannot be regarded as revenue receipt, hence, no TDS is deductible.

Whether the services rendered are in the nature of FIS chargeable to tax under DTAA or not ?

31. This requires examination of,

a. Services rendered by FAA and

b. Article 12(4) of India-USA DTAA

32. The services rendered as per the agreement are as under:

  • FAA shall provide necessary resources, personal and related services to assist the AAI.
  • To assist AAI by participating in INAT requirements, meeting on ATFM requirements.
  • FAA shall assist in development of

i. Detailed qualitative requirements for the proposed ATFM capacity.

ii. Detailed ATFM system architecture and specifications, and

iii. Draft ATFM implementation plan.

FAA shall review US ATFM capability vis-à-vis India ATFM plan and documentation of Qualitative Requirement.

Preparation of detailed system architecture with the regard to above QRs.

Preparation of road map for draft implementation

33. In the background of the above assistance of FAA to AAI, the provisions of Article 12(4) of DTAA are examined which read as under:

“ARTICLE 12 – Royalties and fees for included services –

1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed:

(a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in subparagraph (b) of this paragraph] :

(i) during the first five taxable years for which this Convention has effect,

a. 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company ;

b. and (b) 20 per cent of the gross amount of the royalties or fees for included services in all other cases ; and

(ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services ; and

(b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services.

3. The term “royalties” as used in this Article means :

a. payments of any kind received as a consideration for the use of, or the right to use, any copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and

b. payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8.

4. For purposes of this Article, “fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or

(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.

5. Notwithstanding paragraph 4, “fees for included services” does not include amounts paid :

(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ;

(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ;

(c) for teaching in or by educational institutions ;

(d) for services for the personal use of the individual or individuals making the payments ; or

(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services).

6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included 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 royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be shall apply.

7. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for included 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 included services was incurred, and such royalties or fees for included services are borne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

(b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State.”

34. On going through the Article 12(4) of the Indo-US DTAA, we find that the provisions of Article 12(4)(a) are not applicable to the facts of the case. The dispute between the revenue and the assessee is whether such services mentioned above fall under the category of “make available” technical knowledge, experience, know-how…. or consists of development and transfer of a technical plan or technical design as per Article 12(4)(b).

35. Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how,, or processes, or consist of the development and transfer of a technical plant or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person). This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered “made available” when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available.

36. Typical categories of services that generally involve either the development and transfer of technical plants or technical designs, or making technology available as described in paragraph 4(b), include:

1. Engineering services (including the sub-categories of bioengineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering);

2. Architectural services: and

3. Computer software development.

Under paragraph 4(b), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for examples, relate to any of the following areas:

1. Bio-technical services;

2. Food processing;

3. Environmental and ecological services;

4. Communication through satellite or otherwise;

5. Energy conservation;

6. Exploration or exploitation of mineral oil or natural gas;

7. Geological surveys;

8. Scientific services; and

9. Technical training.

37. The following hypothetical examples indicate the scope of the conditions in paragraph 4(b):

38. Example-1

Facts:

A U.S. manufacturer has experience in the use of process for manufacturing wallboard for interior walls of houses which is more durable than the standard products of its type. An Indian builder wishes to produce this product for its own use. It rents a plant and contracts with the U.S. company to send experts to India to show engineers in the Indian company how to produce the extra-strong wallboard. The U.S. firm considered to be payments for “included services”?

Analysis:

The payments would be fees for included services. The services are of a technical or consultancy nature, in the example, they have elements of both types of services. The services make available to the Indian company technical knowledge, skill and process.

39. Example 2

Facts:

A U.S. manufacturer operates a wallboard fabrication plant outside India. An Indian builder hires the U.S. Company to produce wallboard at that plant for a fee. The Indian company provides the raw materials, and the U.S. manufacturer fabricates the wallboard in its plant, using advanced technology. Are the fees in this example payments for included services?

Analysis:

The fees would not be for included services. Although the U.S. company is clearly performing a technical service, no technical knowledge, skill etc. are made available to the Indian company, nor is there any development and transfer of a technical plant or design. The U.S. company is merely performing a contract manufacturing service.

40. Example 3:

Facts:

An Indian firm owns inventory control software for use in its chain of retail outlets throughout India. It expands its sales operation by employing a team of travelling salesmen to travel around the countryside selling the company’s ware. The company wants to modify its software to permit the salemen to assess the company’s central computers for information on what products are available in inventory and when they can be delivered. The Indian firm hires a U.S. computer programming firm to modify its software for this purpose. Are the fees which the Indian firm pays treated as fees for included services?

Analysis:

The fees are for included services. The U.S. company clearly performs a technical service for the Indian company, and it transfers to the Indian company the technical plan (i.e. the computer programme) which it has developed.

41. Example 4:

Facts:

The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol free oil and wishes to market the product worldwide. It hires and American marketing consulting firm to do a computer simulation off the world market for such oil and to adverse it on marketing strategies. Are the fees paid to the U.S. company for included services?

Analysis:

The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc. nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph 4(b).

42. The concept of make available requires that the fruits of the services should remain available to the service recipient in some concrete shape such as technical knowledge, experience, skills, etc. The assistance provided by FAA in preparation of QRs and development of ATFM system are neither any licensed product of FAA nor exclusive patents of FAA. The assistance rendered on reimbursable basis is based on the agreement between MoCA and FAA of US. The ATFM technology per se has not been made available to the AAI for any perpetual use. The

provision of assistance to MoCA in developing and modernization of civil aviation structure, review analysis and documentation of a traffic flow management system is a dynamic process requiring further development of the process by the MoCA, India. This is a case of assistance and technical cooperation between FAA and AAI sans any commercial interest by the rendering party.

43. We have also gone through the order of the Hon’ble High Court of Delhi in the case of DIT vs Guy Carpenter & Co. Ltd. in ITA 202/2012 dated 23.04.2012 to examine the “make available” clause and to determine the applicability to the facts of the instant case. We find that based on the manner of transacting, agreements, services provided, reimbursement received, we unhesitatingly hold that as the “make available” clause contained in article 12(4)(b) has not been satisfied in the facts and circumstances of the present case, the payment made by the assessee could not be regarded as for the purpose of “fees for included services” (FIS).

44. As a result, both the appeals of the assessee are allowed. Order Pronounced in the Open Court on 04/05/2021.

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