Payment towards leasing/ hiring of equipment doesn’t constitute royalty

Spicejet Limited Vs Addl. CIT (ITAT Delhi)

ITAT Delhi held that payment towards leasing/ hiring of the equipment will not constitute a royalty under the provisions of the India – Netherlands Double Taxation Avoidance Agreement (DTAA).

Facts-

AO noticed an amount of Rs. 1,32,00,000/- was paid to KLM Engineering and Maintenance towards leasing of rotables and repair work. Being of the view that the payment made is in the nature of royalty, on which, assessee was required to withhold tax under section 195 of the Act, AO made disallowance under section 40(a)(i) of the Act.

The assessee contested the aforesaid disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee, learned Commissioner (Appeals) found that the assessee had entered into a leasing agreement with M/s. KLM Engineering and Maintenance and had taken on lease rotables. He observed, as per the India – Netherlands Double Taxation Avoidance Agreement (DTAA) receipt from equipment leasing/hiring is not included within the definition of royalty, as applicable to the assessment year under dispute. He further found that even the income is not taxable as business profit at the hands of M/s. KLM Engineering and Maintenance, as, it did not have a PE in India. Thus, he held that the amount cannot be taxed under the Treaty Provisions. However, considering the fact that the Assessing Officer has not considered the issue in the aforesaid perspective, learned Commissioner (Appeals) directed the Assessing Officer to verify, whether the amount is exempt from taxation under the Tax Treaty and, if so, to delete the addition.

Further, AO noticed that the assessee debited an amount of 13,98,512/- to the profit and loss account towards expenditure incurred on implementation of software system for booking tickets. AO was of the view that the expenditure incurred by the assessee is for purchasing computer software for ticket booking. He was of the view that without the software assessee’s business cannot run. Thus, the asset provides benefit of enduring nature. Accordingly, he treated it as capital expenditure and allowed depreciation thereon at the rate of 60%.

Conclusion-

Thus, as against the definition of royalty before its amendment, wherein leasing/hiring of equipment etc. was included in the expression “royalty”, in the amended provision, amount received from leasing/hiring of equipment been specifically excluded. Therefore, as per the meaning of royalty under the Treaty applicable to the impugned assessment year, leasing/hiring of equipment will not constitute royalty.

In case of Amway India Enterprises (supra), the Special Bench of the Tribunal has held that expenditure incurred in software which gives enduring benefit is of capital nature. In fact, in the depreciation schedule under the Statute, computer software is treated as an asset, on which, depreciation is allowable at the rate of 60%. In fact, the Assessing Officer has allowed depreciation at the prescribed rate.

FULL TEXT OF THE ORDER OF ITAT DELHI

Captioned appeals by the assessee and revenue and cross objections by the assessee and cross objection by the assessee arise out of separate orders of learned Commissioner of Income Tax (Appeals), Delhi, pertaining to assessment years 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11.

ITA No.2688/Del/2011
Assessee’s Appeal for AY: 2006-07

2. In ground no. 1, the assessee has challenged the addition of 13.50 crores made under section 68 of the Income-tax Act, 1961 (In short ‘the Act’).

3. Briefly the facts are, the assessee, a resident corporate entity, is engaged in the business of operating airlines. For the assessment year under dispute, the assessee filed its return of income on 29.11.2006 declaring loss of Rs.97,44,70,071/-. In course of assessment proceeding, while examining the materials on record, the Assessing Officer noticed that in the year under consideration, the assessee has shown to have received share capital of Rs.4.50 crores from Mr. Ajay Singh and Rs. 9 crores from Mr. Sanjay Malhotra. Noticing this, the Assessing Officer called upon the assessee to furnish requisite confirmation, bank statements and copy of Income Tax Returns of the concerned persons and to explain, why the amount should not be treated as unexplained cash credit under section 68 of the Act. As alleged by the Assessing Officer, despite availing adequate opportunity, the assessee failed to furnish the confirmations from the concerned persons. The Assessing Officer observed, when the concerned persons are directors/substantial shareholders of the company, the failure of the assessee to file confirmations from them is unacceptable. Accordingly, he treated the amount of Rs. 13.50 crores as unexplained cash credit under section 68 of the Act and added back to the income of the assessee. The assessee contested the aforesaid addition before learned Commissioner (Appeals). However, learned Commissioner (Appeals) confirmed the addition.

4. Before us, learned counsel appearing for the assessee submitted that in course of proceedings before the departmental authorities, the assessee had furnished the source form which investments in shares have come. He submitted, copy of passports of the concerned persons, bank account details were also furnished. He submitted, though, the Assessing Officer has stated that the concerned persons were in the Board of Directors of the assessee, however at the relevant point of time they were not in the Board. However, he submitted, now both of them are again on the Board of the assessee company and the assessee is ready and willing to produce them before the Assessing Officer for examination not only to prove the genuineness of the transaction but the creditworthiness of the creditors. Thus, he submitted, the issue may be restored back to the Assessing Officer for enabling the assessee to produce the Mr. Sanjay Malhotra and Mr. Ajay Singh for examination.

5. Learned Departmental Representative submitted, the assessee was unable to prove the genuineness of the amount received towards share capital from the concerned persons despite adequate opportunity being given. However, he submitted, an opportunity can be given to the assessee to substantiate its claim.

6. We have considered rival submissions and perused the materials on record. It is observed, though, before the departmental authorities the assessee furnished some documentary evidences to prove the genuineness of the share capital and the creditworthiness of the concerned persons contributing towards share capital, however, they were not to the satisfaction of the Assessing Officer and learned Commissioner (Appeals). Before us, learned counsel appearing for the assessee has submitted that both the persons, namely, Mr. Sanjay Malhotra and Mr. Ajay Singh, who have invested in share capital of the assessee are again back on the Board of the assessee company and assessee is willing to produce them before Assessing Officer not only to prove the identity and creditworthiness of the concerned persons but even the genuineness of the transaction. Considering the above submissions of the assessee, we are inclined to grant opportunity to the assessee to produce Mr. Sanjay Malhotra and Mr. Ajay Singh for examination before the Assessing Officer to prove the creditworthiness of the concerned persons and the genuineness of the transaction. It is open to the assessee to furnish any other evidence to substantiate its claim regarding the genuineness of the share capital. Accordingly, the issue is restored back to the Assessing Officer for adjudicating afresh after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes.

7. In ground no. 2, the assessee has challenged the decision of learned Commissioner (Appeals) in directing the Assessing Officer to examine assessee’s claim that the payment of Rs. 1,32,00,000/- to M/s. KLM Engineering and Maintenance is not in the nature of royalty under India – Netherlands Double Taxation Avoidance Agreement and allow relief accordingly.

8. Briefly the facts relating to this issue are, in course of assessment proceeding, the Assessing Officer noticed that the assessee has debited an amount of Rs.28,55,97,487/- to its profit and loss account towards aircraft maintenance cost, out of which, an amount of Rs. 1,32,00,000/- was paid to KLM Engineering and Maintenance towards leasing of rotables and repair work. Being of the view that the payment made is in the nature of royalty, on which, assessee was required to withhold tax under section 195 of the Act, the Assessing Officer made disallowance under section 40(a)(i) of the Act. The assessee contested the aforesaid disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee, learned Commissioner (Appeals) found that the assessee had entered into a leasing agreement with M/s. KLM Engineering and Maintenance and had taken on lease rotables. He observed, as per the India – Netherlands Double Taxation Avoidance Agreement (DTAA) receipt from equipment leasing/hiring is not included within the definition of royalty, as applicable to the assessment year under dispute. He further found that even the income is not taxable as business profit at the hands of M/s. KLM Engineering and Maintenance, as, it did not have a PE in India. Thus, he held that the amount cannot be taxed under the Treaty Provisions. However, considering the fact that the Assessing Officer has not considered the issue in the aforesaid perspective, learned Commissioner (Appeals) directed the Assessing Officer to verify, whether the amount is exempt from taxation under the Tax Treaty and, if so, to delete the addition.

9. We have considered rival submissions and perused the materials on record. Undisputedly, the Assessing Officer has disallowed the amount in dispute under section 40(a) (i) of the Act by entertaining the view that the payment made is in the nature of royalty, hence, required deduction of tax at source under section 195 of the Act. However, as per the definition of royalty under the new India – Netherlands DTAA, issued vide notification No. SO-6 93[E], dated 30.08.1999, the expression “royalty” has been amended with retrospective effect from 01.04.1998, and would mean payment of any kind received as a consideration for the use of or the right to use any copyright of literary, artistic or scientific work, including, cinematograph film, any patent, trademark, design or model, plan, secret formula or process or for information concerned, inter alia, commercial, scientific experience. Thus, as against the definition of royalty before its amendment, wherein leasing/hiring of equipment etc. was included in the expression “royalty”, in the amended provision, amount received from leasing/hiring of equipment been specifically excluded. Therefore, as per the meaning of royalty under the Treaty applicable to the impugned assessment year, leasing/hiring of equipment will not constitute royalty. Though, learned Commissioner (Appeals) has given a categorical finding to the effect that as per the new provision of the Treaty it is not taxable as royalty, however, since the Assessing Officer has not examined the issue in the aforesaid perspective, he has directed the Assessing Officer to examine it and allow assessee’s claim of exemption. We do not find any deficiency or irregularity in the aforesaid direction of learned Commissioner (Appeals). Accordingly, we dismiss the ground raised.

10. In ground no. 3 & 3.1, the assessee has challenged disallowance of Rs. 13,98,512/- by Treating it as capital

11. Briefly the facts are, in course of assessment proceeding, the Assessing Officer noticed that the assessee debited an amount of 13,98,512/- to the profit and loss account towards expenditure incurred on implementation of software system for booking tickets. After calling for necessary details and examining them, the Assessing Officer was of the view that the expenditure incurred by the assessee is for purchasing computer software for ticket booking. He was of the view that without the software assessee’s business cannot run. Thus, the asset provides benefit of enduring nature. Accordingly, he treated it as capital expenditure and allowed depreciation thereon at the rate of 60%. Following the decision of the ITAT, Special Bench, in case of Amway India Enterprises, 111 ITD 112 (Del)(SB), learned Commissioner (Appeals) upheld the disallowance.

12. We have considered rival submissions and perused the materials on record. Undisputedly, the expenditure incurred by the assessee is for purchasing a software for its ticket booking In case of Amway India Enterprises (supra), the Special Bench of the Tribunal has held that expenditure incurred in software which gives enduring benefit is of capital nature. In fact, in the depreciation schedule under the Statute, computer software is treated as an asset, on which, depreciation is allowable at the rate of 60%. In fact, the Assessing Officer has allowed depreciation at the prescribed rate. In view of the aforesaid, we do not find any reason to interfere with the decision of learned Commissioner (Appeals).

13. In ground no. 4, the assessee has challenged disallowance of 3,96, 14,684/- out of current repair and maintenance expenditure of Rs.4, 16,99,667/- by treating it as capital expenditure.

14. Briefly the facts are, in course of assessment proceeding, the Assessing Officer noticed that the assessee had debited an amount of Rs.4, 16,99,667/- to the profit and loss account towards repair and maintenance. After calling for and examining the necessary details, the Assessing Officer observed that the company has commenced its operation and expenses have been incurred towards creation of counters, help desk etc. at the airports, which cannot be treated as repair. He was of the view that such expenditure are in the nature of furnishing and fixtures. Accordingly, he disallowed the expenditure. The assessee contested the aforesaid disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) observed that the building premises, wherein, the assessee has incurred the expenditure were not owned by the assessee but have been taken on lease. However, referring to section 32(1A), deleted from the statute w.e.f. 01.04.1971, read with Explanation 1 to section 32 of the Act, learned Commissioner (Appeals) held that merely because the expenditure incurred related to property taken on lease, it cannot be claimed as revenue expenditure. Having so observed, he proceeded to decide whether the expenditure can be allowed as current repairs under section 30 or revenue expenditure under section 37(1) of the Act. Referring to facts on record, he observed that two office premises have been taken on lease wherein the assessee undertook renovation work in a big way to adapt to its business. Thus, the expenditure was incurred on the building so that it may yield to the assessee fresh advantage not forthcoming from the lease of premises in its original condition. He observed that only few items, such as, surface coating paint, plumbing work, can be said to be in the nature of repair work. Whereas, major items of expenditure related to furniture, machinery and plant are not repair works. Thus, after factually examining the details of expenditure, he treated the expenditure on generator rent, gen-set repair, generator fuel, cabling repair etc. as revenue in nature. Whereas, he held the other items of expenditure are capital in nature. Accordingly, he allowed 5% of the total expenditure claimed as revenue and the balance amount as capital in nature.

15. Before us, learned counsel appearing for the assessee submitted that the expenditure incurred is for making leased premises usable. Thus, he submitted, the expenditure cannot be considered to be of enduring nature. He further submitted that expenditure cannot be treated as current repairs, which learned Commissioner (Appeals) wrongly observed. He submitted, the expenditure incurred is for making the premises useful, hence, would fall within the terms of repairs. Thus, he submitted, the expenditure incurred should be allowed.

16. Learned Departmental Representative submitted, the expenditure incurred cannot be treated as current repairs under section 30. He submitted, the assessee has renovated the premises substantially; hence, it has derived enduring benefit by incurring such expenditure. However, he submitted, whether the expenditure is capital expenditure or revenue has to be examined after verifying the details of expenditure incurred. In rejoinder, learned counsel for the assessee drew our attention to the details of expenditure at page 338 of the paper-book.

17. We have considered rival submissions and perused the materials on record. The details of expenditure claimed by the assessee towards repairs and maintenance of office premises are as under:

18. On verifying the details of expenditure, it is observed that learned Commissioner (Appeals) has allowed 5% as revenue expenditure after taking note of certain items of expenditure, such as, DG set fuel etc. However, the details furnished do not provide any detail, nature of major expenditure, such as, office renovation and maintenance, repairs and maintenance of office furniture, office facility and maintenance. It has to be seen, whether by incurring such expenditure any asset of enduring benefit has been created by the assessee. Since, the nature and character of each of the expenditure is not verifiable from the material on record, we direct the Assessing Officer to verify each item of expenditure and thereafter decide the character of expenditure, whether revenue or capital, and accordingly allow deduction, either under section 37(1) or 32 of the Act. This, ground is allowed for statistical purposes.

19. In ground no. 5, the assessee has challenged part disallowance of expenditure claimed on leased aircrafts.

20. Briefly the facts are, while examining the financial statements of the assessee, the Assessing Officer noticed that in the year under consideration, the assessee had capitalized expenditure of Rs.7,29,95, 186/- under the head capital expenditure on leased aircrafts. He found that the assessee had claimed depreciation on such expenditure at the rate of 40%. The Assessing Officer was of the view that depreciation at the rate of 40% is allowable only on aero engines and not on airplanes. Whereas, in respect of assets under consideration, depreciation is allowable at the normal rate applicable to plant and machinery, e., 15%. Therefore, he called upon the assessee to explain, why claim of depreciation should not be restricted to 15%.

21. Before the Assessing Officer, the assessee submitted that the expenditure on which the assessee claimed depreciation is not incurred for purchase of aircraft but for leasing aircraft. Thus, it was submitted, the expenditure has to be allowed as revenue expenditure. Ignoring assessee’s claim, the Assessing Officer proceeded to allow depreciation at the rate of 15%. Before learned first appellate authority, the assessee raised an additional ground seeking allowance of expenditure as revenue expenditure. However, learned Commissioner (Appeals) referring to the decision of the Hon’ble Supreme Court in case of Goetze (India) Ltd. Vs.CIT, 284 ITR 323, declined to admit the additional ground. Thus, he sustained the disallowance made by the Assessing Officer.

22. We have considered rival submissions and perused the materials on record. Undisputedly, in the return of income filed for the impugned assessment year the assessee had claimed depreciation on the expenditure incurred towards lease of aircraft. From the materials available on record, it is observed that the capitalized expenditure on which the assessee claimed depreciation was incurred on travelling, boarding and lodging expenses of pilots engaged to fly aircraft to India, cost incurred in respect of documentation of lease agreement, including legal expenses, terminal fee, route inspection charges, ground handling charges, landing and other airport charges incurred during the course of import of the aircraft, ferry flight expenses and fuel cost of aircraft including customs duty, expenditure incurred on the internal configuration of the aircraft and custom clearing expenses on landing of the aircraft, interest cost on advances given to manufacturer/supplier of aircraft, lease rent, insurance charges, test/training flight expenses and other incidental cost incurred in respect of the Aircraft till the date of the commercial flight. It appears, the assessee had capitalized the expenditure over the period of lease of the respective aircraft. However, in course of assessment proceeding, the assessee had filed a revised computation stating that since the aircrafts were taken on lease and not owned by the assessee, the entire expenditure relating to such lease of aircraft has to be treated as revenue expenditure. The aforesaid claim of the assessee was totally ignored by the Assessing Officer. For the aforestated reason the assessee raised an additional ground before learned Commissioner (Appeals) claiming the expenditure as revenue expenditure. However, learned Commissioner (Appeals) has declined to admit the additional ground by referring to the decision of the Hon’ble Supreme Court in case of Goetz (India) Ltd. (supra).

23. In our view, learned Commissioner (Appeals) is unjustified in refusing to admit the additional ground raised by the assessee by misinterpreting the ratio laid down by Hon’ble Supreme Court in case of Goetz (India) Ltd. A careful reading of the aforesaid judgment would make it clear that the restriction in entertaining a fresh/new claim otherwise than through a revised return of income is only applicable to the proceeding before the Assessing Officer and not appellate authority. It is fairly well settled, there are no fetters on the appellate authority in entertaining a fresh claim/additional ground raised by the assessee, if it can be decided based on the facts available on record. In the facts of the present appeal, all necessary and relevant facts relating to assessee’s revised claim of revenue expenditure is available on record. Therefore, learned Commissioner (Appeals should have adjudicated the issue by admitting the additional ground raised by the assessee. Since, neither the Assessing Officer nor learned Commissioner (Appeals) have examined the issue relating to assessee’s claim of revenue expenditure on merits, we are inclined to restore it back to the Assessing Officer for examining assessee’s claim and deciding it in accordance with law, after providing due and reasonable opportunity of being heard to the assessee. This ground is allowed for statistical purposes.

24. Ground no. 6 is consequential in nature, whereas, ground 7 and 8 are general grounds. Accordingly, they do not require adjudication.

25. In the result, the appeal is partly allowed for statistical

ITA No. 3264/Del/201 1
Revenue’s Appeal for AY: 2006-0 7

26. In ground no. 1, the revenue has challenged deletion of addition of Rs. 10,11,79,858/- representing expenses on issue of Foreign Currency Convertible Bonds (FCCBs).

27. Briefly the facts are, in course of assessment proceeding, the Assessing Officer noticed that in the year under consideration the assessee had issue FCCBs for an aggregate value of US $ 80 Million equivalent to Rs.360 crores. He further found, the FCCBs were issued for a period of 5 years and were fully convertible into equity shares of the company. For issue of FCCBs the assessee had incurred expenditure of Rs. 12,64,74,823/-, which has been debited to the profit and loss account as revenue expenditure. Noticing this, the Assessing Officer called upon the assessee to explain why the FCCB issue expenses should not be allowed on pro-rata basis over the period of FCCBs. Though, the assessee furnished its submissions objecting to the proposed disallowance, however, the Assessing Officer remained unconvinced and ultimately held that the entire expenditure incurred by the assessee for issue of FCCBs has to be spread over the period of the bonds. Accordingly, he allowed deduction for 1/5^th of the expenses incurred, which worked out to Rs.2,52,94,965/-. Thus, he disallowed the balance expenses of Rs. 10,11,79,858/-. The assessee contested the aforesaid 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 by holding that since, the FCCBs are convertible at the option of bond holders and the company and will be redeemed on 13^th December, 2010 only if not previously redeemed, repurchased, cancelled or converted, it cannot be said that the bond period of 5 years is static. While so concluding, learned Commissioner (Appeals) relied upon the decision of the Hon’ble Rajasthan High Court in case of Secure Meters Ltd., 175 Taxman 567 (Raj) and the decision of ITAT, Special Bench, in case of Ashima Syntex Ltd., 310 ITR 1 (AHD) (SB) (AT).

28. We have considered rival submissions and perused the materials on record. As could be seen from the facts on record, that the expenditure was fully incurred in the impugned assessment year is not in dispute. The Assessing Officer has amortized the expenditure over the five year period of bonds assuming that the FCCBs cannot be redeemed, repurchased, cancelled etc., either at the option of the assessee or the company before the bond period of five years.

29. In case of Taparia Tools Ltd. Vs. JCIT [2015] 372 ITR 605 (SC), Hon’ble Supreme Court has held that the entire expenditure on non-convertible debentures has to be allowed in the year of incurring of the expenditure. Hon’ble Supreme Court has observed, even if, the terms and conditions of issue gives option to subscribers to receive interest periodically over the period of debenture or one-time payment basis of lower sum payable immediately, onetime payment of interest shown in books as deferred revenue expenditure to be written off over the period of debentures will not affect assessee’s claim of deduction of entire interest expenditure in the year in which such expenditure was

30. In case of ACIT Vs. Ashima Syntex Ltd. (supra), the Special Bench of the Tribunal, while considering somewhat similar issue, has held that the nature of expenditure treated as deferred expenditure in the books, needs to be properly analyzed before taking a view on its allowability or otherwise under the provisions of the Act. The Bench observed, where such expenditure results in creation of any capital asset, a case can be made out to treat the same as capital expenditure. In cases where the nature of revenue expenditure is such that the same can be clearly and unambiguously identified over the specified time period akin to prepaid expenses, the same would be allowable over a period to which these relate proportionally applying the matching principle. However, in other cases where same does not result in the creation of capital asset or where the same is not allocable over defined future time periods, there can be no case for amortizing it under the Act over the expected period over which the benefit is likely to arise there from, since, in such cases the expenditure is essentially revenue in nature but is amortized in the books only on account of some other considerations. Assessee’s case stands on much stronger footing as the assessee has not amortized the expenses in its books. In fact, the Assessing Officer does not dispute the nature of expenditure as revenue.

31. In view of the aforesaid, we do not find any infirmity in the decision of learned Commissioner (Appeals) on the issue. Ground raised is dismissed.

32. In ground no. 2, the Revenue has challenged the deletion of addition of Rs.9,55,32, 186/- made by the Assessing Officer on account of deferred revenue expenses incurred on training and acquisition/endorsement of mandatory license of pilots. Briefly the facts are, in course of assessment proceeding, the Assessing Officer noticed that the assessee has claimed deduction for an amount of Rs. 11,30,94,833/- towards deferred revenue expenses. When called upon to justify such claim, the assessee furnished its submissions justifying its claim. The Assessing Officer observed, the assessee has followed accounting policy of debiting expenses to its profit and loss account over a period of 5 years. Following the same policy, the assessee had debited an amount of Rs. 1,75,62,647/- to the profit and loss account. Whereas, in the statement of computation of income, the assessee had added back the amount debited to the profit and loss account and claimed deduction for the full amount of expenditure incurred. Considering the fact that the assessee itself has considered the expenditure as resulting in benefit over a period of 5 years and, hence, followed the policy of debiting the expenses over the period of 5 years, the Assessing Officer disallowed assessee’s claim for the entire expenditure and allowed 1/5^th of such expenditure. The assessee contested the disallowance before learned Commissioner (Appeals). After taking note of the submissions of the assessee and following the ratio laid down by the assessee in case of Ashima Syntex Ltd. (supra), learned Commissioner (Appeals) deleted the disallowance.

34. We have considered rival submissions and perused the materials on record. As far as the nature of expenditure incurred, there is no doubt that the expenditure was incurred towards training and license to fly of the pilots. The fact that the expenditure incurred is of revenue nature is not disputed. Only because, in its books of accounts the assessee had deferred it over a period of 5 years, the Assessing Officer has restricted the expenditure to 1 / 5th of the amount actually incurred. However, in case of Taparia Tools Ltd. Vs. JCIT (supra), the Hon’ble Supreme Court has observed that the entries made in the books of account are not determinative of the nature of the expenditure. Learned Commissioner (Appeals) has rightly observed that by incurring the expenses the assessee cannot be said to be deriving a benefit which can clearly and unambiguously be identified over specified future time period. Though, the benefit from the expenses is derived in future years also, however, the same cannot be allocable to a definite period of time. Once, it is held to be a revenue expenditure, it has to be allowed in the year wherein the expenditure is incurred. There is no doubt that the assessee has incurred the expenditure in the impugned assessment year. Therefore, the expenses have to be allowed fully.

35. In view of the aforesaid, we do not find any deficiency in the order of learned Commissioner (Appeals). Ground raised is

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). 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 assessee 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 non-deduction of tax at source, the Assessing Officer 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)(i) are as under:

(i) Supplemental Rent/Maintenance Reserve of 26,88,07,23 1/-

(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 observed by the first appellate authority, for payments which are covered in the exceptional clause of section 10(1 5A) 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. DCIT, 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 supplemental rent of Rs.26.88 crores.

40. As regards the payments made towards engine guarantee availability fee, the amount is not deductible to tax at the hands of the payee as it is in the nature of business receipts in case of the non-resident company and in absence of PE it is not taxable in India. Insofar as the payment made towards repair of rotables not only it can be taxed at the hands of the non-resident in India in absence of PE as per India – UAE DTAA it cannot be treated as FTS in absence of any FTS clause in the Treaty. In any case of the matter, it is a fact on record that the entire repair work was carried out outside India, therefore, the assessee had no liability to deduct tax as the income was not taxable in India. Insofar as the expenses on Logo printing, the revenue has failed to demonstrate that the make available condition under Article 12(4B) of the Treaty is fulfilled. Therefore, the amount is not taxable at the hands of the non-resident company in India. That being the case, the assessee has no liability to deduct tax at source.

41. In view of the aforesaid, we do not find any reason to interfere with the decision of learned Commissioner (Appeals). The ground raised is dismissed.

42. As regards ground no. 3(b), while deciding corresponding ground raised by the assessee in its appeal, being ground no. 2 of ITA No. 2688/Del/201 1, we have upheld the decision of the learned Commissioner (Appeals) on the issue. Our decision therein will apply mutatis mutandis to this ground as well. Accordingly, this ground is dismissed.

43. In ground no. 4, the Revenue has challenged reduction of disallowance made on account of repairs and maintenance expenses to Rs. 20,84,982/- from Rs.4,16,99,667/-.

44. Briefly the facts are, in course of assessment proceeding, the Assessing Officer noticed that the assessee had incurred expenses of Rs.4, 16,99,667/- towards repairs and maintenance on After calling for and examining necessary details, the Assessing Officer was of the view that the expenses have been incurred towards creation of counters, help desks etc. at the airports. Hence, cannot be treated as expenses for repairs. Further, he observed that the expenses incurred are in the nature of furnishing/fixtures, hence, they are capital expenditure. Accordingly, he disallowed the expenditure claimed. The assessee contested the aforesaid disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee, learned Commissioner (Appeals) granted partial relief to the assessee by reducing the disallowance to Rs.3,96, 14,684/-.

45. We have heard the parties and perused the materials on While deciding corresponding ground, being ground no. 4 in assessee’s appeal in ITA No. 2688/Del/2011, we have restored the issue to the Assessing Officer for fresh examination. Therefore, the present ground raised by the Revenue is also restored back to the Assessing Officer.

46. In the result, the appeal is partly allowed for statistical

ITA No. 5657/Del/201 1
Revenue’s Appeal for AY: 2007-08

47. In Ground no. 1, the Revenue has challenged the deletion of addition made being Rs.28,59,78,667/- on account of premium payable on redemption of FCCBs.

48. Briefly the facts are, in course of assessment proceeding, the Assessing Officer noticed that on the FCCBs issued in financial year 2005-06 for a period of 5 years which were subsequently convertible to equity shares, the assessee, in the computation of income has claimed deduction of Rs.28,59,78,667/- as premium payable on redemption of FCCBs. After calling for necessary details and examining them the Assessing Officer noticed that the assessee had set off the premium payable on redemption of FCCBs. Being of the view that the premium payable on the FCCBs is a capital expenditure, the Assessing Officer disallowed the claim and added back to the income of the assessee. While deciding the issue in appeal, learned Commissioner (Appeals), allowed assessee’s claim after taking note of the fact that the expenses on issue of FCCB bonds were allowed by his predecessors. Further, he observed that whether the bonds issued were convertible or not, is not a relevant criteria to be considered in order to adjudicate whether the expense is capital or revenue. Thereafter, following the decision of the Hon’ble Jurisdictional High Court in case of CIT Vs. Jagatjit Industries Ltd. [2006] 287 ITR 46, learned Commissioner (Appeals) deleted the disallowance.

49. We have considered rival submissions and perused the materials on record. While deciding Revenue’s appeal for assessment years 2006-07, being ITA No.3264/Del/201 1, we have upheld the decision of learned Commissioner (Appeals) in allowing assessee’s claim of revenue expenditure in respect of expenditure incurred on issue of FCCBs. It is further observed, in assessment years 2006-07, the Assessing Officer himself has allowed the premium payable on redemption of FCCBs as revenue Therefore, we do not find any infirmity in the decision of learned Commissioner (Appeals) on the issue. Ground raised is dismissed.

50. In ground no. 2, the Revenue has challenged the deletion of addition of Rs.54,54, 11,786/- on account of aircraft maintenance cost.

51. The issue raised in this ground is identical to the issue raised in ground no. 3(a) of ITA No. 3264/Del/201 1. Following our decision therein, we uphold the order of learned Commissioner (Appeals) on the issue.

52. In ground no. 3, Revenue has challenged deletion of addition made of Rs.3,61,93,268/- under section 40(a)(i) towards payment of engine guarantee fee, logo printing, leasing of rotables. While deciding identical issue in ground no. 3(a) and 3(b) of ITA 3264/Del/201 1 in the earlier part of the order, we have upheld the decision of learned Commissioner (Appeals). Following our decision therein, we dismiss the ground raised by the Revenue.

53. In the result, the appeal is dismissed.

ITA No. 4448/Del/2012
Revenue’s Appeal for AY: 2008-0 9

54. In ground no. 1, the Revenue has challenged the deletion of addition of Rs.24,25,63,267/- on account of premium payable on redemption of FCCBs. This ground is identical to ground no. 1 of ITA No.5657/Del/201 1 decided by us in the earlier part of the order. Following our decision therein, we uphold the order of learned Commissioner (Appeals) on the issue and dismiss the ground.

55. In ground no. 2, the Revenue has challenged the deletion of addition of Rs.80,74,23,069/- on account of aircraft maintenance This ground is identical to ground no. 2 of ITA No.5657/Del/201 1 decided by us in the earlier part of the order. Following our decision therein, we uphold the order of learned Commissioner (Appeals) by dismissing the ground.

56. In ground no. 3, the Revenue has challenged the deletion of disallowance made of Rs.7,00,000/- under section 40A(2) of the

57. Briefly the facts are, in course of assessment proceeding, the Assessing Officer noticed that the assessee has taken on rent a residential apartment with parking space from Mrs. Meghla Sharma. On verifying the details, he found that the residential apartment was acquired by Mr. Siddhanta Sharma, husband of the landlady, who was in the Board of Directors and executive chairman of the company. Noticing these facts, the Assessing Officer called upon the assessee to explain, why the rent paid to the landlady should not be disallowed under section 40A(2), as according to him, it was excessive considering the market rate. In response to the query raised, the assessee furnished its submissions objecting to the proposed disallowance. As observed by the Assessing Officer, on an internet search for rental values in Gurugram and specifically for apartment located at DLF Windsor Castle, it was found that it ranged between Rs.26,000/- per month to Rs.60,000/- per month for four bed rook apartment. He observed, for a fully furnished property, the rent is Rs.80,000/- per month. Holding that the assessee has paid Rs.1,00,000/- in excess of the market rate for a period of 7 months, the Assessing Officer disallowed an amount of Rs.7 Lakhs under section 40A(2) of the Act. The assessee contested the disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee and taking note of the fact that the Assessing Officer has not confronted the materials relied upon, collected suo motu, deleted the addition.

58. We have considered rival submissions and perused the materials on record. On a reading of sections 40A(2) of the Act, it becomes clear that any payment made to a related party, if considered to be unreasonable and excessive, having regard to the market rate for such goods and services, then disallowance under section 40A(2) can be made. In the facts of the present appeal, the Assessing Officer has made the disallowance relying upon certain information obtained through a search in the internet. The source and authenticity of such information obtained by the Assessing Officer remains doubtful. Even, the Assessing Officer has not confronted the information received to the assessee to get a rebuttal. The information obtained by the Assessing Officer certainly cannot be said to be the prevailing market rate of rent as it is not from any authentic source.

59. In view of the aforesaid, we uphold the decision of learned Commissioner (Appeals) on the issue. Ground raised is dismissed.

60. In ground no. 4, the Revenue has challenged deletion of disallowance made under section 14A of the Act.

61. Briefly the facts are, in course of assessment proceeding, the Assessing Officer noticed that in the year under consideration the assessee had earned exempt income by way of dividend amounting to Rs.3,92,50,533/-. Before the Assessing Officer, the assessee took a stand that no expenditure has been incurred for earning the exempt income, hence, no disallowance under section 14A can be made. However, rejecting assessee’s explanation, the Assessing Officer disallowed an amount of Rs.59,97,880/- under section 14A read with rule 8D. Before the first appellate authority, the assessee submitted that since the investments were out of surplus interest free fund, no interest expenditure was incurred. It was submitted by the assessee that the investments were made in short term mutual funds, hence, no expenditure was incurred. After considering the submissions of the assessee, learned Commissioner (Appeals) directed the Assessing Officer to verify assessee’s claim factually that no expenditure is incurred for earning exempt income and thereafter decide the issue following the issue laid down by the Hon’ble Delhi High Court in case of Maxopp Investment Ltd. Vs. CIT.

62. Having considered rival submissions and perused the materials on record, we find no deficiency in the order of learned Commissioner (Appeals) in directing the Assessing Officer to factually verify assessee’s claim in the light of the ratio laid down in the decision referred to by him. However, since the issue has now been decided by Hon’ble Supreme Court in case of Maxopp Investments Ltd. Vs. CIT [2018] 91 com 154, the Assessing Officer is directed to decide the issue keeping in view the ratio laid down by the Hon’ble Supreme Court. Ground raised is dismissed.

63. In the result, the appeal is dismissed.

C.O. No.401/Del/2012
Assessee’s Cross Objection for AY: 2008-09

64. The only ground raised by the assessee reads as under:

“1. That on the facts and in law the Commissioner of Income Tax (Appeals) erred in upholding the disallowance of the interest paid u/s 201(1A) of Rs.5,89,643/-.”

65. As could be seen from the ground raised, the issue arising for consideration is whether the interest paid by the assessee on delayed remittance of TDS is allowable under section 37(1) of the Act.

66. Before us, learned counsel appearing for the assessee has relied upon a decision of the Coordinate Bench in case of Resolve Salvage & Fire India (P) Ltd., 195 ITD 266 to submit that interest paid is allowable as deduction. However, in case of Chennai Property & Investment, 239 ITR 435 (Madras), the Hon’ble Madras High Court has held that the interest paid on delayed remittance of TDS is not allowable as deduction under section 37(1) of the Act. No contrary decision of any other High Court has been brought to our notice by learned counsel appearing for the assessee. Therefore, respectfully following the decision of the Hon’ble Madras High Court, we uphold the disallowance.

67. In the result, the Cross Objection is dismissed.

ITA No.1 555/Del/201 3
Revenue’s Appeal for AY: 2009-10

68. In ground no. 1, the Revenue has challenged the deletion of addition of Rs.52,70,59,630/- on account of premium payable on redemption of FCCBs. This ground is identical to ground no. 1 of ITA No.5657/Del/201 1 decided by us in the earlier part of the Following our decision therein, we uphold the order of learned Commissioner (Appeals) on the issue and dismiss the ground.

69. In ground no. 2, the Revenue has challenged the deletion of addition of Rs. 1,11,58,12,748/- in respect of supplemental lease This ground is identical to ground no. 2 of ITA No.5657/Del/201 1 decided by us in the earlier part of the order. Following our decision therein, we uphold the order of learned Commissioner (Appeals) by dismissing the ground.

70. In ground no. 3, the Revenue has challenged the deletion of disallowance made of Rs.4,00,000/- under section 40A(2) of the This ground is identical to ground no. 3 of ITA No. 4448/Del/2012 decided by us in the earlier part of the order. Following our decision therein, we uphold the order of learned Commissioner (Appeals) by dismissing the ground.

71. In the result, the appeal is dismissed.

ITA No. 6140/Del/2013
Revenue’s Appeal for AY: 2010-11

72. In ground no. 1, the Revenue has challenged the deletion of addition of Rs.22,25,78,041/- on account of premium payable on redemption of FCCBs. This ground is identical to ground no. 1 of ITA No.5657/Del/201 1 decided by us in the earlier part of the Following our decision therein, we uphold the order of learned Commissioner (Appeals) on the issue and dismiss the ground.

73. In ground no. 2, the Revenue has challenged the deletion of addition of Rs. 1,33,02,472/- in respect of aircraft maintenance This ground is identical to ground no. 2 of ITA No.5657/Del/201 1 decided by us in the earlier part of the order. Following our decision therein, we uphold the order of learned Commissioner (Appeals) by dismissing the ground.

74. In the result, the appeal is dismissed.

75. In nutshell, the appeals are decided as under:

Order pronounced in the open court on 28^th December, 2022