Brief- Delhi High Court has held in the case of DIT vs. M/s Lufthansa Cargo India that Retrospective amendments seeking to tax income of non-residents does not affect the “source rule”. The amendment makes no any difference to the non-taxability of payments made to foreign companies if the income accrues abroad – Section 9.
Brief Facts of the case and Question of Law:
The assessee in the year 1997 was engaged in the business of wet-leasing. It had acquired four old Boeing aircrafts (727-200 Model) from a non-resident company outside India. The Assessee after acquiring the license from DGCA and hiring the crew, ground engineers and other technical personnel for their operation,wet leased the aircrafts to a German company named Lufthansa Cargo AG, Germany (hereafter “LCAG”).
[Wet lease is referred to as “leasing of an aircraft along with the crew in flying condition to a charterer for a specified period”. The lessor has the responsibility formaintaining the crew and the aircraft in airworthy condition. The lessee is free to direct the flightoperations by naming destinations in advance and load any lawful cargo for carriage.]
The license was granted to operate these aircrafts oninternational routes only. Also the aircrafts were not utilized by LCAG for carriage of cargo within India.However, as per the directives of DGCA, the aircraft had to undergo periodic overhaul repairs and such repairs were permissible in the workshops authorized as well as approved by DGCA.
To abide by the guidelines of DGCA and also to keep the aircrafts in working condition, the assessee had entered into agreement with the overhaul service provider Lufthansa Technik‟s (a Germancompany, hereafter “Technik”) having workshops in Germany. The Assessee’s engineering department used to dismantle the components which required repairs and were flown to Technik. The Technik used to then dispatch the parts and were then fitted in to the aircrafts by the assessee’s own personnel. Technik carried out maintenance repairs without providing technical assistance byway of advisory or managerial services.No Technik personnel were ever deputed to India forrendering any technical or advisory services to the assessee. Likewise, the assessee’s technical personnel did not participate or involve themselves in the overhaul repairs carried out abroad byTechnik or other foreign workshops.
Held by Income Tax Appellate Tribunal (“ITAT”):
The ITAT analyzed the agreement entered between the Technik and the Assessee and held that amount received by the latter was a routine business receipt and not technical fees of the nature managerial, technical or consultancy service.
Also the sources from which the assessee has earned income are outside India as the income earning activity is situated outside India. It is towards this income earning activity that the payments for repairs have been made outside India. The payments therefore fall within the purview of the exclusionary clause of Section 9(1) (vii) (b).
Question of Law:
Whether the Income Tax Appellate Tribunal (ITAT) has rightly interpreted the agreements betweenthe assessee and non-residents and is right in holding that payments made by the assessee to thenon-residents are not fee for technical services within the meaning of Section 9(1)(vii) of the Income Tax Act, 1961 so as to oblige the assessee to deduct tax at source under Section 195 of the Act from such payments?
Whether the ITAT was right in holding that payments made by the assessee fell within the purview of the exclusionary clause ofSection 9(1)(vii)(b) of the Act and were not, therefore, chargeable to tax at source?
Contention of the Revenue:
The Revenue (CIT Appeals) held that the repairs of components required knowledge of sophisticated technology and trained engineers were employed by the non-residents for carrying out the overhaul repairs. Hence such repairs constituted as ‘fees for technical services’ and were subject to withholding of tax under section 195(1).
The Revenue also argued that if the assessee was of the view that no tax was deductible on the payments made to foreign companies it should have made an application with the AO under Section 195(2) of the Act. It lastly contented that there is an amendment to Section 9 with retrospective effect and substitution of Section 9 (2) meant that such payments amounted to income in the hands of the non-resident Indians. It was submitted that any doubts as to whether the assessee was obliged todeduct tax at source, is set at rest by virtue of Section 9 (2) which clarifies that income of a non-resident is deemed to arise in India and “shall be included in the total income of the non-resident”regardless of whether such entity has a place of business or business connection and the situs of services provided.
Contention of the Assessee:
The Assessee contended that that Technik carried out normal maintenance repairs including supply of spares, and therefore, had Technik been a domestic company, the payments to it would becovered by the provisions of Section 194C and not by the provisions of Section 194J, which cover fees for technical services as defined in Section 9(1)(vii). The Assessee had also stressed that components of the aircraft require periodic overhauling and such overhauling was conducted as per the instructions and requirements mentioned in Boeing’s Manual. Assessee had no say in the matter; it was unaware of the kind of repairs that had been carried out, as none of its employees visitedTechnik’s facilities in connection with the repair work.
It was argued that the repair work carried out by Technik etc. was not in the nature of technicalassistance by way ofproviding managerial, consultancy or technical services to the assessee. In short, the components were sent to the authorized workshops for carrying out overhauling of components and not for seeking any technical or advisory services. Such repairs, therefore, did not constitute ‘managerial’, ‘technical’ and ‘consultancy services as defined under Explanation 2 to Section 9(1) (vii)(b) of the Act.
Held by the High Court:
Question 1 – Whether repairs could be treated as “Fees for technical services”? : The High Court is of the opinion that aircraft maintenance and repairs inherently are such that it could not be compared with normal machinery repairs. Component overhaul and maintenance by its very nature cannot be undertaken by all and sundry entities.The level of technical expertise and ability required in such cases is not only exacting but specific, in that, aircraft supplied by manufacturer has to be serviced and its components maintained, serviced or overhauled by designated centres. It is this specification which makes the aircraft safe and airworthy because international and national domestic regulatory authorities mandate that certification of such component safety is a condition precedent for their airworthiness. The exclusive nature of these services lead to the inference that they are technical services within the meaning of Section 9(1)(vii) of the Act. Hence the first question of law is explained and set aside.
Question 2 – Treatment of such repairs which is treated as “Fees for technical services”: It is evident that Parliamentary endeavor – through the retrospective amendment (explanation to Section 9(2) was inserted by the Finance Act, 2007 with retrospective effect from 1.6.1976 and The Finance Act, 2010 substituted the same explanation with effect from 1.6.1976), was to target income of non-residents. But importantly, the condition spelt out for this purpose was explicit: “where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub- section (1), such income shall be included in the total income of the non-resident… whether or not,- (ii) the non-resident has rendered services in India.” The explanation is deemed to be clarificatory and retrospective at that, nevertheless there is nothing in its wording which overrides the exclusion of payments made under Section 9(1)(vii)(b).
On a studied scrutiny of the said Clause, it becomes clear that it lays down the principle what is basically known as the “source rule”, that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. The Clause further mandates and requires that the services should be utilized in India.Thus, it is evident that the “source” rule, i.e. the purpose of the expenditure incurred, i.e. for earning the income from a source in India, is applicable.
In the present case, the source of income from wet-leasing aircraft to non-resident companies is outside India. Secondly, leasing revenue was received in convertible foreign exchange directly from foreign charterers through wired transfer in assessee’s account denominated in foreign currency but maintained in India with the permission of the RBI and that the remittances to the foreign company for repairs had a direct nexus with the income. Also the expenses towards maintenance and repairs payments were for the purpose of earning abroad. Hence such “Fees for technical service” cannot be taxable in India and therefore the assessee is not required to withhold TDS on such payments.
For reference relevant data quoted–Section 9(1)(vii) – income by way of fees for technical services payable by—
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside Indiaor
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India.
The explanation to Section 9(2) was inserted by the Finance Act, 2007 with retrospective effect from 1.6.1976.The Finance Act, 2010 substituted the same explanation with effect from 1.6.1976. It now reads as follows:
“Explanation.- For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.”