2015 (5) TMI 873 - HC - Income Tax

Liability to deduct tds - agreements between the assessee and non-residents are not fee for technical services within the meaning of Section 9(1)(vii) so as to oblige the assessee to deduct tax at source under Section 195 as held by ITAT - Held that - ITAT was unduly influenced by all the regulatory compulsions which the assessee had to face. Besides international convention and domestic law that mandated aircraft component overhaul, the manufacturer itself as a condition for the continued application of its warranty, and in order to escape any liability for lack of safety, required periodic overhaul and maintenance repairs. Unlike normal machinery repair, aircraft maintenance and repairs inherently are such as at no given point of time can be compared with contracts such as cleaning etc. 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 cannot but lead to the inference that they are technical services within the meaning of Section 9(1)(vii) of the Act. The ITAT s findings on this point are, therefore, erroneous. This question is accordingly answered in favour of the Revenue. Whether payments made by the assessee fell within the purview of the exclusionary clause of Section 9(1)(vii)(b) of the Act and were not, therefore, chargeable to tax at source? - Held that - Coming to the instant case, it is evident that fee which has been named as success fee by the assessee has been paid to the NRC. In the present case, the ITAT held that the overwhelming or predominant nature of the assessee s activity was to wet-lease the aircraft to LCAG, a foreign company. The operations were abroad, and the expenses towards maintenance and repairs payments were for the purpose of earning abroad. In these circumstances, the ITAT s factual findings cannot be faulted. The question of law is answered in favour of the assessee and against the revenue.

Summary

Issues Involved:
1. Interpretation of agreements between the assessee and non-residents regarding the nature of payments.
2. Applicability of Section 9(1)(vii) of the Income Tax Act, 1961, concerning fees for technical services.
3. Applicability of the exclusionary clause of Section 9(1)(vii)(b) of the Act.
4. Requirement to deduct tax at source under Section 195 of the Act.
5. Impact of retrospective amendments to Section 9(2) of the Act.

Issue-Wise Detailed Analysis:

1. Interpretation of Agreements and Nature of Payments:
The High Court examined whether the payments made by the assessee to non-residents were fees for technical services under Section 9(1)(vii) of the Income Tax Act, 1961. The assessee was engaged in wet-leasing aircraft and had agreements with Lufthansa Technik for maintenance and overhaul services. The ITAT found that the services provided by Technik did not constitute technical services, as the assessee had no involvement in the repairs, and the work was performed entirely by Technik without any advisory or managerial role. The High Court, however, disagreed, stating that the nature of aircraft maintenance inherently involves technical expertise, making the services technical within the meaning of Section 9(1)(vii).

2. Applicability of Section 9(1)(vii) - Fees for Technical Services:
The ITAT concluded that the payments to Technik were not for technical services, as the work was performed without the involvement of the assessee's personnel. The High Court overturned this finding, emphasizing that aircraft maintenance and repairs require a high level of technical expertise and are performed by designated centers, making them technical services under Section 9(1)(vii).

3. Exclusionary Clause of Section 9(1)(vii)(b):
The ITAT held that the payments fell within the exclusionary clause of Section 9(1)(vii)(b), as the services were utilized for earning income from sources outside India. The assessee's primary source of income was from wet-leasing aircraft to non-resident companies, and the payments for maintenance were directly related to this income. The High Court upheld the ITAT's finding, stating that the exclusionary clause applied, as the income-earning activity was situated outside India.

4. Requirement to Deduct Tax at Source under Section 195:
The Assessing Officer (AO) and CIT (A) held that the assessee was required to deduct tax at source under Section 195, as the payments were fees for technical services. The ITAT disagreed, stating that the payments were not for technical services and fell within the exclusionary clause. The High Court, while recognizing the technical nature of the services, upheld the ITAT's conclusion that the payments were for earning income from sources outside India, thus not requiring tax deduction at source under Section 195.

5. Impact of Retrospective Amendments to Section 9(2):
The Revenue argued that the retrospective amendment to Section 9(2) clarified that income of non-residents is deemed to arise in India, regardless of where the services are rendered. The High Court noted that the amendment did not override the exclusionary clause of Section 9(1)(vii)(b). The Supreme Court's interpretation in GVK Industries Ltd. v. ITO confirmed that the exclusion for services utilized for earning income from sources outside India remains valid despite the amendment.

Conclusion:
The High Court concluded that the ITAT's findings regarding the exclusionary clause of Section 9(1)(vii)(b) were correct, and the payments made by the assessee for maintenance and repairs were not taxable in India. The Revenue's appeal was dismissed, affirming that the payments fell within the exclusionary clause and did not require tax deduction at source under Section 195.