2017 (10) TMI 245 - AT - Income Tax

Disallowance u/s. 40(a)(i) - maintenance of aircraft and engine/repairs and maintenance of aircraft and travelling and accommodation charges - PE in India - Held that - The impugned expenditure has been incurred by the assessee in pursuance of maintenance contract between the assessee and M/s EAT, Germany. In the case of Kandla Port Trust (2011 (11) TMI 469 - ITAT RAJKOT ), it was held that the payment made for annual maintenance contracts would not fall under the category of fee for technical services within the meaning of provisions of sec. 194J of the Act. In the case of DDRC SRL Diagnostic (P) Ltd (2015 (10) TMI 2366 - ITAT MUMBAI) the co-ordinate bench has noticed that the CBDT has expressed the view in Circular No.715 (supra) that routine, normal maintenance contracts which includes supply of spares will be covered by sec. 194C of the Act. In the instant case no material was placed before us to show that the clarifications issued by the CBDT would not apply to the facts of the present case. Hence, consistent with the view taken in the above cited cases, we hold that the payment made towards annual maintenance contracts would fall under the category of works contract. In that view of the matter, the payment given by the assessee would constitute business receipts in the hands of M/s EAT and the same is not taxable in India, since it does not have PE in India. In that case, there is merit in the contentions of the assessee that it is not required to deduct tax at source u/s 195 of the Act, as no part of the amount paid to M/s EAT is chargeable in India in the hands of M/s EAT. - Decided in favour of assessee. Disallowance u/s. 40(a)(i) in respect of travelling and accommodation charges - Held that - At the time of hearing, the assessee was asked to furnish break-up details of reimbursements duly describing the details of deduction of tax at source. However, till the date of finalizing this order, the same has not been received. In any case, the claim of the assessee requires verification at the end of the AO. Accordingly we set aside the order passed by the AO on this issue and restore the same to his file with the direction to examine this issue afresh by duly following the ratio of decision rendered in the case of ASK wealth advisors (P) Ltd (2015 (10) TMI 921 - ITAT MUMBAI ). - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income Tax Act for maintenance and repairs of aircraft and engine.
2. Disallowance under Section 40(a)(i) of the Income Tax Act for traveling and accommodation charges.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(i) for Maintenance and Repairs of Aircraft and Engine:

The assessee, a UK tax resident, filed an appeal challenging the disallowance of expenses under Section 40(a)(i) of the Income Tax Act for maintenance and repairs of aircraft and engine. The expenses included ?113.50 lakhs for maintenance and ?175.93 lakhs for repairs. The Assessing Officer (AO) disallowed these expenses due to the failure to deduct tax at source, a decision upheld by the Dispute Resolution Panel (DRP).

The assessee argued that payments made to European Air Transport Leipzig GmbH (EAT), a German company, for maintenance and repairs were not taxable in India as EAT did not have a Permanent Establishment (PE) in India. The payments were considered business profits under the India-Germany Double Taxation Avoidance Agreement (DTAA) and not subject to tax deduction at source.

The DRP disagreed, stating that the services provided by EAT were technical in nature and fell under Article 12 of the India-Germany tax treaty. The payments were deemed to arise in India as they were borne by the PE in India. The DRP upheld the AO's disallowance, considering the payments as fees for technical services.

The Tribunal, however, sided with the assessee, referencing cases like Kandla Port Trust and DDRC SRL Diagnostic (P) Ltd., which classified routine maintenance contracts as works contracts and not technical services. The Tribunal concluded that the payments were business receipts not taxable in India due to the absence of a PE, and thus, no tax deduction at source was required. The AO's disallowance was set aside, and the additions were directed to be deleted.

2. Disallowance under Section 40(a)(i) for Traveling and Accommodation Charges:

The second issue involved the disallowance of traveling and accommodation charges reimbursed to Blue Dart Aviation Ltd (BDAL). The AO disallowed these reimbursements under Section 40(a)(i) due to the failure to deduct tax at source.

The assessee contended that BDAL had already deducted tax at source where required. The Tribunal referenced the case of ASK Wealth Advisors (P) Ltd vs. ACIT, which held that no disallowance could be made on reimbursements if the holding company had deducted tax at source.

The Tribunal directed the AO to verify the details of tax deductions for the reimbursements. The AO was instructed to re-examine the issue following the principles established in the ASK Wealth Advisors case.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the AO to delete the disallowance for maintenance and repairs of aircraft and engine and to re-examine the disallowance for traveling and accommodation charges. The judgment emphasized the importance of the nature of services and the applicability of DTAA provisions in determining tax liabilities and deductions at source.