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2021 (5) TMI 478 - AT - Income TaxIncome taxable in India - TDS on payment to Federal Aviation Agency FAA -USA - 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 - 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? - HELD THAT - 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. 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. Whether based on the agreements, the payment is in the nature of reimbursement are not? - 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. 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. 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. The Hon'ble Calcutta High Court in the case of Dunlop Rubber Company Ltd. 1982 (2) TMI 24 - CALCUTTA HIGH COURT 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 1992 (7) TMI 38 - DELHI HIGH COURT 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? - 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. 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. 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). Appeals of the assessee are allowed.
Issues Involved:
1. Tax Deducted at Source (TDS) on payments to Federal Aviation Agency (FAA) - USA. 2. Sovereign immunity and applicability of Section 196 of the Income Tax Act. 3. Nature of payments as reimbursements. 4. Classification of services as Fees for Technical Services (FTS) under the Double Taxation Avoidance Agreement (DTAA) between India and the USA. Detailed Analysis: TDS on Payment to Federal Aviation Agency (FAA) - USA: The Airport Authority of India (AAI) entered into a Memorandum of Agreement with the FAA for technical assistance. The Assessing Officer (AO) treated the payments as fees for technical services (FTS) chargeable to tax under Section 115A of the Income Tax Act, 1961, and not exempt under sovereign immunity. The AO argued that sovereign immunity applies only to acts in a sovereign capacity (acta jure imperii) and not to commercial acts (acta jure gestionis). The AO also referenced Section 10(15A) and the Vienna Convention, emphasizing that the Income Tax Act is a self-contained code, and no general immunity from taxation exists unless specifically provided. Sovereign Immunity and Applicability of Section 196: The CIT(A) upheld the AO's decision, stating that FAA is not a foreign government but a commercial entity similar to AAI. The CIT(A) argued that Section 196, which exempts payments to the Indian government and certain Indian entities from TDS, does not apply to foreign governments. The CIT(A) also referenced Articles 285 and 289 of the Constitution of India, which provide limited immunity from taxation to the Union and State governments, and concluded that no general immunity from tax is available to foreign sovereigns unless specifically granted by the Income Tax Act. Nature of Payments as Reimbursements: The CIT(A) rejected the appellant's argument that the payments were mere reimbursements and not chargeable to tax. The CIT(A) cited the Supreme Court's decision in GE India Technology Centre Pvt. Ltd. v. CIT (327 ITR 456), which held that TDS applies to composite payments with an embedded income element. The CIT(A) reasoned that the payments to FAA were for technical services, which are taxable on a gross basis under the DTAA, irrespective of whether they include a profit element. Classification of Services as FTS under DTAA: The CIT(A) determined that the services provided by FAA fell within the definition of FTS under Explanation 2 to Section 9(1)(vii) of the Income Tax Act and Article 12(4)(b) of the Indo-US DTAA. The CIT(A) noted that the services involved the development and transfer of a technical plan, which does not require the "make available" condition to be satisfied. The CIT(A) also rejected the appellant's argument that the agreements should be viewed separately, emphasizing that they were part of an integrated contract with a unified objective. Tribunal's Decision: The Tribunal examined the agreements and concluded that the payments were reimbursements of costs incurred by FAA, which do not include any profit element. The Tribunal referenced the Supreme Court's decision in GE India Technology Centre Pvt. Ltd. and other judicial precedents, holding that TDS is not required on reimbursements that are not chargeable to tax under the Income Tax Act. The Tribunal also analyzed Article 12(4) of the Indo-US DTAA and determined that the services provided by FAA did not "make available" technical knowledge, experience, skill, know-how, or processes to AAI. Consequently, the payments could not be classified as FTS under the DTAA. Conclusion: The Tribunal allowed the appeals, holding that the payments made by AAI to FAA were not subject to TDS as they were reimbursements and did not constitute FTS under the Indo-US DTAA. The Tribunal emphasized that the agreements were for technical assistance on a cost-reimbursement basis, and no profit element was involved. The "make available" condition under Article 12(4)(b) of the DTAA was not satisfied, and therefore, the payments were not taxable in India as FTS.
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