2024 (9) TMI 1522 - HC - Income Tax

Reassessment proceedings on income from aircraft leasing treated as royalty under IT Act and DTAA - AO had proceeded to hold that the consideration received by the writ petitioner would be in the nature of royalty for use of aircraft and thus taxable both in terms of Section 9 (1) (vi) as well as the provisions of the India-Ireland Double Taxation Avoidance Agreement DTAA . HELD THAT - We find that it is the respondent who had proceeded on the premise that the revenue and consideration received was in connection with aircraft leasing and would thus amount to royalty by virtue of the relevant provisions of the DTAA. However, on a plain reading of Article 12 (3) (a) of the DTAA, the view as taken is rendered wholly unsustainable. We are also of the considered opinion that it would be wholly impermissible for the AO to invoke Section 9 (1) (vi) of the Act in light of the express exemption under the DTAA. Insofar as the question of interplay between provisions contained in a domestic legislation and those in the DTAA, we have in Telstra. 2024 (7) TMI 1340 - DELHI HIGH COURT already held that the latter would override being more beneficial to the assessee. Accordingly, and for the aforesaid reasons we find ourselves unable to sustain the reassessment action. Writ petition is accordingly allowed. The impugned notice referrable to Section 148 is hereby quashed and set aside.

Summary

Issues:
Challenge to reassessment action for AY 2016-2017 based on income from aircraft leasing treated as royalty under IT Act and DTAA.

Analysis:
The petitioner challenged a reassessment action for AY 2016-2017, disputing the treatment of income received from M/s Global Vectra Helicorp Ltd as royalty for aircraft leasing under Section 9(1)(vi) of the Income Tax Act, 1961, and the India-Ireland Double Taxation Avoidance Agreement (DTAA). The AO concluded that the income was taxable as royalty. However, the petitioner relied on Article 12 of the DTAA, which explicitly exempts revenue from aircraft leasing from taxation. The court found the AO's interpretation unsustainable based on Article 12(3)(a) of the DTAA, which clearly excludes aircraft from the definition of royalties.

The court emphasized that the AO's invocation of Section 9(1)(vi) of the Act was impermissible due to the express exemption under the DTAA. Citing Commissioner of Income Tax-International Taxation -3 Vs. Telstra, the court held that treaty provisions override domestic legislation when more beneficial to the assessee. The court highlighted that treaty provisions cannot be overridden by unilateral legislative amendments, as recognized in Section 90(2) of the Act. Consequently, the reassessment action was deemed unsustainable.

In conclusion, the court allowed the writ petition, quashing the notice under Section 148 dated 31 March 2021. The respondents were granted the option to pursue permissible proceedings under the law. The judgment reaffirmed the primacy of treaty provisions over domestic legislation when providing a more beneficial scheme for the taxpayer.