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TMI Blog2017 (10) TMI 245X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the case are stated in brief. The assessee-company is tax resident of UK. It filed its return of income declaring total loss of Rs. 174.40 lakhs. The assessee took an aircraft under dry lease agreement from DHL Aviation, Netherlands B.V, and in turn, leased out the same under wet lease agreement to an Indian company named M/s. Blue Dart Aviation Limited (BDAL). Both assessee-company and BDAL are held at Deutsche Post AG and hence the assessee-company and BDAL are associated enterprises (AE). 6. Under wet lease agreement, lessor shall provide aircraft to the lessee and is also fully responsible for functioning of the aircraft, i.e., it should also provide competent personnel for operation of the aircraft and should also ensure that there is no interruption in service due to strike or injuries to crew members or due to inferior quality working. The assessee should also ensure that the aircraft is properly maintained and all necessary maintenance services are carried out at regular intervals. 7. During the year under consideration, the assessee claimed following expenses:- (a) Maintenance of aircraft and engine : Rs. 113.50 lakhs (b) Repairs and maintenance of air ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d maintenance of aircraft/engine is not liable for tax deduction at source u/s. 195(1) of the Act, as the said payment is not chargeable to tax in India in the hands of EAT. Learned DRP did not agree with the contentions of the assessee and accordingly rejected the same with following observations:- 4. Objection No. 2- Disallowance of payments of Rs. 1,13,50,933 made to EAT towards maintenance of aircraft engines under Section 40(a)(i) of the Act Grounds of Objections "On the facts and circumstances of the case, and in law, the Assessing Officer has erred in proposing to disallow the payments towards maintenance of aircraft engines made to European Air Transport Leipzig Gmbh; Germany ('EAT') amounting to Rs. 1,13,50,933 under section 40(a)(i) of the Act.) On the facts and circumstances of the case, and in law, the Assessing Officer erred in holding that the payment made towards maintenance of aircraft engines to EAT constitutes Fees for Technical Services ('FTS') under Article 12 of the India-Germany tax treaty. On the facts and circumstances of the case, and in law, the Assessing Officer erred in holding that the payment made towards maintenance of ai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made for standard services/ facilities. Since the dominant purpose of the above transaction is purchase/ replacement of old part with a new one and that the above services are in the nature of routine repairs and replacement from the perspective of an airline company like the Assessee. In the following decisions the Courts have upheld the view that payments towards standard services/ facilities do not constitute ITS: * Kandla Port Trust v. DOT (50 SOT 109) (Rajkot) * DDRC SRL Diagnostic (P.) Ltd. [2016] 157 1TD 92 (Mumbai - Trib.) * ADIT v. BHEL-GE-Gas Turbine Servicing (P.) Ltd. [2012] 53 SOT 460 (Hyderabad) In view of the above, the Assessee submits that payments made to EAT are towards standard services/ facilities and therefore do not constitute FTS under section 9(1)(vii) of the Act as well as the Article 12 of the India-Germany tax treaty. Without prejudice to the above, Assessee also submits that even if the aforesaid payments are characterized as FTS under Act, the same do not constitute FTS under the Article 12 of the India-Germany tax treaty on account of the following reasons: Para 6 of the India-Germany tax treaty provides that In the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments made to EAT would not qualify as FTS under the aforesaid article. In view of this, the payment made to EAT would be taxable in India only if EAT has a PE in India. The Assessee submits that EAT does not have any PE in India. Based on the above facts and in law, the disallowance of payment to EAT as proposed by the AO is not justified and ought to be deleted". Directions of the DRP on Objection No. 2 4.6 We have considered the arguments of the Ld AR. The contract with European Air Transport Leipzig GmbH, Germany (EAT in short) is for availing maintenance, repair and overhaul services on the basis of per flight hour support in respect of its aircrafts operated by the assessee. These are highly specialised services requiring the technical expertise to keep the airworthiness of the aircraft at all times. It is not just an agreement for the sale of spare parts as being projected by the assessee. This is further supported by the fact that the bills are raised not based on supply of spare parts but based on number of hours of flight undertaken by the aircrafts. Thus, the substance of the contract is service and not mere supply of spares. When overall scope of contract is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me when services were received and the payments were made by such PE thereafter. Hence the argument of the appellant that payments made by it to EAT were not in nature of fee for technical services u/s 9(1)(vii) of the Act nor under Article 12 of the DTAA with Germany, thereby creating no tax withholding liability u/s 195, is untenable and the same is hereby rejected. The action of the A.O. of making the disallowance of Rs. 1,13,50,933/- is upheld. The objection filed by the assessee is dismissed. 5. Objection No. 3 - Disallowance of payments of Rs. 1 ,75,93,595 made to EAT towards repairs and maintenance under Section 40(a)(i) of the Act. Grounds of Objections "On the facts and circumstances of the case, and in law, the Assessing Officer has erred in proposing to disallow the payment towards repair and maintenance made to EAT amounting to Rs. 1,75,93,595 under section 40(a)(i) of the Act. On the facts and circumstances of the case, and in law, the Assessing Officer erred in holding that the payment made towards repairs and maintenance to EAT constitutes FTS under Article 12 of the India-Germany tax treaty. On the facts and circumstances of the case, and in law, the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot) * DDRC SRL Diagnostic (P.) Ltd. [2016] 1571TD 92 (Mumbai - Trib.) * ADIT Vs. BHEL-GE-Gas Turbine Servicing (P.) Ltd. (2012] 53 SOT 460 (Hyderabad) In view of the above, the assessee submits that payments made to EAT are towards standard services/facilities and therefore do not constitute FTS under section 9(1)(vii) of the Act as well as the Article 12 of the India-Germany tax treaty. Without prejudice to the above, Assessee also submits that even if the aforesaid payments are characterized as FTS under Act, the same do not constitute FTS under the Article 12 of the India-Germany tax treaty on account of the following reasons: Para 6 of the India-Germany tax treaty provides that "Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a land or a political subdivision, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties pr fees for tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment made to EAT amounting to Rs. 1,75,93,595 in respect of repairs and maintenance charges. As the reasons given by AO as well the arguments given by appellant is similar to the one as discussed in objection number 2 above and nature of services also being similar as well as the recipient of the amounts is also the same, therefore, for the same reasons given by us while giving directions to objection number 2 above, the objections raised by the appellant is found untenable and the same is rejected. The action of the A.O. of making the disallowance of Rs. 1,75,93,595/- is upheld. The objection filed by the assessee is dismissed. 10. The Ld A.R submitted that the German entity, viz., EAT did not enter Indian soil at all, in order to repair the aircrafts, i.e., the aircraft was taken outside India and the maintenance services were carried out outside India. Further, the expenses claimed by the assessee are not aircraft specific, but it was allocation made out of over all expenses to the aircraft leased out in India. The Ld A.R submitted that the assessing officer has treated the impugned payments as fee for technical services. He invited our attention to Article 12 of India-Ger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprise and its proceeds are used for several permanent establishments situated in different countries. It has been specifically explained that the above said situation falls outside the provisions of paragraph 5, as it precludes the attribution of more than one source to the same loan. Accordingly the Ld A.R contended that the expenditure incurred outside India and allocated to an Indian PE shall fall outside the scope of Article 12(6). 11. The Ld A.R further submitted that the Annual Maintenance contract given to carryout repairs and maintenance works is a "works contract" and hence the same constitutes business profit. In this regard, the Ld A.R placed reliance on the following case law:- (a) Kandla Port Trust (50 SOT 109) (b) DDRC SRC Diagostics (P) Ltd (2016) (157 ITD 92) He submitted that the co-ordinate benches have placed reliance on the Circular No.715 dated 08-08-1995 issued by CBDT, where in the Board has clarified as under:- "Q.No.29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act? Ans: Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xable 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. Accordingly we set aside the order passed by AO on this issue and direct him to delete the impugned additions. 15. The next issue contested by the assessee relates to the disallowance u/s. 40(a)(i) of the Act in respect of travelling and accommodation charges. The Ld A.R submitted that M/s Blue dart Aviation Ltd (BDAL) had incurred certain expenses on behalf of the assessee, being in the nature of travelling and accommodation charges of crew members. He submitted that M/s BDAL had deducted tax at source, wherever required while making payment on behalf of the assessee. The AO was of the view that the assessee should have deducted tax at source while reimbursing the amount to M/s BDAL and accordingly disallowed the claim of the assessee u/s 40(a)(i) of the Act. The Ld A.R placed reliance on the decision rendered by co-ordinate bench in the case of ASK wealth Advisors (P) Ltd vs. ACIT (2014)(51 taxmann.com 128) and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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