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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 ..... 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .50 lakhs (b) Repairs and maintenance of aircraft : ₹ 175.93 lakhs (c) Reimbursement of travelling and accommodation charges : ₹ 149.62 lakhs The Assessing Officer took the view that the assessee should have deducted tax at source from the above said payments. Since the assessee has failed to deduct tax at source, the AO took the view that the above said expenditure are liable to be disallowed under section 40(a)(i) of the Act for the failure to deduct tax at source. The view so taken by the Assessing Officer was also confirmed by learned DRP. Accordingly, the Assessing Officer passed final assessment order disallowing the above expenditure claimed by the assessee u/s 40(a)(i) of the Act. 8. The disallowances listed as (i) and (ii) relate to expenditure incurred on maintenance of aircraft and engine/repairs and maintenance of aircraft. Hence both the issues are addressed together. 9. The assessee submitted before the Tax authorities that a sum of ₹ 113.50 lakhs and further a sum of ₹ 175.93 lakhs was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical 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 aircraft engines to EAT arises in India as per the India - Germany tax treaty. The Assessee prays that the Assessing Officer be directed to allow deduction in respect payments made to EAT towards engine PBH amounting to ₹ 1,13,50,933 . Facts of the Case 4.1 The assessee has to mandatorily undertake regular, periodic maintenance of the aircraft in order to ensure the airworthiness of the aircraft. In order to ensure that the maintenance requirements are complied with, the assessee has entered into a contract with European Air Transport Leipzig GmbH, Germany (EAT) for availing maintenance, repair and overhaul services on the basis of per flight hour support in respect of its aircrafts operated by the assessee. Accordingly, EAT is paid flight hour rate based on the flight hours flown by the aircrafts covered under the contract. A statement giving the details of the payment made to EAT amounting to ₹ 1,13,50,933/- in respect of E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the present case, the payments being made by DHL Air to EAT would 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 or fees for technical services was incurred and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. In the facts of the present case, the payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 nature of works contract, the dominant purpose test cannot be applied and all other ancillary obligation pale into the main contract. This view gets support from decision of 5 member bench of the Hon ble Supreme court in case of Kone Elevator India (P) Ltd. v. State of T.N., (2014) 7 SCC 1. Thus, change of defective or damaged parts is only incidental to the overall composite obligation of maintenance support services being undertaken by EAT. Hence, the services rendered by EAT would be in nature of technical service within the meaning of section 9(1)(vii). 4.7 It is contended that EAT is resident of Germany. As per article 12(4) of the DTAA with Germany, the fee for technical services means: The term 'fees for technical services as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounting to ₹ 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 Assessing Officer erred in holding that the payment made towards maintenance of aircraft engines to EAT arises in India as per the India Germany tax treaty. The Assessee prays that the Assessing Officer be directed to allow deduction in respect payments made to EAT towards repairs and maintenance amounting to ₹ 1,75,93,595/- . Facts of the Case 5.1 The assessee had availed repairs and maintenance services under the cost sharing contract with EAT. The services were in the nature of routine aircraft repair and maintenance. These expenses have to be incurred in order to maintain the airworthiness of the aircrafts. A statement giving the details of the payment made to EAT amounting to ₹ 1,75,93,595 in respect of repairs and maintenance charges along with a copy of the sample invoice were submitted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. In the facts of the present case, the payments being made by DHL Air to EAT would be regarded as FTS arising in India under the above mentioned para if the (cumulative conditions) mentioned below are satisfied: o Condition 1: the person paying the FTS i.e. the Assessee has a PE in India in connection with which the liability to pay the FTS was incurred; and o Condition 2: such FTS are borne by the PE of the Assessee The aforesaid payments are being made by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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-Germany treaty relating to Royalties and Fees for Technical Services . He submitted that clause (1) of Article 12 states that the royalty and fee for technical services arising in the contracting state and paid to a resident of other contracting state may be taxed in the other state. He submitted that the payment was made to a German company and hence it may be taxed only in Germany. He submitted that the tax authorities have placed their reliance on clause (6) of Article 12, which reads as under:- (6) Royaties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a land or political sub-division, a local authority or a resident of that State. Where, however, the pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) (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. However, where technical services are rendered, the provisions of section 194J will apply in regard to tax deduction at source. Accordingly he submitted that the annual maintenance contracts would fall outside the scope of section 194J, which is related to fees for technical services. He submitted that the definition of the expression fees for technical services is identically worded both under the Act and India-German DTAA. Hence the impugned payments constitute payment made for works contract and hence shall constitute business profits in the hands of M/s EAT. Since EAT does not have permanent establishment in India, the business profits are not taxable in India. Since the impugned payments are not taxable in India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. 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 submitted that the co-ordinate bench has held that no disallowance can be made in the hands of subsidiary company on the reimbursements made by it to the Holding company, if the holding company has deducted tax at source from the payments. The Ld A.R submitted that M/s BDAL has already deducted tax at source, wherever required and accordingly contended that the AO was not correct in law in invoking the provisions of sec. 40(a)(i) for making the impugned disallowance. 16. We have heard Ld D.R and perused the record. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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