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TMI Blog2021 (5) TMI 478X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA Nos. 5162 and 5163/Del/2012 - - - Dated:- 4-5-2021 - K.N. Chary, Member (J) And Dr. B.R.R. Kumar, Member (A) For the Appellant : Ashish Gupta, Adv. For the Respondents : Sohail Malik, Sr. DR ORDER Per Dr. B.R.R. Kumar, Accountant Member The present appeals have been filed by the assessee against the orders of ld. CIT(A)-XXIX, New Delhi dated 03.07.2012 and 03.08.2012. 2. Since, the issues involved in both the appeals are common, they were heard together. TDS on payment to Federal Aviation Agency FAA -USA: 3. The Airport Authority of India (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be immune from union taxation unless otherwise provided by the Parliament. * The concept of general immunity from taxation to a sovereign is not available. * There is no immunity from tax to a sovereign unless it is specifically, granted. If there is no immunity to Government of India the question of availability of such automatic immunity to a foreign sovereign does not arise. * The AO relied on the Section 10(15A) to exemplify the stated immunities Viz. any payment made, by an Indian company engaged in the business of operation of aircraft, to acquire an aircraft or an aircraft engine (other than a payment for providing spares, facilities or services in connection with the operation of leased aircraft) on lease from the Government of a foreign State or a foreign enterprise under an agreement [not being an agreement entered into between the 1st day of April, 1997 and 31st day of March, 1999] and approved by the Central Government in this behalf: [Provided that nothing contained in this clause shall apply to any such agreement entered into on or after the [1st day of April, 2007]................... * The Article 28 of Vienna Convention, which has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices, products, technologies, with a focus on the air traffic flow management (ATFM), necessary to make India's air traffic management system a reality. The work covered in this proposal is the necessary foundation to set-up ATFM in India. * This memorandum also defines the scope of work, which mentions as under: The scope of work will primarily include the following: 1. Development of Detailed Qualitative Requirement (QRs) for the proposed ATFM system. 2. Preparation of a Detailed System Architecture and Specifications - hardware (Services/Operating system, display units), software, various ATFM tools, baseline data requirements, interface with internal and external systems, communication system requirements, and protocols and other associated systems, etc. 3. Preparation of a Draft Implementation Plan with time frame alongwith requirement of manpower, training and ATFM procedures. * Thereafter the statement of tasks gives the further breakup of individual activities and their objective which would be performed for the purpose of achieving the main objective. In respect of participation in an Indian air traffic management requirement meetings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raffic Managers. * The financial provisions are provided in Article-V to the memorandum of agreement, which mentions as under: A. The AAI shall reimburse the FAA for all costs incurred in providing services under this Annex. B. The estimated cost of the related services for completing Phase 1, 2 and 3 activities under this Annex is four hundred and ninety four thousand one hundred U.S. Dollars (US$ 494,100). Payment by the AAI under this Annex shall be made in accordance with the following schedule: 1. The AAI shall pay in advance the sum of twenty five thousand eight hundred U.S. Dollars (US$ 25,800) which is the estimated cost for review of Aeronautical Information AAI (Attachment A, Task 1, Paragraph 1.1). Upon receipt of payment from the AAI, the FAA and Volpe Center shall commence activities for this milestone. 2. The AAI shall pay in advance the sum of thirty-seven thousand eight hundred U.S. Dollars (US$ 37,800), which is the estimated cost for analysis of India's Future Plans (Attachment A, Task 1, Paragraph 1.3). Upon receipt of payment from the AAI, the FAA and Volpe Center shall commence activities for this milestone. 3. The AAI shall p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provision of services of technical or other personnel is for the purpose and consists of development and transfer of technical plan namely the ATFM plan for Indian operations. The conditions of the DTAA are satisfied. (iv) The apparent watertight division between the two contracts,-which the applicant has tried to present, Is not correct, In fact it is part and parcel of same memorandum of agreement with an integrated objective. In this background each and every payment for a sub task or an activity cannot be viewed in isolation when it is part of series of transaction taking place for a crystallized objective. (v) Coming to the aspect of rendering of services outside India and the reliance placed on the decision of Ishikawajima-Harima Heavy Industries Co. Ltd. (supra), the first and foremost it is to be appreciated that the Hon'ble Supreme Court in the said case had analyzed the provisions of Section 9(1)(vii)(c) of the Act, whereas for the present purpose it is Section 9(1)(vii)(b), which will be applicable, because the payer in the present case AAI is a resident The wordings of Section 9(1)(vii)(b) and 9(1)(vii)(c) are different, therefore, the ratio of the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; has been defined as to include both central and state governments of India. Though the word 'Government' in the section is unqualified, yet it finds itself In company of other three entities which are RBI, Indian corporation and Indian mutual fund. Therefore, applying the principle of Noscitur a socitis, the word 'Government' has to be given a meaning with reference to other entities mentioned at sr. no. (ii) to (iv) above, which are nothing but Indian entities. This rule of interpretation has been advocated by Hon'ble Supreme Court in its recent decision in case of CIT vs Bharti Cellular Ltd. (2010-TII-05-SC-INTL). Applying this rule of interpretation, the word 'Government' as mentioned in clause (i) above would mean Indian Government which includes both central and state governments. By no stretch of Imagination, it can be deemed to include foreign government also. 5.4 It is also to be seen all the entities mentioned from sr. no. (i) to (iv) are exempted from paying income tax. Therefore, section 196 makes sense that there should not be any requirement of deducting tax at source on income pertaining to these exempted entities, this section can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. (3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of Government. The combined reading of above Articles of Constitution of India reveals that even Union and/or state governments do not enjoy blanket immunity from taxes. Therefore, it is not legally tenable to presume that foreign government is exempt from income tax without any such specific exemption provided under the Act. In view of discussion supra, it is clear that provisions of section 196 are not applicable to present case. On the issue of reimbursement 5.5 The contention of the appellant is that payments made by it are just reimbursements and since there is no income element in it, these are not chargeable to tax in India and consequently not subject to withholding of tax u/s. 195. It s seen that as per provisions of section 195(1), liability to deduct tax at source arises when sum payable to a non-resident is chargeable to tax in India. The law on this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explanation 2 to section 9(1)(vii) of the Act. The appellant has contended that services are not technical services as per Article 12(4) of Indo-USA DTAA because 'make available' clause is not satisfied and moreover, payments represent just reimbursement of expenses incurred by FAA and hence there is no income element involved. Article 1(A) of MO A dated 13-11-2006 entered into between Department of transportation, USA and Ministry of Civil Aviation, Government of India says that: This Memorandum of Agreement establishes the terms and conditions under which FAA may provide assistance to MoCA in developing and modernizing the civil aviation infrastructure of India in the managerial, operational and technical areas. For this purpose, FAA shall, subject to the availability of appropriated funds and necessary resources, provide personnel, resources and related services to assist the MoCA to the extent called for in the annexes and appendices to this agreement. There is a Appendix 2 to Annex 3 to MOA entered into on 25-09-2009, Article II of which says that: A. The FAA. shall provide three (3) specialists, from the FAA and the Volpe National Transportation Syst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia: (a) The services provided by FAA though technical services as per definition under domestic act are not technical services under Article 12(4) of DTAA because 'make available' clause is not satisfied. (b) The payments are purely in nature of reimbursement and therefore there is no element of income contained in these payments. In order to deal with these arguments, Article 12(4) of Indo-USA DTAA is reproduced as under: For purposes of this Article, fees for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received/or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.'' The case of the appellant falls within purview of Clause (b) of Article 12(4). It is pertinent to note that said c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s followed the said ratio in case of Dongfang Electric Corporation ( 2012-TII-66-ITAT-KOL-INTL) wherein it has been held that: While one may have legitimate issues as to whether these observations regarding looking at the transactions as a whole and not adopting dissecting approach can indeed be applied in all cases in which separate contracts are entered into for offshore supplies and onshore services, in our considered view, these observations are certainly applicable in the cases in which the values assigned to the onshore services are prima facie unreasonable vis- -vis values assigned to the offshore supplies, which make no economic sense when viewed in isolation with offshore supplies contract. To that limited extent, our views are the same as of the learned Authority for Advance Ruling. Thus, Hon'ble ITAT Kolkata has a gone a step further and observed that principle of 'look at' can be applied even where there are two separate contracts for offshore supplies and onshore services but values assigned to onshore services are unreasonable vis- -vis values assigned to offshore supplies. In present case, there is only one MOA which cannot be dissected in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich will be reimbursed, the fact remains that the expenditure has been incurred for earning the royalty/FTS. The expenditure is that of the assessee and not that of the Indian subsidiary company. Article 12 provides for taxation of royalty/FTS in the source country on gross basis at a concessional rate of tax. This means that the expenditure incurred for earning royalty/FTS is not deductible in computing gross royalties or gross FTS received by the assessee company. The assessee has found that taxation under the Income Tax Act, 1961 is not more beneficial to it. Therefore, the receipts have been offered for taxation under Article 12 of the DTAA, It is clear from the language that this article taxes royalty/FTS on gross basis and does not permit deduction of expenses. Therefore, it is held that the alleged reimbursement of expenses for traveling or the expenses of the assessee-company are its expenses, liable to be included in its gross receipts. Although the decision in the case of CIT Another Vs. Halliburton Offshore Services Inc. was rendered under section 44BB, yet, it deals with the amounts received by the assessee in India on account of provision of services and facilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the United States of America is directed to encourage the development of civil aeronautics and the safety of air commerce, and is authorized to furnish on a reimbursable basis to foreign governments certain technical assistance to that end; * Thus, it is clear from the preamble to the MoA that the FAA is Department of Transportation of the Government of USA. The FAA has been organized by the Government of USA with a view to encourage the development of civil aeronautics and the safety of air commerce. Further, the FAA has been authorized that it may provide technical assistance to a foreign government on a reimbursable basis. Article VI- Financial Provisions of the MoA clearly provides that the MoCA shall reimburse the FAA, in accordance with the provisions set forth in this agreement and its annexes and appendices, for all costs associated with the technical assistance provided by the FAA. (Refer page no 4 of the Paper Book) * In other words, the FAA has been established by the Government of USA for the purpose of ensuring the safety of air commerce. Further, to achieve the aforesaid objective, it has been further authorized to render assistance to a Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as specifically been provided in the appendix/annex that the assessee shall be responsible to pay the cost which FAA would incur in sending their specialists to India. * The second agreement has been entered into by the assessee with the FAA on 25.09.2009 namely Annex 4 to the MoA. This appendix/annex provides that the FAA shall assist the assessee in the following activities: i. Development of detailed qualitative requirements for the proposed A TFM capacity ii. Development of detailed ATFM system architecture and specifications, and iii. Development of draft implementation plan. It has been provided in the agreement that the FAA shall provide the aforesaid assistance to the assessee in the following three separate phases: Phase I: Development of detailed qualitative requirements (QRs) to include: i. Review of US ATFM capabilities, including operating operations and systems. ii. Analyses of India's future A TM plan, and iii. Documentation of QRs Phase II: preparation of detailed system architecture and specifications that will satisfy the detailed QRs elicited in the previous task Phase III: preparation of a road map draft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant has submitted as under: Section 196 of the Income-tax Act provides as under: Notwithstanding anything contained in the foregoing provisions of this chapter, no deduction of tax shall be made by any person from any sums payable to.. i. the Government, or ii. the Reserve Bank of India, or iii. ............ iv. ............ Where such sum is payable to it by way of interest or dividend in respect of any security or shares owned by it or in which it has full beneficial interest, or any other income accruing or arising to it. It is clear from the aforesaid reproduced provision that the provision of TDS shall not apply in case payment is to be made to a Government. In the instant case, the assessee is making payment to the Government. Therefore, the provisions of section 196 shall apply. Provisions of 196 override the provisions contained in section 195. Therefore, we respectfully submit that applying the provision of section 196, no TDS should be deducted in the instant case. The Ld. AO in its assessment order at page 2 to 4 of order has observed that no immunity from taxation has been granted by referring to various provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevail. Provisions of domestic law may be given effect only in case they are more beneficial to the assessee. Reference in this connection may be made to Supreme Court decision in case of Azadi Bachao Andolan 263 ITR 706. * Fees for included services has been defined in Para 4 of Article 12. The arguments of the ld. AR are as under: For purposes of this Article, fees for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. It is clear from the definition that if payment has been made in respect of any of the services prescribed in clause (a) or (b) of the above reproduced Article, then the sum paid shall be treated as paid for Fees for Included Servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place for a crystallized objective. And thereafter, the Ld. AO has decided the applicability of the TDS considering both the agreements together without considering the individual transactions as detailed in the agreement. In this respect, we respectfully submit that the Hon'ble Authority for Advance Rulings in the case of Rotem Company, In re, 279 ITR 165 has held that where the agreement provides for various services, and contains break-up of the contract price with reference to the services, then each service has to be examined individually for the purpose of determining the applicability of taxability in India. In the instant case also, the agreements contain break up of each of the assistance which the FAA would provide to the assessee. Therefore, applying the decision of the AAR, we contend that each agreement should be examined separately and further, each phase in the agreement should also be examined separately for the purpose of examining the taxability in India. Accordingly, we hereby submit our agreements on the taxability of different agreements: Analysis of the First Agreement (Appendix 2 and annexe 3 to the MoA) This agreement provides i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e MoA. This appendix/annex provides that the FAA shall assist the assessee in the following activities: a. Development of detailed qualitative requirements for the proposed A TFM capacity b. Development of detailed ATFM system architecture and specifications, and c. Development of draft implementation plan. It has been provided in the agreement that the FAA shall provide the aforesaid assistance to the assessee in the following three separate phases: Phase I: Development of detailed qualitative requirements (QRs) to include: i. Review of US ATFM capabilities, including operating operations and systems, j. Analyses of India's future ATM plan, and k. Documentation of QRs Phase II: preparation of detailed system architecture and specifications that will satisfy the detailed QRs elicited in the previous task Phase III: preparation of a road map draft implementation plan to include a time frame along with requirements for labour, trainees and ATFM procedures. The agreement vide Article V - Financial Provisions provides for the phase wise cost, which the FAA would incur in completion of the different phases, It provides that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an organization involved in Airport management, Aircraft certification, Advisory and Consultancy. The main sources of income are grants, Airport and Airways Trust Fund (AATF). Thus, it can also be considered as an 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by FAA in providing the services. The amounts are paid to FAA account of US treasury, Federal Reserve Bank of New York. 19. Article VI- Termination of costs. This Article provides that the AAI shall pay the costs incurred by the FAA in case the agreement is terminated. 20. On going through the above, we find that FAA is providing assistance in developing and modernizing civil aviation infrastructure in India in the managerial, operational and technical areas. The agreement did not specify any mark up amounts or percentage or service charges but it only talks about reimbursement of expenses incurred by FAA. 21. Thus, we find that the agreement mainly revolves around specification of assistance, its costing and reimbursement thereof. Having said that, the provisions of the Income Tax Act with regard to TDS on reimbursements are being examined. 22. Section 195 of the Act reads as under: Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llection of taxes and the charging provisions of the I.T. Act form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are chargeable to tax under the I.T. Act applies only to those sums which are chargeable to tax under the I.T. Act. 24. The law has been laid down clearly that no TDS is required on the amounts paid are not chargeable under the provisions of the Income Tax Act. This leads us to an issue as to whether reimbursements are liable to TDS or not? 25. The word reimbursement in general economic parlance is to be understood as payback as it has not been defined specifically in the Indian Income Tax Act. The Cambridge English dictionary reimbursement means to pay back money to someone who has spent it for you or lost it because of you . Reimbursement is neither reward nor compensation nor income for Income Tax purpose. Since, it doesn't include payment for services over and above, it cannot be treated as royalty or fees. There has been no mark up of expenses here. In the instant case, AAI has to incur the travelling, salary expenses to the three employees deputed by FAA for assisting the AAI. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. Services rendered by FAA and b. Article 12(4) of India-USA DTAA 32. The services rendered as per the agreement are as under: FAA shall provide necessary resources, personal and related services to assist the AAI. To assist AAI by participating in INAT requirements, meeting on ATFM requirements. FAA shall assist in development of i. Detailed qualitative requirements for the proposed ATFM capacity. ii. Detailed ATFM system architecture and specifications, and iii. Draft ATFM implementation plan. FAA shall review US ATFM capability vis- -vis India ATFM plan and documentation of Qualitative Requirement. Preparation of detailed system architecture with the regard to above QRs. Preparation of road map for draft implementation 33. In the background of the above assistance of FAA to AAI, the provisions of Article 12(4) of DTAA are examined which read as under: ARTICLE 12 - Royalties and fees for included services- 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article, fees for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 5. Notwithstanding paragraph 4, fees for included services does not include amounts paid: (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ledge, experience, know-how.... or consists of development and transfer of a technical plan or technical design as per Article 12(4)(b). 35. Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plant or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person). This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered made available when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for included services. Although the U.S. company is clearly performing a technical service, no technical knowledge, skill etc. are made available to the Indian company, nor is there any development and transfer of a technical plant or design. The U.S. company is merely performing a contract manufacturing service. 40. Example 3: Facts: An Indian firm owns inventory control software for use in its chain of retail outlets throughout India. It expands its sales operation by employing a team of travelling salesmen to travel around the countryside selling the company's ware. The company wants to modify its software to permit the salesmen to assess the company's central computers for information on what products are available in inventory and when they can be delivered. The Indian firm hires a U.S. computer programming firm to modify its software for this purpose. Are the fees which the Indian firm pays treated as fees for included services? Analysis: The fees are for included services. The U.S. company clearly performs a technical service for the Indian company, and it transfers to the Indian company the technical plan (i.e. the computer programme) which it has dev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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