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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 ..... A and VNTSC for 10 days for participating in meeting. 2. US$ 25,800 Towards review of the Aeronautical Information 3. US$ 37,800 Towards analyses of India's future ATFM plan 4. US$ 1,17,300 Towards documentation of the Qualitative Requirement 5. US$ 1,62,000 Towards preparation of the system architecture and specifications 6. US$ 1,51,200 Towards preparation of the road map, Draft implementation plan. US$ 4,94,100 5. The AO treated these amounts paid as fees for technical services (FTS), chargeable to tax @10% + surcharge + cess on the gross amount as per Section 115A of the Income Tax Act, 1961. The reasoning given by the AO is as under: * The contention of the applicant that FAA is a sovereign entity and entitled to immunity from taxation under the Act is not well founded in law and facts. * Sovereign immunity can only be claimed in respect of the acts done in its sovereign capacity (acta jure imperii) but not done in capacity of private law or commercial character (acta jure gestionis). * Any immunity from taxation to any sovereign State can only be tested against the Constitution of India. There would be no immunity from taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicant. The applicant was asked to produce the copy of memorandum of agreement. The same has been produced and is placed on record. Perusal of memorandum give the following: "This memorandum of agreement (the agreement) establishes the terms and conditions under which the FAA may provide assistance to the MoCA in developing and modernizing the civil aviation infrastructure of India in the managerial, operational and technical areas. For this purpose, the 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 annexures and appendices to this agreement." Thereafter the Attachment-A to Annexure-XX to the memorandum of agreement gives again the objective as under: "The purpose of this effort is for the U.S. Department of Transportation's Volpe National Transportation Systems Center to assist the FAA and the Airport Authority of India (AAI) in the development, justification, and definition of a plan that will address India's growing air traffic activity and need for a modernized ATM system to cover all Indian Flight Information Regions (FIRs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be obtained, as their automation capabilities may be useful to establishing the initial ATFM system. Travel participants from the U.S. (Volpe and ATCSCC) will be limited to individuals that understand ATFM and will participate in the development of requirements, functional specifications, and roadmap. Obtaining this collective understanding of the current ATM environment will help elicit meaningful and valid qualitative requirements and guide the development of the envisioned ATFM road map........ * Included in this review will be discussion on the issue of training. Traditional air traffic control (ATC) specialists are not typically exposed to the procedures and applications that characterize ATFM. Therefore, as we formulate a plan to bring the ATFM technology to bear on the situation in India, we need to plan how to train personnel to take on the role of Traffic Manager. This plan will involve identifying the types of people within India's ATC organization who are candidates for Traffic Manager and summarizing their backgrounds. We expect to accomplish this task, at least to the level to start planning a training program, during the team visit to India mentioned previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nter shall commence activities for this milestone. *...(iii) The above analysis would clearly prove all contentions of the applicant to be incorrect. It is very clear from the analysis of the agreement that it is a integrated contract for providing consultancy by the FAA to AAI for the purpose of upgradation of ATFM capabilities, preparation of detailed system architecture and specification and preparation of a road map for implementation plan with requirements for labour, training and ATFM procedures. The sum and substance of the agreement is that FAA would be providing technical services, which consists of development and transfer of a technical plan/technical design. To this extent the services rendered by FAA fails under the category of fees for technical services as per Section 9(1)(vii) of the Act and also as fees for included services under Article 12(4)(b) of the Indo-US DTAA. It need to be also mentioned that Clause (b) of Article 12(4) has two limbs and "make available" condition applies to first limb comprising technical knowledge, experience, skill, know-how or process. Whereas second limb consists of development and transfer of a technical plan or technical design. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees for technical services u/s. 9(1)(vii) of the Act read with Article 12(4)(b) of Indo-US DTAA is chargeable to tax in India. 6. The matter reached to ld. CIT(A) who considered various submissions of the assessee, quoting various clauses of the agreement between FAA & AAI held that payments made to FAA are indeed in the nature of FIS and taxable in India. 7. The rationale given by the ld. CIT(A) is as under: On the issue sovereignty: "5.2 In the very first place, it has not been established by the appellant that FAA is foreign 'Government and not a commercial entity of the foreign government as AAI is to Indian Government. Nothing is clear from copy of MOA itself. The MOA is signed by Federal Aviation Administration, Department of Transportation, United States of America AND Airports Authority of India, Ministry of Civil Aviation, Government of India. From it, it appears that status of FAA is the same as that of AAI. Therefore, it cannot be said that FAA is foreign government. 5.3 The argument of the appellant is that Government In clause (i) above should be read as any government whether Indian or foreign. This contention is fallacious because the section has to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to agreement entered into after prescribed date. Further, Article 265 of Constitution of India says: 'No tax shall be levied or collected except by authority of law'. Thus, constitution gives power to parliament to make laws regarding levy and collection of taxes. Article 285 says that: Exemption of property of the Union from State taxation. (1) The property of the Union shall, save in so far as Parliament may by law otherwise provide, be exempt from all taxes imposed by a State or by any authority within a State. (2) Nothing in clause (I) shall, until Parliament by law otherwise provides, prevent any authority within a State from levying any tax on any property of the Union to which such property was immediately before the commencement of this Constitution liable or treated as liable, so long as that tax continues to be levied in that State. Article 289 says that: Exemption of property and income of a State from Union taxation. (1) The property and income of a State shall be exempt from Union taxation. (2) Nothing in clause (1) shall prevent the Union from imposing, or authorizing the imposition of, any tax to such extent, if any, as Parliament ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Board v CIT (2004) 90 ITD 793(Mum), - Van Oord ACZ India P. Ltd. v. CIT 230 CTR 365 (Del) and - Prasad Productions 3 ITR (Trib) 58 Chennai (SB) Therefore, we have to see whether the payments made by the appellant to the non-resident FAA are chargeable to tax in India in hands of FAA. The taxability of non-resident is governed by section 5(2) of the act, which is reproduced as below: "Subject to provisions of this act, the total income of any previous year of a person who is non-resident included all income from whatever source derived which- a) Is received or is deemed to be received in India in such year by or on behalf of such person; or b) Accrues or arises or deemed to accrue or arise to him in India during such year" It is not the case of the AO that payments made by the appellant are received or deemed to be received by the non-resident in India. Therefore, section 5(2)(a) is not applicable. The AO's case is that such payments are deemed to accrue or arise in India and are in nature of FTS under explanation 2 to section 9(1)(vii) r.w. section 5(2)(b) of the act. It is not the case of AO that non-resident has business connection and PE in India. On the is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct plan, based on parties prior discussion, describing the intended scope and content of FAA's assistance in development of QRs' AFTM system architecture and specifications and a draft AFTM implementation plan. Further, Article III of said Annex says as under: A. Subject to available resources, the FAA and Volpe Centre shall implement this project in three (3) phases as follows: Phase I: Development of detailed qualitative requirements (QRs) to include: I Review of US A TFM capabilities, including operating operations and systems. II Analyses of India's future ATM plan, and II 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. 5.7 Perusal of these above referred clauses of MOA and annexes show that nature of services to be provided by FAA squarely fall within purview of explanation 2 to section 9(1)(vii) of the Act. Even, appellant has not denied it. The appellant has taken two arguments, on bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n scope of second limb of clause (b) of Article 12(4) and therefore services provided by FAA are in nature of technical services. 5.8 The appellant has contended that MO A, Appendix 2 to Annex 3 to MO A, Annex 4 to MOA and three phases as mentioned in Article IIIA of Annex 4 should be read independently and separately as if these were separate independent agreements as such. This contention of the appellant Is fallacious as there is, in fact only one agreement in form of MOA dated 13-11-2006. Other two annexes are just in continuation of said MOA. Article IIIA of Annex 4 is regarding stages in which services will be provided by FAA. By no stretch of imagination, it can be said that all these are independent and separate agreements. This is particularly so after decision of Hon'ble Apex Court in case of Vodafone International Holdings BV Netherlands vs UOI 345 ITR 1 (SC), wherein principle of look at and not look through' has been prescribed. The ratio of said decision of Hon'ble Supreme Court has been followed by AAR in following recent decisions: - Roxar Maximum Reservoir Performance WLL ( 2012-TII-24-ARA-INTL) - Alstom Transport SA vs DIT (2012-TII-28-ARA-INTL) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is pertinent to see that what for the appellant has made payments. The payments have been made for getting technical services from FAA. From perspective of payer, these are undoubtedly in nature of FTS. Looking from perspective of payee, these are in nature of FTS against which payee had incurred certain expenses and after deducting those expenses, there may not be any profit in hands of payee. But, as per domestic act and DTAA both, where there is no PE in India, FTS are taxable on gross basis on certain rate and no deduction whatsoever is allowed from the FTS. Therefore, these payments are in nature of FTS which are taxable on gross basis @ 10% as per DTAA. Reliance is placed on recent decision given by jurisdictional Hon'ble ITAT, Delhi in case of CSC technology Singapore Pte. Ltd., ( 2021-TII-35-ITAT-DEL-INTL), wherein it has been held that: "however, the position of reimbursement of traveling expenses is quite different, These expenses have been incurred in connection with technical services agreement. Therefore, the expenditure has been incurred for earning royalty/FTS. In spite of the fact that the agreement provides inter-alia for adequate level of support and posti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee filed appeal before us. 10. During the hearing before us, the ld. AR taken various arguments taken before the ld. CIT(A) (as mentioned in order from page nos. 2 to 15) alternatively and in consonance, the gist of which is as under: * In the first contention, the appellant has submitted that the payments made relate to the cost which the FAA is expected to incur in rendering the services. The payments are simply reimbursement of cost which does not include any element of profit therein. The appellant has made detailed submission on this ground which is as under: * The Ministry of Civil Aviation (MoCA) of the Government of India has entered into a memorandum of agreement with the Federal Aviation Administration (FAA) of the Department of Transportation of the United States of America vide agreement dated 13.11.2006. The agreement has been entered into with an object that the FAA may provide assistance to the MoCA in developing and modernizing the civil aviation infrastructure of India in the managerial, operational and technical areas. * The first para of the preamble to the MoA states as under: WHEREAS, the Federal Aviation Administration (FAA) of the department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Annex 3 to the MoA was entered into between the assessee and the FAA on 25.09.2009. This agreement provides in detail the specific assistance which FAA wilt provide in pursuance of the aforesaid agreement. It has been provided in the agreement that the FAA shall provide three specialists, from the FAA and the Volpe National Transportation Systems Centre, with background in Air Traffic Flow Management (FATM) to travel to New Delhi, India, to assist the assessee by participating in an Indian National Air Traffic Requirements Meeting on ATFM requirements with the assessee and the industry experts, In other words, the specialists from the FAA will simply provide their inputs in the meetings at the time of discussion. It is clear that the three specialists will not make available any technical know-how or other related things to the assessee during the course of the meetings. * The financial provisions for the aforesaid assistance are contained in Article III of the appendix/annex. It provides that the estimated cost for the three specialists for the reference period is US$ 1,33,142, which includes salary and benefits, transportation, per diem and FAA support. In other words, it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 86 ITD 791 (Bom) * Modicon Network, 14 SOT 204 (Del) * It was argued that from the judgment of the Hon'ble jurisdictional High Court as well as other High Courts that the reimbursement of expenses under no circumstances can be regarded as income. Therefore, in the instant case, what has been paid by the assessee to the non-resident, i.e. FAA is nothing but the reimbursement of expenses which the FAA would incur in providing such services. Therefore, the sum paid by the assessee to the nonresident is not chargeable to tax in India. * Under the aforesaid circumstances, if the sum paid to the FAA is not chargeable to tax in India, then the provisions of section 195 cannot be applied. Therefore, we respectfully submit that the sum paid by the assessee to the FAA may kindly be allowed to be remitted without any deduction of TDS. * The second contention of the appellant is that it is a payment to the Government; therefore, the provisions of section 196 shall apply. And accordingly, no TDS is required to be deducted in the instant case on the payments made by the assessee. In this regard, the appellant has submitted as under: Section 196 of the Income-tax Act provides as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded Services amount to US$ 3,13,200 relating to the assistance mentioned In phase II and III of the agreement. The appellant has filed detailed submission in this regard, which is as under: * It is clear from the aforesaid details that in pursuance of the general MoA entered into between Govt. of USA and Govt. of India, the assessee has entered into two different and separate agreements for the purpose of achieving the general purpose of encouraging safety in air traffic. The agreements contain in detail the purpose for which the agreement has been entered into by the assessee with the FAA. Further, the cost which the FAA would incur in providing the assistance mentioned in the agreement, has been detailed in the each of the agreements. * In this respect, it was submitted that the taxability of the FAA will be subject to the provisions of Double Taxation Avoidance Agreement which India has signed with USA. It is a well settled and internationally accepted principle that in case of conflict between DTAA and the domestic law, the provisions of DTAA will prevail. Provisions of domestic law may be given effect only in case they are more beneficial to the assessee. Reference in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bodies technology shall not per se be considered to make technology available." Therefore, in order to be covered by this provision, it is a necessary condition that the service provided should make available the technology which enables the person acquiring the service to apply the technology. Applicability of second limb This clause provides that if services consist of the development and transfer of a technical plan or technical design, then payment for such services shall be treated as fees for included services. In the instant case, the assessee has entered into two separate agreements with the FAA. And the agreements define separately the reimbursement amount which the assessee will be liable to pay for the various assistances. Therefore, the applicability of the aforesaid clauses has to be checked with reference to each agreement individually. The Ld. AO at page 7 and 8 of the order has observed that the activity cannot be considered in isolation when it is a part of series of transactions taking 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 indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case. Therefore, the assistance provided by the FAA in the first agreement by no stretch of imagination can be said to fall within the definition of the FTS as contained in Article 12 of the Indo-USA DTAA. Under the circumstances, such assistance can at the most fall within the meaning of Business Profits as contained in Article 7 of the DTAA. However, Article 7 provides that the sum will be taxable in India only in a case where the non-resident (i.e. the FAA) has any permanent establishment in India. In the instant case, it has already been submitted before the Ld. AO that the FAA does not have any permanent establishment in India and this fact has also not been doubted by the AO. Therefore, we respectfully submit that the cost reimbursed towards the first agreement amounting to USD 1,33,142 is not taxable in India. Analysis of the Second Agreement (Annexe 4 to the MoA) The second agreement has been entered into by the assessee with the FAA on 25.09.2009 vide Annex 4 to the 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. Developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not taxable and hence no TDS is deductible or not? b. Whether based on the agreements, the payment is in the nature of reimbursement are not? c. Whether the services rendered are in the nature of FTS chargeable to tax under DTAA or not? 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? 13. We have gone through the entire factum of the case. The argument of the appellant that since payment is made to FAA which is a US Government organization, it cannot be subjected to TDS as per Section 196 cannot be accepted. We find that AAI is a Government organization under Ministry of Civil Aviation is a Mini Ratna, category-1, Public sector undertaking running organization under commercial terms, earning profit and paying taxes to the Government of India which is a part of consolidated fund of India. Similarly, the FAA 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 st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain technical assistance to that end. 17. Article VI reads as under: 2) Article VI- Financial Provisions 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. In the event of a termination by either party under Article XI of this Agreement, the MoCA shall pay: 1. All costs incurred by the FAA prior to the date of such termination; and 2. All termination costs incurred by the FAA during the 120 day close out period. 18. The MoA between FAA and AAI dated 02.08.2009 signed between Assistant Administrator- FAA and Executive Director-AAI, Article III - Financial Provisions provides for deputing three specialists from FAA for participating in Air Traffic Flow Management (ATFM) and AAI shall reimburse the FAA for all costs incurred 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le under the provisions of the Act" in Section 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of tax even in a case where an amount paid is not chargeable to tax in India at all. The moment there is remittance the obligation to deduct tax doesn't arise automatically. Doing so, would mean obliteration of the expression "sum chargeable under the provisions of the Act" from Section 195(1). While interpreting a Section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections. As held in the case of C.I.T. Vs. Eli Lilly & Co. (India) (P.) Ltd. [312 ITR 225] the provisions for deduction of TAS which is in Chapter XVII dealing with collection 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 30. The Hon'ble Calcutta High Court in the case of Dunlop Rubber Company Ltd. 142 ITR 493 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 202 ITR 1014 (Del.) 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? 31. This requires examination of, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. 4. 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 informatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. (b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State." 34. On going through the Article 12(4) of the Indo-US DTAA, we find that the provisions of Article 12(4)(a) are not applicable to the facts of the case. The dispute between the revenue and the assessee is whether such services mentioned above fall under the category of "make available" technical knowledge, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w to produce the extra-strong wallboard. The U.S. firm considered to be payments for "included services"? Analysis: The payments would be fees for included services. The services are of a technical or consultancy nature, in the example, they have elements of both types of services. The services make available to the Indian company technical knowledge, skill and process. 39. Example 2 Facts: A U.S. manufacturer operates a wallboard fabrication plant outside India. An Indian builder hires the U.S. Company to produce wallboard at that plant for a fee. The Indian company provides the raw materials, and the U.S. manufacturer fabricates the wallboard in its plant, using advanced technology. Are the fees in this example payments for included services? Analysis: The fees would not be 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 chai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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