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TMI Blog2023 (7) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the assessee and to decide the issue in accordance with law after providing adequate opportunity of being heard to the assessee. Addition in respect of supplemental lease rent u/s 40(a)(i) - exemption u/s 10(15A) of the Act would not apply to supplemental rent/maintenance reserve - assessee contended that maintenance reserve is in the nature of supplemental rent paid by the assessee on monthly basis in addition to the basic lease rental for the aircraft and is part of lease rent - HELD THAT:- Tribunal [ 2023 (1) TMI 652 - ITAT DELHI] decided the issue in favour of the assessee holding that supplemental rent/maintenance reserve would be exempt from tax in the hands of lesser in India as per Section 10(15A) of the Act and hence, no disallowance u/s 40(a)(ia) can be made. Special Bench of the Delhi Tribunal in the case of Inter Globe Aviation Ltd. (Indigo) [ 2021 (9) TMI 1400 - ITAT DELHI] considered the lease rental pursuant to agreements executed after 01.04.2007 and its chargeability to tax in the hands of lesser under Article 12 of DTAA between India and Ireland and the Special Bench held that supplementary rent paid for lease agreements executed after 01.04.2007 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of brought forward loss and unabsorbed depreciation as reflected in the books of accounts. 3. At the outset, Ld. Counsel for the assessee submits that ground no.2 and 2.1 of the grounds of appeal are not pressed. In view of the submissions of the Ld. Counsel these grounds are dismissed as not pressed. The only ground for adjudication of assessee s appeal is whether the Ld.CIT(Appeals) erred in sustaining the action of the Assessing Officer in denying Forex unrealized loss on account of Foreign Exchange amounting to Rs. 11,72,81,379/- as not allowable deduction and at the same time the gain on Foreign Exchange fluctuation amounting to Rs. 82,56,666/- is taxable. 4. Briefly stated the facts are that the Assessing Officer while completing the assessment noticed that assessee has debited an amount of Rs. 93,41,17,888/- as exchange fluctuation loss in profit and loss account. The assessee was required to justify the allowability of this loss. The assessee submitted that the transactions entered into foreign currency are required to be reported in Indian Rupees following the accounting treatment prescribed in the Accounting Standard-11 issued by Institute of Chartered Accountant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment for acquisition of 10 aircrafts. Assessee submitted that after obtaining the possession of 8 aircrafts out of 10 upto September, 2007 were sold to the lessors and taken back on operating leases. The remaining two aircrafts were sold and were not taken back on lease. The assessee therefore submitted that the profits on sale of 10 aircrafts were offered for taxation in the year in which the aircrafts were sold. 6. Not convinced with the submissions of the assessee, the Assessing Officer treated the unrealized Foreign Exchange loss is on capital account, a notional loss and not allowable as deduction. At the same time the Assessing Officer has held that the unrealized Forex gain due to deduction in liability in Foreign Exchange fluctuation is with respect to various sundry creditors pursuant to repair and maintenance of aircraft parts and components was only on Revenue account and liable to be taxed. Thus, the Assessing Officer denied the claim for unrealized Forex loss as deduction and brought to tax the Foreign Exchange gain at the same time. 7. On appeal, the Ld.CIT(A) sustain the action of the Assessing Officer. 8. Before us, the Ld. Counsel for the assessee reiter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on monthly basis in addition to the basic lease rental for the aircraft and is part of lease rent. It was submitted that one way of fixing the lease rent could be one consolidated lease rent payable per month in respect of total cost to the lesser incurred in providing the aircrafts on lease. However, in its case lease rent has been broken into parts and apart from the basic lease rent a supplemental rent has been provided with reference to major parts of the aircrafts separately considering the overall cost required to be incurred by the lesser in respect of major parts including the replacement or overhauling which may be required to be carried out by the lesser to keep the aircrafts in perfect operational condition. It was contended that the basic lease rent is fixed per month and the supplemental rent is calculated with reference to flight hours for various items like auxiliary power unit, landing air left and right hand translating cowl installed on each engine etc. It is stated that the lessor would incur a fixed cost per month in respect of the aircrafts and further cost could be incurred on account of wear and tear of the aircrafts on the basis of flight hours. Referring to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents entered into by the assessee prior to 01.04.2007 are concerned. Accordingly, the disallowance to the extent of Rs. 84,07,89,542/- was deleted. 16. Coming to the lease agreements entered into on or after 01.04.2007 and the payments made towards supplemental rent which was treated as royalty is concerned the Ld.CIT(A) on examining Article 12 and Article 8 of Indo-Ireland DTAA, held that the payments of aircrafts are specifically excluded from the ambit of royalty as defined in Article 12 of the DTAA and also held that as per Article 8 of the DTAA the profits derived by an enterprise of a contracting state from rentals of aircraft are taxable only in such country. Therefore, the Ld.CIT(Appeals) rejected the contention of the Ld. Assessing Officer that the supplemental lease rent paid for the aircrafts taken on lease on or after 01.04.2007 will be treated as royalty. The Ld.CIT(A) accordingly deleted the disallowance of the supplemental rent of Rs. 84,64,61,731/-. In other words the Ld.CIT(A) deleted the entire disallowance of Rs. 168,72,51,723/- made u/s 40(a)(ia) of the Act by the AO while completing the assessment. 17. The Ld. Counsel for the assessee submits that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot covered by the approval of CBDT under section 10(15A). Alleging that the asses see had failed to deduct tax at source while making the payment, the Assessing Officer disallowed the amount under section 40(a)(i) of the Act. Similarly, for the very same reason of non-deduction of tax at source, the Assessing Officer disallowed various other expenses under section 40(a)(i) of the Act. The assessee contested the disallowance before learned Commissioner (Appeals). After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) deleted the disallowance made by the Assessing Officer. 38. We have considered rival submissions and perused the materials on record. The expenditures, which have been subjected to disallowance under section 40(a)(1) are as under: i. Supplemental Rent /Maintenance Reserve of Rs. 26,88,07,231/- ii. Engine Guarantee Availability Fee of Rs. 5,24,155/- iii. Repair of Rotables of Rs. 3,75,556/- iv. Logo Printing of Rs. 25,15,000/- 39. As far as supplemental rent/maintenance reserve is concerned, it is observed, learned Commissioner (Appeals) after analyzing the lease agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Bench observed as under: - 42. For Lease Agreements executed after 1st April, 2007, a claim was made by the assessee before 1 'Mower authorities that the income is not chargeable to tax in hands of Lessor under Article 12 of the DT7 between India and Ireland. We find the AO has not accepted this the reasons of which has already be reproduced at para 1.5 of the order. 42.1 Cross border leasing of aircraft enjoyed a special exemption under section 10(15A) of the I.T. A However, a sunset clause was introduced by Finance Act, 2005 to provide that this exemption shall not available for agreements entered after 1st April, 2007. In the aftermath of withdrawal of exemption the liability of the lessor is to be governed by the provisions of bilateral tax treaties. Learned Senior counsel for the assessee submitted that as per provisions of section 90 of the Act, provisions of DTAA shall apply to the extent they are beneficial. Under the DTAA the foremost consideration is whether the non-resident lessor has a permanent establishment (PE) in India as per Article 5 of the relevant. According to him, m leasing of an aircraft which is located in India ought not to result in an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 1 or Article 14, as the case may be, shall apply. 5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, 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. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee s own case and also the decision of the Special Bench of Delhi Tribunal in the case of Inter Globe Aviation Ltd. (Indigo) vs. Addl. CIT (supra), we uphold the order of the Ld.CIT(Appeals) and reject the grounds raised by the Revenue. ITA No.667/Del/2022 (AY 2012-13) (Assessee s appeal) : 23. The assessee has raised the following grounds: - 1. That on facts and in law, the CIT(A) has erred in upholding disallowance of Rs. 9,80,34,955/- being Loss incurred on account of Foreign Exchange Fluctuation. 1.1 That on facts and in law, the AO/CIT(A) have erred in holding/observing that: (a) Foreign Exchange Loss is notional and not actualized. (b) Forex Loss has been incurred on Capital Account. (c) Appellant has not been able to give working of Loss claimed. 2. Without prejudice, that on facts and in law, the AO/CIT(A) have erred in not appreciating that if Foreign Exchange Loss of Rs. 9,80,34,955/- is not allowable as a deduction then the corresponding Foreign Exchange Gain of Rs. 19,79,61,407/- is also not taxable. 24. These grounds are identical to the grounds raised by the assessee for the AY 2011-12 and the decision taken therein applies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer and the Ld. Counsel placed reliance on the orders of the Ld.CIT(Appeals). 31. On perusal of the order of the Ld.CIT(A), we observe that the assessee made its submissions along with evidences to prove that the interest paid on delayed deposit of service tax and VAT are only compensatory in nature and the Ld.CIT(Appeals) deleted the disallowance observing as under: - 10.2 During the course of appellate proceedings before me, when directed, the appellant has furnished copies of semi-annual service tax returns filed by the appellant for the year under consideration. Relying upon this it was submitted that the nature of interest of Rs. 76,52,276/- is compensatory in nature, in this regard, it has been submitted by the appellant as under:- It is submitted that since the appellant is liable to pay Service Tax there was a delay in deposit of Service tax for following months and accordingly the appellant had to ii additional interest cost as under: Month Interest Paid (Rs.) Mar-11 56.519 Jun-11 16,74,417 Jul-11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e whether the nature of interest is compensatory or penal. Since the appellant has not been able to substantiate claim for deduction of interest expense of Rs. 2,16,682/-, therefore, disallowance to this extent is upheld. 12. As regards, interest payment on delay in payment of service tax, from the perusal of service tax returns furnished by the appellant, it is apparent that the nature of interest paid is compensatory as mandated in terms of Section 75 of Chapter V of Finance Act 1994. Section 75 provides for a levy of compensatory interest for any delay in payment of service tax after due date. This is clearly allowable within the ambit of section 37(1) of the Income Tax Act. Hon ble Mumbai ITAT in the case of Shri Radhakrishna Shipping Ltd. reported in 179 ITD 139 (Mum) analyzing nature of interest paid on delay in deposit of TDS has held as under: - 9. We shall now advert to the disallowance made by the AO of the interest on service tax of Rs. 4,84,307/- paid by the assessee, which thereafter had been vacated by the CIT(A). As is discernible from the orders of the lower authorities, the assessee had paid the aforesaid amount of interest on account of delay in payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on account of Foreign Exchange Fluctuation. 1.1 That on facts and in law, the AO/CIT(A) have erred in holding/observing that: a) Foreign Exchange Loss is notional and not actualized. b) Forex Loss has been incurred on Capital Account. c) Appellant has not been able to give working of Loss claimed. 2. Without prejudice, that on facts and in law, the AO/CIT(A) have erred in not appreciating that if Foreign Exchange Loss of Rs. 13,00,37,516/- is not allowable as a deduction then the corresponding Foreign Exchange Gain of Rs. 8,36,55,039 is also not taxable. 34. These grounds are identical to the grounds raised by the assessee for the AY 2011-12 and the decision taken therein applies mutatis mutandis for the appeal of the assessee for the year under consideration i.e. 2015-16. We ordered accordingly. ITA No.882/Del/2022 (AY 2015-16) (Revenue s appeal): 35. The Revenue has raised the following grounds: 1. That on the facts and circumstances of the case, Ld.CIT(A) has erred in deleting addition of Rs. 22,87,51,591/- made by AO on account of disallowance of supplementary rent/maintenance reserve u/s 40(a)(i). 2. That on the facts and circu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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