The Delhi High Court Restores the Matter To
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2256 May April 2018 2018 The Delhi High Court restores the matter to the Tribunal to examine the taxability of the payments made under technical support and crew lease agreements under the Income-tax Act as well as under the India-Germany tax treaty Background The taxpayer’s request for withholding tax Recently, the Delhi High Court in the case of certificate in respect of crew lease payments for Modiluft Ltd.1 (the taxpayer) has dealt with the issue engineers was declined by the Assessing Officer with respect to taxability of payment under technical (AO) who held that: support and crew lease agreements. crew lease payment was not covered under The Income-tax Appellate Tribunal (the Tribunal) Section 10(15A) of the Act held that lease rent and fee for technical services were business profits, and the payments were not technical support agreement for providing taxable in India under the India-Germany tax treaty engineers on lease was not approved under (tax treaty) in the absence of a Permanent Section 10(15A) of the Act Establishment (PE) in India. under the tax treaty, payments to a non- However, there is no discussion in the Tribunal’s resident for providing technical personnel is order whether the payments made under the ‘Fee for Technical Service’ and the same is technical support and the crew lease agreements taxable in the country in which they arise. were for payment for technical services. On appeal, Commissioner of Income-tax The High Court restored the matter to the Tribunal (Appeals) [CIT(A)] and the Tribunal followed the to examine the taxability of such payment under the Tribunal’s previous decision where it was held relevant provisions of the Income-tax Act, 1961 (the as follows: Act) as well as under the tax treaty. Payments under technical support and crew Facts of the case lease agreements were not entitled to exemption under Section 10(15A) of the Act The taxpayer leased three aircrafts under the because no approval under the said Section ‘aircraft lease agreement’ from Deutsche was granted to these agreements Lufthansa Aktiengesellschaft (Lufthansa). Before the lease agreement, the taxpayer had Both the lease rent and the Fee for entered into agreement for technical support. In Technical Services were business profits of addition, another agreement for provision for Lufthansa, inasmuch as the lease of the flight deck crews was also entered. The ‘aircraft aircrafts was with the operational staff lease agreement’ was approved by the Central Board of Direct Taxes (CBDT) under Section Having held that lease rent and fee for 10(15A) of the Act. technical services were business profits, the Tribunal relied on the decision of the _________________ 1 DIT v. Modiluft Ltd. (ITA 772/2004, ITA 15/2005 (Del) – Taxsutra.com © 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Authority for Advance Ruling (AAR) in the With respect to payment for services of case of Tekniskil (Sendirian) Berhard2 and personnel under the crew lease agreement, held that payment made for provision for both the statute and the tax treaty talk of technical personnel was not taxable in India taxability of payments for services that are within the meaning of Article III3 of the tax managerial, technical or consultative in treaty. nature “including provision of services of technical or other personnel.” Issue before the High Court Whether the Tribunal was justified in holding that In the absence of the agreements and a technical service charges payable to the foreign fuller discussion by the Tribunal which seems company in Germany constitute business profit of the to have decided only on the applicability of foreign company and that the same was not taxable the AAR’s ruling, it was opined that the in India. appeals need to be reconsidered and specific findings rendered in the context of High Court’s decision Section 9(1)(vii) of the Act and provisions of the tax treaty. The findings of the Tribunal were influenced by the decision of the AAR in Tehniskil (Sendirian) The issue thus, is restored to the Tribunal to which were rendered in an entirely different render its findings in light of the provisions of context, and in that case the India-Malaysia tax tax treaty and the other provisions of the Act, treaty as applicable at the relevant time did not in accordance with law. contain the clause for ‘Fee for Technical Services’. In that context it was held by the AAR, Our comments that the ‘Fee for Technical Services’ arising out The issue with respect to whether the taxability of of supply of skilled labour were not liable to tax in payments for lease rent and specified services India in terms of Article 7 as business profits on are fees for technical services has been a matter the ground that the taxpayer did not have a PE in of debate before the Courts/Tribunal. India in terms of Article 5 of the tax treaty between India and Malaysia. The Delhi High Court in the case of Sumitomo Corporation4 held that supervisory fees received In the facts of the present case, in terms of the by the taxpayer were taxable as Fees for tax treaty, payments made to Lufthansa may not Technical Services and not as business profits be liable to tax in India in terms of Article III since such fees are not effectively connected (business profits) of the tax treaty, yet their with the PE in India under the India-Japan tax taxability in terms of Article VIIIA (Fees for treaty. The AAR in the case of Brown & Root Technical Services) of the tax treaty, as there Inc.5 held that income earned from a contract for exists a ‘Fee for Technical Services‟ clause in installing a pipeline was classified as business the tax treaty, was not examined in proper income and not Fees for Technical Services and perspective. since the taxpayer did not have a PE in India, the amount was not taxable in India. In the present case, the issue of technical fee has to be examined from the point of view of The High Court distinguished the case of Article VIIIA introduced by the amending Tekniskil on the ground that the clause dealing protocol, which to the extent is relevant. with ‘Fees for Technical Services’ is missing in the India-Malaysia tax treaty. Therefore, the The facts of present case also reveal that only issue of technical fees in the present case needs one agreement, i.e., the lease agreement, was to be examined under the Act as well as under approved under Section 10(15A) of the Act. The the tax treaty. Accordingly, the matter has been other two agreements, i.e., the crew lease and sent back to the Tribunal. technical support agreements were not approved. There is no discussion in the orders of the Tribunal whether the payments made under the technical support agreement or the crew lease agreements were not payment for technical services, apart from a priori assumption that the question of taxation does not arise if there is no PE. ________________ _____________ 4 CIT v Sumitomo Corporation [2017] 80 taxman.com 247 (Del) 5 Brown & Root Inc. [1999] 103 Taxmann 515 (AAR) 2 Tekniskil (Sendirian) Berhard v. CIT [1996] 222 ITR 551 (AAR) 3 Article on ‘business profits’ © 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 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