Taxability of FTS to foreign airliner for providing engineers and flight deck under amended DTAA

Taxability of FTS to foreign airliner for providing engineers and flight deck crews remanded to ITAT for reconsideration as per amended DTAA

ABCAUS Case Law Citation:
ABCAUS 2332 (2018) (05) HC

Important Case Laws Cited/relied upon by the parties:
Tehniskil (Sendirian) Rerhard vs. C.I.T.(1996) 222 ITR 551 AAR

The assessee leased three aircrafts from a German company and also had entered into two agreements for technical support for providing engineers and provision for flight deck crews. The aircraft lease agreement was approved by the Central Board of Direct Taxes (CBDT) under Section 10(15A) of the Income Tax Act, 1961 [Act]. However, request for withholding tax certificate in respect of crew and engineers was declined by the Assessing Officer (AO) holding that those payments were not covered u/s 10(15A) of the Act and under the relevant DTAA, payments to a non resident for providing technical personnel is fee for technical service (FTS) were taxable in the country in which they arise.

The ITAT following its previous order held that lease rent and fee for technical services was business profits. However, payment made for provision for technical personnel was not taxable in India within the meaning of the DTAA.

Thus the question of law arises for consideration was as to whether the Tribunal was justified in holding that technical service charges payable to the foreign company in Germany constituted business profit of the foreign company and that the same was not taxable in India?

The assessee laid great emphasis on the fact that the ITAT had recorded independent findings with regard to the nontaxability –as FTS and under the DTAA, of the assessee’s payments and the finding that German Company had no PE in India. However the Hon’ble High Court observed that the the findings of the ITAT were influenced by the decision of the Authority for Advance Rulings which were rendered in an entirely different context, and in that case the relevant Double Taxation Avoidance Agreement as applicable at the relevant time did not contain the clause for “Fee for Technical Services‟ (FTS). In that context it was held by the AAR, that the fee for technical services arising out of supply of skilled labour were not liable to tax in India in terms of Article 7 as “business profits‟ on the ground that the assessee did not have a permanent establishment in India in terms of Article 5 of the Double Taxation Avoidance Agreement.

On perusal of the DTAA between India and Germany, the Hon’ble High Court  noted that in terms of the DTAA, payments made to German Company Lufthansa may not be liable to tax in India in terms of Article III of the DTAA, yet their taxability in terms of Article VIIIA of the DTAA, as there exists a “Fee for Technical Services‟ clause in the Agreement, was not examined in proper perspective

The Hon’ble High Court opined that in the instant case(s), the issue of technical fee had to be examined from the point of view of Article VIIIA introduced by the amending protocol, which to the extent it is relevant, states that FTS means payments of any kind to any person, other than payments to an employee of the person making the payments, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel. In the instant case only the lease agreement, was approved under Section 10 (15A). The other two agreements, i.e., the crew lease and technical support agreements were not approved. There was no discussion in the orders of the ITAT whether the payments made under the technical support agreement or the crew lease agreements were not payment for technical services, apart from an a priori assumption that the question of taxation does not arise if there is no PE. With respect to payment for services of personnel under the crew lease agreement, both the Explanation 2 to Section 9 (1) (vii) of the Income Tax Act and the DTAA talk of taxability of payments for services that are managerial, technical or consultative in nature “including provision of services of technical or other personnel.”

The Hon’ble High Court opined that in the absence of the agreements and a fuller discussion by the ITAT which seemed to have decided only on the applicability of the AAR’s ruling, the appeals need to be reconsidered and specific findings rendered in the context of Section 9 (1) (vii) and provisions of the DTAA.

Accordingly, the orders were set aside and the issue was restored to the file of the ITAT to hear the cases and render its findings in the light of the provisions of DTAA and the other provisions of the Act, in accordance with law.

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