In Director of Income Tax Inter. vs. M/s. Moduluft Ltd. the Delhi High Court remanded the issue, of whether Taxability of Technical Service charges Foreign Airliner for providing Engineers and Flight Deck Crews, to the Income Tax Appellate Tribunal (ITAT) for reconsidering the matter.
The assessee had leased 3 aircraft from the Lufthansa. Before entering into the lease agreement, the assessee had entered into the agreement for technical support as well as another agreement for provision for flight deck crews. The Central Board of Direct Taxes (CBDT) approved the lease agreement under Section 10(15A) of the Income Tax Act, 1961. However, the Assessing Officer (A.O.) declined the request of the assessee for withholding tax certificate in respect of crew lease payments for engineers, on the ground that crew lease payment and technical support agreement was not approved under section 10(15A) of the Income Tax Act, 1961.
On appeal, the Commissioner of Income Tax (Appeals) (CIT(A)) and Income Tax Appellate Tribunal (ITAT) following the ITAT’s previous order held that payments under technical support and crew lease agreements were not entitled to exemption under Section 10(15A) of the Act because no approval under Section 10(15A) was granted to these agreements. Having held that lease rent and fee for technical services was business profits, the Tribunal relying upon Tekniskil (Sendirian) Berhard v. Commissioner of Income Tax held that payment made for provision for technical personnel was not taxable in India within the meaning of Article III of the Double Taxation Avoidance Agreement (DTAA) between India and Germany.
The Counsel for the assessee argued that the decision of the Advance Ruling Authority in Tekniskil (Sendirian) Bernhard rendered in the context of DTAA with Malaysia is inapplicable to the facts of this case, and at the relevant time, DTAA with Malaysia had no provision relating to the fee for technical services. It is submitted that the order of the Tribunal be set aside and remitted back to it, to decide whether payment under consideration was inextricably linked to the lease of the aircraft constituted “fee for technical services” within the meaning of Article VIII of the DTAA with Germany.
The Counsel for the Revenue contended that Lufthansa was providing to Moduluft technical services including technical personnel and that payments to Lufthansa were covered by the definition of “Fees for Technical Services‟ as contained in Paragraph 4 of Article VIIIA of DTAA. He further argued that as the payments were made by an Indian company, the same is deemed to accrue or arise in India in terms of Para 6 of Article VIIIA of the DTAA and therefore, such payments are liable to tax in India in terms of Para 1 of Article VIIIA of the DTAA at the beneficial rate of 20% on gross basis.