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 payable to Foreign company would constitute business profit of the foreign company, to the Income Tax Appellate Tribunal (ITAT) for reconsidering the matter.
The assessee had leased 3 aircrafts from the Lufthansa. Before entering into the lease agreement, the assessee had entered into 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 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) Berhard 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 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 aircrafts 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 are 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.
The Bench comprising Justice S. Ravindra Bhat and Justice A.K. Chawla observed that the issue of technical fee has to be examined from the point of view of Article VIIIA introduced by the amending protocol.
“There is 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. In the absence of the agreements and a fuller discussion by the ITAT which seems to have decided only on the applicability of the AAR‟s ruling, this Court is of opinion that the appeals need to be reconsidered and specific findings rendered in the context of Section 9 (1) (vii) and provisions of the DTAA.” observed the bench.
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