Chennai bench ITAT on Payment to Chinese Ship Yard for repairs etc Held no TDS u/s 195 r.w.s 9 (with comprehensive past coverage); Unsecured loan between incorporation date and commencement date not taxable u/s 68; Lease premium whether Advance rent

 KRISHAK BHARATI COOPERATIVE LTD.

 THE HIGH COURT OF DELHI AT NEW DELHI Reserved on : 03.07.2012 Decided on :12.07.2012 “Did not the Tribunal commit a patent error of law in holding that the amortization of lease premium paid by the appellant was capital expenditure and not revenue expenditure?” 13. This court is of opinion that all the decisions cited by the assesse, apart from Madras Auto are fact dependent. The concerned High Courts were able to discern some elements from the conduct of parties, or surrounding circumstances, and conclude that the lease or premium amount paid, was advance rent, which could be amortized and treated as revenue payments over the succeeding years. Some advantage in the form of token, or highly depressed rent coupled with other benefit or liability conferred to the lessee was present in each of those cases. In Sun Pharma, for instance, the assessee, claimed deduction of `. 48,02,616,- payment to the Gujarat Industrial Development Corporation (GIDC). The assesse was able to show that the annual lease rent was extremely nominal, i.e., at ` 40/- and claimed it is as revenue expenditure. After considering the terms of the lease agreement, which stipulated the lease term as 99 years, the High Court affirmed the following findings of the Tribunal: "It is not disputed that the land which has been leased out to the assessee did not cease to be belonging to GIDC, the lessor. The lease deed was registered because as per the Registration Act it is compulsorily registrable, but it has not changed the ownership. It is not also disputed that the lease rent is very nominal and by obtaining this land by lease the capital structure of the company has not been . . Thus, by this payment the assets of the assessee-company had not been increased because the land continued to be the land of GIDC. The benefit the assessee got is only of an advantage of carrying on the business more profitably by paying nominal rent on the land. The issue can be considered in another angle. It cannot be disputed that if the land is not obtained by the assessee it would not be possible for it to carry on the business . . " Facially, the High Court’s judgment discloses that the reasoning of the Tribunal was affirmed. The Court held that: “By obtaining the land on lease the capital structure of the assessee did not undergo any change. The assessee only acquired a facility to carry on business profitably by paying nominal lease rent. In the light of the aforesaid findings of fact and the ratio of the apex court decisions, the court does not find this to be a case which warrants interference. Even the Assessing Officer has recorded that the payment was for use of land. There is no legal infirmity committed by the Tribunal.” The above extracts bear out the previous observation of this Court that the reasoning in the judgments cited by the assesse were fact dependent, and contextual. 14. In the present case, what is apparent is that the lessee (assesse) paid a substantial amount (`. 2.53 crores) in 1989 at the time of entering into the transaction. It was a precondition for securing possession; the amount was one-time consideration in terms of the lease condition. In addition, the lessee has to pay 2.5% of the said amount as annual rent, which is subject to increase periodically. No doubt, the assesse argues that the annual rent is depressed, and does not reflect the market rent. However, there is no material to support this submission. Nor is there any material to support the argument that the amount of `. 2.53 crore paid over 23 years ago did not constitute the true and real consideration for creating an interest in the property. We also notice that the terms of the lease agreement stipulated that the registration and stamp duty and charges were borne by the lessee (assesse). In this background, the restrictions imposed on the lessee, i.e. enjoining it not to transfer for a particular period, and granting liberty to transfer the right subject to certain conditions, and other restrictions regarding land use, are consistent with the nature of interest created, i.e. lease hold rights. The court is also conscious of the fact that the tenure of the lease is quite substantial, and virtually creates ownership rights in favour of the lessee, who is at liberty to construct upon the plot. Exclusive possession was handed over to the assessee at the time of creation of the lease. Having regard to all these factors this Court is un-persuaded by the assesses’ submission that the amount of `. 2.53 crores paid in 1989 had to be treated as advance rent, which could be amortized annually, in equal instalments, as is urged on its behalf The question of law framed is answered accordingly, against the appellant, and in favour of the revenue

M/s. Divya Fuels, Mahaboobnagar  IN THE INCOME TAX APPELLATE TRIBUNAL

HYDERABAD BENCH ‘A’, HYDERABAD It is an

undisputed fact that the assessee-firm came into existence only 7.6.2005

and commenced its business in the month of August, 2005, and that being so assessment year 2006-07 is the first year of business of the assessee. While the total unsecured loans claimed to have been raised by the assessee are of the order of Rs.42,27,977, the CIT(A), as noted above, segregated the same into two categories, viz. pertaining to the periods prior to commencement of business and after commencement of business. Prior to commencement of business, the assessee having not made any sale or business, could not have income to cover the aggregate amount of unsecured loans of the relevant period. As such, the CIT(A) in

our opinion , was justified in directing the assessing officer to delete the additions in respect of unsecured loans pertaining to the period prior to commencement of business. The decision of the Hon’ble Allahabad High Court in the case of Kapur Bros. (supra) clearly applies to the facts of the present case. We accordingly uphold the order of the CIT(A) on that aspect and dismiss the grounds of the Revenue.

IN THE INCOME TAX APPELLATE TRIBUNAL

‘B’ BENCH, CHENNAI ITA Nos.1252 to 1254/Mds/2011

(Assessment Years: 2003-04, 2005-06 & 2008-09) 8. We have heard rival submissions made by the parties and have gone through the order of the CIT(A) as well as judgements relied on by the counsel for the assessee. We are of the considered opinion that dry dock expenses were paid by the assessee to the Chinese ship yard for carrying out

maintenance and repairs to the ship to make it seaworthy. The Chinese ship yard does not have permanent establishment in India, therefore the entire amount of dry dock expenses paid to Chinese ship yard companies is not taxable in India. Since no part of the payment is taxable in India, the assessee was not liable to deduct tax at source on such payments. Our view is further fortified by the decision of the

Delhi Bench of the Tribunal in the case of Lufthansa Cargo India (P) Ltd. Vs. DCIT reported as 91 ITD 133, wherein, it has been held that payment for repairs made outside India, therefore such items would fall within the purview of exclusionary clause of section 9(1)(vii)(b). Thus, even assuming that payment for such maintenance repairs were in

the nature of fees for technical services, it would not be chargeable to tax. The Tribunal further held that the payments for repairs of aircrafts were made for earning income from sources outside India and were therefore, to be excluded from fees for technical services under section

9(1)(vii)(b). The CIT(A) in the impugned order has observed that

under Article 7 of Double Taxation Avoidance Act agreement between India and China, the business profits of Chinese resident is taxable only in China unless it carries on business through permanent establishment in India. The CIT(A) relied on the order of the Delhi Bench of the Tribunal in the case of Lufthansa Cargo India (P) Ltd.(supra) and has directed the Assessing Officer to delete the addition made towards dry

dock expenses. We find that in the instant case ships were sent by the assessee outside India (i.e to Chinese ship yards) for maintenance and repairs on work contract basis. Since there was no permanent establishment of Chinese ship yards in India, therefore, no tax at source is to be deducted on the payments made by the assessee to Chinese ship yards. We therefore, uphold the finding of the CIT(A) on this issue.

Accordingly, the appeals of the Revenue are dismissed Also refer:

1 IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘C’ CHENNAI M/s. Leaap International P.
Ltd., Once it is found that the
payments have been made to foreign companies for their services rendered
outside India and that such foreign companies do not have any branch or place
in India, then the income of such foreign companies would obviously not be taxable in India. If the income of the foreign company is not taxable in India,
then as per the provisions of sec. 195 as the sum is not chargeable under the
provisions of this Act the said section cannot have an application This view of
ours finds support from the decision of the Hon'ble Supreme Court in the case of
G.E. India Tech reported in 327 ITR 456 (SC)... In the circumstances, respectfully following the principles as laid down by the
Hon'ble Supreme Court, as it is found that the payments made by the assessee
being to a foreign company for services rendered outside India and the foreign
company having no branches or business place in India, the payments made by
the assessee to the foreign companies are not liable for deduction at source u/s
195 of the Act. (It was the
further submission that the finding of the learned CIT(A) that all the freight
payments or clearing and forwarding charges, payments have been received
abroad and the real work of transportation or clearing and forwarding by the
non-resident have been done abroad only, has not been disputed by the
Revenue)

2.Taj Leather Works   I.T.A. No.: 1686 and 1687/Kol/2011
Assessment year 2007-08 and 2008-09   IN THE INCOME TAX APPELLATE TRIBUNAL,  KOLKATA ‘B’ BENCH, KOLKATA 6. It is an admitted position that so far as the airfreight is concerned, it is paid to the agents on the actuals basis and that the bills and airfreight documents have been directly issued to the foreign airlines. PDP and DHL, while accepting payments for airfreight components, have acted merely as agents of the respective airlines and have not received the airfreight payments in their own right. In copies of airway bills, which have been filed before us in the paperbook, the name of thes e agents is shown as “Issuing carrier’s agent and the city” as also the agent’s code is given as “Agent’s IATA code”. There is thus enough material to demonstrate that the persons having received money for the airfreight have received the same in their capacity as “issuing carrier’s agent” i.e. agent of the airline concerned. The airfreight payment is thus made to the foreign airlines, namely SIA, Emirates, British Airways and Lufthansa – though through the agent, i.e. PDP and DHL etc. 9. We have also noted that it is not even the revenue’s case that the amounts paid to foreign airlines, on account of airfreight payments, are taxable in India, and quite rightly so, because, as the provisions of all the respective tax treaties clearly provide, the profits from operations of ships and aircrafts in the international traffic are taxable only in the state in which the respective enterprise are fiscally domiciled and not in the source state. This rule, howsoever devoid of paradigm justification as it may appear to many of us, is one of the fundamental rules followed in almost all the tax treaties and our tax treaties with UK, UAE, Singapore and Germany are no exception to this general rule. It is only elementary that a tax deduction at source under section 195 is only a vicarious liability inasmuch as when recipients of income, i.e. the airlines concerned, have no primary liability to pay tax, there cannot be any vicarious liability to deduct tax from payments in which such income is embedded.

3, M/s.UPS SCS (Asia) Limited IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCHES “L”, MUMBAI 22nd day of February, 2012.  ITA No.2426/Mum/2010

4. We have heard the rival submissions and perused the relevant material on record in the light of precedents cited. The entire dispute centers around the taxability of the amount received by the assessee from Menlo India in respect of services performed outside India on the export consignments of Menlo India originating from India. There is no quarrel over the nature of services for which the above referred amount has been paid to the assessee being, freight and logistics services such as transport, procurement, customs clearance, sorting, delivery, warehousing and pick up services. Now the primary question which arises for our consideration is as to whether the payment in respect of these services can be held as `fees for technical services’ within the meaning of section 9(1)(vii).

 17. Thus it can be noticed that the payment made to the assessee in question is not a consideration for managerial or technical or consultancy services. That being the position, it cannot fall within the ambit of section 9(1)(vii). 19. It is, therefore, patent that the payment received by the assessee neither falls u/s 9(1)(i) nor u/s 9(1)(vii). Since the income cannot be described as deemed to accrue or arise in India and there is no doubt about such income having not been received or deemed to be received or accruing or arising in India, the taxability of such income fails. We, therefore, overturn the impugned order and hold that the amount in question cannot be charged to tax.

4, Gujarat High Court in  VENKATESH KARRIER LTD TAX APPEAL No. 172 of 2011  20/03/2012 3. The only question that falls for determination in all these appeals is whether the Tribunal committed substantial error of law in holding that the assessee was not liable to tax in India as per Article 8 of the Double Taxation Avoidance Agreement [for short, DTAA hereafter] between India and UAE and accordingly was justified in deleting the tax levied by the Assessing Officer. At this stage, it will also be profitable to refer to the provisions contained in Circular No. 333 dated February 2, 1982 issued by the Board which states that the provisions made in DTAA would prevail over the general provisions of the Act. Circular No. 732 dated December 20, 1995 further clarifies that if ships are owned by an enterprise belonging to a country, with which India has entered into an agreement of avoidance of double taxation, and the agreement provides for taxation of shipping profits only in the country of which the enterprises is a resident, no tax is payable by such ships at the Indian ports.  10. After taking into consideration the above circulars issued by the Board and also the provisions contained in Article 8 of the DTAA, we find that both the Tribunal below and the CIT [Appeals] rightly held that in such a situation, the owner of the ship being admittedly a resident of UAE, there was no scope of taxing the income of the ship in any of the ports in India. The agreement between the two countries has ousted the jurisdiction of the taxing officers in India to tax the profits derived by the enterprise once it is found that the ship belongs to a resident of the other contracting country and such position has also been clarified by the Circulars issued by the Board as indicated above.

5.Delhi ITAT in M/s MRO (India) (P) Ltd., ITA No.3838/Del/2007 11.02.2011. Kiwish Co Payment for co-ordination charges : HELD not FTS u/s 9(1)(vii) (refer 5  judge bench GVK order of SC of India dated 1/3/2011)

11. Similarly, the term “fee for technical services” mean payment of any kind to any person other than payments to an employee or the persons making the payments or to any individual for independent personal services mentioned in Article 14 in consideration for services of managerial, technical or consultancy nature, including the provision of services of technical or other personnel. The nature of payment

made by the assessee to MRO New Zealand is of liaisoning and coordinating to ensure that the blood samples collected by the assessee is properly received at US and the reports are received in time and as per the terms fixed by the US Embassy. Neither of these services can be termed as services in the nature of managerial, technical or consultancy nature. It is also not providing the services of technical or other personnel, therefore, it also cannot be said that such services fall within the term ‘fee for technical services.’

12. The Assessing Officer has drawn analogy from service tax provisions which are totally different from the provisions contained in aforementioned agreement of India with New Zealand and cannot be said to apply on the payments made by the assessee to MRO New Zealand. In our opinion, learned CIT (A) has rightly held that the payments made by the assessee to MRO New Zealand were not the payments in the nature of income which could be assessed as chargeable to tax in India in the hands of MRO New Zealand. If it is so, then, the assessee was not under an obligation to deduct tax at source u/s 195 of the Act and, hence, the question of disallowance to be made u/s 40 (a) of the Act does not arise. He has rightly deleted the addition. We confirm his order and the appeal filed by the revenue is dismissed