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Director Of Income Tax Vs. M/s. Modiluft Ltd.
May, 15th 2018
*       IN THE HIGH COURT OF DELHI AT NEW DELHI

                                     Reserved on: 22.03.2018
                                   Pronounced on: 08.05.2018

+       ITA 772/2004
+       ITA 15/2005

        DIRECTOR OF INCOME TAX INTER. T       ..... Appellant
                 versus
        M/S. MODILUFT LTD.                    ..... Respondent

+       ITA 146/2005

        DIRECTOR OF INCOME TAX                ..... Appellant
                 versus
        M/S. MODILUFT LTD.                    ..... Respondent

+       ITA 832/2006
+       ITA 837/2006
+       ITA 838/2006
+       ITA 839/2006
+       ITA 840/2006
+       ITA 841/2006
+       ITA 842/2006
+       ITA 843/2006
+       ITA 844/2006
+       ITA 845/2006
+       ITA 846/2006
+       ITA 847/2006
+       ITA 1006/2006
+       ITA 1007/2006
+       ITA 1008/2006
+       ITA 1009/2006
+       ITA 1010/2006
+       ITA 1014/2006
+       ITA 1015/2006




ITA 772/2004 & connected matters                         Page 1 of 21
        DIRECTOR OF INCOME TAX                            ..... Appellant
                 versus
        M/S. ROYAL AIRWAYS LTD.                           ..... Respondent

                Through: Sh. Rahul Chaudhary, Sr. Standing Counsel, for
                appellant in ITA 772/2004, ITA 15/2005, ITA 832/2006, ITA
                838/2006, ITA 839/2006, ITA 840/2006, ITA 841/2006, ITA
                843/2006, ITA 846/2006, ITA 1008/2006, ITA 1009/2006 &
                ITA 1015/2006.
                Sh. Raghvendra Singh, Advocate, for appellant in ITA
                146/2005.
                Sh. Zoheb Hossain, Sr. Standing Counsel, for appellant in ITA
                837/2006, ITA 839/2006, ITA 842/2006, ITA 844/2006, ITA
                845/2006, ITA 847/2006, ITA 1006/2006, ITA 1007/2006, ITA
                1010/2006 & ITA 1014/2006.
                Sh. M.S. Syali, Sr. Advocate with Sh. Satyen Sethi, Sh. A.T.
                Panda, Ms. Gargi Sethee, Sh. Vikrant. A. Maheshwari and Sh.
                Tarun Singh, Advocates, for respondent.


        CORAM:
        HON'BLE MR. JUSTICE S. RAVINDRA BHAT
        HON'BLE MR. JUSTICE A.K. CHAWLA

MR. JUSTICE S. RAVINDRA BHAT

%

1.      In these appeals, the following common question of law arises for
consideration:
        "Whether the Tribunal was justified in holding that technical
        service charges payable to the foreign company in Germany
        constitute business profit of the foreign company and that the
        same was not taxable in India. "




ITA 772/2004 & connected matters                                     Page 2 of 21
2.      Since the facts leading to the dispute are largely similar in all these
appeals, the facts in ITA 772/2004 are set-out for reference. The assessee
leased three aircrafts (hereafter, "the aircraft lease agreement") from
Deutsche Lufthansa Aktiengesellschaft (hereafter "Lufthansa"). Before the
lease agreement (of 18.03.1993), the assessee had, on 15.02.1993 entered
into agreement for technical support (hereafter "the technical support
agreement"). In addition, another agreement for provision for flight deck
crews ("the flight deck agreement" hereafter) was also entered into on
05.08.1993. The aircraft lease agreement dated 18.03.1993 was approved
by the Central Board of Direct Taxes (CBDT) under Section 10(15A) of the
Income Tax Act, 1961 [hereafter "the IT Act"] by orders dated 08.10.1993,
15.09.1993 and 20.08.1993.
3.      The assessees request for withholding tax certificate in respect of
crew lease payments for engineers was declined by the Assessing Officer
(AO) who held that:
(a) crew lease payment was not covered under Section 10(15A) of the IT
Act;
(b) technical support agreement dated 15.02.1993 for providing engineers
on lease was not approved under Section 10(15A) of the IT Act;
(c) Under the DTAA between India and Germany, payments to a non-
resident for providing technical personnel is fee for technical service (FTS)
and the same is taxable in the country in which they arise.
4.      The assessee argued, before all the authorities that the crew
lease/provision of engineers is inextricably linked to the lease of aircrafts.
It was emphasized that Lufthansa first entered into technical support
agreement dated 15.02.1993 and only thereafter, the aircrafts were leased to



ITA 772/2004 & connected matters                                     Page 3 of 21
the assessee by the agreement dated 18.03.1993. On appeal, the CIT (A)
and the Income Tax Appellate Tribunal (ITAT) followed the ITATs
previous order dated 18.09.1998 in ITA 2648/Del/1998.
5.      The order dated 18.09.1998 held that:
(i)     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.
(ii)    Both the lease rent and the fee for technical services were business
profits of Lufthansa, inasmuch as the lease of the aircrafts was with the
operational staff.
(iii)   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 1996 (222) ITR 551 (AAR) held that
payment made for provision for technical personnel was not taxable in
India within the meaning of Article III of the DTAA between India and
Germany [1985 (156) ITR (St) 90 @ 93]. These orders were followed in
several assessment years. In the common order impugned before this Court
the ITAT firstly condoned the delay in filing the appeal (preferred by the
assessee) and held that in view of its previous findings, essentially relying
on Teknisil (Sendirian) (supra), the payments to technical personnel was
not taxable in India, under the Indo-German DTAA.
6.      The Revenue relies on the order of the AO rejecting the assessees
contention that the payments made to Lufthansa were exempt under Section
10(15A) of the Act on the ground that under Section 10(15A) the Act, the
agreement in terms of which payments are being made must be approved by
the Central Board of Direct Taxes (CBDT) for claiming exemption under



ITA 772/2004 & connected matters                                   Page 4 of 21
Section 10(15A) and only the agreement dated 18.03.1993 for lease of
aircrafts has been approved by CBDT.          Further, the benefit of Section
10(15A) of the Act is available only in respect of payment made to acquire an
aircraft on lease and not to any other payments such as payments for
provision of services (including technical personnel). Thus, AO held that the
above payments were not exempt under Section 10(15A) and therefore, liable
to tax as per the provisions of Act.
7.      It is submitted that the AO rejected the alternative contention that the
payments were not liable to tax as per provisions of DTAA as Lufthansa did
not have permanent establishment in India. The AO held that the payments
to be made to Lufthansa were liable to tax in India, as per the provisions of
the Act as well as DTAA as the same were in the nature of ,,Fee for Technical
Services chargeable to tax in India at the rate of 20% on gross basis as per
Article VIIIA of the DTAA.
8.      The AO also held that for the purpose of computing amount of tax to
be deducted and deposited in terms of Section 195 of the Act, the provisions
of grossing up contained in Section 195A of the Act would apply and,
therefore, tax borne by Modiluft have to be added to the payments to be made
to Lufthansa. It is pointed out that the AO also held that the benefit of Section
44BBA of the Act, which were applicable to non-residents engaged in the
business of operating aircrafts, was also not be available since Lufthansa did
not have permission from Government of India to operate aircrafts in India
and had merely leased aircrafts.
9.      It is stated that the CIT(A), by a consolidated order dated 24.09.2004,
dismissed the appeals in limine on the ground that the same were barred by
limitation.



ITA 772/2004 & connected matters                                      Page 5 of 21
10.      The Revenue points out that a reference application filed by it against
the order dated 18.09.1998 passed by the Tribunal in ITA No. 2648/Del/1998
was dismissed by the Tribunal by its order dated 30.09.1999 in RA No.
598/Del/1998.        However, the Revenue challenged the said order of the
Tribunal, before this Court in ITC No. 16/2000. This Court by order dated
11.04.2001 had decided the issue in favour of the Revenue by holding as
under:
         "Heard.
         We direct the Tribunal to refer the following questions along
         with statement of the case:

         "Whether the Tribunal was justified in holding that technical
         services charges payable to the foreign company in Germany
         constitute business profits of the foreign company and that the
         same was not taxable in India?"

         ITC disposed of."

11.      In view of the above it is submitted that the order dated 18.09.1998
passed by the Tribunal in ITA No. 2648/Del/1998 on the basis of which relief
was granted in favour of the assessee by the ITAT has been set aside.
12.      It is also urged that the AOs finding that the payments to be made to
Lufthansa are not exempt from tax in terms of Section 10(15A) of the Act has
also attained finality. The ITAT had, by order dated 18.09.1998, passed in
ITA No. 2648/Del/1998 held that the payments to be made to Lufthansa are
not exempt under Section 10(15A) of the Act. That order was followed by
the Tribunal in the impugned order. The assessee did not prefer any appeal
on this issue before this Court.




ITA 772/2004 & connected matters                                      Page 6 of 21
13.     It is argued that the payments made to Lufthansa were in the nature of
,,Fee for technical services liable to tax under Article VIIIA of DTAA. The
term ,,Fees for technical services as defined in the said article means
payments of any kind to any person (other than payments to an employee of
the other person making payments), in consideration for services of
managerial, technical or consultancy nature, including the provision of
services of technical or other personnel.      The payments were made to
Lufthansa for provisions of technical services including provision of
technical personnel and therefore, clearly fall within the ambit of term ,,Fee
for Technical Services as defined in para 4 of Article VIIIA of the DTAA.
14.     The revenue argues that the nature of services being technical was not
in dispute before the AO. The contention raised by the Modiluft before the
AO was that the technical services were being provided to Lufthansa for
protecting the leased aircrafts, and not to Modiluft. Reliance in this regard is
placed on para 2 of the Order dated 31.10.1995 passed by Assessing Officer
being Annexure A to appeal at Page 40 of the appeal being ITA No. 832 of
2006 which read as under:
        "2.xx
        In your letter dated 27.10.1995, which has reiterated this
        position, you have further stated that the engineers leased from
        Lufthansa do not provide any technical service to your
        company, but provide service to M/s Lufthansa as they protect
        the leased assets, i.e., the aircrafts owned by the German
        Company thus the payments on account of crew lease are in
        respect of the leased aircrafts, and are therefore, exempt u/s
        10(15A) of the Income Tax Act, 1961" (emphasis supplied)"

15.     Arguing that from the above it is clear that Lufthansa was providing to
Modiluft technical services including technical personnel, the         Revenue




ITA 772/2004 & connected matters                                     Page 7 of 21
underlines that payments to Lufthansa were covered by the definition of
,,Fees for Technical Services as contained in Paragraph 4 of Article VIIIA of
DTAA. 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
(after applying grossing up principle as specified in section 195A of the Act).
16.     The Revenue submits that the contention that payments to be made to
Lufthansa are covered by Article III of the DTAA is without any merit; it
relies on paragraph 7 of Article 3 of the DTAA clearly provided as under:
        "7. Where profits include items of income which are dealt
        with separately in other articles of this agreement, then the
        provisions of those articles shall not be affected by the
        provisions of this article."






It is argued that the provision in paragraph 7 of Article III of the DTAA
excludes from its ambit income dealt with separately by other Articles of
DTAA. Therefore, it was submitted that ,,Fee for Technical Services being
an item of income separately dealt with in Article VIIIA of DTAA would,
therefore, fall outside the ambit of scope of Article III of DTAA. It was
further submitted that the payments made to Lufthansa are in the nature of
,,Fee for Technical Services and would, therefore, be liable to tax in terms of
Article VIIIA of the DTAA at the beneficial rate of 20% on gross basis (after
applying grossing up principle as specified in section 195A of the Act).
17.     The Revenue argues importantly that the ruling rendered by the
Authority For Advance Ruling (,,AAR) in the case of Tekniskil
(Sendirian)(supra) relied on by ITAT in its order in ITA 2648/Del/1998 is




ITA 772/2004 & connected matters                                     Page 8 of 21
distinguishable on facts as in that case the relevant Double Taxation
Avoidance Agreement between India and Malaysia as applicable at the
relevant time did not contain the clause for ,,Fee for Technical Services, and
it was 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. However, in the facts of the present
case in terms of the DTAA, payments made to Lufthansa would not be liable
to tax in India in terms of Article III of DTAA, but would still be liable to tax
as in terms of Article VIIIA of the DTAA, as there exists a ,,Fee for Technical
Services clause in the Agreement. It is therefore, urged that payments made
to Lufthansa are in the nature of ,,Fee for Technical Services and would,
therefore, be liable to tax in terms of Article VIIIA of DTAA at the beneficial
rate of 20% on gross basis (after applying grossing up principle as specified
in Section 195A of the Act).
18.     The assessee argues, in these appeals that the decision of the
Advance Ruling Authority in Tekniskil (Sendirian) Berhard (supra),
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.




ITA 772/2004 & connected matters                                      Page 9 of 21
19.     Mr. Syali, learned senior counsel for the assessee argued that the
ITAT found that the present case was not one of mere provision of
technical personnel, rather, such personnel were provided to operate the
leased aircrafts. Though the agreements were separate, the fact of prior
technical support agreement provides sufficient nexus between the
provision of personnel and the lease of aircrafts. The nature of the
transaction does not change only because the agreements were separate.
What matters is the substance and not the form. Therefore, the issue
whether on a correct interpretation of the relevant clause of the DTAA,
provision of technical personnel was FTS, requires adjudication by the
Tribunal, more so, because there is no precedent on this nascent issue,
which is purely legal.
20.     It is furthermore argued that for the exception to business profits
being taxable only in Germany to apply, the finding that what is received is
fee for technical service (FTS), is essential. The contention of the Revenue
that the payment was FTS, is in the absence of any finding of the appellate
authorities. The finding of the AO also is inconclusive. It is submitted that
the question framed, i.e.,whether the ITAT was justified in holding that
technical service charges payable to the foreign company in Germany
constitute business profit of the foreign company and that the same was not
taxable in India has not been addressed squarely by the lower appellate
authorities. Therefore, a remand on the question is called for.
Analysis and Conclusions
21.     Before analyzing the rival contentions, it would be appropriate to
extract the relevant parts of the Indo German DTAA, which is applicable to
the facts of this case. They are extracted as below (incorporating the



ITA 772/2004 & connected matters                                  Page 10 of 21
amending protocol, which had come into force by the time of the assessment
years involved in this case):
                                   "ARTICLE V

        Article III of the Agreement shall be deleted and replaced by
        the following text :

        (1) The profits of an enterprise of a Contracting State shall
        be taxable only in that State unless the enterprise carries on
        business in the other Contracting State through a permanent
        establishment situated therein. If the enterprise carries on
        business as aforesaid, the profits of the enterprise may be
        taxed in the other State but only so much of them as is
        attributable to that permanent establishment.

        (2) Subject to the provisions of paragraph (3), where an
        enterprise of a Contracting State carries on business in the
        other Contracting State through a permanent establishment
        situated therein, there shall, in each Contracting State, be
        attributed to that permanent establishment, the profits which it
        might be expected to make if it were a distinct and separate
        enterprise engaged in the same or similar activities under the
        same or similar conditions and dealing wholly independently
        with the enterprise of which it is a permanent establishment.

        (3).In the determination of the profits of a permanent
        establishment, there shall be allowed as deductions, expenses
        which are incurred for the purposes of the business of the
        permanent establishment including executive and general
        administrative expenses so incurred, whether in the State in
        which the permanent establishment is situated or elsewhere, and
        according to the domestic law of the Contracting State in which
        the permanent establishment is situated.

        (4) In so far as it has been customary in a Contracting State to
        determine the profits to be attributed to a permanent
        establishment on the basis of an apportionment of the total




ITA 772/2004 & connected matters                                    Page 11 of 21
        profits of the enterprise to its various parts, nothing in
        paragraph (2) shall preclude that Contracting State from
        determining the profits to be taxed by such an apportionment
        as may be customary; the method of apportionment adopted
        shall, however, be such that the result shall be in accordance
        with the principles contained in this Article.

        (5) No profits shall be attributed to a permanent
        establishment by reason of the mere purchase by that
        permanent establishment of goods or merchandise for the
        enterprise.

        (6) For the purposes of the preceding paragraphs, the profits
        to be attributed to the permanent establishment shall be
        determined by the same method year by year unless there is
        good and sufficient reason to the contrary.

        (7) Where profits include items of income which are dealt
        with separately in other Articles of this Agreement, then the
        provisions of those Article shall not be affected by the
        provisions of this Article.

                ********                     ****
                                   ARTICLE IX

        After Article VIII of the Agreement, a new Article VIIIA shall
        be inserted with the following text:

        "(1) Royalties and fees for technical services arising in a
        Contracting State and paid to a resident of the other
        Contracting State may be taxed in that other State.

        (2) However, such royalties and fees for technical services
        may also be taxed in the Contracting State in which they
        arise, and according to the laws of that State. But in so far as
        the fees for technical services are concerned, the tax so
        charged shall not exceed 20 per cent of the gross amount of
        such fees.




ITA 772/2004 & connected matters                                    Page 12 of 21
        (3) The term ,,royalties as used in this Article means
        payments of any kind received as a consideration for the use
        of, or the right to use any copyright of literary, artistic or
        scientific work including cinematograph films, or films or
        tapes used for radio or television broadcasting, any patent,
        trade mark, design or model, plan, secret formula or process,
        or for the use of, or the right to use, industrial, commercial,
        or scientific equipment, or for information concerning
        industrial, commercial or scientific experience.

        (4) The term ,,fees for technical services as used in this
        Article 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.

        (5) The provisions of paragraphs (1) and (2) of this Article
        shall not apply if the beneficial owner of the royalties or fees
        for technical services, being a resident of a Contracting State,
        carries on business in the other contracting State in which the
        royalties or fees for technical services arise through a
        permanent establishment situated therein, and the right,
        property or contract in respect of which the royalties or fees
        for technical services are paid is effectively connected with
        such permanent establishment. In such a case, the provisions
        of Article III shall apply.

        (6) Royalties and fees for technical services shall be deemed
        to arise in a Contracting State where the payer is that State
        itself, a land, a political sub-division, a local authority or a
        resident of that State. Where, however, the person paying the
        royalties or fees for technical services, whether he is a
        resident of a Contracting State or not, has in a Contracting
        State a permanent establishment in connection with which the
        obligation to make the payments was incurred and the
        payments are borne by that permanent establishment, then the




ITA 772/2004 & connected matters                                    Page 13 of 21
        royalties or fees for technical services shall be deemed to
        arise in the Contracting State in which the permanent
        establishment is situated.

        (7) Where, owing to a special relationship between the
        payer and some other person, the amount of the royalties or
        fees for technical services paid exceeds for whatever reason
        the amount which would have been paid in the absence of
        such relationship, the provisions of this Article shall apply
        only to the last mentioned amount. In that case, the excess
        part of the payments shall remain taxable according to the
        law of each Contracting State, due regard being had to the
        other provisions of this Agreement."

22.     The main reasoning of ITAT in its earliest decision (dated 15 th
September, 1998) which ultimately rejected the Revenue s argument with
regard to taxability, is as follows:
        "We have carefully considered the rival submissions in the light
        of the materials on records. The facts as brought out by the AO
        and CIT are not disputed. On these facts, we, at the outset, may
        straightaway reject the claim of the assessee for exemption u/s
        10(15A) of the IT Act, 1961 for the simple reason that the
        agreements for technical assistance entered into by the assessee
        with the foreign company vide agreement dated 15.2.1993 and
        5.8.1993 have not got approval of the Govt. of India in terms of
        section 10(15A). We hold accordingly.

        With regard to the claim of the assessee for exemption under
        the Indo German DTAA, it is seen that the assessee and the
        foreign company entered into an agremeent for lease of three
        aircrafts. The assessee also separately entered into an
        agreement for provision of technical services as indicated
        above. Both the lease rent and the fees for technical services
        form part of the business profit of the foreign company. Section
        10(15A) before its substitution by the Finance Act, 1995 w.e.f.
        1.4.1996 did not make any bifurcation of the payment for




ITA 772/2004 & connected matters                                    Page 14 of 21
        acquiring an aircraft on lease from government of the foreign
        State or a foreign enterprise. Therefore, if the assessee in this
        case make a composite agreement for lease of aircraft with
        operational staff, then the provisions of Section 10(15A) of the
        Act will fully cover the case. However, the assessee in this case
        entered into a separate agreement and such agreement for
        provision of technical services having not been approved, we
        have already rejected the claim of exemption u/s 10(15A) of the
        Act.
        The denial of the exemption u/s 10(15A) of the Act in so far as
        fees for technical services are concerned, does not change the
        character of the receipt in the hands of the foreign company.
        Both the lease rent and the fees for technical services are
        profits of an enterprise of the foreign company for the lease of
        the aircrafts alongwith operational. staff. It is also not denied
        that, the foreign company is not having a permanent
        establishment in India. In such a situation, such profit
        wouldcame for consideration under Article III of the Indo
        German DTAA. However para (7) of Article III makes
        anexception that where such profits include items of income
        which are dealt with separately in other Articles of this
        Agreement, then the provisions of those Articles shall not be
        affected by the provisions of this Article. In other words a
        specific provision will override the general provisions made
        under Article III of the Agreement.
        This brings us to Article VIIIA which provides (1) royalties and
        fees for technical services arising in a contracting State and
        paid to a resident of the other contracting State may be taxed in
        that other State. (2). However, such royalties and fees for
        technical services may also be taxed in the contracting State in
        which they arise and according to the laws of that State.
        XXXXXXXXX (not legible) for technical services are
        concerned, the tax so charged shall not exceed 20% of the
        gross amount of such fees."
        The AO        in this case applied the second provision and
        assessed the income at 20% of the gross amount of such. fees. It
        is, however, the claim of the assessee that the first provision




ITA 772/2004 & connected matters                                     Page 15 of 21
        will apply and the same will not be taxable in India and,
        therefore, there is no question of any deduction of tax at source.
        This controversy has been set at rest by the decision of the
        Authority for Advance Rulings in the case of Tehniskil
        (Sendirian) Rerhard vs. C.I.T.(1996) 222 ITR 551. In that case
        Tekniskil
        (Sendirian) Berhard referred to as TSB entered into a contract
        with 'Hyundai Heavy Industries Co. Ltd. referred to as HHI,
        having its registered office in Korea. The Agreement recited
        that HHI had been awarded certain contracts in the Neelam
        Process Complex and .NOP Process Complex in the territory of
        Bombay High by the Oil and Natural Gas Commission of India.
        It had to execute these projects involving offshore installation
        works from the end of September, 1993.For carrying out the
        above.work, HHI needed the services of skilled labour and
        requested TSB to supply the skilled labour necessary to carry
        out the above works. Under the agreement, TSB had to supply
        in time necessary labour force duly qualified to carry out the
        projects in question. The workmen were to function under the
        directions and the -supervision of TWIT which could disqualify
        and demobilize any of the workers in the event of.their-services
        nut being satisfactory on certain grounds stated in the contract.
        TSB was to pay salary, insurance premium, charges for
        mobilitation to Bombay and demobilization from Bombay, all
        taxes, medical treatment etc. The work under the contract
        which commenced on October 8, 1993, came to a conclusion in
        Apri1,1994. In an application before the Authority for Advance
        Rulings, TSB claimed complete exemption on the basis of the
        provisions of DTAA between India and Malaysia which was
        entered into with retrospective effect from April 1,1973. TSB
        claimed that the fees derived by it from Hill arose out of a
        business in the supply of skilled labour carried on by it; that the
        taxability of this amount of income is governed by Article 7 of
        the DTAA which is equivocal with the income, cannot be taxed
        in. India unless the applicant is found to have a permanent
        establishment in India and the profits arc attributable to such
        permanent establishment; that Article 5(1) which defines a
        permanent establishment for the purpose of DTAA envisaged a




ITA 772/2004 & connected matters                                       Page 16 of 21
        fixed place of business in which the business of the enterprise
        iswholly carried on. According to the assessee, it had no place
        of business at all in India much less a fixed place of business.
        The Authority for Advance Ruling considered the provisions of
        Article 7 of the DTAA between India and Malaysia in that case
        which corresponds to Article III of the DTAA of India with
        Federal Republic of Germany and it was held an follows:

        "The fact that the remuneration paid to the assessee may be in
        the nature of technical fee within the scope of Section 9(1)(vii)
        does not make a difference.       Fees of this nature can be
        earned in business or otherwise.        If earned in the course of
        business, they constitute income from business. There is no
        incompatibility between recognising the receipts as royalties or
        technical fees and also looking upon them as the profits of a
        business. Judicial decisions have recognised the principle in
        regard to other types of receipts such as dividends and interest.
        That being so, when technical fees are received in the course of
        business, one cannot deny them the treatment envisaged by
        article 7, specially intended for application to business income.
        That apart, an pointed out earlier, there are several DTAA
        which prescribe different modes of taxation for business and for
        royalties and fees for technical services but they are clear that
        the provisions of the "business- clause of the treaty (article 7
        here) will govern where such technical fees are earned in the
        course of a business with a permanent establishment in the
        State (article 11(4) ), Canada (article XIII(SC) ) or U.S.A.
               (article 12(6) ). These indicate that even where royalties
        and fees for technical services receive separate treatment under
        a DTAA, it is the article relating to computation or business
        income that would apply where such royalties or fees arise in
        the course of a business carried on by the recipient. For these
        reasons, the payments received by TSB in this case from HHI
        have to be taxed under article 7 of the DTAA"

        Since the facts of the case of the assessee are entirely the same
        and the provisions of the DTAA between India and Federal
        Republic of Germany and India with Malaysia are the same, we




ITA 772/2004 & connected matters                                      Page 17 of 21
        have no hesitation in following the ratio laid down therein.
        While contending that the provisions of Article 7 will govern
        where such technical fees are earned in the course of business
        with a permanent establishment in theState in question, the
        Authority for Advance Ruling referred to DTAAs between India
        and Australia (article 11(4), which reads as follows:
        " (4) The provisions of paragraphs (1) and (2) shall not: apply
        if the person beneficially entitled to the interest:, being a
        resident of one of the Contracting States, carries on business in
        the other Contracting State, in which the interest arises,
        through a permanent establishment situated therein, or
        performs in that other Start independent personal services from
        a fixed base situated therein, and the indebtedness in respect of
        which the interest is paid is effectively connected with such
        permanent establishment or fixed base. In such a cave, the
        provisions of Article 7 or Article 14, as the ease may be, shall
        apply."

        Similar is the provision the Agreement between India and
        Federal Republic of Germany as contained in Article VIIIA(S)
        as under:
        -(5) The provisions of paragraphs (1) and (2) of this Article
        shall not apply if the beneficial owner of the royalties or fees
        for technical. services being a resident of a Contracting State,
        carries on business in the other Contracting State in which the
        royalties or fees for technical services arise through a
        permanent establishment situated therein, and the right,
        property or contract in respect of which the royalties or fees for
        technical services are paid is effectively connected with such
        permanent establishment. In such a case, the provisions of
        Article III shall apply.-
        The Authority for Advance Ruling held that these provisions
        indicate that even where royalties and fees for technical
        services received separate treatment under a DTAA, it is the
        Article relating to computation of business income; that would
        apply where such royaltiesor fees arise in the course of
        business carried on by the recipient. For these reasons, the
        payment received by TSB in this case from HHI have to be




ITA 772/2004 & connected matters                                      Page 18 of 21
        taxed ed under Article 7 of the DTAA which corresponds to
        Article III of the DTAA between India and Federal Republic of
        Germany. Since TSB in that case did not have any permanent
        establishment, it was held that. the amounts received by the
        TSB were not taxable in India. Since in this case also, the
        foreign company did not have any permanent establishment in
        India, the fees for technical services cannot be taxed in India in
        the light of the ruling given above by the Authority for Advance
        Rulings. We hold accordingly."

23.     During the hearing of the appeals, great emphasis was laid on the fact
that the ITAT had recorded independent findings with regard to the non-
taxability ­as FTS and under the DTAA, of the assessees payments and the
finding that Lufthansa had no PE in India. The fact that the findings of the
ITAT, as is evident, were influenced by the decision of the AAR in Tehniskil
(Sendirian)(supra) which were rendered in an entirely different context, and in that
case the relevant Double Taxation Avoidance Agreement between India and
Malaysia as applicable at the relevant time did not contain the clause for ,,Fee
for Technical Services. 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 gr ound that the
assessee did not have a permanent establishment in India in terms of Article 5
of the Double Taxation Avoidance Agreement. In the facts of the present
case in terms of the DTAA, payments made to 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.
24.     In the present case, the issue of technical fee has to be
examined from the point of view of Article VIIIA introduced by the









ITA 772/2004 & connected matters                                        Page 19 of 21
amending protocol, which to the extent it is relevant, states (by
clause (4)) that:",,fees for technical services as used in this Ar ticle 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." The facts of this case also reveal
that only one agreement, i.e., 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 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. With respect to payment for
services of personnel under the crew lease agreement, both the statute
(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."
25.     In the absence of the agreements and a fuller discussion by the ITAT
which seems to have decided only on the applicability of the AARs 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.
26.     For the above reasons, the appeals are allowed to the extent that the
impugned orders are set aside; the issue is restored to the file of the ITAT
which shall now proceed to hear the cases and render its findings in the



ITA 772/2004 & connected matters                                   Page 20 of 21
light of the provisions of DTAA and the other provisions of the Act, in
accordance with law. The ITATs final order shall be made within six
months. The questions of law are answered accordingly.


                                                 S. RAVINDRA BHAT
                                                           (JUDGE)


                                                         A.K. CHAWLA
                                                               (JUDGE)
MAY 08, 2018




ITA 772/2004 & connected matters                              Page 21 of 21

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