TDS – Income deemed to accrue or arise in India – Sections 9(1)(vii)(b) and 195 – A. Ys. 1998- 99 to 2000-01 – Wet-leasing aircraft to foreign company – Operational activities were abroad – Expenses towards maintenance and repairs were for purpose of earning abroad – Payments falling within the purview of exclusionary clause of section 9(1)(vii)(b) – Not chargeable to tax and not liable for TDS

The assessee acquired four old aircrafts from a nonresident company outside India and wet-leased them to a foreign company. “Wet-leasing” means the leasing of an aircraft along with the crew in flying condition to a charterer for a specified period. As the assessee was obliged to keep the aircraft in flying condition, it had to maintain them in accordance with the DGCA guidelines to possess a valid airworthiness certificate as a pre-condition for its business. The assessee entered into an agreement with the overhaul service provider, T. T carried out maintenance repairs without providing technical assistance by way of advisory or managerial services.

The Assessing Officer noticed that no tax was deducted at source on payments to T and no application u/s. 195(2) was filed. He held that the payments were in the nature of “fees for technical services” defined in Explanation 2 to section 9(1)(vii)(b) and were, therefore, chargeable to tax and tax should have been deducted at source u/s. 195(1). He passed order u/s. 201 deeming the assesee to be assessee in default for the F. Ys. 1997-98 to 1999- 2000 and levied tax as well as interest u/s. 201(1A). The Tribunal held that the payments made to T and other foreign companies for maintenance repairs were not in the nature of fees for technical services as defined in Explanation 2 to section 9(1)(vii)(b) and that in any event these payments were not taxable for the reason that they had been made for earning income from sources outside India and, therefore, fall within the exclusionary clause of section 9(1)(vii)(b).

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The level of technical expertise and ability required in such cases is not only exacting but specific, in that, the aircraft supplied by the manufacturer has to be serviced and its components maintained, serviced and overhauled by the designated centers. International and national regulatory authorities mandate that certification of such component safety is a condition precedent for their airworthiness. The exclusive nature of these services could not but lead to the inference that they are technical services within the meaning of section 9(1)(vii).

ii) However, the overwhelming or predominant nature of the assessee’s activity was to wet-lease the aircraft to a foreign company. The operations were abroad and the expenses towards maintenance and repairs payments were for the purpose of earning abroad. Therefore, the payments made by the assessee fell within the purview of the exclusionary clause of section 9(1)(vii)(b) and were not chargeable to tax at source.

iii) The question of law is answered in favour of the assessee and against the revenue.”