Tax Alert | Delivering clarity - 21 May 2021 - Deloitte
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Tax Alert | Delivering clarity
21 May 2021
Technical assistance received for air traffic flow management not taxable as fees for technical
services
The Delhi Bench of the Income Tax Appellate Tribunal held that technical assistance received
from a US-based entity is outside the purview of Article 12(4)(b) of the India-USA Tax treaty as it
did not satisfy the make available clause. Further, payments made on cost-to-cost basis not
involving any profit element, is not liable for withholding tax.
Background:
• The taxpayer1 is an organisation under Ministry of Civil Aviation, Government of India. It entered into a
Memorandum of Agreement (MoA) with Federal Aviation Administration, USA (FAA) [Department of
Transportation, USA] for:
─ Providing technical assistance to AAI by way of providing its personnel and meeting air traffic flow
management (ATFM) requirements; and
─ Assisting AAI in connection with ATFM by development of detailed quantitative requirements (QRs),
detailed ATFM system architecture and draft ATFM implementation plan.
• During the course of audit proceedings, the Assessing Officer (AO) treated the sum paid to FAA as fees
for technical services (FTS) chargeable to tax at 10% (plus applicable surcharge and cess) on the gross
amount as per section 115A of the Income-tax Act, 1961 (ITA) and held that the taxpayer was liable to
withhold tax (TDS) from the payment made to FAA.
• The matter in the course of appeal proceedings reached the Delhi Bench of the Income-tax Appellate
Tribunal (ITAT).
• The key issues contended by the Revenue and the taxpayer before the ITAT, were as follows:
─ Whether the payment made to a sovereign state (FAA) by another sovereign state (AAI) was not
taxable and hence, was any TDS applicable?
─ Whether the payment was in the nature of reimbursement (based on the agreements)?
─ Whether the services rendered were in the nature of FTS / fees for included services (FIS) under the
India-USA tax treaty and hence, chargeable to tax?
Certain provisions in brief:
• As per section 195 of the ITA, any person responsible for paying to a non-resident, not being a
company, or to a foreign company, any interest or any other sum chargeable under the provisions of
1Airports Authority of India v. ITO [ITA No. 5162 & 5163 /Del/2012] (Delhi ITAT)
©2021 Deloitte Touche Tohmatsu India LLPthis Act shall, at the time of credit of such income to the account of the payee or at the time of
payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier,
deduct income-tax thereon at the rates in force.
• As per section 196 of the ITA no deduction of tax shall be made by any person from any sums payable
to Government, or the Reserve Bank of India, or a corporation established by or under a Central Act
which is, under any law for the time being in force, exempt from income-tax on its income, or a Mutual
Fund specified under section 10(23D) of the ITA, where such sum is payable to it by way of interest or
dividend in respect of any securities or shares owned by it or in which it has full beneficial interest, or
any other income accruing or arising to it.
• As per Article 12(4)(b) of the India-USA tax treaty “fees for included services” means payments of any
kind to any person in consideration for the rendering of any technical or consultancy services (including
through the provision of services of technical or other personnel) if such services:
a. are ancillary and subsidiary to the application or enjoyment of the right, property or information for
which a payment described in paragraph 3 is received; or
b. make available technical knowledge, experience, skill, know-how, or processes, or consist of the
development and transfer of a technical plan or technical design.”
Decision of the ITAT:
Issue 1: Sovereignty
• The ITAT noted / observed that:
─ The taxpayer is a government organisation under Ministry of Civil Aviation, public sector
undertaking running on commercial terms, earning profit and paying taxes to the Government of
India.
─ FAA is an organisation involved in airport management, aircraft certification, advisory and
consultancy [main sources of income are grants, Airport and Airways Trust Fund (AATF)]. Thus, it is
also an organisation under the government with budgetary support of the state and recourses of its
own but not a government.
─ The employees of both FAA and taxpayer were called government employees for the convenience
of implementation agreements.
─ The agreement between the taxpayer and FAA was of a commercial character and state was not
liable for the actions or contracts entered between the parties.
─ There was no general immunity from taxation unless specified, which was absent in the agreements
entered between the two organisations.
─ Wherever the legislature intended to accord exemption, they had been specifically provided for in
the ITA [such as in section 10(15A) of the ITA wherein payments made to foreign government are
exempt].
©2021 Deloitte Touche Tohmatsu India LLP• In view of the above, the ITAT held that the payments made by taxpayer to FAA were not excluded
from the purview of section 196 of the ITA. The transactions between the taxpayer and FAA and the
profits thereof were subjected to the provisions of the ITA.
Issue 2: Reimbursement
• The ITAT noted/observed the following:
─ As per the agreement, FAA was providing assistance in developing and modernising civil aviation
infrastructure in India in the managerial, operational and technical areas. It did not specify any
mark-up amounts or percentage or service charges but it only talked about reimbursement of
expenses incurred by FAA.
─ The agreement mainly revolved around specification of assistance, its costing and
reimbursement thereof.
─ AAI had to incur the travelling, salary expenses to the three employees deputed by FAA for
assisting the AAI. The payments received by FAA did not involve any element of profit which
made it liable to pay tax in India.
─ Reimbursement was neither reward nor compensation nor income for income-tax purpose.
─ The provisions relating to TDS applied only to those sums which were "chargeable to tax" under
the ITA. A concurrent reading of sections 4(2) and 195(1) of the ITA, denoted that the liability to
deduct tax arose only when the payee was a non-resident and the amount payable to him was
chargeable to tax in India.
─ The ITAT relied on an earlier decision2 wherein it was held that reimbursement of actual
expenditure from an Indian company could not be treated as taxable. The ITAT also relied on
earlier decision3 wherein it was held that reimbursement expenses could not be regarded as
revenue receipt, hence, no TDS was deductible.
• In view of the above, the ITAT held that, since the payments in the case under consideration were on
cost-to-cost basis which did not involve any profit element, the reimbursement was not liable for any
income-tax. Accordingly, the withholding / TDS provisions were not attracted.
Issue 3: FTS
• The ITAT noted that FAA had rendered the following services under the agreement:
─ Providing necessary resources, personal and related services to assist the AAI.
─ Assist AAI by participating in INAT requirements, meeting on ATFM requirements.
─ Assist in development of:
i. Detailed qualitative requirements for the proposed ATFM capacity;
ii. Detailed ATFM system architecture and specifications; and
2 CIT vs Dunlop Rubber Company Ltd. (1983) 142 ITR 493 (Cal)
3 CIT Vs Industrial Engineering Projects 202 ITR 1014 (Del)
©2021 Deloitte Touche Tohmatsu India LLPiii. Draft ATFM implementation plan.
─ Review US ATFM capability vis-à-vis India ATFM plan and documentation of qualitative
requirement (QR).
─ Preparation of detailed system architecture with the regard to QRs.
─ Preparation of road map for draft implementation
• The ITAT further noted /observed the following:
─ The concept of make available required that the fruits of the services should remain available to
the service recipient in some concrete shape such as technical knowledge, experience, skills, etc.
─ The assistance provided by FAA in preparation of QRs and development of ATFM system were
neither any licensed product of FAA nor exclusive patents of FAA.
─ The ATFM technology per se had not been made available to the taxpayer for any perpetual use.
─ The provision of assistance to Ministry of Civil Aviation in developing and modernisation of civil
aviation structure, review analysis and documentation of traffic flow management system was a
dynamic process requiring further development of the process by Ministry of Civil Aviation.
─ It was a case of assistance and technical cooperation between FAA and taxpayer sans any
commercial interest by the rendering party.
• In view of the above and based on the manner of transacting, agreements, services provided,
reimbursement received, the ITAT held that as the "make available “clause contained in Article 12(4)(b)
of the India-USA tax treaty had not been satisfied in the facts and circumstances of the present case,
therefore, the payment made by the taxpayer could not be regarded as for the purpose of FIS.
Comment:
This ruling reiterates the following principle:
• There is no general immunity from taxation unless specified under the provisions of ITA / tax treaty.
• The liability to deduct tax in case of non-resident under section 195 of the ITA arises only when the
amount payable to them is chargeable to tax in India.
• Technical assistance provided by a US resident would not qualify as FIS unless it satisfies the make
available clause as per Article 12(4)(b) of the India-USA ta treaty.
Taxpayers with similar facts may want to evaluate the impact of this ruling to the specific facts of their
cases.
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