DIT vs. Lufthansa Cargo India (Delhi High Court)

(i) It is evident that Parliamentary endeavor – through the retrospective amendment (explanation to Section 9(2) was inserted by the Finance Act, 2007 with retrospective effect from 1.6.1976 and The Finance Act, 2010 substituted the same explanation with effect from 1.6.1976), was to target income of non-residents. But importantly, the condition spelt out for this purpose was explicit: “where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub- section (1), such income shall be included in the total income of the non-resident… whether or not,- (ii) the non-resident has rendered services in India.” The revenue urges that the fiction created by the said amendment is to do away with the requirement of the non-resident having a place of business, or business connection, irrespective of whether “..the non-resident has rendered services in India.” Did this amendment make any difference to payments made to such companies – even in relation to income accruing abroad? The revenue grounds its arguments in the assumption that the later, 2010 retrospective amendment, overrides the effect of Section 9 (1) (vii) (b) exclusion. While no doubt, the explanation is deemed to be clarificatory and for a good measure retrospective at that, nevertheless there is nothing in its wording which overrides the exclusion of payments made under Section 9(1)(vii)(b). The Supreme Court clarified this in GVK Industries Ltd. v. ITO 371 ITR 453 Thus, it is evident that the “source” rule, i.e the purpose of the expenditure incurred, i.e for earning the income from a source in India, is applicable;

(ii) The source of income from wet-leasing aircraft to non-resident companies is outside India. Secondly, leasing revenue was received in convertible foreign exchange directly from foreign charterers through wired transfer in assessee‟s account denominated in foreign currency but maintained in India with the permission of the RBI and that the remittances to the foreign company for repairs had a direct nexus with the income. Payments to Technik for maintenance and repairs were essential and crucial for earnings from the wet-leasing activity. Articles 2 and 3 of the contract with LCAG clearly state that only when the latter informed the assessee in writing that it did not require a certain capacity for a particular period, that the assessee could wet-lease the aircraft to others for that period. In all other periods, the assessee is committed to wet-lease the aircraft to LCAG, and the assessee’s failure to do so would imply that LCAG was obliged to pay the rent for the minimum guaranteed block hours. The ITAT held that the overwhelming or predominant nature of the assessee’s activity was to wet-lease the aircraft to LCAG, a foreign company. The operations were abroad, and the expenses towards maintenance and repairs payments were for the purpose of earning abroad. In these circumstances, the ITAT’s factual findings cannot be faulted.