TDS As Per Section 194-I Where Use Of The Land Was Only Minor And Insignificant, Incidental One: Whether Applicable?

Shri. Akhilesh Kumar Sah, Advocate, has examined the controversial issue as to whether payments for use of services involving use of land and building can be characterized as “rent” so as to warrant deduction of TDS under section 194-I of the Act. He has analyzed all the latest and important verdicts on the issue

Introduction:

Section 194 I and section 194 C of the Income Tax Act, 1961 deal with the deduction of tax at source from rent and deduction of tax from payment to contractors and sub-contractors, respectively.

Very recently, in Japan Airlines Co. Ltd. vs. CIT [Civil Appeal No. 9875 of 2013 with Civil Appeal Nos. 9876-9881 OF 2013, decided on: 04.08.2015], on the facts and circumstances of the appeals, SC has held that use of the land was only minor and insignificant, incidental one, the TDS provision under section 194-I of the Act was not applicable on the charges paid and also, it was not necessary to go into the scope of Section 194-C of the Act.

Facts and Decision In Brief Of The Japan Airlines Case (supra):

In these appeals, the issue involved related to the deduction of tax at source (‘TDS’). In both the cases, assessees were foreign Airlines. One was Japan Airlines Company Limited (hereinafter referred to as the ‘JAL’) and the other was Singapore Airlines Limited (hereinafter referred to as the ‘SAL’). As both were international Airlines, they were flying their aircrafts to various destinations across the world. Their services include inward and outbound air traffic to and from New Delhi as well. For landing the aircrafts and parking thereof at New Delhi Airport i.e. Indira Gandhi International Airport (‘IGIA’), New Delhi, the Airports Authority of India (‘AAI’) which managed IGIA levies charges on these two Airlines. For payment of landing and parking charges in respect of its aircrafts, the two Airlines are deducting TDS under Section 194-C of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). The TDS under Section 194-C of the Act was deductible @ 2%. After deducting this TDS while making payment to AAI, the same was deposited with the Income Tax Authorities. The Income Tax Authorities, however, were of the view that the TDS was to be deducted under the provisions of Section 194-I of the Act which called for deduction @20%. Thus, the dispute was as to whether TDS to be deducted under Section 194-C or under Section 194-I of the Act. In the appeal pertaining to JAL (assessement year involved in appeal was 1998-1999), it was the JAL which was the appellant as the High Court of Delhi by the impugned judgment dated 23.10.2008 had taken the view that the TDS was to be deducted under Section 194-I of the Act. In the other appeal which involved SAL, it was the Commissioner of Income Tax/Revenue which had filed the appeals as the High Court of Madras in its judgment dated 13.07.2012 had taken contrary view holding that the case was covered under Section 194-C of the Act and not under Section 194-I of the Act thereof. The Madras High Court had taken the note of the judgment of the Delhi High Court but has differed with its view. Thus, the two judgments were in conflict with each other.

The Supreme Court observed that the expression ‘rent’ is given much wider meaning under this provision than what was normally known in common parlance. In the first instance, it means any payment which was made under any lease, sub-lease, tenancy. Once the payment is made under lease, sub-lease or tenancy, the nomenclature which is given is inconsequential. Such payment under lease, sub-lease and/or tenancy would be treated as ‘rent’. In the second place, such a payment made even under any other ‘agreement or arrangement for the use of any land or any building’ would also be treated as ‘rent’. Whether or not such building is owned by the payee is not relevant. The expression ‘any payment’, by whatever name called and ‘any other agreement or arrangement’ have the widest import. Likewise, payment made for the ‘use of any land or any building’ widens the scope of the proviso.

The Learned Judges of the Supreme Court were convinced that the charges which are fixed by the AAI for landing and take-off services as well as for parking of aircrafts are not for the ‘use of the land’. That would be too simplistic an approach, ignoring other relevant details which would amply demonstrate that these charges are for services and facilities offered in connection with the aircraft operation at the airport. To point out at the outset, these services include providing of air traffic services, ground safety services, aeronautical communication facilities, installation and maintenance of navigational aids and meteorological services at the airport.

Before the High Court of Madras, the assessee had filed them material in the form of Airport Economics Manual, the International Airports Transport Agreement (IATA) to the contracting states on charges for airport and air navigation services. This material which was shown for our perusal as well, would candidly show that there are various international protocols which mandate all such authorities manning and managing these airports to construct the airports of desired standards which are stipulated in the protocols. The services which are required to be provided by these authorities, like AAI, are aimed at passengers’ safety as well as on safe landing and parking of the aircrafts.

Therefore, it is not mere ‘use of the land’. On the contrary, it is the facilities, that are to be compulsarily offered by the AAI in tune with the requirements of the protocol, which is the primary focus. For example, runways are not constructed like any ordinary roads. Special technology of different type is required for the construction of these runways for smooth landing and take-off of the aircrafts. According to ICAO, a runway is a “defined rectangular area on a land aerodrome prepared for the landing and takeoff of aircraft.” Runways may be a man-made surface (often asphalt, concrete, or a mixture of both) or a natural surface (grass, dirt, gravel, ice, or salt). Specialised kind of orientation and dimensions are needed for these runways which are prescribed with precision and those standards are to be adhered to. Further, there has to be proper runway lighting, runway safety area, runway markings etc. Technical specifications for such lighting, safety area and markings are stipulated which have to be provided. Insofar as runway lighting is concerned which is essentially used at airports that allow night landings, requires that there has to be Runway End Identification Lights, Runway End Lights, Runway Edge Lights, Runway Centerline Lighting System, Touchdown Zone Lights, Taxiway Centerline Lead-Off Lights, Taxiway Centerline Lead-On Lights, Land and Hold Short Lights, Approach Lighting System etc. Technical specifications for all these lights have to be complied with. Same applies to runway markings. Runway markings and signs on most large runways include Threshold, Touch Down Zone, Fixed Distance Marks, Center Line etc. and all these have specific purpose. So much so, designs and quality of pavement on these runways are also to be taken compliant.

All these technical specifications keep in mind the basic fact, namely, on landing the aircraft is light on fuel and usually less than 5% of the weight of the aircraft touches the runway in one go. On take-off the aircraft is heavy but as the aircraft accelerates the weight gradually moves from the wheels to the wings. It is while the aircraft is being loaded and taxiing prior to departure, that the apron experience significant loads from aircraft weight.

The Hon’ble Judges emphasised the technological aspects of these runways in some detail to highlight the precision with which designing and engineering goes into making these runways to be fool proof for safety purposes. The purpose is to show that the AAI is providing all these facilities for landing and take-off of an aircraft and in this whole process, ‘use of the land’ pails into insignificance. What is important is that the charges payable are for providing of these facilities. In fact, the charges which are taken from the aircrafts for landing and even for parking of the aircrafts are not dependent upon the use of the land. On the contrary, the protocol prescribes a detailed methodology of fixing these charges. Chapter 4 of Airport Economics Manual issued by International Civil Aviation Organization deals with ‘Determine the cost basis for charging purposes’. The charges on air-traffic which includes Landing Charges, Lighting Charges, Approach and Aerodrome Control Charges, Aircraft Parking Charges, Aerobridge Charges, Hangar Charges, Passenger Service Charges, Cargo Charges etc. are to be fixed applying the formulae stated therein. A reading thereof would clearly point out the cost analysis which is to be done for fixing these charges. Thus, when the airlines pay for these charges, treating such charges as charges for ‘use of land’ would be adopting a totally naïve and simplistic approach which is far away from the reality. We have to keep in mind the substance behind such charges. When matter is looked into from this angle, keeping in view the full and larger picture in mind, it becomes very clear that the charges are not for use of land per se and, therefore, it cannot be treated as ‘rent’ within the meaning of Section 194-I of the Act. We, therefore, are of the considered opinion that the view taken by the Madras High Court is correct and we are unable to subscribe to the view taken by Delhi High Court in United Airlines vs. CIT case(2006 287 ITR 281 Delhi). The judgment in United Airlines case as well as the impugned judgment of the Delhi High Court are accordingly over-ruled. At this stage, we would like to make one comment about the judgment of the Madras High Court. Madras High Court has given one more reason in support of its view that the charges paid by the Airlines to the AAI do not come within the definition of the ‘rent’ as defined under Section 194-I. The High Court has held that the words ‘any other agreement or arrangement for the use of any land or any building’ have to be read ejusdem generis and it should take it colour from the earlier portion of the definition namely “lease, sub-lease and tenancy”. Thereby, it has tried to limit the ambit of words ‘any other agreement or arrangement’. This reasoning is clearly fallacious. A bare reading of the definition of ‘rent’ contained in explanation to Section 194-I would make it clear that in the first place, the payment, by whatever name called, under any lease, sub-lease, tenancy which is to be treated as ‘rent’. That is rent in traditional sense. However, second part is independent of the first part which gives much wider scope to the term ‘rent’. As per this whenever payment is made for use of any land or any building by any other agreement or arrangement, that is also to be treated as ‘rent’. Once such a payment is made for use of land or building under any other agreement or arrangement, such agreement or arrangement gives the definition of rent of very wide connotation. To that extent, High Court of Delhi appears to be correct that the scope of definition of rent under this definition is very wide and not limited to what is understood as rent in common parlance. It is a different matter that the High Court of Delhi did not apply this definition correctly to the present case as it failed to notice that in substance the charges paid by these airlines are not for ‘use of land’ but for other facilities and services wherein use of the land was only minor and insignificant aspect. Thus it did not correctly appreciate the nature of charges that are paid by the airlines for landing and parking charges which is not, in substance, for use of land but for various other facilities extended by the AAI to the airlines. Use of land, in the process, become incidental. Once it is held that these charges are not covered by Section 194-I of the Act, it is not necessary to go into the scope of Section 194-C of the Act.

As a result of the decision of the Supreme Court, Civil Appeal No.9875 of 2013 filed by the JAL against the judgment of Delhi High Court was allowed and Civil Appeal Nos.9876-9881 of 2013 filed by the Revenue against the judgment of Madras High Court was dismissed.

Bottomline:

Payment, by whatever name called, under any lease, sub-lease, tenancy has to be treated as ‘rent’ and where the use of land is incidental, minor and insignificant, TDS provision for the purposes of 194-I, may not be applicable as per the facts and circumstances of a particular case.