By TIOL News Service

MUMBAI, APR 26, 2019: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether charges paid by Airlines to specific agencies as per pre-agreed terms, for offering lounge facility to its premier class customers, cannot be construed as rent, and hence does not attract TDS obligation u/s 194-I. YES IS THE VERDICT.

Facts of the case:

The Assessee is an Airline Company. As part of its Airlines business, the assessee would provide lounge service to its selected customers at various airports. In a typical case, a lounge would be rented out by an agency, in the nature of an intermediary from the Airport Authority. The assessee company and other Airlines as well as in some cases, credit card companies would provide the lounge facility to its premier class customers. According to the assessee, it would pay to the agency for use of such lounge space by its customers as per pre-agreed terms. While making such payment, the assessee used to deduct tax at source in terms of section 194C treating it as a payment to a contract for performance of a worker. The AO however contended that the assessee had paid rent to the agency and therefore while paying such rental charges tax at source u/s 194I should have been deducted. When the matter reached the Tribunal, it was held that the Department was not right in insisting deduction of tax at source u/s 194I.

High Court held:

++ it is noticed that the AO in the present case, had placed reliance on a decision of Delhi High Court in case of Japan Airlines Ltd - 2008-TIOL-808-HC-DEL-IT and United Airlines - 2006-TIOL-111-HC-DEL-IT . The Supreme Court in case of Japan Airlines Company limited - 2015-TIOL-171-SC-IT has overruled such decision of Delhi High Court. Supreme Court approved the view of Madras High Court in case of CIT Vs Singapore Airlines Ltd - 2012-TIOL-646-HC-MAD-IT. The issue before the Supreme Court was regarding nature of payments made by the international Airlines to the Airport Authority of India for availing the services for the purpose of landing and take off of the Aircrafts. The Revenue was of the opinion that the charges paid for such purposes were in the nature of rent for use of land, a view which was accepted by the Delhi High Court. The Supreme Court in the judgment in case of Japan Airlines held that the charges paid by international Airlines for landing & take off services as also for parking of Aircrafts are in substance not for use of the land but for various other facilities such as providing of Air traffic services, ground safety services aeronautical communication facilities etc. The Court therefore held that the payment of such charges did not invite section 194I;

++ this Court is conscious that this decision of the Supreme Court does not automatically answer the question at hand. Reference to this decision was made for two purposes. Firstly, to record that the reliance placed by AO on the decision of Delhi High Court is no longer valid. Secondly, for the purpose of drawing an analogy that the payment for certain services, need not be seen in isolation. The real character of the service provided and for which the payment is made, would have to be judged. In the present case, as noted the assessee would enter into an agreement with the agency which has rented out the lounge space at the Airport from the Airport Authority. Under such agreement, the assessee would pay committed charges be it on lumpsum basis or on the basis of customer flow to such agency. This in turn would enable the passengers of the Airlines to utilize the lounge facilities while in transit;

++ this Court accepts the suggestion of Revenue's counsel that service of providing beverages and refreshments was not the dominant part of service. It may only be incidental to providing quiet, comfortable and clean place for customers to spend some spare time. However, this Court does not descreen element of rent being paid by the assessee to the agency. The assessee did not rent out the premises. The assessee did not have exclusive use to the lounge for its customers. The customers of the Airlines along with customers of other Airlines of specified categories, would be allowed to use all such facilities. Section 194I governs the situation where a person is responsible for paying any rent. In such a situation, deduction of tax at source while making such payment is obligated.

(See 2019-TIOL-916-HC-MUM-IT)