JUDGMENT judgment of court was delivered by S. Ravindra Bhat J.-The following two questions of law have to be answered in this appeal, under section 260A of Income-tax Act, 1961 (hereafter "the Act"): "1. Whether Income-tax Appellate Tribunal ('the ITAT') has rightly interpreted agreements between assessee and nonresidents and is right in holding that payments made by assessee to non-residents are not fee for technical services within meaning of section 9(1)(vii) of Income- tax Act, 1961, so as to oblige assessee to deduct tax at source under section 195 of Act from such payments? 2. Whether Income-tax Appellate Tribunal was right in holding that payments made by assessee fell within purview of exclusionary clause of section 9(1)(vii)(b) of Act and were not, therefore, chargeable to tax at source?" assessee was at relevant time (in mid 1997), engaged in business of wet-leasing. It had acquired four old Boeing aircrafts (727-200 model) from non-resident company outside India. After registration of aircraft with DGCA, assessee hired crew, ground engineers and other technical personnel for their operation. It was granted licence by DGCA to operate these aircrafts on international routes only. assessee's Boeing 727-200 aircrafts were not used by any other airline in India. Consequently, there were no facilities in India for their overhaul repairs. However, according to DGCA directives various components and aircraft itself had to undergo periodic overhaul repairs before expiry of number of flying hours prescribed for such individual components. Such overhaul repairs were permissible only in workshops authorised for purpose by manufacturer as well as duly approved by DGCA. assessee's all four aircrafts were wet-leased to foreign company, Lufthansa Cargo AG, Germany (hereafter "LCAG") under agreement dated April 28, 1997. In airline parlance, "wet-leasing" means leasing of aircraft along with crew in flying condition to charterer for specified period. lessor has responsibility for maintaining crew and aircraft in airworthy condition. lessee is free to direct flight operations by naming destinations in advance and load any lawful cargo for carriage. lessee pays rental on basis of number of flying hours during period subject to minimum guarantee as per terms of charter party. India is party to several International Conventions governing aircraft maintenance. Under Aircraft Act, 1934, read with Aircraft Rules, 1937, necessary regulatory and enforcement powers have been delegated by Government to DGCA. latter issues notifications and guidelines, etc., from time to time in regard to maintenance and upkeep of aircraft. Every aircraft operator has to strictly abide by these guidelines; non-compliance entails in immediate withdrawal of licence and grounding of aircraft. As assessee was obliged to keep aircraft in flying condition, it had to maintain them in accordance with DGCA guidelines to possess valid airworthiness certificate as pre-condition for its business. assessee's engineering department would track flying hours of every component; and before expiry of flying hours, component needing overhaul/repairs or needing replacement would be dismantled by assessee's engineers and flown to Lufthansa Technik's (a German company, hereafter "Technik") workshops in Germany. parts were supplied by Technik under separate agreement of sale, loan or exchange. In due course, overhauled component would be dispatched by Technik along with airway bill for which freight would be paid by assessee. overhauled component would be fitted into aircrafts by assessee's own personnel. assessee had entered into agreement with overhaul service provider, called "the Technik agreement" on March 14, 1997. Technik carried out maintenance repairs without providing technical assistance by way of advisory or managerial services. LCAG utilised aircrafts wet-leased to it for transporting cargo mainly to and from Sharjah to Mumbai, Delhi, Kathmandu, Lahore, Calcutta, Chennai, Bangalore and Colombo. As DGCA licence permitted operations on international routes only, aircrafts were not utilised by LCAG for carriage of cargo within India. LCAG had integrated its international air transport business at Sharjah with its worldwide network. cargo brought from South Asian countries would be put into wide-body aircrafts and flown from Sharjah to various destinations in Europe and American continent. assessee maintained base at Sharjah where aircrafts were normally kept and where its crew and engineering personnel were also stationed. accounts of branch at Sharjah are duly reflected in audited annual accounts of company. repairs by way of component overhaul in Technik workshops in Germany and other foreign workshops were in nature of routine maintenance repairs. No Technik personnel were ever deputed to India for rendering any technical or advisory services to assessee. Likewise, assessee's technical personnel did not participate or involve themselves in overhaul repairs carried out abroad by Technik or other foreign workshops. services enumerated in attachments "A" and "B" of Technik Contract are described below: (a) Provision of personnel (b) Engineering support services including: (i) Engineering work which includes air worthiness. (ii) Directives and alert services (iii) Development design and modification (iv) Familiarisation course. Article 2 of agreement stated that such services would be provided by Technik at request of assessee. In assessment proceedings, it was contended that Technik carried out normal maintenance repairs including supply of spares, and, therefore, had Technik been domestic company, payments to it would be covered by provisions of section 194C and not by provisions of section 194J, which cover fees for technical services as defined in section 9(1)(vii). assessee stressed that in terms of international conventions, every component containing rotable parts is allotted unique identity number and its historical containing rotable parts is allotted unique identity number and its historical record is maintained in tag which accompanies component throughout its life. Such component including engines needs to be overhauled periodically in accordance with Boeing's manual. assessee used to send components with tag to workshop abroad. Technik's workshops in Germany were duly authorised by manufacturer, i.e., Boeing USA. Upon receipt, Technik overhauled component in terms of manufacturer's manual, as mandated by DGCA. assessee had no say in matter; it was unaware of kind of repairs that had been carried out, as none of its employees visited Technik's facilities in connection with repair work. It is submitted that assessee's interest is that Technik returned overhauled component duly certifying that it has carried out prescribed overhaul repairs. It is evident from invoices of Technik, ATC Lasham and others that those workshops replace parts at their own discretion in course of overhaul of component. replaced parts, however, come with tags giving their unique identity number and history. They also issue warranty for free-of-defect functioning of component for requisite number of flying hours. It was argued that repair work carried out by Technik, etc., was not in nature of technical assistance by way of providing managerial, consultancy or technical services to assessee. In short, components were sent to authorised workshops for carrying out overhauling of components and not for seeking any technical or advisory services. assessee contended that it satisfied requirements of DGCA for carrying out prescribed maintenance repairs of aircraft. These repairs, therefore, do not constitute "managerial", "technical" and "consultancy services" as defined under Explanation 2 to section 9(1)(vii)(b) of Act. After considering record, including agreement with Technik, Assessing Officer ("the AO") noticed that no tax was deducted at source on payments to Technik and no application under section 195(2) was filed. Assessing Officer held that payments were in nature of "fees for technical services" defined in Explanation 2 to section 9(1)(vii)(b) of Act and were, therefore, chargeable to tax on which tax should have been deducted at source under section 195(1). Assessing Officer rejected assessee's plea that payments for repairs were incurred for earning income from sources outside India and, therefore, case fell within exclusionary clause of section 9(1)(vii)(b). Assessing Officer further rejected assessee's plea that business of aircraft leasing was carried on outside India. assessee's alternate plea that in any case payments made to residents of USA, UK, Israel, Netherlands, Singapore and Thailand could be taxed as business profits only and not as fees for technical services keeping in view relevant provisions of DTAAs with those countries too was rejected. Assessing Officer passed orders under section 201 of Act deeming assessee to be assessee in default for financial years 1997-98 to 1999- 2000, and levied tax as well as interest under section 201(1A) of Act. On appeal, Commissioner of Income-tax (Appeals) rejected assessee's contention that payments made to various non-residents for carrying out overhaul repairs were not chargeable to tax. payments made to Technik were treated as model for considering question of taxability of payments made to all other foreign companies. Commissioner of Income- tax (Appeals) held that such repairs required knowledge of sophisticated technology and trained engineers are employed by non-residents for carrying out overhaul repairs. According to Commissioner of Income-tax (Appeals), repairs constituted "fees for technical services" and, therefore, were subject to TDS. With reference to payments made to residents of UK and USA, Commissioner of Income-tax (Appeals) held that they were not in nature of "fees for technical or included services" under article 12 of DTAA read with memorandum of understanding with USA which equally applied to UK Treaty. Payments made to residents of USA and UK were held to be "business profits" and since those companies did not have permanent establishment in India, their income was not chargeable to tax. Revenue appealed against order of Commissioner of Income-tax (Appeals) on that point; assessee appealed against other findings adverse to it, to Income-tax Appellate Tribunal. Income-tax Appellate Tribunal noticed that agreement with Technik provided for three categories of services; they were outlined in attachments A, B and C. It held that Commissioner of Income-tax (Appeals) was in error in holding that since agreement provided for all kinds of services, it amounted to providing for technical services. Income-tax Appellate Tribunal held, pertinently, that (page 40 of 274 ITR (AT)): "26. reading of Technik agreement shows that apart from above quoted general clauses, it also contains three other independent and distinct sections. Each such section is by itself self-contained contract dealing with distinct subject matter stipulating independent and separate terms and conditions. These three sections are: (a)'Attachment A' of agreement dealing with'engineering support services' on request including provision of training, (b) 'attachment B' of agreement relating to'assignment of personnel' on request by Technik, (c)'attachment C' of agreement concerning repairs and overhauls of components. Attachments and B of Technik agreement deal with engineering support services including training and assignment of personnel by Technik. These are clearly optional services which would be provided by Technik for charges specified in two 'attachments' only on specific request of assessee. assessee has emphasised that none of these services was availed of and, therefore, no payment was made on this account. All invoices raised by Technik were produced before lower authorities and no instance of payment for training or other optional support services as per attachments and B of contract has been brought out either by Assessing Officer or by Commissioner of Income-tax (Appeals). learned Departmental representative has also not cited any instance of payment for any of optional services enumerated in attachments and B. learned Departmental representative has also could not controvert that payments to Technik were made for specific job work of repairs and replacement of parts and no technician was assigned to India for consultancy or supervision of repairs. We are, therefore, of view that simply because attachments and B stipulate charges for optional services, it cannot be said that any payment is attributable to such services. These services are optional and could be performed on specific request by assessee. On facts brought out before us such option was not exercised by assessee. learned Departmental representative also could not indicate any clause in Technik agreement which would oblige assessee to pay fees towards optional services even if such option is not exercised by assessee. In circumstances, we hold that Commissioner of Income-tax (Appeals) was not correct in making attachments and B of Technik contract as basis for concluding that payments were primarily made for rendering of technical services..." Attachment C reads as follows (page 41 of 274 ITR (AT)): "Attachment C 1. Scope of services 1.1 Repair, overhaul, modification and test of all components as far as identical with Lufthansa Technik's own components. In cases of differences in dash-number repair/overhaul items shall only be accepted after Lufthansa Technik's prior telex confirmation; 1.2 Material, supply out of Lufthansa Technik stock for above components repair/overhaul in accordance with article 2 hereof. 1.3 Lufthansa Technik shall be entitled to subcontract repair and overhaul of components in accordance with article 4 of GTA. 1.4 Each overhauled component will be redelivered with following documentation: 1. JAA form (airworthiness approval tag) 2. Workshop report 3. Test reports if applicable 2. Material provisioning 2.1 Repairable and consumables required for work to be performed on customer's components shall be supplied by Lufthansa Technik on basis of sale provided Lufthansa Technik's stock permits such supply. 2.2 Modification material and, if required serialised sub-assemblies shall be provided by customer. 2.3 If specially requested by customer, and if Lufthansa Technik's stock permits such supply, Lufthansa Technik shall provide rotables out of its stock under Lufthansa Technik's normal loan agreement conditions. copy of such loan agreement is attached hereto as annexure B. 2.4 If specially requested by customer and, if Lufthansa Technik's stock permits such supply, Lufthansa Technik shall provide repairable out of its stock on 1.1 basis using Lufthansa Technik's form Exchange 1.1 agreement annexure A. 3. Shipping 3.1 Any shipments of customer's components to and form respective Lufthansa Technik base shall be effected at customer's own risk and expense. 4. Charges Article 4 for work performed pursuant to article 1 hereof, customer shall be charged according of Lufthansa Technik's manhour rates valid at that time as stipulated in annexure A1 of GTA. For material consumed customer shall be charged, with manufacturer's list prices plus material handling surcharge of twenty five (25) per cent. Sub-contracted work in sense of article 4 of GTA shall be charged according to amount payable by Lufthansa Technik to sub-contractor plus handling charge of ten (10) per cent. plus transportation costs, if any. In case of repair work customer shall pay minimum charge per event of DM 1,000." Upon analysis of various terms of agreement and actual services provided by Technik and availed of by assessee, it was held that amount received by former was routine business receipt and not technical fee: "it cannot, therefore, be said that Technik rendered any managerial, technical or consultancy service to assessee." Upon consideration of wet leasing activity of assessee and agreements it entered into with foreign companies, Income-tax Appellate Tribunal held that these arrangements showed that (page 56 of 274 ITR (AT)): "(i) assessee has to maintain crew and keep aircrafts in airworthy state. (ii) assessee-company earns rental income on block hours basis. (iii) assessee cannot wet-lease aircrafts to third party without written permission from LCAG. (iv) In case of non-utilisation of aircrafts by LCAG, it has to pay minimum guaranteed rental 240 block hours per month in accordance with clause No. 2.2 read with, annexure 3 of contract. (v) amount of leasing revenues depends on number of flying hours utilised by LCAG and not on value of freight earned by LCAG. (vi) assessee is also assured of minimum rental income in event LCAG does not actually use aircrafts. In this view of matter, we are satisfied that assessee's immediate source of income is from activity of wet-leasing of aircrafts under contracts made outside India to non-resident parties. miniscule fraction of lease rental (0.2 per cent.) has been earned from Indian party. But this cannot detract from fact that virtually entire income has been earned from non- residents through activity of wet-leasing of aircrafts carried on outside India. assessee's activity of wet-leasing of aircrafts is distinct activity which constitutes source form which income has been earned. Revenue is not correct in identifying this leasing activity with transportation activity of lessee, LCAG, Germany." Income-tax Appellate Tribunal concluded, on facts as follows (page 57 of 274 ITR (AT)): "The sources from which assessee has earned income are, therefore, outside India as income earning activity is situated outside India. It is towards this income earning activity that payments for repairs have been made outside India. payments, therefore, fall within purview of exclusionary clause of section 9(1)(vii)(b). Thus, even assuming that payments for such maintenance repairs were in nature of fees for technical services, it would not be chargeable to tax... As per this chart leasing revenues earned in foreign exchange were 100 per cent., 99.79 per cent. and 99.86 per cent. for financial years 1997- 98, 1998-99 and 1999-2000, respectively. This chart also gives figures of direct operational expenses in foreign exchange on actual payment basis as culled out from annual accounts of company for three years (at pages 122, 132, 143 of paper book). As per annual accounts, direct expenses are mainly on account of lease rent, travelling and training, foreign office expenses, maintenance, interest on aircrafts acquired under hire-purchase, and depreciation. aggregate of direct expenditure incurred outside India works out to 55 per cent., 81 per cent. and 67 per cent. of total expenses debited to profit and loss account of each of three years. It is submitted that remaining indirect expenditure was on account of head office expenses in India and expenditure on ground staff, overnight stay of crew and airport charges, etc. When aircrafts landed in Indian airports for delivering and picking up cargo. learned Commissioner of Income-tax Departmental representative relied on order Assessing Officer and contended that assessee's business was controlled from India and, therefore it cannot be said that business was carried on outside India. We have carefully considered rival submissions and we have also gone through annual accounts of assessee for financial years ended March 31, 1998, March 31, 1999, and March 31, 2000, respectively, filed in paper book. question whether business is carried on in India or outside India cannot be decided by situs of head office or place of control of business. assessee, being Indian company, would have head office or place of control in India. We agree that assessee's business of wet-leasing of aircrafts have been predominantly carried on outside India. However, it cannot be said that entire business has been carried on outside India. assessee's business of wet-leasing of aircrafts is composed of number of operations such as acquisition of aircrafts, wet-leasing, maintenance of crew and engineering personnel, aircrafts maintenance and establishment, etc. It is settled law that profits of business cannot be said to accrue only in place where sales take place or revenue is earned but they are embedded in each distinct operation of business, both on revenue and expenditure side. For this legal proposition, we are supported by decision of Supreme Court in case of Anglo-French Textile Co. Ltd. v. CIT [1954] 25 ITR 27 (SC), where relying on earlier judgment of larger Bench in case of CIT v. Ahmedbhai Umarbhai and Co. [1950] 18 ITR 472 (SC)... learned counsel for assessee fairly states that he has no objection to apportionment on basis of above-quoted decision. He, however, submits that virtually 100 per cent. of revenues were earned outside India and aggregate direct expenditure incurred outside India is about 71 per cent., and another 10 per cent. should at least be attributed to business outside India on account of head office expenses incurred in India. Normally, we would have referred matter to Assessing Officer to verify figures and work out apportionment on reasonable basis. However, we need not go into this arithmetical exercise because we have already held that payments made to Technik and other foreign companies for maintenance repairs are not in nature of fees for technical services as defined in Explanation 2 to section 9(1)(vii)(b). Further, in any event these payments are not taxable for reason that they have been made for earning income from sources outside India and, therefore, fall within exclusionary clause of section 9(1)(vii)(b). In view of our decision allowing main ground relating to chargeability of tax, alternate grounds have become academic. We, therefore, do not propose to go into them though considerable arguments were advanced on alternate grounds." Mr. Rohit Madan, learned counsel for Revenue, argues that Assessing Officer's finding that assessee used sophisticated technical experience and skills of personnel of Technik in process of repairs and overhaul carried out on aircraft clearly showed that services were technical in nature. It was argued that assessee defaulted in not deducting tax before making payments in accordance with provisions of section 195(1) of Act and, therefore, it could not plead that receipts in hands of non-residents is not chargeable to tax under Act. Counsel also stressed that if assessee was of view that no tax was deductible on payments made to foreign companies it should have made application with Assessing Officer under section 195(2) of Act. Stating that section 195(1) is concerned with "payment to non-residents" and not with taxability of corresponding "income of non-resident" it was argued that if assessee defaulted by not having deducted tax at source at time of payment, it cannot later argue that corresponding income of non-resident was not chargeable to tax. learned counsel also relied on concurrent findings of Commissioner of Income-tax (Appeals) that all payments made were in accordance with agreements signed by assessee with Technik. It was contended that payments for various services were specified in agreement on annual basis while other charges are on man hour basis. charges were for specialised and sophisticated services which fell squarely within ambit of "fees for technical services" as envisaged under Explanation 2 to section 9(1)(vii) "fees for technical services" as envisaged under Explanation 2 to section 9(1)(vii) of Act. He drew our attention to various findings recorded in orders of Commissioner of Income-tax (Appeals). Mr. Madan next submitted that to fall under excepted category in section 9(1)(vii)(b), i.e., "except where fees are payable in respect of services utilised in business or profession carried on by such person outside India or for purposes of making or earning any income from any source outside India", there should be clinching evidence to establish that indeed income is earned wholly out of India. It was argued that Commissioner of Income-tax (Appeals) held correctly that in terms of agreement between assessee and LCAG latter only has priority over others in use of aircraft. Crucially, there was no compulsion restricting assessee to wet-leasing aircraft to third parties. lower authorities found that aircraft were wet-leased to LCAG and also to other parties. Therefore, it could not be said that revenues were earned wholly from source outside India. findings of Assessing Officer that since income from leasing of aircrafts is assessed to tax in India, source of income is situated in India were also highlighted. Learned counsel stated, lastly, that amendment, with retrospective effect of section 9 and substitution of section 9(2) meant that such payments amounted to income in hands of non-resident Indians. said amendment reads as follows: "9. (2) Explanation.-For removal of doubts, it is hereby declared that for purposes of this section, income of non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub- section (1) and shall be included in total income of non-resident, whether or not,- (i) non-resident has residence or place of business or business connection in India; or (ii) non-resident has rendered services in India." It was submitted that any doubts as to whether assessee was obliged to deduct tax at source, is set at rest by virtue of section 9(2) which clarifies that income of non-resident is deemed to arise in India and "shall be included in total income of non-resident" regardless of whether such entity has place of business or business connection and situs of services provided. Assessee's contentions Mr. Ajay Vohra, learned senior counsel for assessee, argued that findings of Income-tax Appellate Tribunal with respect to nature of services, i.e., they were not technical services is correct and should not be disturbed. It was submitted that Income-tax Appellate Tribunal took pains to analyse correspondence, invoices raised by Technik and relevant clauses of agreement with it. service obtained from that entity was in line with attachment C, which was concerned only with overhaul and repair. It was urged that by reason of section 5(2) of Act, non-resident is liable to tax in India in respect of all income from whatever source derived which-(a) is received or is deemed to be received in India by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during year. Section 9 of Act deems certain income to accrue or arise in India. Counsel submitted that said provision prescribes that fees for technical services payable, inter alia, by person resident in India is deemed to accrue or arise in India and, therefore, liable to tax in India in hands of non- resident service provider. He relied on Supreme Court judgment in Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC) to say that to apply section 9(1)(vii), services should not only be rendered in India but also utilised in India. It was argued that to nullify said decision Parliament enacted Explanation to section 9(2) by Finance Act, 2007, which was again substituted by Finance Act, 2010, with effect from June 1, 1976. effect of those amendments by enactment of section 9(2) is to clarify beyond doubt that income by way of, inter alia, fees for technical services would be deemed to accrue or arise in India and, consequently, taxable in India, in hands of non-resident recipients, if payer is resident, irrespective of situs of services, i.e., place where services are rendered. Mr. Vohra said that section 9(1)(vii)(b) of Act provides exception to general source rule by providing that where services rendered by non-resident service provider (recipient of income) are utilised by resident payer for purpose of earning income from any source outside India, then, in that situation, such fees would not be deemed to accrue or arise in India. It was highlighted that Explanation to section 9(2), added by Finance Act, 2010, with effect from June 1, 1976, merely clarifies source rule, i.e., income is deemed to accrue or arise in India where payer is Indian resident and situs of services, i.e., place where services are performed is immaterial. Explanation is not intended to take away exception provided in clause (b) to section 9(1)(vii) of Act. assessee submits that there is no conflict between provisions of Explanation to section 9(2) and clause (b) of section 9(1)(vii) of Act; two provisions operate in different fields. Resultantly, exception provided in section 9(1)(vii)(b) of Act is not taken away by retrospective insertion of Explanation to section 9(2) of Act. assessee relied on Supreme Court judgment in S. Sundaram Pillai v. V. R. Pattabiraman [1985] 1 SCC 591 to highlight that object of Explanation to statutory provision is to explain meaning and intendment of Act itself, where there is any obscurity or vagueness in main enactment or to clarify same so as to make it consistent with dominant object which it seems to subserve. It cannot, however, take away statutory right with which any person under statute has been clothed or set at naught working of Act by becoming hindrance in interpretation of same. Counsel, lastly, relied on recent Supreme Court judgment interpreting section 9(1)(vii) of Act in GVK Industries Ltd. v. ITO [2015] 371 ITR 453 (SC). Explaining interplay between section 9(1)(vii) and amendment made by Finance Act, 2007, and Finance Act, 2010, resulting in retrospective insertion of Explanation to section 9(2) of Act, court clarified that exception provided in terms of clause (b) of section 9(1)(vii) was not overridden by insertion of Explanation to section 9(2) of Act and that for "fees for technical services" to be taxed in India, it is imperative that payer is resident in India and that services are utilised in India. As sequitur, where resident utilises services provided by non-resident service provider for purpose of earning income from any source outside India, payment for such services is not deemed to accrue or arise in India and, hence, not taxable in India. Supreme Court also dealt with two principles, namely, situs of residence and situs of source of income and pointed out that "source State taxation" rule which confers primacy to right to tax particular income or transaction to State/nation where source of said income is located, is accepted and applied in international taxation law. In said judgment, it was observed that "deduction of tax at source when made applicable, it has to be ensured that this principle is not violated." Analysis and reasoning Question No. 1: Income-tax Appellate Tribunal, in impugned order has returned finding that services provided by Technik did not fall within expression "technical service" and that section 9(1)(vii) did not apply at threshold. To arrive at this conclusion, Income-tax Appellate Tribunal held that assessee had no say in work done by Technik and did not know what kind of repairs were carried out and that none of its employees ever visited Technik's facility in connection with such work. Income-tax Appellate Tribunal surmised that since what assessee asserted is that overall components are returned duly certified by Technik that it had carried out prescribed repairs, along with warranty and tax, there was no technical assistance by providing managerial, consultancy or technical services. It concluded that Technik performed entire work on "an inanimate body without any involvement or participation of assessee's personnel". It also held that managerial or physical exertion by Technik's engineers on assessee's components did not render such services managerial, technical and consultancy services within meaning of section 9(1)(vii)(d). This court is of opinion that Income-tax Appellate Tribunal was unduly influenced by all regulatory compulsions which assessee had to face. Besides international convention and domestic law that mandated aircraft component overhaul, manufacturer itself as condition for continued application of its warranty, and in order to escape any liability for lack of safety, required periodic overhaul and maintenance repairs. Unlike normal machinery repair, aircraft maintenance and repairs inherently are such as at no given point of time can be compared with contracts such as cleaning, etc. Component overhaul and maintenance by its very nature cannot be undertaken by all and sundry entities. level of technical expertise and ability required in such cases is not only exacting but specific, in that, aircraft supplied by manufacturer has to be serviced and its components maintained, serviced or overhauled by designated centres. It is this specification which makes aircraft safe and airworthy because international and national domestic regulatory authorities mandate that certification of such component safety is condition precedent for their airworthiness. exclusive nature of these services cannot but lead to inference that they are technical services within meaning of section 9(1)(vii) of Act. Income-tax Appellate Tribunal's findings on this point are, therefore, erroneous. This question is, accordingly, answered in favour of Revenue. Question No. 2 This question relates to treatment of expenditure incurred by assessee (i.e., payments made) towards its activities outside India. Here, assessee's submission was that payment made fell within exclusionary part of section 9(1)(vii)(b) and was not affected by Explanation to section 9(2). assessee stressed upon fact that no foreign technician was deputed to work in India. assessee's submission is that source of its income is wet-leasing activity to non-resident companies and, consequently, source of income 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 permission of Reserve Bank of India and that remittances to foreign company for repairs had direct nexus with income. It was underlined here that payments to Technik for maintenance and repairs was essential and crucial for earnings from wet-leasing activity. It was argued that articles 2 and 3 of contract with LCAG clearly state that only when latter informed assessee in writing that it did not require certain capacity for particular period, that assessee could wet-lease aircraft to others for that period. In all other periods, assessee is committed to wet-lease aircraft to LCAG, and assessee's failure to do so would imply that LCAG was obliged to pay rent for minimum guaranteed block hours. assessee relied upon revenue earned on comparative basis from LCAG and other wet-lease charters. said chart is reproduced below: F. Y. 1997- F. Y.1998- F. Y.1999- 98 99 00 Traffic revenue from wet- lease of aircraft s 318,513,565 854,612,518 657,569,352 received from Lufthansa Cargo AG (Germany) Singapore 67,352,333 41,020,195 Airlines (Singapore) Pacific Asia Cargo Airlines 26,125,451 37,769,600 (Indonesia) Shareef Express Travels 2,038,548 1,065,865 (UAE) Falcon Air Express Cargo 974,220 Airlines (UAE) Total 319,128,850 950,128,850 737,425,012 It was submitted that revenue earned from LCAG accounted for 99 per cent., 90 per cent. and 89 per cent. of aggregate lease rentals earned by assessee in assessment year 1997-98, 1998-99 and 1999-2000, respectively. balance income was also earned from foreign wet-lease. Revenue's contention, on other hand, was that materials did not show that entire income was earned from sources outside India and, consequently, payment made to Technik could not be excluded. Revenue also relied on retrospective amendment to section 9(2) made in 2010 to say that regardless of question as to whether expenditure is towards income earned abroad, payee is deemed to have earned income in India by virtue of amendment. Before proceeding to analyse merits of rival contentions, it would be essential to extract stipulations in contract between LCAG and assessee. They are as follows (page 54 of 274 ITR (AT)): "3.1 Operations aircrafts employed shall hold valid certificate of airworthiness issued by Civil Aviation Authority of India (DGCA) or by any other country should such issuance become necessary to perform obligations of LCI as set forth under this agreement. aircraft shall remain registered under registration of LCI during entire period of this agreement. LCI shall ensure that aircraft registrations and authorisations are suitable to perform flights to all countries set forth in flight schedules hereunder. LCI shall maintain aircraft during term of this agreement in accordance with LCI's maintenance program and schedule as approved by Civil Aviation Administration of India or any such program or schedule mutually agreed upon between parties. All flights operated under this agreement shall be performed under operational control of LCI in all respect. LCI shall obtain and maintain throughout term of this agreement all necessary licenses and permits required for any operation of aircraft under this agreement." "Capacities and flight schedules annexure 2 1. Capacities to be made available by LCI Should LCAG anticipate that capacity provided by LCI under agreement could not be utilised by LCAG in its entirety in any calendar month, LCAG shall give promptly written notice of such determination to LCI. In instance such notice is given more than 60 days before date of flight concerned, LCI will use its utmost efforts to re-market capacities and flights not to be utilised by LCAG. Should LCI be able to sell any such capacities on its own behalf, LCAG shall be entitled to refund as set forth in annexure 3 of agreement, but only within minimum block hours guaranteed to LCAG to LCI under this agreement. Charges and payments annexure No. 3 As set forth in article 3.2 of agreement following terms and conditions apply for calculation and payments of any charges by LCIL for capacity provided under this agreement. 1. "block hour" is defined as period of time operated by aircraft gate to gate expressed in hours commencing when aircraft moves from blocks to begin flight and ending when chocks have been inserted under wheels after touchdown at next point of landing. Such block hours shall be charged and invoiced in accordance of movement messages given by respective flight deck crews/OPS department. 2. LCAG shall pay to LCI guaranteed rate as set forth in this Annexures. For each effectively completed block hour of operation or fractions thereof. Such rate (rate A) shall be: Until October 31, 1997: US$ 1,845.00 (US $ one thousand eight hundred and forty-five) per block hour from November 1, 1997: US-$ 1,630.00 (US $ one thousand six hundred and thirty) Per block hour. aforementioned price shall apply to all block hours performed by LCI up to total of 960 (nine hundred and sixty) block hours performed under this agreement per calendar month. Unless otherwise agreed upon in this capacity agreement, LCAG shall guarantee to LCI payment totalling amount of 960 (nine hundred and sixty) block hours performed under this agreement per calendar month. Should number of block hours actually performed during calendar month fall short of number of block hours being in minimum block hours guaranteed by LCAG, rate (rate B) for such block hours not actually performed for reasons not proved to be under control of LCI shall be US$ 1,225.00 (US $ one thousand two hundred and twenty-five) per block hour." Explanation to section 9(2) was inserted by Finance Act, 2007, with retrospective effect from June 1, 1976. said Explanation read as under: "For removal of doubts, it is hereby declared that for purposes of this section, 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 total income of non-resident, whether or not non-resident has residence or place of business or business connection in India." Finance Act, 2010, substituted same Explanation with effect from June 1, 1976. It now reads as follows: "Explanation.-For removal of doubts, it is hereby declared that for purposes of this section, income of non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in total income of non-resident, whether or not,- (i) non-resident has residence or place of business or business connection in India; or (ii) non-resident has rendered services in India." It is evident that Parliamentary endeavour-through later retrospective amendment, was to target income of non-residents. But importantly, 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 total income of nonresident... whether or not,- (ii) non-resident has rendered services in India". Revenue urges that fiction created by said amendment is to do away with requirement of non-resident having place of business, or business connection, irrespective of whether "... 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? Revenue grounds its arguments in assumption that later, 2010 retrospective amendment overrides effect of section 9(1)(vii)(b) exclusion. While no doubt, Explanation is deemed to be clarificatory and for good measure retrospective at that, nevertheless there is nothing in its wording which overrides exclusion of payments made under section 9(1)(vii)(b). Supreme Court clarified this in GVK Industries (supra) (pages 467, 468, 469, 471 and 472 of 371 ITR): "The principal provision is clause (b) of section 9(1)(vii) of Act. said provision carves out exception. exception carved out in latter part of clause (b) applies to situation when fee is payable in respect of services utilised for business or profession carried out by Indian payer outside India or for purpose of making or earning of income by Indian assessee, i.e., payer, for purpose of making or earning any income from source outside India. On studied scrutiny of said clause, it becomes clear that it lays down principle what is basically known as the'source rule', that is, income of recipient to be charged or chargeable in country where source of payment is located, to clarify, where payer is located. clause further mandates and requires that services should be utilised in India... two principles, namely,'situs of residence' and'situs of source of income' have witnessed divergence and difference in field of international taxation. principle'residence State taxation' gives primacy to country of residency of assessee. This principle postulates taxation of world-wide income and world-wide capital in country of residence of natural or juridical person. The'source State taxation' rule confers primacy to right to tax to particular income or transaction to State/nation where source of said income is located. second rule, as is understood, is transaction specific. To elaborate, source State seeks to tax transaction or capital within its territory even when income benefits belongs to non-residence person, that is, person resident in another country. aforesaid principle sometimes is given different name, that is, territorial principle. It is apt to state here that residence based taxation is perceived as benefiting developed or capital exporting countries whereas source based taxation protects and is regarded as more beneficial to capital importing countries, that is, developing nations. Here comes principle of nexus, for nexus of right to tax is in source rule. It is founded on right of country to tax income earned from source located in said State, irrespective of country of residence of recipient. It is well settled that source based taxation is accepted and applied in international taxation law... Coming to instant case, it is evident that fee which has been named as'success fee' by assessee has been paid to NRC. It is to be seen whether payment made to non-resident would be covered under expression'fee for technical service' as contained in Explanation 2 to section 9(1)(vii) of Act. said expression means any consideration, whether lump sum or periodical in rendering managerial, technical or consultancy services. It excludes consideration paid for any construction, assembling, mining or like projects undertaken by non-resident that is recipient or consideration which would be taxable in hands of non-recipient or nonresident under head'Salaries'. In case at hand, said exceptions are not attracted. What is required to be scrutinised is that appellant had intended and desired to utilise expert services of qualified and experience professional who could prepare scheme for raising requisite finances and tie up loans for power projects. As company did not find any professional in India, it had approached consultant NRC located in Switzerland, who offered their services. Their services rendered included, inter alia, financial structure and security package to be offered to lender, study of various lending alternatives for local and foreign borrowings, making assessment of expert credit agencies world-wide and obtaining commercial bank support on most competitive terms, assisting appellant company in loan negotiations and documentations with lenders, structuring, negotiating and closing financing for project in co- ordinated and expeditious manner... In case at hand, we are concerned with expression'consultancy services'. In this regard, reference to decision by Authority for Advance Rulings in P. No. 28 of 1999, In re [2000] 242 ITR 208 (AAR), would be applicable. observations therein read as follows (page 215): 'By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context, advisory services. categories of technical and consultancy services are to some extent overlapping because consultancy service could also be technical service. However, category of consultancy services also includes advisory service, whether or not expertise in technology is required to perform it.' In this context, reference to decision in CIT v. Bharti Cellular Ltd. [2009] 319 ITR 139 (Delhi), would be apposite. In said case, while dealing with concept of'consultancy services', High Court of Delhi has observed thus (page 147 of 319 ITR): 'Similarly, word "consultancy" has been defined in said Dictionary as work or position of consultant; department of consultants. "Consultant" itself has been defined, inter alia, "as person who gives professional advice or services in specialised field". It is obvious that word "consultant" is derivative of word "consult" which entails deliberations, consideration, conferring with someone, conferring about or upon matter. Consult has also been defined in said Dictionary as "ask advice for, seek counsel or professional opinion from; refer to (a source of information); seek permission or approval from for proposed action". It is obvious that service of consultancy also necessarily entails human intervention. consultant, who provides consultancy service, has to be human being. machine cannot be regarded as consultant.' In this context, we may fruitfully refer to dictionary meaning of 'consultation' in Black's Law Dictionary, eighth edition. word 'consultation' has been defined as act of asking advice or opinion of someone (such as lawyer). It means meeting in which party consults or confers and eventually it results in human interaction that leads to rendering of advice." Thus, it is evident that "source" rule, i.e., purpose of expenditure incurred, i.e., for earning income from source in India, is applicable. This was clearly stated by Supreme Court, when it later held that (page 467 of 371 ITR): "The exception carved out in latter part of clause (b) applies to situation when fee is payable in respect of services utilised for business or profession carried out by Indian payer outside India or for purpose of making or earning of income by Indian assessee i.e. payer, for purpose of making or earning any income from source outside India. On studied scrutiny of said clause, it becomes clear that it lays down principle what is basically known as the'source rule', that is, income of recipient to be charged or chargeable in country where source of payment is located, to clarify, where payer is located. clause further mandates and requires that services should be utilised in India." In present case, Income-tax Appellate Tribunal held that overwhelming or predominant nature of assessee's activity was to wetlease aircraft to LCAG, foreign company. operations were abroad and expenses towards maintenance and repairs payments were for purpose of earning abroad. In these circumstances, Income-tax Appellate Tribunal's factual findings cannot be faulted. question of law is answered in favour of assessee and against Revenue. For foregoing reasons, Revenue's appeal fails and is dismissed without any order as to costs. *** Director of Income-tax v. Lufthansa Cargo India