TaxTMI 
TaxTMI 
2019 (11) TMI 689
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....tice on the Official Liquidator, none appeared on behalf of the Assessee. In the circumstances, we proceed to decide these appeals, after hearing the learned DR and taking note of the material on record and the orders of the revenue authorities. 3. The Assessee is a Company carrying on the business of Airline. There was a survey u/s.133A of the Income Tax Act, 1961 (Act) on 11.11.2008 by the respondent herein viz., DDIT - International Taxation - Circle 1(1), Bangalore. Consequent to survey proceedings, the AO called for various agreements entered into with Non-residents and the details of payments made to them. The assessee furnished all the details and information called for. From the details so provided it transpired that the Assessee had made the following payments to non-residents: A. Y 2007- A.Y 2008-09 TOTAL M/s. CAE Aviation, Dubai Rs. 93,83,394/ Rs. 2,34,87,077/ Rs. 3,28,70,471/- M/s. Lufthansa Rs. 1,17,336/- Rs. 55,18,890/- Rs. 56,36,226/- M/s. Alteon, Singapore Rs. 7,73,214/- Rs. 92,00,659/- Rs. 99,73,873/- 4. The Assessee explained the nature of payments made to the nonresidents by pointing out that it had sen....
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....the said treaty and therefore resort should be had to Article-7 of the DTAA which relates to taxing of income from business. If a DTAA does not recognize any income as FTS or royalty, then classification of said income has to be as per other provisions of DTAA and in the absence of provision in DTAA to tax FTS, same would be taxed as per article 7 of DTAA between India and UAE applicable for business profit and in absence of PE in India, said income would not be chargeable to tax in India. This stand of the Assessee is supported by a decision of the ITAT Bangalore Bench in the case of ABB FZ-LLC Vs. ITO (IT) Ward-1(1) Bangalore, [2016] 75 taxmann.com 83 (Bangalore - Trib.) which is a case dealing with India-UAE DTAA. 8. In respect of payment made to M/s. Lufthansa, which is a tax resident of Germany, the DTAA between India and Germany in clause 12(4) defines FTS to mean payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel. According to the Assessee the sum in question cannot be said to be FTS because there was no territorial nexus between India and the place wh....
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....xable in India if it is a payment to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through 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, which enables the person acquiring the services to apply the technology contained therein ; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person. 11. It was the plea of the Assessee that the training given by the Nonresident companies is part of their routine business and does not involve transfer of any technology. The training involves use of technology by the training companies ....
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..... A320 full flight simulator. c. A320 initial/transition course. d. ELT bridge course. e. Jet indoctrinate entry level course. The charges for above courses are prescribed at attachment A of the agreements. According to the AO, these charges are mainly charged on the basis of no. of hours simulator made available for the use in training. According to the AO, the purpose of the agreement as mentioned in the preamble was as follows : " WHEREAS CAE Inc. is the world leader in the design, manufacture and sale of commercial flight simulators and other flight training devices (hereinafter "Simulator') WHEREAS Customer operates or intends to operate A320 family aircrafts (4318, A319, ACJ, A320 and A321) and ATR 42,172 family aircrafts (ATR 42-300 and ATR 72- 500) as well as other aircraft types and therefore has a training requirement for its flight crew members: WHEREAS CAE agrees to make the Simulator, as described in. Attachment "A" and Attachment "B" hereto which forms an integral part of this Agreement, available for use by Customer in a training facility located in Dubai for A320 and Maastricht for ATR42/72 (the "Tra....
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....resources." 16. The AO therefore held that the nature of payments is mainly for use of simulator which is covered by clause (iva) of the above definition. The non-resident company has also imparted the trainees of the Indian company with technical information, scientific knowledge, experience, skill therefore, these payments also falls as per clause (iv) of the above definition. Thus the payments amounted to royalty as per Explanation-2 clause (iv) and (iva) of Sec.9(1) of the Act and as per article 12(3) of DTAA between India and UAE. (B) Payment made to M/s. Lufthansa, Germany: 17. As far as payments to M/s.Lufthansa, Germany is concerned, the payments according to the AO was also for use of simulator and imparting of information and training facilities. In this regard, the AO referred to the agreement entered with Lufthansa training dated 15.11.2007 wherein the main purpose of the agreement was is to make available simulators and training facilities to the assessee. The AO refer to clause 1 to attachment B of the agreement which lays down the terms and conditions for services wherein it has been laid down that are laid down as under:- "1.14. DKN (De....
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.... imparting information etc. therefore clearly falls under the definition of royalty as per Explanation 2 clause (iv) & (iva) to Sec.9(1) of the Act. 19. The AO also referred to ARTICLE 12(3) of the DTAA between India and Germany which defines "Royalties and fees or technical services" as follows:- "Article 12(3) - The term royalties as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. Article 12(4) - The term fees for technical services as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical _ or other personnel, but does not include payments for services mentioned in Article 15 of this Agreem....
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....ication that may be needed for Customer students to be qualified to act as crew members in operations conducted by Customer, according to the controlling regulatory authority. * Types of Training : For purposes of this Agreement, "Training" shall include, but shall not be limited to, the following categories of pilot training : * Initial Training. * Upgrade Training. * Transition Training. * Recurrent Training. * Low Visibility Operations Training. * Dry simulator lease. * Other training services. 22. According to the AO, there were two components of the agreement. Firstly, to make available the training aircrafts such as A320 simulators to the trainees and the second component is to impart various types of trainings through instructors as mentioned in above clauses. Thus, the payments made by the Assessee represents towards use of simulators and towards training of its employees. The charges (prices) are also determined on the basis of no. of leased hours of simulators made available to the Indian company and on the basis of the instructors fees etc. The AO in this regard has made reference to the charges f....
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....n or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein." 24. According to the AO the charges paid by the Indian company towards training charges includes two components: (1) Charges for usage of simulators and (2)The charges of trainers, instructors etc. Therefore the payments were in the nature of Royalty and FTS both under the Act and the DTAA and therefore were chargeable to tax in India and therefore the Assessee was under an obligation to deduct tax at source on the aforesaid payments made to the non-resident. 25. The AO also dealt with the decision of the Hon'ble Supreme Court in the case of Ishika Wajima Harima heavy industries Ltd. Vs. DIT (288 ITR 408) based on which the Assessee had contended that non-residents neither rendered any services in India nor these services were utilized in India and therefore as held in the aforesaid decision, the payment to the non-resident was not chargeable to tax in India. He was of the view that the aforesaid judgment was applicable and based on the ratio laid down therein, the Assessee would not be liable to deduct tax at source on the paym....
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....lls under Sec.9(1) Explanation-1, clause (iva) & (iv) of definition of royalty as per the Act and also within the definition of the royalty under relevant DTAA. 3. Notwithstanding the fact that the training charges comes within the definition of royalty, the said charges also falls under the category of Fees for technical services. 4. That the services have been utilized for its business in India. 5. That consequent to amendment of the statute by the Finance Act 2007, it is not necessary for non resident to have a place of residence or place of business or business connection in India in respect of incomes which accrue or arise to them in India which comes within the purview of section 9(1)(vi) or 9(l)(vii) of the Act. 29. The AO computed the liability of the Assessee for AY 2007-08 & 2008-09 u/s.201(1) & 201(1A) of the Act as follows:- AY 2007-08 Liability u/s.201(1) Payments to the foreign companies 1. M/s CAE Aviation, Dubai 93,83,394 2. M/s Lufthansa, Germany 1,17,336 3. M/s Alteon, Singapore 3,29,369 98,30,499 Tax liability u/s 201(1) @ 10% on Rs. 98,30,499: 9,83,0....
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....ary order, the assessee preferred appeal before the CIT(A), reiterating the contentions as were put forth before the AO. 31. As far as the conclusion of the AO that payments to non-resident constituted "Royalty" because the payment was for right to use simulator and was therefore in the nature of consideration for use or right to use any industrial, commercial or scientific equipment, the CIT(Appeals) held for training pilots in India, simulators are being used even within the country. Only the advanced versions of simulators are allowed to be used by the pilots for their 2 days training as per these agreements. He was of the view that though in a loose sense such equipment can be regarded as scientific equipment, in the context of broader definition of royalty, usage of simulator cannot really be regarded as usage of a scientific equipment. If the same is interpreted as usage of scientific equipment, even using a computer or internet or a mobile outside India could be regarded as usage of scientific equipment. For the purpose of considering an equipment as falling under definition of Sec.9(1) Explanation-2 clause (iva) the context in which it is used i.e. for the purposes of co....
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.... 201(1A) was directed to be deleted to that extent. 33. Against the aforesaid two reliefs allowed by the CIT(A), the revenue is in appeal before the Tribunal. The grounds of appeal raised by the Revenue in both its appeal for the two AYs reads thus:- "1. The learned CIT (Appeals) has erred in partly allowing the appeal of the assessee which is opposed to law, equity, facts and circumstances of the case. 2 The learned CIT (A) erred in disallowing the addition of Rs. 98, 30,499/-, thereby disregarding the payment does not fall in under the definition of Royalty as per Clause (iv) and (iva) of explanation 2 to Sec. 9(1) (vi) of the I.T. Act. 3. The CIT (Appeals) erred in holding that the usage charges of simulator are not covered under the definition of "Use or right to use any industrial, commercial, scientific equipment" there by misinterpreting the definition of "Royalty" 4. The CIT (A) erred in holding that payments towards usage of simulators is not to be regarded as FTS and excluding these payments from taxing under fee for technical services." 34. The next aspect which the CIT(A) took up for consideration was with regard to the question....
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....ce the Hon'ble AAR has specifically touched upon this subject and held that payment of fees for training of pilots and cabin crew as towards technical know-how fees, the CIT(A) held that the Assessee cannot get relief to the extent the composite fee paid for training is attributable to imparting training. The CIT(A) found that the AO has not bi-furcated the two amounts one towards royalty and another towards technical know-how fees. 37. The CIT(A) did the exercise of bifurcating payments towards use of simulators and imparting of training in respect of Payment made to M/s. Lufthansa, Germany and M/S.Alteon, Singapore. In respect of Lufthansa, Germany payments, the CIT(A) found that the Assessee had brought to the notice of CIT(A) that the payment made on 31.10.2006 amounting to Rs. 1,17,336/- was towards airfare of Mr. Wadia, Mr. Khadivalla, Mr. Prasad and Mr. Dhillon being 983.53 + 1023.31 Euros which is equivalent to Rs. 58,854/- + Rs. 60,341/-. The CIT(A) directed the AO to exclude these two amounts from his quantification of Rs. 56,36,226/-. Also a sum of Rs. 36,644/- was paid towards accommodation of the pilots on 19.02.2008. Besides these 2 amounts of Rs. 1,19,195/- (w....
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.... "Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v ), (vi) and (vii) of subsection (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India." 41. The CIT(A) referred to the decision of the Hon'ble Karnataka High Court in the case of Jindal Thermal Power Co. Ltd. v. DCIT reported in 321 ITR 31, wherein it was argued by the revenue that after insertion of Explanation to Sec.9 by the finance Act, 2007 w.r.e.f. 1.6.1976, the decision rendered by the Hon'ble Supreme court in the case of Ishikawajma's case stands nullified. The Hon'ble Karnataka High Court however held that "rendering the theoretical aspects of technical services can be done wholly offshore and outside India. - Criterion of residence, place of business or business connection of a non-resident in India has been done away with for fastening the tax liability by incorporating the Explanation to S.9(2). However, the criteria of rendering service in India and utilization of service in In....
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.... non resident. 6. The Learned CIT-Appeals erred in coming to the conclusion that training charges falls under the category of Fees for technical services. 7. The Learned CIT-Appeals erred in coming to the conclusion that income has accrued / arisen in India even though no services were rendered in India by the above Non-residents. 8. That levy of interest u/s 201(1A) of the Act is hereby disputed. 9. That levy of interest u/s 201(1A) of the Act is not as per rules and law requires to be deleted. 10. The order passed is not inconformity with Circular No. 14 (XL-35) dt: 11.04.55 issued by the Board. 11. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the appellant requests that the appeal be allowed as prayed and justice be rendered." 43. We have heard the submissions of the learned DR on the appeals by the revenue as well as the appeals by the Assessee. The learned DR reiterated the stand of the AO in so far as the appeals by the Revenue is concerned and the stand of the CIT(A) in so far as it relates to appeals by the Assessee. He relied on the decision of the Ho....
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....s. ITO (IT) Ward-1(1) Bangalore, [2016] 75 taxmann.com 83 (Bangalore - Trib.), which was a case rendered in the context of DTAA between India and UAE. The decision of the CIT(A) is in line with the decision referred to above and is a correct interpretation of the treaty. We find no grounds to interfere with the decision of the CIT(A) on this issue. 46. The appeals of the revenue are accordingly dismissed. 47. As far as the appeals of the Assessee are concerned, the CIT(A) has upheld the order of the AO only the ground of a retrospective amendment to the Sec.9 by insertion of an explanation by the Finance Act, 2010 with retrospective effect from 1.6.1976 which provides income of a 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 the total income of the non-resident, whether or not,- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India. 48. The law is by now well settled that tax deduction at source obligation cannot be fastened on a person on the basis of a retrosp....
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....ee submitted that the disallowance u/s 40(a)(ia) should not be made on the basis of subsequent amendment made with retrospective effect. In this regard, the Assessee placed reliance on the following decisions:- (a) Sonata Information Technology Ltd Vs. DCIT (2012)(TaxCorp (INTL)4659 (Mumbai-Trib) (b) Infotech Enterprises Limited Vs. Addl. CIT (2014) TaxCorp (INTL) 6945 (ITAT - Hyderabad) (c) Channel Guide India Limited Vs. ACIT (2013) TaxCorp (INTL) 6702 (ITAT-Mum) 50. The Cochin Bench of ITAT following the ruling in the decisions referred to above held that the assessee cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective effect. The Tribunal held that the view entertained by the assessee that the pay channel charges cannot be considered as royalty in fact gets support from the decision rendered by Hon'ble Delhi High Court in the case of Asia Satellite Telecommunication Co. Ltd. Though the Explanation 6 to sec. 9(1)(vi) inserted by Finance Act, 2012 is clarificatory in nature, yet in view of the fact that the view entertained by the assessee gets support from the decision of De....