TaxTMI 
TaxTMI 
2019 (11) TMI 689
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....ared 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 sent its personnel for training of pilots and cockpit crew to Dubai, Germany ....
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....ch 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 where the services were rendered. The Assessee pointed out that in view of the dec....
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....ical 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 but there is no technology transfer to employees of the assessee company. Consequently, the services cannot be regarded as te....
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....escribed 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 "Training Centre') and Customer agrees to lease hours on such Simulator, subject to the terms and conditions contained herein." 14. According to the AO, the main objective of the agreement was to lease the flight tr....
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....ntific 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 (Deccan Aviation) requests Cockpit simulator Training for its personnel on LFT (Lufthansa) training equipment. 1.15. For this purpose DKN request "Wet Lease" & "Dry Lease" on LFT's Full Flight Simulator A320-200 1.16 The dates and number of training sessions shall be as mutually agr....
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....icle 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 Agreement." 20. According to the AO, the above definition of Royalty under the DTAA includes payment of any consideration for use or right to use industrial, commercial or scientific equipments and payment for imparting of information concerning industrial, commercial or scientific experience. Therefore, the said payment clearly falls under the category of royalty. The AO a....
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....* 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 for leased hours of simulator as laid down at appendix 1 of the agreement which were as follows:- "Charges a. A320 Dry Lease Simulator Usage. 1. Full flight simulator Singapore- dollars 350/hour 2. Fixed base simulator Singapore- dollars 265/hour b. Wet Training Services A. Alteon Instructors Groundschool Instructor pounds 420 per working day Groundschool Instructor pounds 530 per working day Simulator Instructor pounds 615 per working day Instructo....
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....aid 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 payments made to non-resident, because the judgment of Hon'ble Supreme Court pertained to the period prior to the amendment to the Act. According to the AO, the Act has been amended by Finance act 2007 w.r.e.f. 01.04.1972 by insertion of the following Explanation to Sec.9 of the Act, which reads as under:- "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 sub-section (1), such income shall be included in the total income of the nonresident, ....
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....ndia 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: 9,83,050 Interest u/s 201(1A) (a) M/s CAE Aviation, Dubai: @ 1% on 5,60,700 for 29 months : 1,63,183 @ 1% on 1,57,590 for 26 months : 40,973 @ 1% on 2,18,048 for 25 months : 54,512 2,58,668 (b) M/s Lufthansa. Germany: @ 1% on 11,733 for 28 months : 3,285 3,285 (c) M/s Alteon, Singapore: @ 1% pm 32.976 for 24 months : 7,914 7,914 2,69,867 Total liability u/s 201(1) & 201(1A) = Rs. 9,83,050 + Rs. 2,69,867 = Rs. 12,52,917 AY 2008-09 Interest u/s. 201(1) 1. M/s CAE Aviation, Dubai : 2,22,88,097 2. M/s Lufthansa, German....
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....r 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 considering it as royalty, is to be taken into account. Though when considered in isolation, it can loosely be regarded as usage of scientific equipment, for considering payment as towards royalty, perhaps more tests are needed as to its uniqueness and nonavailability elsewhere etc., Otherwise even payment outside India towards purchase of a mobile, laptop or usage of Internet will also have to be regarded as usage of scientific equipment which ultimately require it to be considered under payment towards royalty. The payment for usage of the simulators at the time of training the cabin crew/pilots cannot really be regarded as payment towards Royalty. Accordingly, he held that the same is not covered under Royalty for taxing the appellant u/s 201(1) or the resultant interest u/s 201(1A). 32. As far as the case made by the AO that the payment to nonresident can be regarded as FTS, the CIT(A) held that as far as payment made to M/S.CAE Aviati....
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....sage 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 whether the part of the consideration which is attributable to imparting of training outside India could be taxed as FTS. i.e., the payment made to M/s. Lufthansa, Germany and M/s. Alteon, Singapore. As far as payment to M/s.CAE Aviation Dubai, is concerned, the CIT(A) held that the payment is not in the nature of Royalty. The question whether it is FTS does not arise because of the absence of a clause relating to FTS in the DTAA regarding FTS and the settled position of law that in the absence of a clause in a treaty not dealing with a particular item of income, the same should not be regarded as residuary income but income from business and in the absence of Permanent Establishment in India (PE) of the non-resident in India, the same cannot be taxed. We have already made a reference to the decision of the ITAT Bangalore in the case of ABB FZ-LLC Vs. ITO (IT) Ward-1(1) Bangalore, [2016] 75 taxmann.com 83 (Bangalore - Trib.), which was a case rendered in the contex....
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....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/- (when the payment was made, in view of the exchange difference, the same was reduced to Rs. 1,17,336/- ) and Rs. 36,644 for simulator usage of 3.5 hours the Assessee had paid certain sum which is included in Rs. 1,32,955/- on 18.12.2007. The CIT(A) directed the AO to exclude the payment made towards usage of simulators of 3.5 hours. Similarly, the CIT(A) directed the AO to reduce the simulator charges included in two payments of Rs. 26,13,006/- provided on 27.03.2008 for December 2007 and Rs. 27,61,706/- provided on 27.03.2008 for Feb' 2008 and only the rest of the payments made towards training expenses alone have to be regarded as fees for technical service and taxed accordingly. Hence, the CIT(A) directed the AO to reduce (Rs. 1,17,336/- + Rs. 36,644/- + the amount of simulator usage charges included in the 2 provisions made on 27.03.2008 for Dec'2007 and Feb'2008) from his computation of Rs. 56,36,226/- made to M/s. Lufthansa and on the balance compute tax u/s ....
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....ity by incorporating the Explanation to S.9(2). However, the criteria of rendering service in India and utilization of service in India to attract tax liability u/s 9(1)(vii) remains unaffected by the Explanation to Section 9(2). Therefore remuneration for rendering technical services did not attract tax liability." The CIT(A) further observed that there was a further amendment to Explanation- to Sec.195 of the Act, by Finance Act 2010 with retrospective effect from 01.06.76 to nullify the decision of the Hon'ble Karnataka High Court referred to above and therefore territorial nexus for taxing a receipt as FTS was no longer required to be satisfied and therefore the payments to non-residents in the nature of FTS was taxable in India. The Explanation so inserted was in substitution of the earlier explanation inserted by the Finance Act, 2007. Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this section, 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 h....
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.... Assessee. He relied on the decision of the Hon'ble ITAT Delhi Bench in the case of Sahara Airlines LTD. Vs. DCIT 83 ITD 11 (Delhi). The aforesaid decision relates to exemption u/s.10(15A) of the Act read with Sec.195 of the Act in respect of payment to acquire aircraft or for providing spares and has no relevance to the issue in these appeals. 44. 24. As far as the appeal of the revenue is concerned, the first aspect which we need to notice is as to what is simulator fee. A flight simulator is a device that artificially re-creates aircraft flight and the environment in which it flies, for pilot training, design, or other purposes. It includes replicating the equations that govern how aircraft fly, how they react to applications of flight controls, the effects of other aircraft systems, and how the aircraft reacts to external factors such as air density, turbulence, wind shear, cloud, precipitation, etc. Flight simulation is used for a variety of reasons, including flight training (mainly of pilots), the design and development of the aircraft itself, and research into aircraft characteristics and control handling qualities. Therefore flight simulator is essential part of training....
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....son on the basis of a retrospective amendment to the law, which was not in force when the payments were made. The revenue seeks to rely upon the Explanation inserted as Explanation 2 to section 195 by the Finance Act of 2002 w.r.e.f 1-4-1961. The aforesaid amendment lays down that even if the payment by a resident in India to a non-resident constitutes business income in the hands of the non-resident then irrespective of the existence or non-existence of a permanent establishment of the non-resident in India, tax is liable to the deducted at source by the resident in India making payment to non-resident. Admittedly, for the A.Y. 2007-08 & 2008-09, such provision did not exist. At the time when the Assessee made payments to the non-resident such a provision did not exist. It is not possible for the Assessee to foresee an obligation to deduct tax at source by a retrospective amendment to the law. In such circumstances, the question that arises for consideration is as to, whether a liability to deduct tax at source can be fastened on an assessee on the basis of a retrospective amendment to the law. The amendment brought in by the Finance Act with retrospective effect, which was passed....