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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
O R D E R Per N V Vasudevan, Vice President
These are cross appeals by the assessee and the revenue directed against the common order of the CIT(Appeals)-IV, Bangalore, dated & 87 and 143& 144/Bang/2011 . Page 2 of 35 25.11.2010, relating to assessment years 2007-08 & 2008-09. Since common issues are involved in these appeals, they were heard together and disposed of by this consolidated order for the sake of convenience and brevity.
2. The Assessee has been ordered to be wound up by the Hon’ble Karnataka High Court and the Official Liquidator has been appointed as provisional Liquidator to proceed with the process of winding up. Hence notice was issued to the Official Liquidator. However, despite service of notice 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/ 08 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/- Rs.7,73,214/- Rs.92,00,659/- Rs.99,73,873/- M/s. Alteon, Singapore
The Assessee explained the nature of payments made to the non- residents by pointing out that it had sent its personnel for training of pilots & 87 and 143& 144/Bang/2011 . Page 3 of 35 and cockpit crew to Dubai, Germany and Singapore respectively. The nature of training is mentioned in the agreement with the respective non- residents. The place of training was outside India and the respective countries referred to above. The training facilities are all located outside India, the training is given outside India and payments for the same are also made outside India. Thus, all ingredients of the transaction are outside India. It was claimed that the training given by the above 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 fees for technical services (FTS).
5. The AO vide his letter dated: 09.02.2009 proposed to treat the assessee as defaulter as per provisions of section 201(1) and 201(1A) of the Act for having not deducted tax at source u/s 195 of the Act in respect of the payments made as aforesaid to non-residents referred to above which partakes the character of fees for technical services as per the provisions of section 9(1)(vii) of the Act as well as relevant Double Taxation Avoidance Agreement (DTAA) between India and the respective countries of which the recipients of payment from the Assessee were tax residents. The AO was of the view that the services rendered were highly technical in nature which will impart the trainees with technical knowledge and skill and therefore any consideration paid towards these services comes within the nature of FTS and therefore the assessee ought to have deducted tax at source as per section 195 of the Act.
The Assessee reiterated its stand that the payment in question was not in the nature of FTS. Without prejudice the aforesaid stand, the & 87 and 143& 144/Bang/2011 . Page 4 of 35 Assessee also submitted that even assuming that the payment is in the nature of FTS, the same cannot be taxed in India in the hands of the recipients of the payment from the Assessee because as per the DTAA with the respective countries of which the recipients were tax residents, FTS is taxable only subject to certain conditions.
In respect of payment made to M/s. CAE Aviation, Dubai which is a tax resident of United Arab Emirates (UAE), there is no clause relating to FTS in 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.
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 decision of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. & 87 and 143& 144/Bang/2011 . Page 5 of 35 DIT in 288 ITR 408(SC), there should be territorial nexus because an income can be considered as taxable in India under the Act. The Supreme Court has laid down twin conditions for an amount to be taxable in India. Unless the two conditions are satisfied neither Section 9(1)(vii) nor Article 14 of India-Germany DTAA can be applied. The relevant portion of the decision is extracted hereunder:-
(vii) That in this case the entire transaction was completed on the high seas and, therefore, the profits on sale did not arise in India. Once excluded from the scope of taxation under the Income tax Act application of the Double Taxation Avoidance Treaty would not arise. (viii) That, in relation to offshore services, section 9(1)(vii)(c) required two conditions to be met : to be taxable in India the services which were the source of the income sought to be taxed had to be rendered in India as well as utilized in India. In this case, both these conditions were not satisfied simultaneously, thereby excluding the income from the ambit of taxation in India. Thus for a non-resident to be taxed on income for services, such a service had to be rendered within India, and had to be part of a business or profession carried on by such person in India. The appellants had provided services to persons resident in India, and though they had been used here, they had not been rendered in India. (ix) That whatever was payable by a resident to a non-resident by way of technical fees would not always come within the purview of section 9(1)(vii). It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax.
It was the plea of the Assessee that the services in its case were both not rendered and not utilized in India. Hence both the conditions laid down by the Supreme Court are not satisfied. Consequently, income of the & 87 and 143& 144/Bang/2011 . Page 6 of 35 aforesaid company as well as the other two non-resident referred to in the earlier part of this order is not liable for tax in India.
In respect of payments made to M/S.Alteon Singapore, who was a tax resident of Singapore, the Assessee pointed out that as per Article 12(4) of the DTAA between India and Singapore, FTS is taxable 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.
It was the plea of the Assessee that the training given by the Non- resident 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 technical in nature as nothing is made available to the Assessee by reason of the services provided by the non-resident.
& 87 and 143& 144/Bang/2011 . Page 7 of 35
The sum and substance of the Assessee's objections/ arguments can be summarized as under:-
1. The training facilities are all located outside India, the training is given outside India and payments for the same are also made outside India. Thus, all ingredients of the transaction are outside India.
Training given by the Non-resident 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 technical in nature. Further, even in the DTAA with the respective countries, technical services is defined on 'included services' basis. In such cases both hardware and technology have to be transferred together which is not the case with parties concerned herein. 3. The subject matter of the transaction is provision of training services. There is neither transfer of hardware nor transfer of technology. 4. That the services have been rendered and utilized outside India, hence the question of deduction of tax at source u/s 195 of the Act does not arise.
The AO examined the nature of services rendered by the Non- resident. We will set out the discussion and findings of the AO in respect of each of the non-resident to whom the Assessee made payment which are reproduced as follows:- & 87 and 143& 144/Bang/2011 . Page 8 of 35
(A) Payment made to M/S.CAE Aviation, Dubai: “5.1 The Assessee had made payment to this person in both the AY 2007-08 & 08-09, towards training of cockpit crews and pilots. The assessee has entered agreement with M/s. CAE Aviation, Dubai on 22.02.2006. The main objective of the agreement is that M/S.CAE Aviation has to made available A320 simulator and other flight training devices for the purpose of training to cockpit crews and pilots etc. The non-resident was supposed to provide various trainings to the assessee as per assessee's requirement which are mentioned at attachment A of the above agreement as under : a. Recurrent training. b. 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 "Training Centre') and Customer agrees to lease hours on such & 87 and 143& 144/Bang/2011 . Page 9 of 35 Simulator, subject to the terms and conditions contained herein."
According to the AO, the main objective of the agreement was to lease the flight training equipments i.e. simulator to the assessee. Rates and payment terms are determined on the basis of usage of simulators. The charges also includes the other costs like costs of the instructors and facilities etc. Therefore, basic nature of payment was for use of equipment which also includes charges of instructors and trainers. Therefore, part of the payments for usage of equipment and part of the charges for imparting of information concerning industrial, scientific and commercial experience knowledge or skill therefore nature of payments clearly falls under Explanation-2, clause (iv) and (iva) of Sec.9(1) of the Act, which defines royalty as follows:
“Royally' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) XXXYXXX (ii) XXXXXXX (iii) XXXXXX
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
(iva) the use or right to use' any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; & 87 and 143& 144/Bang/2011 . Page 10 of 35
(vi) the rendering of any services in connection with the activities referred to in sub-clauses N to (iv) (iva) and (v).
The AO was also of the view that as per the definition of Royalty as per Article 12(3) of the DTAA between India and UAE reads as follows:-
The term royalties as used in this Article means payment 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 cinematography 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 but do not include royalties or other payments in respect of the operation of mines or quarries or exploitation of petroleum or other natural resources.
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:
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 & 87 and 143& 144/Bang/2011 . Page 11 of 35 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 agreed 1.17. Training will be carried out solely during the hours 23.15 and 06.55 kcal time. 1.18. The duration of the recurrent training is two (2) days. 1.19. Both Parties agree that; some 55 crews recurrent training will be trained on a Wet Lease basis with LFT within each twelve (12) calendar months. 1.20. The maximum number of participants in a training course is two students. 1.21. Training arranged under this Attachment is always limited to ground based training. Not included in this training is line training or any other in-flight training. 1.22. On request of DKN the respective simulator can be approved to the laws and regulations of the respective Aviation Authority of India. The necessary preparations will be done by LFT and the final approval by the respective Aviation Authority.
& 87 and 143& 144/Bang/2011 . Page 12 of 35 1.23. The Subject of this Attachment B is the implementation of training programs in LFT Cockpit Simulators under the directions of qualified LFT training personnel concerning Wet Lease. Additionally the implementations of Dry Lease training for DKN flight crews under the directions of DKN qualified personnel. 1.24. The training content defined hereinafter reflects the established training process as of the date of the signing of this contract. The described training concepts may be subject to change in consequence of any changes in Indian Civil Aviation regulations. 1.25. Any documentations required for this training shall be provided by DKN. Costs rising thereof shall be borne by DKN. 1.26. The prices mention in paragraphs. 3.1, 3.2 and 3.3 "Prices for Services" do not includes hotel accommodations and flight tickets."
According to the AO, as per clause 1.15 set out above, the non- resident has to make available simulator to the assessee for the purpose of training. As per clause 1.23 & 1.24 of the agreement the Lufthansa training personnel have to impart training to the Assessee. The above terms clearly establishes that the charges paid/payable are mainly for usage of simulator and for 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.
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 & 87 and 143& 144/Bang/2011 . Page 13 of 35 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.”
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 also held that payment would also fall under the category of fees for technical services as per article 12(4) of the DTAA. Accordingly, the AO held that the payments made to this person was either in the nature of Royalty or FTS.
(C) Payments made to Alteon, Singapore:
As far payments made to the aforesaid non-resident is concerned, the AO was of the view that as per the agreement with the above company dated 18.11.2006, the non-resident has to impart training to the cockpit crews & pilots of the Assessee. Again, the AO was of the view that the basic purpose of the agreement was to made available the simulator for training of the pilots and impart various training thereby. In this regard the AO referred to clauses 2, 3 & 4 of the agreement which reads as follows:- & 87 and 143& 144/Bang/2011 . Page 14 of 35
"Usage Agreement: On the terms set forth herein, Customer agrees to use and Alteon agrees to make available to Customer the Simulator, together with briefing rooms. Alteon has available a broad range of additional training services and equipment and, if requested by Customer, will make those items available to Customer on mutually agreeable terms and conditions. Statement of Work : • Location of the Training: The Training will be made available to Customer at the following Alteon Training Centres : • A320 flight Simulator — London Gatwick Training Centre, UK • A320 flight Simulator — Manchester Training Centre, UK • A320 flight Simulator -- Singapore Training Centre, Singapore • Other Training : Subject to simulator and instructor availability. Alteon will provide Customer with other requested Maintenance or Flight Training, testing, qualification, and continued qualification for its crew members, technicians or engineers for the Aircraft and shall maintain appropriate student records as specified by the controlling Regulatory Authority. • Instructors : Alteon will use qualified instructors and examiners, to provide such training, and qualification 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.
& 87 and 143& 144/Bang/2011 . Page 15 of 35
• Recurrent Training. • Low Visibility Operations Training. • Dry simulator lease. • Other training services.
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 Instructors in Singapore pounds 175 per working day & 87 and 143& 144/Bang/2011 . Page 16 of 35
According to the AO, the basis of charge is for usage of equipment and for utilizing the services of instructors. Therefore, the charges paid are mainly towards use of simulator and trainers. The trainers and instructors mainly are involved in imparting information to the cockpit crew and pilots. Thus, the payments clearly falls under Explanation-2 clause (iva) & (iv) of Sec.9(1) of the Act. The AO also referred to the definition of royalty & FTS as per article 12(3) & 12(4) of the DTAA between India and Singapore which reads as under:-
"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 a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information;" 12(4): The term fees for technical services as used in this Article means payments of any kind 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 & 87 and 143& 144/Bang/2011 . Page 17 of 35 the person acquiring the service to apply the technology contained therein."
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.
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 non- resident, whether or not the non-resident has a residence or place of business or business connection in India."
& 87 and 143& 144/Bang/2011 . Page 18 of 35
According to the AO, as per above explanation, it does not require non-resident to have any place of business or business connection in India. In other words even though non-resident renders services from outside India in connection with Indian business, such incomes deemed to accrue or arise in India in respect of incomes which are chargeable as royalty/FTS of the non-residents Thus, the above explanation clarifies that the place of business-residence or business connection is not necessary to the non- resident in respect of incomes which accrue or arise u/s. 9(1)(vi) or 9(1)(vii) of the I.T. act. Thus, the same shall be deemed to be included as income of the non-resident therefore income is chargeable in India even though no services were rendered by the non-resident in India.
The AO also held that the services were certainly utilized in India. The training imparted to the trainees are mainly meant for utilization in the assessee’s business. He held that pilots and cockpit crews are instrumental in rendering services to various aircrafts therefore services of the non- resident were certainly utilized by the assessee through its pilots and other trainees. Thus, the basic purpose of the training services are to utilize these knowledge and skills from trainings in India to earn income from India. Therefore the assessee's contentions are not acceptable.
The conclusions of the AO may be summed up thus:-
1. That the charges payable to the non resident parties is partly for usage of equipments and partly for imparting of information concerning industrial, scientific and commercial experience, knowledge and skill.
& 87 and 143& 144/Bang/2011 . Page 19 of 35
2. That the nature of payments clearly falls 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.
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.
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 & 87 and 143& 144/Bang/2011 . Page 20 of 35
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)
M/s CAE Aviation, Dubai : 2,22,88,097 2. M/s Lufthansa, Germany : 55,18,890 3. M/s Alteon, Singapore : 96,44,104 3,74,51,091 Tax liability u/s 201(1) @ 10% on Rs. 3,74,51,091 Rs. 37,45,109 Interest u/s 201(1A)
M/s CAE Aviation, Singapore @ 1% on 1,14,77,738 for 21 months : 2,41,025 @ 1% on 1,59,296 for 21 months : 33,452 @ 1% on 2,37,831 for 20 months : 47,566 & 87 and 143& 144/Bang/2011 . Page 21 of 35 @ 1% on 1,63,520 for 20 months : 32,704 @ 1% on 1,21,864 for 19 months : 23,154 @ 1% on 1,51,011 for 18 months : 27,182 @ 1% on 1,50,681 for 17 months : 25,512 @ 1% on 97,234 for 12 months : 11,668 4,42,263 (b) Lufthansa. Germany:
@ 1% on 14,408 for 12 months : 1,729 @ 1% on 2,61,300 for 12 months : 31,356 @ 1% on 2,76,179 for 12 months 33,141 66,226 (c) Alteon, Singapore:
@ 1% on 44,344 for 22 months 9,755 @ 1% on 30,430 for 21 months 6,390 @ 1% on 1,45,992 for 21 months 30,658 @ 1% on 14,490 for 21 months 3,042 @ 1% on 2,51,536 for 19 months 47,792 @ 1% on 1,24,524 for 18 months 22,414 @ 1% for 94,783 for 17 months 16,113 @ 1% on 1,27,898 for 12 months 15,347 1,51,511 -------------- 6,60,000 -------------- Total liability u/s 201(1) & 201(1A) : Rs. 37,45,109 + Rs. 6,60,000 = Rs. 44,05,109
Aggrieved by the arbitrary order, the assessee preferred appeal before the CIT(A), reiterating the contentions as were put forth before the AO. & 87 and 143& 144/Bang/2011 . Page 22 of 35
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 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 non- availability 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). & 87 and 143& 144/Bang/2011 . Page 23 of 35
As far as the case made by the AO that the payment to non- resident can be regarded as FTS, the CIT(A) held that as far as payment made to M/S.CAE Aviation, Dubai is concerned, as per the DTAA between India and UAE, there is no clause defining FTS and therefore any payment in the nature of FTS, even assuming such payments are in the nature of FTS, can be regarded only as income from business. Article 12 of DTAA between India and UAE only makes reference to Royalty and once the fees for technical services are not included in Article 12 the income has to be considered under Article 7 of DTAA between India and U.A.E. Once it is considered as income under Article 7 as per Article 7.1 "the profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein". Admittedly, there was no PE of the U.A.E. concern in India and accordingly even if any income had arisen in India that can be taxed only in U.A.E. and not in India since Article 12 contains only provisions for royalty and not for fees for technical services. Accordingly, the CIT(A) held that fees for technical services paid to the U.A.E. concern was not liable for tax in India and accordingly provisions of Section 195 were not applicable. Hence the CIT(A) directed the AO to exclude that portion of the fees for technical services paid to U.A.E. concern being CAE Aviation, Dubai, U.A.E as being liable for tax deduction u/s 195 and hence tax worked out u/s 201(1) as also interest u/s. u/s. 201(1A) was directed to be deleted to that extent.
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:- & 87 and 143& 144/Bang/2011 . Page 24 of 35 “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 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, & 87 and 143& 144/Bang/2011 . Page 25 of 35 [2016] 75 taxmann.com 83 (Bangalore - Trib.), which was a case rendered in the context of DTAA between India and UAE.
35. As far as the payments to M/S.Lufthansa, Germany and M/Alteon, Singapore is concerned, we have already seen that the consideration paid was for training which also include the charges for use of simulators in imparting training. The CIT(A) already held that consideration attributable to payment for use of simulator cannot be regarded as royalty and therefore what remains for consideration is 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. The CIT(A) did not accept the argument of the Assessee that no part of the consideration can be said to be payment in the nature of FTS by relying on a decision of the Authority for Advance Ruling (AAR) while interpreting Clause (c) of Article 13(4) with UK in connection with Section 9(1)(viii) pf the Act wherein at page 433 as reported in 307 ITR 418 (AAR) it was held as under:-
Taking some examples, the training given to a commercial aircraft pilot or training the staff in particular skills such as software development would fall within the ambit of the said expression in clause (c)
36. The CIT(A) also held that the above observations of the AAR was in connection with interpretation of 'making available' technical experience, skill, know-how etc. Since 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 & 87 and 143& 144/Bang/2011 . Page 26 of 35 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/- (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 201(1) and interest u/s 201(1A). & 87 and 143& 144/Bang/2011 . Page 27 of 35
38. As far as payments made to M/s Alteon, Singapore, is concerned, the CIT(A) found that the charges towards A-320 full flight simulator usage is also included in the total payment considered towards fees for technical services, as under :-
Amount Sl. No. Date Description (Rs.) 1 15.02.2007 A-320 full flight simulator usage (32 hrs) 3,21,080 2 17.04.2007 A-310 full flight simulator usage 4,73,760 3 31.03.2007 A-320 full flight simulator usage (100 hrs) 14,80,500 4 27.04.2007 A-320 full flight simulator usage in February 12,84,570 5 17.05.2007 A-320 full flight simulator usage (106 hrs) - April 15,15,164 6 20.09.2007 A-320 full flight simulator usage (68 hrs) -July'07 9,58,188 7 20.03.2008 A-320 full flight simulator usage - Dec'07 6,79,560 Total 67,12,822
The CIT(A) directed the AO to reduce the above sums from the total and consider the balance as fees for technical services liable for tax deduction u/s 195 and is directed the AO to re-compute tax payable u/s 201(1) and interest u/s 201(1A).
20. To justify his conclusion that FTS was taxable in India, the CIT(A) also made a reference to the Amendment to Sec.9 of the Act, by the Finance Act, 2007 w.r.e.f. 1-6-1976, by insertion of Explanation which read thus:- & 87 and 143& 144/Bang/2011 . Page 28 of 35
“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 sub- section (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.”
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 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. & 87 and 143& 144/Bang/2011 . Page 29 of 35 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 has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.
Aggrieved by the order of the CIT(A) in upholding a part of the payment made to non-residents as in the nature of FTS and fastening liability on the Assessee to deduct tax at source and because of default in doing so, treating him as assessee in default u/s.201(1) and levying interest on default u/s.201(1A) of the Act, the Assessee is in appeal before the Tribunal, raising the following grounds of appeal:-
“1. That the order of the assessing officer in so far as it is against the appellant is against the law, facts, circumstances, natural justice, equity, without jurisdiction and all other known principles of law.
2. The notice, proceedings and order are all bad in law and invalid.
That the Learned CIT-Appeals failed to appreciate that Article 7 is applicable to the facts of the case and not Article 12 of the DTAA of UAE/Germany/Singapore.
4. The Learned CIT-Appeals erred in holding the assessee as in default u/s 201(1) on the charges paid/payable to M/s. Alteon, Singapore.
5. The Learned CIT-Appeals erred in upholding the assessee as in default for not deducting tax at source in respect of payments made to above non resident.
& 87 and 143& 144/Bang/2011 . Page 30 of 35
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 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.
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 & 87 and 143& 144/Bang/2011 . Page 31 of 35 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 imparted to the pilots and crew of aircraft. The fact that the charges for use of the simulator is separately quantified on hourly basis does not mean that the Assessee is hiring the same or making payment for a right to use the same. Without the imparting of training by the instructors, the hiring of simulator on its own does not have any purpose. It cannot therefore be said that the Assessee paid royalty for use of simulator. The CIT(A) has rightly held that the action of the AO in treating the payments to non-residents and any part of it as royalty is unsustainable.
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 & 87 and 143& 144/Bang/2011 . Page 32 of 35 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.
The appeals of the revenue are accordingly dismissed.
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.
The law is by now well settled that tax deduction at source obligation cannot be fastened on a person 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 & 87 and 143& 144/Bang/2011 . Page 33 of 35 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 in the year subsequent to the year under consideration, should not be considered for penalizing the assessee by treating him as an Assessee in default.
In the case of Kerala Vision Ltd. Vs. Asstt. CIT (ITAT Cochin), ITAT No. 794/Coch/2013, order dated 06.06.2014, a question that came up for consideration was whether the retrospective amendment to Sec.195 can fasten obligation to deduct tax at source. The Tribunal found that the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd Vs. DIT (332 ITR 340) had taken the view that the transmission of television signals through Satellite / transponders would not fall in the category of "royalty" as defined under Explanation 2 to sec. 9(1) of the Act. Subsequently Explanation 6, which expanded the scope of the expression "process" was inserted by the Finance Act, 2012 with retrospective effect, to nullify the decision rendered by the Hon'ble Delhi High Court. The Assessee submitted before the Tribunal that the view entertained by the assessee that the payment of "Pay channel charges" will not fall in the category of royalty, was supported by the decision of Hon'ble Delhi High Court referred above. Accordingly the Assessee 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:- & 87 and 143& 144/Bang/2011 . Page 34 of 35
(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 Delhi High Court, the tribunal held that the assessee cannot be held to be liable to deduct tax at source from the Pay Channel Charges. The tribunal held that the assessing officer was not justified in disallowing the claim of pay channel charges by invoking the provisions of sec. 40(a)(ia) of the Act. Accordingly, the order of Ld. CIT(A) on the issue was set aside and the AO was directed to delete the impugned disallowance. Similar view has also been expressed by the ITAT Bangalore bench in the case of TTK Prestige Ltd. Vs. ACIT order dated 11.4.2014 wherein this tribunal held that liability to deduct tax source cannot be fastened on the basis of a retrospective amendment to law which did not exist when payment was made. Respectfully following the decisions referred to above, we hold that the CIT(A) erred in holding that FTS was taxable in India only because of the retrospective amendment to & 87 and 143& 144/Bang/2011 . Page 35 of 35 the law and he erred in not holding that the liability to deduct tax at source arises at the time of making payment and therefore there would be no obligation to deduct tax at source. Accordingly, the order of the CIT(A) holding Assessee to be an Assessee in default u/s.201(1) of the Act to the extent of the payment relating to FTS and consequent liability towards interest u/s.201(1A) of the Act is hereby cancelled. The appeals of the Assessee are allowed.
In the result, the appeals by the revenue are dismissed while the appeals by the Assessee are allowed.
Pronounced in the open court on this 23rd day of July, 2019.