TMI Blog2019 (11) TMI 689X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. - ITA Nos. 86 & 87/Bang/2011 And ITA Nos. 143 And 144/Bang/2011 - - - Dated:- 23-7-2019 - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER For The Assessee : None For The Respondent : Shri Harinder Kumar, CIT(DR), ITAT, Bengaluru ORDER 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 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 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (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. 6. The Assessee reiterated its stand that the payment in question was not in the nature of FTS. Without prejudice the aforesaid stand, the Assessee also submitted that even assuming that the payment is in the nature of FTS, the same cannot be taxed in India in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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. 9. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployees 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. 13. The AO examined the nature of services rendered by the Nonresident. 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:- ( 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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; ( vi) the rendering of any services in connection with the activities referred to in sub-clauses N to (iv) (iva) and (v). 15. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. 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 fli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany 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:- 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. Al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent 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 nonresident 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. 27. 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 nonresident 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 fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... @ 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) = ₹ 9,83,050 + ₹ 2,69,867 = ₹ 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, Germany : 55,18,890 3. M/s Alteon, Singapore : 96,44,104 3,74,51,091 Tax liability u/s 201(1) @ 10% on ₹ 3,74,51,091 ₹ 37,45,109 Interest u/s 201(1A) M/s CAE Aviation, Singapore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total liability u/s 201(1) 201(1A) : ₹ 37,45,109 + ₹ 6,60,000 = ₹ 44,05,109 30. Aggrieved by the arbitrary 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ₹ 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 tow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ₹ 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 ₹ 58, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,164 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 39. 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). 40. 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:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 3. 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. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 45. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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:- ( a) Sonata Information Techno ..... X X X X Extracts X X X X X X X X Extracts X X X X
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