By Geeta Jani | Dhishat B. Mehta
Chartered Accountants
22.
Kingfisher Airlines Ltd. vs. DDIT ITA No.: 86 & 87/Bang./2011 and 143
& 144/Bang./2011 A.Ys.: 2007-08 & 2008-09 Date of order: 17th July, 2019; Members: N.V. Vasudevan (V.P.) and Jason P.
Boaz (A.M.) Counsel for Assessee / Revenue: None /
Harinder Kumar
Article 12 of India-UAE DTAA; Article 12 of
India-Germany DTAA; Article 12 of India-Singapore DTAA; sections 9 and 195 of
the Act – Since hiring of simulator by itself has no purpose, fee paid for
simulator is not royalty – Payment to foreign companies for flight simulation
training was in the nature of FTS – In absence of FTS article in India-UAE
DTAA, it was to be treated as business income which, in absence of PE of foreign
company in India, was not taxable – TDS obligation cannot be fastened on the
assessee because of retrospective amendment if such obligation was not there at
the time of payment
FACTS
The assessee was an Indian company in the
business of running an airline. During the relevant years, it had deputed its
pilots and cockpit crew to non-resident companies located in Dubai (UAE Co),
Germany (German Co) and Singapore (Sing Co) for training on flight simulators.
The assessee had made payments to the three foreign companies towards charges
for use of simulators and for training of its personnel. The assessee had not
deducted tax from the payments made to non-residents.
According to the AO, the main purpose of the
assessee was to lease the simulator, which also included charges of trainers.
Hence, the payment was in the nature of ‘royalty’ u/s 9(1)(vi) of the Act. In
respect of payments made to the three foreign companies, the AO concluded as
follows:
In respect of the UAE Co, since the payment
was for use of equipment and also for imparting information concerning
industrial, commercial or scientific experience, knowledge or skill, it
constituted ‘royalty’ under Article 12 of the India-UAE DTAA.
As for the German Co, it was required to
make available the simulator to the assessee for training. Hence, the payment
was ‘royalty’ under Article 12(3) of the India-Germany DTAA. Besides, the
charges were for use of simulator and for imparting information concerning
industrial, commercial or scientific experience, knowledge or skill. Therefore,
the AO further concluded that the payment was also covered under Article 12(4)
as FTS. Accordingly, they were chargeable to taxin India.
In respect of the Sing Co, the payment was
for use of simulator and for training. The trainers were mainly involved in
imparting information to the personnel of the assessee. Accordingly, the
payments were in the nature of ‘royalties’ under Article 12(3), and FTS under
Article 12(4), of the India-Singapore DTAA. Therefore, they were chargeable to
tax in India.
Thus, the assessee was required to deduct
tax from the all the payments made to non-resident companies.
The CIT(A) directed the AO to exclude
payments made for use of simulators and to regard only the payments made for
training as FTS. CIT(A) held that as the India-UAE DTAA did not have any
article defining or dealing with FTS, and since the UAE Co had received payment
in the course of its business, the receipt was its business income; further,
even assuming that any income had arisen to the UAE Co in India, since the UAE
Co did not have a PE in India, in terms of Article 7(1) of the India-UAE DTAA,
such income could be taxed only in the UAE. This view was supported by the ITAT
Bangalore decision in ABB FZ-LLC vs. ITO (IT) Ward-1(1) Bangalore, [2016]
75 taxmann.com 83 (Bangalore – Trib.) in the context of the India-UAE
DTAA.
In respect of
the payments made to the German Co and the Sing Co, relying on the AAR decision
in Inter Tek Testing Services India (Pvt.) Ltd. [2008] 307 ITR 418 (AAR),
the CIT(A) concluded that they were in the nature of FTS. Thereafter, referring
to the retrospective amendment to section 9 regarding deeming of income u/s
9(1)(v), (vi) and (vii), the CIT(A) held that the payment was taxable in India.
Further, insertion of Explanation 2 to section 195 of the Act made it
obligatory for the assessee to deduct tax.
HELD
Payment for simulator
Flight
simulator is an essential part of training. Merely because charges for simulator
are separately quantified on an hourly basis did not mean that the assessee had
hired the same or made payment for a right to use the same.
Without imparting training by the
instructors, hiring of the simulator on its own is of no purpose. Hence, the
charges paid by the assessee for use of simulator were ‘royalty’.
Payment to UAE Co.
In the case of the UAE Co, the question of
payment being FTS did not arise since the India-UAE DTAA does not have an
article relating to FTS.
It is settled position of law that in the
absence of an article in a DTAA regarding a particular item of income, the same
should not be regarded as residuary income but income from business. In the
absence of the PE of a non-resident in India, business income cannot be taxed
in India.
Retrospective amendment
The CIT(A) had upheld the order of the AO
only on the ground of retrospective amendment to section 9 in 2010 and to
section 195 in 2012.
The law is well settled that TDS obligation
cannot be fastened on a person on the basis of a retrospective amendment to the
law, which was not in force at the time when the payments were made. Since at
the time when the assessee made payments to the non-resident there was no TDS
obligation on him, it was not possible for him to foresee that by a
retrospective amendment to the law a TDS obligation would be fastened on him.
