Kingfisher Airlines Ltd, Bangalore V. DDIT, Bangalore

ITA 86/BANG/2011

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 7568 (ITAT-BANGALORE)
• Duration Of Justice: 8 year(s) 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 01-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Double taxation relief; Principle of natural justice; Deemed to accrue or arise in india; Retrospective amendment; Permanent establishment; Advance ruling; Set aside
• Section: 40(a)(ia); 201(1); 195; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER I TA NO S . 86 & 87/BANG/2011 ASSESSMENT YEAR S : 2007 - 0 8 & 2008 - 09 M/S. KINGFISHER AIRLINES LTD., 35/2, CUNNINGHAM ROAD, BANGALORE-560 052. PAN: AAACD 5301J VS. THE DEPUTY DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE - 1(1), BANGALORE. APP EL L ANT RESPONDENT I TA NO S . 143 & 144 /BANG/2011 ASSESSMENT YEAR S : 2007 - 0 8 & 2008 - 09 THE DEPUTY DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE - 1(1), BANGALORE. VS. M/S. KINGFISHER AIRLINES LTD., 35/2, CUNNINGHAM ROAD, BANGALORE-560 052. PAN: AAACD5301J APP EL L ANT RESPONDENT A SSESSEE BY : NONE R E SPONDENT BY : SHRI HARINDE R KUMAR, CIT(DR), ITAT, BENGALURU. DATE OF HEA RING : 17. 0 7 . 201 9 DATE OF PRONOUNCEMENT : 23 . 0 7 . 201 9 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, BA NGALORE, DATED ITA NOS . 86 & 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 W ERE 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 HONBLE KARNATAKA HIGH COURT AND THE OFFICIAL LIQUIDATOR HA S BEEN APPOINTED AS PROVISIONAL LIQUIDATOR TO PROCEED WITH THE PROCESS OF WINDING UP. HENCE NOTICE WAS ISSUED TO THE OFFICIAL LIQUIDATOR. HOWE VER, DESPITE SERVICE OF NOTICE ON THE OFFICIAL LIQUIDATOR, NONE APPEARED ON BEHALF OF THE ASSESSEE. IN THE CIRCUMSTANCES, WE PROCEED TO DECIDE THESE AP PEALS, AFTER HEARING THE LEARNED DR AND TAKING NOTE OF THE MATERIAL ON R ECORD AND THE ORDERS OF THE REVENUE AUTHORITIES. 3. THE ASSESSEE IS A COMPANY CARRYING ON THE BUSIN ESS 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 IN TERNATIONAL TAXATION CIRCLE 1(1), BANGALORE. CONSEQUENT TO SURVEY PROC EEDINGS, THE AO CALLED FOR VARIOUS AGREEMENTS ENTERED INTO WITH NON -RESIDENTS AND THE DETAILS OF PAYMENTS MADE TO THEM. THE ASSESSEE FURN ISHED ALL THE DETAILS AND INFORMATION CALLED FOR. FROM THE DETAILS SO PRO VIDED IT TRANSPIRED THAT THE ASSESSEE HAD MADE THE FOLLOWING PAYMENTS TO NON -RESIDENTS: A. Y 2007 - 08 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 MA DE TO THE NON- RESIDENTS BY POINTING OUT THAT IT HAD SENT ITS PERS ONNEL FOR TRAINING OF PILOTS ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 3 OF 35 AND COCKPIT CREW TO DUBAI, GERMANY AND SINGAPORE RE SPECTIVELY. THE NATURE OF TRAINING IS MENTIONED IN THE AGREEMENT WI TH THE RESPECTIVE NON- RESIDENTS. THE PLACE OF TRAINING WAS OUTSIDE INDIA AND THE RESPECTIVE COUNTRIES REFERRED TO ABOVE. THE TRAINING FACILITIE S ARE ALL LOCATED OUTSIDE INDIA, THE TRAINING IS GIVEN OUTSIDE INDIA AND PAYM ENTS FOR THE SAME ARE ALSO MADE OUTSIDE INDIA. THUS, ALL INGREDIENTS OF T HE TRANSACTION ARE OUTSIDE INDIA. IT WAS CLAIMED THAT THE TRAINING GIVEN BY TH E ABOVE COMPANIES IS PART OF THEIR ROUTINE BUSINESS AND DOES NOT INVOLVE TRAN SFER OF ANY TECHNOLOGY. THE TRAINING INVOLVES USE OF TECHNOLOGY BY THE TRAI NING COMPANIES BUT THERE IS NO TECHNOLOGY TRANSFER TO EMPLOYEES OF THE ASSES SEE COMPANY. CONSEQUENTLY, THE SERVICES CANNOT BE REGARDED AS FE ES FOR TECHNICAL SERVICES (FTS). 5. THE AO VIDE HIS LETTER DATED: 09.02.2009 PROPOSE D 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 1 95 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 RE SPECTIVE COUNTRIES OF WHICH THE RECIPIENTS OF PAYMENT FROM THE ASSESSE E WERE TAX RESIDENTS. THE AO WAS OF THE VIEW THAT THE SERVICES RENDERED W ERE HIGHLY TECHNICAL IN NATURE WHICH WILL IMPART THE TRAINEES WITH TECHNICA L KNOWLEDGE AND SKILL AND THEREFORE ANY CONSIDERATION PAID TOWARDS THESE SERV ICES COMES WITHIN THE NATURE OF FTS AND THEREFORE THE ASSESSEE OUGHT TO H AVE DEDUCTED TAX AT SOURCE AS PER SECTION 195 OF THE ACT. 6. THE ASSESSEE REITERATED ITS STAND THAT THE PAYM ENT IN QUESTION WAS NOT IN THE NATURE OF FTS. WITHOUT PREJUDICE THE AF ORESAID STAND, THE ITA NOS . 86 & 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 RECIPIEN TS WERE TAX RESIDENTS, FTS IS TAXABLE ONLY SUBJECT TO CERTAIN CONDITIONS. 7. IN RESPECT OF PAYMENT MADE TO M/S. CAE AVIATION, DUBAI WHICH IS A TAX RESIDENT OF UNITED ARAB EMIRATES (UAE), THERE I S 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 BUSINES S. IF A DTAA DOES NOT RECOGNIZE ANY INCOME AS FTS OR ROYALTY, THEN CLASSI FICATION OF SAID INCOME HAS TO BE AS PER OTHER PROVISIONS OF DTAA AND IN TH E ABSENCE OF PROVISION IN DTAA TO TAX FTS, SAME WOULD BE TAXED AS PER ARTI CLE 7 OF DTAA BETWEEN INDIA AND UAE APPLICABLE FOR BUSINESS PROFI T AND IN ABSENCE OF PE IN INDIA, SAID INCOME WOULD NOT BE CHARGEABLE TO TA X 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, WH ICH IS A TAX RESIDENT OF GERMANY, THE DTAA BETWEEN INDIA AND GER MANY IN CLAUSE 12(4) DEFINES FTS TO MEAN PAYMENTS OF ANY AMOUNT IN CONSIDERATION FOR THE SERVICES OF MANAGERIAL, TECHNICAL OR CONSULTANC Y NATURE, INCLUDING THE PROVISION OF SERVICES BY TECHNICAL OR OTHER PERSONN EL. ACCORDING TO THE ASSESSEE THE SUM IN QUESTION CANNOT BE SAID TO BE F TS BECAUSE THERE WAS NO TERRITORIAL NEXUS BETWEEN INDIA AND THE PLACE WH ERE 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. ITA NOS . 86 & 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 T O BE TAXABLE IN INDIA. UNLESS THE TWO CONDITIONS ARE SATISFIED NEITHER SEC TION 9(1)(VII) NOR ARTICLE 14 OF INDIA-GERMANY DTAA CAN BE APPLIED. THE RELEVA NT PORTION OF THE DECISION IS EXTRACTED HEREUNDER:- '(VII) THAT IN THIS CASE THE ENTIRE TRANSACTION WAS COMPLETED ON THE HIGH SEAS AND, THEREFORE, THE PROF ITS 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, SECT ION 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 IND IA AS WELL AS UTILIZED IN INDIA. IN THIS CASE, BOTH THESE CONDITIONS WERE NOT SATISFIED SIMULTANEOUSLY, THEREBY EXCLUDIN G THE INCOME FROM THE AMBIT OF TAXATION IN INDIA. THUS FO R A NON-RESIDENT TO BE TAXED ON INCOME FOR SERVICES, SU CH 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 P ERSONS RESIDENT IN INDIA, AND THOUGH THEY HAD BEEN USED HE RE, 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 ALW AYS COME WITHIN THE PURVIEW OF SECTION 9(1)(VII). IT MU ST HAVE SUFFICIENT TERRITORIAL NEXUS WITH INDIA SO AS TO FU RNISH A BASIS FOR IMPOSITION OF TAX.' 9. IT WAS THE PLEA OF THE ASSESSEE THAT THE SERVICE S 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. CONSEQ UENTLY, INCOME OF THE ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 6 OF 35 AFORESAID COMPANY AS WELL AS THE OTHER TWO NON-RESI DENT REFERRED TO IN THE EARLIER PART OF THIS ORDER IS NOT LIABLE FOR TAX IN INDIA. 10. IN RESPECT OF PAYMENTS MADE TO M/S.ALTEON SINGA PORE, 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 SER VICES OF A MANAGERIAL, TECHNICAL OR CONSULTANCY NATURE (INCLUDING THE PROV ISION 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 ACQ UIRING THE SERVICES TO APPLY THE TECHNOLOGY CONTAINED THER EIN ; OR (C) CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TE CHNICAL PLAN OR TECHNICAL DESIGN, BUT EXCLUDES ANY SERVICE THAT DOES NOT ENABLE THE PERSON ACQUIRING THE SERVICE TO APPLY TH E TECHNOLOGY CONTAINED THEREIN. FOR THE PURPOSES OF (B) AND (C) ABOVE, THE PERSON A CQUIRING THE SERVICE SHALL BE DEEMED TO INCLUDE AN AGENT, NOMINE E, OR TRANSFEREE OF SUCH PERSON. 11. IT WAS THE PLEA OF THE ASSESSEE THAT THE TRAINI NG GIVEN BY THE NON- RESIDENT COMPANIES IS PART OF THEIR ROUTINE BUSINES S AND DOES NOT INVOLVE TRANSFER OF ANY TECHNOLOGY. THE TRAINING INVOLVES U SE OF TECHNOLOGY BY THE TRAINING COMPANIES BUT THERE IS NO TECHNOLOGY TRANS FER 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. ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 7 OF 35 12. THE SUM AND SUBSTANCE OF THE ASSESSEE'S OBJECTI ONS/ ARGUMENTS CAN BE SUMMARIZED AS UNDER:- 1. THE TRAINING FACILITIES ARE ALL LOCATED OUTSIDE INDIA, THE TRAINING IS GIVEN OUTSIDE INDIA AND PAYMENTS FOR TH E SAME ARE ALSO MADE OUTSIDE INDIA. THUS, ALL INGREDIENTS OF THE TRANSACTION ARE OUTSIDE INDIA. 2. TRAINING GIVEN BY THE NON-RESIDENT COMPANIES IS PART OF THEIR ROUTINE BUSINESS AND DOES NOT INVOLVE TRANSFE R OF ANY TECHNOLOGY. THE TRAINING INVOLVES USE OF TECHNOLOGY BY THE TRAINING COMPANIES BUT THERE IS NO TECHNOLOGY TRANS FER TO EMPLOYEES OF THE ASSESSEE COMPANY. CONSEQUENTLY, TH E SERVICES CANNOT BE REGARDED AS TECHNICAL IN NATURE. FURTHER, EVEN IN THE DTAA WITH THE RESPECTIVE COUNTRIES, TEC HNICAL SERVICES IS DEFINED ON 'INCLUDED SERVICES' BASIS. I N SUCH CASES BOTH HARDWARE AND TECHNOLOGY HAVE TO BE TRANS FERRED TOGETHER WHICH IS NOT THE CASE WITH PARTIES CONCERN ED HEREIN. 3. THE SUBJECT MATTER OF THE TRANSACTION IS PROVISI ON OF TRAINING SERVICES. THERE IS NEITHER TRANSFER OF HAR DWARE NOR TRANSFER OF TECHNOLOGY. 4. THAT THE SERVICES HAVE BEEN RENDERED AND UTILIZE D OUTSIDE INDIA, HENCE THE QUESTION OF DEDUCTION OF TAX AT SO URCE U/S 195 OF THE ACT DOES NOT ARISE. 13. THE AO EXAMINED THE NATURE OF SERVICES RENDERED BY THE NON- RESIDENT. WE WILL SET OUT THE DISCUSSION AND FINDI NGS OF THE AO IN RESPECT OF EACH OF THE NON-RESIDENT TO WHOM THE ASSESSEE MADE PAYMENT WHICH ARE REPRODUCED AS FOLLOWS:- ITA NOS . 86 & 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 I N BOTH THE AY 2007-08 & 08-09, TOWARDS TRAINING OF COCKPIT CRE WS AND PILOTS. THE ASSESSEE HAS ENTERED AGREEMENT WITH M/S . CAE AVIATION, DUBAI ON 22.02.2006. THE MAIN OBJECTIVE O F THE AGREEMENT IS THAT M/S.CAE AVIATION HAS TO MADE AVAI LABLE A320 SIMULATOR AND OTHER FLIGHT TRAINING DEVICES FOR THE PURPOSE OF TRAINING TO COCKPIT CREWS AND PILOTS ETC. THE NON-R ESIDENT WAS SUPPOSED TO PROVIDE VARIOUS TRAININGS TO THE ASSESS EE AS PER ASSESSEE'S REQUIREMENT WHICH ARE MENTIONED AT ATTAC HMENT 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 ATT ACHMENT 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 PURPO SE OF THE AGREEMENT AS MENTIONED IN THE PREAMBLE WAS AS FOLLO WS : ' WHEREAS CAE INC. IS THE WORLD LEADER IN THE DESIGN , MANUFACTURE AND SALE OF COMMERCIAL FLIGHT SIMULATOR S AND OTHER FLIGHT TRAINING DEVICES (HEREINAFTER 'SIMULAT OR') 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, AVAI LABLE 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 ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 9 OF 35 SIMULATOR, SUBJECT TO THE TERMS AND CONDITIONS CONT AINED HEREIN.' 14. 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 US AGE OF SIMULATORS. THE CHARGES ALSO INCLUDES THE OTHER COSTS LIKE COST S OF THE INSTRUCTORS AND FACILITIES ETC. THEREFORE, BASIC NATURE OF PAYMENT WAS FOR USE OF EQUIPMENT WHICH ALSO INCLUDES CHARGES OF INSTRUCTORS AND TRAI NERS. THEREFORE, PART OF THE PAYMENTS FOR USAGE OF EQUIPMENT AND PART OF THE CHARGES FOR IMPARTING OF INFORMATION CONCERNING INDUSTRIAL, SCIENTIFIC AN D COMMERCIAL EXPERIENCE KNOWLEDGE OR SKILL THEREFORE NATURE OF PAYMENTS CLE ARLY 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 S UM CONSIDERATION BUT EXCLUDING ANY CONSIDERATION WHICH WOULD BE THE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HE AD 'CAPITAL GAINS') FOR- (I) XXXYXXX (II) XXXXXXX (III) XXXXXX (IV) THE IMPARTING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNO WLEDGE, EXPERIENCE OR SKILL; (IVA) THE USE OR RIGHT TO USE' ANY INDUSTRIAL, COMM ERCIAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SECTION 44BB; ITA NOS . 86 & 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) (IV A) AND (V). 15. THE AO WAS ALSO OF THE VIEW THAT AS PER THE DEF INITION 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 P AYMENT OF ANY, KIND RECEIVED AS A CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC W ORK, INCLUDING CINEMATOGRAPHY FILMS, OR FILMS OR TAPES USED FOR RA DIO OR TELEVISION BROADCASTING, ANY PATENT, TRADE MARK, DE SIGN 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 SC IENTIFIC EXPERIENCE BUT DO NOT INCLUDE ROYALTIES OR OTHER PA YMENTS IN RESPECT OF THE OPERATION OF MINES OR QUARRIES OR EX PLOITATION OF PETROLEUM OR OTHER NATURAL RESOURCES.' 16. THE AO THEREFORE HELD THAT THE NATURE OF PAYMEN TS IS MAINLY FOR USE OF SIMULATOR WHICH IS COVERED BY CLAUSE (IVA) OF TH E ABOVE DEFINITION. THE NON-RESIDENT COMPANY HAS ALSO IMPARTED THE TRAINEES OF THE INDIAN COMPANY WITH TECHNICAL INFORMATION, SCIENTIFIC KNOW LEDGE, EXPERIENCE, SKILL THEREFORE, THESE PAYMENTS ALSO FALLS AS PER CLAUSE (IV) OF THE ABOVE DEFINITION. THUS THE PAYMENTS AMOUNTED TO ROYALTY A S 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 SI MULATOR AND IMPARTING ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 11 OF 35 OF INFORMATION AND TRAINING FACILITIES. IN THIS REG ARD, 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 AVAILA BLE SIMULATORS AND TRAINING FACILITIES TO THE ASSESSEE. THE AO REFER T O CLAUSE 1 TO ATTACHMENT B OF THE AGREEMENT WHICH LAYS DOWN THE TERMS AND COND ITIONS FOR SERVICES WHEREIN IT HAS BEEN LAID DOWN THAT ARE LAID DOWN AS UNDER:- '1.14. DKN (DECCAN AVIATION) REQUESTS COCKPIT SIMU LATOR TRAINING FOR ITS PERSONNEL ON LFT (LUFTHANSA) TRAI NING EQUIPMENT. 1.15. FOR THIS PURPOSE DKN REQUEST 'WET LEASE' & 'D RY LEASE' ON LFT `S FULL FLIGHT SIMULATOR A320-200 1.16 THE DATES AND NUMBER OF TRAINING SESSIONS SHA LL BE AS MUTUALLY AGREED 1.17. TRAINING WILL BE CARRIED OUT SOLELY DURING T HE HOURS 23.15 AND 06.55 KCAL TIME. 1.18. THE DURATION OF THE RECURRENT TRAINING IS TW O (2) DAYS. 1.19. BOTH PARTIES AGREE THAT; SOME 55 CREWS RECUR RENT TRAINING WILL BE TRAINED ON A WET LEASE BASIS WITH LFT WITHI N EACH TWELVE (12) CALENDAR MONTHS. 1.20. THE MAXIMUM NUMBER OF PARTICIPANTS IN A TRAI NING COURSE IS TWO STUDENTS. 1.21. TRAINING ARRANGED UNDER THIS ATTACHMENT IS A LWAYS LIMITED TO GROUND BASED TRAINING. NOT INCLUDED IN T HIS TRAINING IS LINE TRAINING OR ANY OTHER IN-FLIGHT TR AINING. 1.22. ON REQUEST OF DKN THE RESPECTIVE SIMULATOR C AN BE APPROVED TO THE LAWS AND REGULATIONS OF THE RESPECT IVE AVIATION AUTHORITY OF INDIA. THE NECESSARY PREPARAT IONS WILL BE DONE BY LFT AND THE FINAL APPROVAL BY THE RESPECTIVE AVIATION AUTHORITY. ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 12 OF 35 1.23. THE SUBJECT OF THIS ATTACHMENT B IS THE IMPL EMENTATION OF TRAINING PROGRAMS IN LFT COCKPIT SIMULATORS UNDE R THE DIRECTIONS OF QUALIFIED LFT TRAINING PERSONNEL CONCERNING WET LEASE. ADDITIONALLY THE IMPLEMENTATI ONS OF DRY LEASE TRAINING FOR DKN FLIGHT CREWS UNDER TH E DIRECTIONS OF DKN QUALIFIED PERSONNEL. 1.24. THE TRAINING CONTENT DEFINED HEREINAFTER REF LECTS THE ESTABLISHED TRAINING PROCESS AS OF THE DATE OF THE SIGNING OF THIS CONTRACT. THE DESCRIBED TRAINING CONCEPTS M AY BE SUBJECT TO CHANGE IN CONSEQUENCE OF ANY CHANGES IN INDIAN CIVIL AVIATION REGULATIONS. 1.25. ANY DOCUMENTATIONS REQUIRED FOR THIS TRAININ G SHALL BE PROVIDED BY DKN. COSTS RISING THEREOF SHALL BE BORN E BY DKN. 1.26. THE PRICES MENTION IN PARAGRAPHS. 3.1, 3.2 A ND 3.3 'PRICES FOR SERVICES' DO NOT INCLUDES HOTEL ACCOMMODATIONS AND FLIGHT TICKETS.' 18. ACCORDING TO THE AO, AS PER CLAUSE 1.15 SET OUT ABOVE, THE NON- RESIDENT HAS TO MAKE AVAILABLE SIMULATOR TO THE ASS ESSEE FOR THE PURPOSE OF TRAINING. AS PER CLAUSE 1.23 & 1.24 OF THE AGREEMEN T THE LUFTHANSA TRAINING PERSONNEL HAVE TO IMPART TRAINING TO THE ASSESSEE. THE ABOVE TERMS CLEARLY ESTABLISHES THAT THE CHARGES PAID/PAYABLE ARE MAINL Y FOR USAGE OF SIMULATOR AND FOR IMPARTING INFORMATION ETC. THEREFORE CLEARL Y FALLS UNDER THE DEFINITION OF ROYALTY AS PER EXPLANATION 2 CLAUSE (IV) & (IVA) TO SEC.9(1) OF THE ACT. 19. THE AO ALSO REFERRED TO ARTICLE 12(3) OF THE DT AA BETWEEN INDIA AND GERMANY WHICH DEFINES ROYALTIES AND FEES OR TE CHNICAL SERVICES AS FOLLOWS:- ARTICLE 12(3) - THE TERM ROYALTIES AS USED IN TH IS ARTICLE MEANS PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FO R THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERARY, ART ISTIC OR SCIENTIFIC ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 13 OF 35 WORK, INCLUDING CINEMATOGRAPH FILMS OR FILMS OR TAP ES 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 SC IENTIFIC EXPERIENCE. ARTICLE 12(4) - THE TERM FEES FOR TECHNICAL SERVICE S AS USED IN THIS ARTICLE MEANS PAYMENTS OF ANY AMOUNT IN CONSIDERATI ON FOR THE SERVICES OF MANAGERIAL, TECHNICAL OR CONSULTANCY NA TURE, INCLUDING THE PROVISION OF SERVICES BY TECHNICAL _ OR OTHER P ERSONNEL, BUT DOES NOT INCLUDE PAYMENTS FOR SERVICES MENTIONED IN ARTICLE 15 OF THIS AGREEMENT. 20. ACCORDING TO THE AO, THE ABOVE DEFINITION OF RO YALTY UNDER THE DTAA INCLUDES PAYMENT OF ANY CONSIDERATION FOR USE OR RI GHT TO USE INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENTS AND PAYMENT FOR IMPARTING OF INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SC IENTIFIC 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 EITH ER IN THE NATURE OF ROYALTY OR FTS. (C) PAYMENTS MADE TO ALTEON, SINGAPORE: 21. AS FAR PAYMENTS MADE TO THE AFORESAID NON-RESI DENT IS CONCERNED, THE AO WAS OF THE VIEW THAT AS PER THE AGREEMENT WI TH THE ABOVE COMPANY DATED 18.11.2006, THE NON-RESIDENT HAS TO IMPART TR AINING TO THE COCKPIT CREWS & PILOTS OF THE ASSESSEE. AGAIN, THE AO WAS O F THE VIEW THAT THE BASIC PURPOSE OF THE AGREEMENT WAS TO MADE AVAILABL E 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 WH ICH READS AS FOLLOWS:- ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 14 OF 35 'USAGE AGREEMENT: ON THE TERMS SET FORTH HEREIN, C USTOMER AGREES TO USE AND ALTEON AGREES TO MAKE AVAILABLE T O CUSTOMER THE SIMULATOR, TOGETHER WITH BRIEFING ROOMS. ALTEO N HAS AVAILABLE A BROAD RANGE OF ADDITIONAL TRAINING SERVICES AND E QUIPMENT AND, IF REQUESTED BY CUSTOMER, WILL MAKE THOSE ITEMS AVA ILABLE 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 TRAIN ING CENTRES : A320 FLIGHT SIMULATOR LONDON GATWICK TRAINING CEN TRE, UK A320 FLIGHT SIMULATOR MANCHESTER TRAINING CENTRE, UK A320 FLIGHT SIMULATOR -- SINGAPORE TRAINING CENTRE, SINGAPORE OTHER TRAINING : SUBJECT TO SIMULATOR AND INSTRUCT OR AVAILABILITY. ALTEON WILL PROVIDE CUSTOMER WITH OTH ER 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 B Y THE CONTROLLING REGULATORY AUTHORITY. INSTRUCTORS : ALTEON WILL USE QUALIFIED INSTRUCTOR S AND EXAMINERS, TO PROVIDE SUCH TRAINING, AND QUALIFICAT ION 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. ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 15 OF 35 RECURRENT TRAINING. LOW VISIBILITY OPERATIONS TRAINING. DRY SIMULATOR LEASE. OTHER TRAINING SERVICES. 22. ACCORDING TO THE AO, THERE WERE TWO COMPONENTS OF THE AGREEMENT. FIRSTLY, TO MAKE AVAILABLE THE TRAINING AIRCRAFTS S UCH 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 US E OF SIMULATORS AND TOWARDS TRAINING OF ITS EMPLOYEES. THE CHARGES (PRI CES) ARE ALSO DETERMINED ON THE BASIS OF NO. OF LEASED HOURS OF SIMULATORS M ADE 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/HOU R 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 DA Y ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 16 OF 35 23. ACCORDING TO THE AO, THE BASIS OF CHARGE IS FOR USAGE OF EQUIPMENT AND FOR UTILIZING THE SERVICES OF INSTRUCTORS. THER EFORE, THE CHARGES PAID ARE MAINLY TOWARDS USE OF SIMULATOR AND TRAINERS. THE T RAINERS 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 DE FINITION OF ROYALTY & FTS AS PER ARTICLE 12(3) & 12(4) OF THE DTAA BETWEEN IN DIA 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 SCI ENTIFIC WORK, INCLUDING CINEMATOGRAPH FILM OR FILMS OR TAPES USED FOR RADIO OR TELEVISION BROADCASTING, ANY PATENT, TRADE MARK, DE SIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE, IN CLUDING GAINS DERIVED FROM THE ALIENATION OF ANY SUCH RIGHT, PROP ERTY OR INFORMATION;' 12(4): THE TERM FEES FOR TECHNICAL SERVICES AS USED IN THIS ARTICLE MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDE RATION FOR SERVICES OF A MANAGERIAL, TECHNICAL OR CONSULTANCY NATURE (INCLUDING THE PROVISION OF SUCH SERVICES THROUGH T ECHNICAL 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, SKI LL, KNOW-HOW OR PROCESSES, WHICH ENABLES THE PERSON ACQ UIRING THE SERVICES TO APPLY THE TECHNOLOGY CONTAINED THEREIN; OR (C) CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNI CAL PLAN OR TECHNICAL DESIGN, BUT EXCLUDES ANY SERVICE THAT DOES NOT ENABLE ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 17 OF 35 THE PERSON ACQUIRING THE SERVICE TO APPLY THE TECHN OLOGY CONTAINED THEREIN.' 24. ACCORDING TO THE AO THE CHARGES PAID BY THE IND IAN COMPANY TOWARDS TRAINING CHARGES INCLUDES TWO COMPONENTS: (1) CHARGES FOR USAGE OF SIMULATORS AND (2)THE CHARGES OF TRAINERS, INSTR UCTORS 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 IN DIA AND THEREFORE THE ASSESSEE WAS UNDER AN OBLIGATION TO DEDUCT TAX AT S OURCE ON THE AFORESAID PAYMENTS MADE TO THE NON-RESIDENT. 25. THE AO ALSO DEALT WITH THE DECISION OF THE HON 'BLE SUPREME COURT IN THE CASE OF ISHIKA WAJIMA HARIMA HEAVY INDUSTRIES LTD. VS. DIT (288 ITR 408) BASED ON WHICH THE ASSESSEE HAD CONTENDED THAT NON- RESIDENTS NEITHER RENDERED ANY SERVICES IN INDIA NOR THESE SE RVICES WERE UTILIZED IN INDIA AND THEREFORE AS HELD IN THE AFORESAID DECISI ON, 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 FI NANCE ACT 2007 W.R.E.F. 01.04.1972 BY INSERTION OF THE FOLLOWING E XPLANATION TO SEC.9 OF THE ACT, WHICH READS AS UNDER:- 'FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED T HAT 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 O F THE NON- RESIDENT, WHETHER OR NOT THE NON-RESIDENT HAS A RES IDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA.' ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 18 OF 35 26. ACCORDING TO THE AO, AS PER ABOVE EXPLANATION, IT DOES NOT REQUIRE NON-RESIDENT TO HAVE ANY PLACE OF BUSINESS OR BUSIN ESS CONNECTION IN INDIA. IN OTHER WORDS EVEN THOUGH NON-RESIDENT RENDERS SER VICES FROM OUTSIDE INDIA IN CONNECTION WITH INDIAN BUSINESS, SUCH INCO MES DEEMED TO ACCRUE OR ARISE IN INDIA IN RESPECT OF INCOMES WHICH ARE C HARGEABLE AS ROYALTY/FTS OF THE NON-RESIDENTS THUS, THE ABOVE EXPLANATION CL ARIFIES THAT THE PLACE OF BUSINESS-RESIDENCE OR BUSINESS CONNECTION IS NOT NE CESSARY TO THE NON- RESIDENT IN RESPECT OF INCOMES WHICH ACCRUE OR ARIS E 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 CERTAIN LY UTILIZED IN INDIA. THE TRAINING IMPARTED TO THE TRAINEES ARE MAINLY ME ANT FOR UTILIZATION IN THE ASSESSEES BUSINESS. HE HELD THAT PILOTS AND COCKPI T CREWS ARE INSTRUMENTAL IN RENDERING SERVICES TO VARIOUS AIRCRAFTS THEREFOR E SERVICES OF THE NON- RESIDENT WERE CERTAINLY UTILIZED BY THE ASSESSEE TH ROUGH ITS PILOTS AND OTHER TRAINEES. THUS, THE BASIC PURPOSE OF THE TRAINING S ERVICES ARE TO UTILIZE THESE KNOWLEDGE AND SKILLS FROM TRAININGS IN INDIA TO EARN INCOME FROM INDIA. THEREFORE THE ASSESSEE'S CONTENTIONS ARE NOT ACCEPTABLE. 28. THE CONCLUSIONS OF THE AO MAY BE SUMMED UP THUS :- 1. THAT THE CHARGES PAYABLE TO THE NON RESIDENT PA RTIES IS PARTLY FOR USAGE OF EQUIPMENTS AND PARTLY FOR IMPARTING OF INFORMATION CONCERNING INDUSTRIAL, SCIENTIFIC AND C OMMERCIAL EXPERIENCE, KNOWLEDGE AND SKILL. ITA NOS . 86 & 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 R OYALTY UNDER RELEVANT DTAA. 3. NOTWITHSTANDING THE FACT THAT THE TRAINING CHARG ES 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 BUS INESS IN INDIA. 5. THAT CONSEQUENT TO AMENDMENT OF THE STATUTE BY T HE FINANCE ACT 2007, IT IS NOT NECESSARY FOR NON RESIDENT TO H AVE A PLACE OF RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNE CTION IN INDIA IN RESPECT OF INCOMES WHICH ACCRUE OR ARISE T O 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 ITA NOS . 86 & 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 2,58,6 68 B) M/S LUFTHANSA. GERMANY: @ 1% ON 11,733 FOR 28 MONTHS : 3,285 3,2 85 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, 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 R S. 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 ITA NOS . 86 & 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. 37,45,1 09 + RS. 6,60,000 = RS. 44,05,109 30. AGGRIEVED BY THE ARBITRARY ORDER, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A), REITERATING THE CONTENTIONS AS W ERE PUT FORTH BEFORE THE AO. ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 22 OF 35 31. AS FAR AS THE CONCLUSION OF THE AO THAT PAYMENT S TO NON-RESIDENT CONSTITUTED ROYALTY BECAUSE THE PAYMENT WAS FOR R IGHT TO USE SIMULATOR AND WAS THEREFORE IN THE NATURE OF CONSIDERATION FO R 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 ALLOWE D TO BE USED BY THE PILOTS FOR THEIR 2 DAYS TRAINING AS PER THESE AGREE MENTS. 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 REGARDE D AS USAGE OF SCIENTIFIC EQUIPMENT. FOR THE PURPOSE OF CONSIDERING AN EQUIP MENT AS FALLING UNDER DEFINITION OF SEC.9(1) EXPLANATION-2 CLAUSE (IVA) T HE CONTEXT IN WHICH IT IS USED I.E. FOR THE PURPOSES OF CONSIDERING IT AS ROY ALTY, IS TO BE TAKEN INTO ACCOUNT. THOUGH WHEN CONSIDERED IN ISOLATION, IT CA N LOOSELY BE REGARDED AS USAGE OF SCIENTIFIC EQUIPMENT, FOR CONSIDERING P AYMENT AS TOWARDS ROYALTY, PERHAPS MORE TESTS ARE NEEDED AS TO ITS UN IQUENESS AND NON- AVAILABILITY ELSEWHERE ETC., OTHERWISE EVEN PAYMENT OUTSIDE INDIA TOWARDS PURCHASE OF A MOBILE, LAPTOP OR USAGE OF INTERNET W ILL ALSO HAVE TO BE REGARDED AS USAGE OF SCIENTIFIC EQUIPMENT WHICH ULT IMATELY REQUIRE IT TO BE CONSIDERED UNDER PAYMENT TOWARDS ROYALTY. THE PAYME NT FOR USAGE OF THE SIMULATORS AT THE TIME OF TRAINING THE CABIN CREW/P ILOTS CANNOT REALLY BE REGARDED AS PAYMENT TOWARDS ROYALTY. ACCORDINGLY, H E HELD THAT THE SAME IS NOT COVERED UNDER ROYALTY FOR TAXING THE APPELLA NT U/S 201(1) OR THE RESULTANT INTEREST U/S 201(1A). ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 23 OF 35 32. AS FAR AS THE CASE MADE BY THE AO THAT THE PAY MENT TO NON- RESIDENT CAN BE REGARDED AS FTS, THE CIT(A) HELD TH AT AS FAR AS PAYMENT MADE TO M/S.CAE AVIATION, DUBAI IS CONCERNED, AS PE R 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 A RE 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 ROYAL TY 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 AN D 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 CON TRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN'. ADMITTED LY, 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 I N INDIA SINCE ARTICLE 12 CONTAINS ONLY PROVISIONS FOR ROYALTY AND NOT FOR FE ES FOR TECHNICAL SERVICES. ACCORDINGLY, THE CIT(A) HELD THAT FEES FOR TECHNICA L 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) D IRECTED THE AO TO EXCLUDE THAT PORTION OF THE FEES FOR TECHNICAL SERV ICES PAID TO U.A.E. CONCERN BEING CAE AVIATION, DUBAI, U.A.E AS BEING L IABLE 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 TH E CIT(A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. THE GROUNDS OF AP PEAL RAISED BY THE REVENUE IN BOTH ITS APPEAL FOR THE TWO AYS READS TH US:- ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 24 OF 35 1. THE LEARNED CIT (APPEALS) HAS ERRED IN PARTLY A LLOWING THE APPEAL OF THE ASSESSEE WHICH IS OPPOSED TO LAW, EQU ITY, FACTS AND CIRCUMSTANCES OF THE CASE. 2 THE LEARNED CIT (A) ERRED IN DISALLOWING THE ADD ITION OF RS.98, 30,499/-, THEREBY DISREGARDING THE PAYMENT D OES NOT FALL IN UNDER THE DEFINITION OF ROYALTY AS PER CLAU SE (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 USAG E 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 TOWAR DS USAGE OF SIMULATORS IS NOT TO BE REGARDED AS FTS AND EXCLUDI NG THESE PAYMENTS FROM TAXING UNDER FEE FOR TECHNICAL SERVIC ES. 34. THE NEXT ASPECT WHICH THE CIT(A) TOOK UP FOR CO NSIDERATION WAS WITH REGARD TO THE QUESTION WHETHER THE PART OF THE CONS IDERATION WHICH IS ATTRIBUTABLE TO IMPARTING OF TRAINING OUTSIDE INDIA COULD BE TAXED AS FTS. I.E., THE PAYMENT MADE TO M/S. LUFTHANSA, GERMANY A ND M/S. ALTEON, SINGAPORE. AS FAR AS PAYMENT TO M/S.CAE AVIATION D UBAI, IS CONCERNED, THE CIT(A) HELD THAT THE PAYMENT IS NOT IN THE NATU RE OF ROYALTY. THE QUESTION WHETHER IT IS FTS DOES NOT ARISE BECAUSE O F THE ABSENCE OF A CLAUSE RELATING TO FTS IN THE DTAA REGARDING FTS AN D 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 R EGARDED 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, ITA NOS . 86 & 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, GERMAN Y AND M/ALTEON, SINGAPORE IS CONCERNED, WE HAVE ALREADY SEEN THAT T HE CONSIDERATION PAID WAS FOR TRAINING WHICH ALSO INCLUDE THE CHARGES FOR USE OF SIMULATORS IN IMPARTING TRAINING. THE CIT(A) ALREADY HELD THAT C ONSIDERATION 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 ACC EPT THE ARGUMENT OF THE ASSESSEE THAT NO PART OF THE CONSIDERATION CAN BE S AID TO BE PAYMENT IN THE NATURE OF FTS BY RELYING ON A DECISION OF THE AUTHO RITY 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 COM MERCIAL 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 OBSERVATION S OF THE AAR WAS IN CONNECTION WITH INTERPRETATION OF 'MAKING AVAILABLE ' TECHNICAL EXPERIENCE, SKILL, KNOW-HOW ETC. SINCE THE HON'BLE AAR HAS SPEC IFICALLY TOUCHED UPON THIS SUBJECT AND HELD THAT PAYMENT OF FEES FOR TRAI NING 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 COMPOS ITE FEE PAID FOR TRAINING IS ATTRIBUTABLE TO IMPARTING TRAINING. THE CIT(A) F OUND THAT THE AO HAS NOT ITA NOS . 86 & 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 PAYM ENTS TOWARDS USE OF SIMULATORS AND IMPARTING OF TRAINING IN RESPECT OF PAYMENT MADE TO M/S. LUFTHANSA, GERMANY AND M/S.ALTEON, SINGAPORE. IN RE SPECT OF LUFTHANSA, GERMANY PAYMENTS, THE CIT(A) FOUND THAT THE ASSESSE E HAD BROUGHT TO THE NOTICE OF CIT(A) THAT THE PAYMENT MADE ON 31.10.200 6 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 P ILOTS 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 RE DUCED TO RS.1,17,336/- ) AND RS.36,644 FOR SIMULATOR USAGE OF 3.5 HOURS TH E ASSESSEE HAD PAID CERTAIN SUM WHICH IS INCLUDED IN RS.1,32,955/- ON 1 8.12.2007. 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/- PRO VIDED ON 27.03.2008 FOR FEB' 2008 AND ONLY THE REST OF THE PAYMENTS MAD E TOWARDS TRAINING EXPENSES ALONE HAVE TO BE REGARDED AS FEES FOR TECH NICAL SERVICE AND TAXED ACCORDINGLY. HENCE, THE CIT(A) DIRECTED THE A O TO REDUCE (RS.1,17,336/- + RS.36,644/- + THE AMOUNT OF SIMULA TOR 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/- MA DE TO M/S. LUFTHANSA AND ON THE BALANCE COMPUTE TAX U/S 201(1) AND INTER EST U/S 201(1A). ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 27 OF 35 38. AS FAR AS PAYMENTS MADE TO M/S ALTEON, SINGAPOR E, IS CONCERNED, THE CIT(A) FOUND THAT THE CHARGES TOWARDS A-320 FUL L FLIGHT SIMULATOR USAGE IS ALSO INCLUDED IN THE TOTAL PAYMENT CONSIDERED TO WARDS FEES FOR TECHNICAL SERVICES, AS UNDER :- SL. NO. DATE DESCRIPTION AMOUNT (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) 14,80,5 00 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 39. THE CIT(A) DIRECTED THE AO TO REDUCE THE ABOVE SUMS FROM THE TOTAL AND CONSIDER THE BALANCE AS FEES FOR TECHNICAL SERV ICES LIABLE FOR TAX DEDUCTION U/S 195 AND IS DIRECTED THE AO TO RE-COMP UTE TAX PAYABLE U/S 201(1) AND INTEREST U/S 201(1A). 40. 20. TO JUSTIFY HIS CONCLUSION THAT FTS WAS TAX ABLE IN INDIA, THE CIT(A) ALSO MADE A REFERENCE TO THE AMENDMENT TO SE C.9 OF THE ACT, BY THE FINANCE ACT, 2007 W.R.E.F. 1-6-1976, BY INSERTION O F EXPLANATION WHICH READ THUS:- ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 28 OF 35 EXPLANATION.FOR THE REMOVAL OF DOUBTS, IT IS HERE BY DECLARED THAT FOR THE PURPOSES OF THIS SECTION, WHERE INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSES (V ), (VI) A ND (VII) OF SUB- SECTION (1), SUCH INCOME SHALL BE INCLUDED IN THE T OTAL INCOME OF THE NON-RESIDENT, WHETHER OR NOT THE NON-RESIDENT H AS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDI A. 41. THE CIT(A) REFERRED TO THE DECISION OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF JINDAL THERMAL POWER CO. LTD. V. DCIT REPORTED IN 3 21 ITR 31 , WHEREIN IT WAS ARGUED BY THE REVENUE THAT AFTER I NSERTION OF EXPLANATION TO SEC.9 BY THE FINANCE ACT, 2007 W.R.E .F. 1.6.1976, THE DECISION RENDERED BY THE HONBLE SUPREME COURT IN T HE CASE OF ISHIKAWAJMAS CASE STANDS NULLIFIED. THE HONBLE K ARNATAKA HIGH COURT HOWEVER HELD THAT 'RENDERING THE THEORETICAL ASPECT S OF TECHNICAL SERVICES CAN BE DONE WHOLLY OFFSHORE AND OUTSIDE INDIA. - CR ITERION OF RESIDENCE, PLACE OF BUSINESS OR BUSINESS CONNECTION OF A NON-R ESIDENT 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 N OT ATTRACT TAX LIABILITY.' THE CIT(A) FURTHER OBSERVED THAT THERE WAS A FURTHE R 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 HONBLE KARNATAKA HIGH COURT REFERRED TO ABOVE AND THEREFORE TERRITORIAL N EXUS FOR TAXING A RECEIPT AS FTS WAS NO LONGER REQUIRED TO BE SATISFIED AND T HEREFORE THE PAYMENTS TO NON-RESIDENTS IN THE NATURE OF FTS WAS TAXABLE I N INDIA. THE EXPLANATION SO INSERTED WAS IN SUBSTITUTION OF THE EARLIER EXPL ANATION INSERTED BY THE FINANCE ACT, 2007. ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 29 OF 35 EXPLANATION.FOR THE REMOVAL OF DOUBTS, IT IS HEREB Y DECLARED THAT FOR THE PURPOSES OF THIS SECTION, INCOME OF A NON-RESIDENT SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER C LAUSE (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 IN DIA. 42. AGGRIEVED BY THE ORDER OF THE CIT(A) IN UPHOLDI NG A PART OF THE PAYMENT MADE TO NON-RESIDENTS AS IN THE NATURE OF F TS AND FASTENING LIABILITY ON THE ASSESSEE TO DEDUCT TAX AT SOURCE A ND BECAUSE OF DEFAULT IN DOING SO, TREATING HIM AS ASSESSEE IN DEFAULT U/S.2 01(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 F AR AS IT IS AGAINST THE APPELLANT IS AGAINST THE LAW, FACTS, CI RCUMSTANCES, NATURAL JUSTICE, EQUITY, WITHOUT JURISDICTION AND A LL 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 APPRECIAT E THAT ARTICLE 7 IS APPLICABLE TO THE FACTS OF THE CASE AN D NOT ARTICLE 12 OF THE DTAA OF UAE/GERMANY/SINGAPORE. 4. THE LEARNED CIT-APPEALS ERRED IN HOLDING THE ASS ESSEE AS IN DEFAULT U/S 201(1) ON THE CHARGES PAID/PAYABLE T O M/S. ALTEON, SINGAPORE. 5. THE LEARNED CIT-APPEALS ERRED IN UPHOLDING THE A SSESSEE AS IN DEFAULT FOR NOT DEDUCTING TAX AT SOURCE IN RE SPECT OF PAYMENTS MADE TO ABOVE NON RESIDENT. ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 30 OF 35 6. THE LEARNED CIT-APPEALS ERRED IN COMING TO THE C ONCLUSION THAT TRAINING CHARGES FALLS UNDER THE CATEGORY OF F EES FOR TECHNICAL SERVICES. 7. THE LEARNED CIT-APPEALS ERRED IN COMING TO THE CONCLUSION THAT INCOME HAS ACCRUED / ARISEN IN INDIA EVEN THOU GH NO SERVICES WERE RENDERED IN INDIA BY THE ABOVE NON-RE SIDENTS. 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 CIRCU LAR NO. 14 (XL-35) DT: 11.04.55 ISSUED BY THE BOARD. 11. FOR THE ABOVE AND OTHER GROUNDS AND REASONS WHI CH MAY BE SUBMITTED DURING THE COURSE OF HEARING OF THIS APPE AL, THE APPELLANT REQUESTS THAT THE APPEAL BE ALLOWED AS PR AYED 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 ASSESS EE. THE LEARNED DR REITERATED THE STAND OF THE AO IN SO FAR AS THE APP EALS 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 A PPEALS. 44. 24. AS FAR AS THE APPEAL OF THE REVENUE IS C ONCERNED, THE FIRST ASPECT WHICH WE NEED TO NOTICE IS AS TO WHAT IS SIM ULATOR FEE. A FLIGHT SIMULATOR IS A DEVICE THAT ARTIFICIALLY RE-CREATES AIRCRAFT FLIGHT AND THE ITA NOS . 86 & 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 EFFEC TS OF OTHER AIRCRAFT SYSTEMS, AND HOW THE AIRCRAFT REACTS TO EXTERNAL FACTORS SUC H AS AIR DENSITY, TURBULENCE, WIND SHEAR, CLOUD, PRECIPITATI ON, ETC. FLIGHT SIMULATION IS USED FOR A VARIETY OF REASONS, INCLUDING FLIGHT TRA INING (MAINLY OF PILOTS), THE DESIGN AND DEVELOPMENT OF THE AIRCRAFT ITSELF, AND RESEARCH INTO AIRCRAFT CHARACTERISTICS AND CONTROL HANDLING QUALITIES. TH EREFORE FLIGHT SIMULATOR IS ESSENTIAL PART OF TRAINING IMPARTED TO THE PILOTS A ND CREW OF AIRCRAFT. THE FACT THAT THE CHARGES FOR USE OF THE SIMULATOR IS SEPARA TELY 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 I MPARTING OF TRAINING BY THE INSTRUCTORS, THE HIRING OF SIMULATOR ON ITS OWN DOES NOT HAVE ANY PURPOSE. IT CANNOT THEREFORE BE SAID THAT THE ASSE SSEE 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 O F ROYALTY. THE QUESTION WHETHER IT IS FTS DOES NOT ARISE BECAUSE OF THE ABS ENCE OF A CLAUSE RELATING TO FTS IN THE DTAA REGARDING FTS AND THE S ETTLED POSITION OF LAW THAT IN THE ABSENCE OF A CLAUSE IN A TREATY NOT DEA LING WITH A PARTICULAR ITEM OF INCOME, THE SAME SHOULD NOT BE REGARDED AS RESID UARY INCOME BUT INCOME FROM BUSINESS AND IN THE ABSENCE OF PERMANEN T ESTABLISHMENT IN INDIA (PE) OF THE NON-RESIDENT IN INDIA, THE SAME C ANNOT BE TAXED. WE HAVE ALREADY MADE A REFERENCE TO THE DECISION OF THE ITA T BANGALORE IN THE CASE OF ABB FZ-LLC VS. ITO (IT) WARD-1(1) BANGALORE, [2016] 75 TAXMANN.COM ITA NOS . 86 & 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) I S IN LINE WITH THE DECISION REFERRED TO ABOVE AND IS A CORRECT INTERPR ETATION OF THE TREATY. WE FIND NO GROUNDS TO INTERFERE WITH THE DECISION OF T HE CIT(A) ON THIS ISSUE. 46. THE APPEALS OF THE REVENUE ARE ACCORDINGLY DISM ISSED. 47. AS FAR AS THE APPEALS OF THE ASSESSEE ARE CONCE RNED, 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 EXPLANATI ON 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 IN DIA. 48. THE LAW IS BY NOW WELL SETTLED THAT TAX DEDUCTI ON AT SOURCE OBLIGATION CANNOT BE FASTENED ON A PERSON ON THE BASIS OF A RE TROSPECTIVE AMENDMENT TO THE LAW, WHICH WAS NOT IN FORCE WHEN THE PAYMENT S 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 R ESIDENT IN INDIA TO A NON-RESIDENT CONSTITUTES BUSINESS INCOME IN THE HAN DS 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 N ON-RESIDENT. ADMITTEDLY, FOR THE A.Y. 2007-08 & 2008-09, SUCH PROVISION DID NOT EXIST. AT THE TIME ITA NOS . 86 & 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 T O THE LAW. IN SUCH CIRCUMSTANCES, THE QUESTION THAT ARISES FOR CONSIDE RATION IS AS TO, WHETHER A LIABILITY TO DEDUCT TAX AT SOURCE CAN BE FASTENED O N 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 ASSES SEE IN DEFAULT. 49. IN THE CASE OF KERALA VISION LTD. VS. ASSTT. CIT (ITAT COCHIN), IT AT NO. 794/COCH/2013, ORDER DATED 06.06.2014, A QUESTION THAT CAME UP FOR CONSIDERATION WAS WHETHER THE RETROSPECTIVE AMENDME NT TO SEC.195 CAN FASTEN OBLIGATION TO DEDUCT TAX AT SOURCE. THE TRIB UNAL 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 SCOP E OF THE EXPRESSION 'PROCESS' WAS INSERTED BY THE FINANCE ACT, 2012 WIT H RETROSPECTIVE EFFECT, TO NULLIFY THE DECISION RENDERED BY THE HON'BLE DEL HI HIGH COURT. THE ASSESSEE SUBMITTED BEFORE THE TRIBUNAL THAT THE VIE W 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 SUBM ITTED THAT THE DISALLOWANCE U/S 40(A)(IA) SHOULD NOT BE MADE ON TH E BASIS OF SUBSEQUENT AMENDMENT MADE WITH RETROSPECTIVE EFFECT. IN THIS R EGARD, THE ASSESSEE PLACED RELIANCE ON THE FOLLOWING DECISIONS:- ITA NOS . 86 & 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 (20 14) TAXCORP (INTL) 6945 (ITAT - HYDERABAD) (C) CHANNEL GUIDE INDIA LIMITED VS. ACIT (2013) TA XCORP (INTL) 6702 (ITAT-MUM) 50. THE COCHIN BENCH OF ITAT FOLLOWING THE RULING I N THE DECISIONS REFERRED TO ABOVE HELD THAT THE ASSESSEE CANNOT BE HELD TO BE LIABLE TO DEDUCT TAX AT SOURCE RELYING ON THE SUBSEQUENT AMEN DMENTS MADE IN THE ACT WITH RETROSPECTIVE EFFECT. THE TRIBUNAL HELD TH AT 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 EN TERTAINED 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 ASSESSI NG OFFICER WAS NOT JUSTIFIED IN DISALLOWING THE CLAIM OF PAY CHANNEL C HARGES BY INVOKING THE PROVISIONS OF SEC. 40(A)(IA) OF THE ACT. ACCORDINGL Y, 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 ITA NO.1257/BANG/2011 ORDER DATED 11.4.2014 WHEREIN THIS TRIBUNAL HELD THAT LIABILITY TO DEDUCT TAX SOURCE CANNOT BE FASTENED ON THE BASIS OF A RETROSP ECTIVE AMENDMENT TO LAW WHICH DID NOT EXIST WHEN PAYMENT WAS MADE. RESP ECTFULLY 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 RETROS PECTIVE AMENDMENT TO ITA NOS . 86 & 87 AND 143& 144/BANG/2011 . PAGE 35 OF 35 THE LAW AND HE ERRED IN NOT HOLDING THAT THE LIABIL ITY 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, T HE ORDER OF THE CIT(A) HOLDING ASSESSEE TO BE AN ASSESSEE IN DEFAULT U/S.2 01(1) OF THE ACT TO THE EXTENT OF THE PAYMENT RELATING TO FTS AND CONSEQUEN T LIABILITY TOWARDS INTEREST U/S.201(1A) OF THE ACT IS HEREBY CANCELLED . THE APPEALS OF THE ASSESSEE ARE ALLOWED. 51. IN THE RESULT, THE APPEALS BY THE REVENUE ARE D ISMISSED WHILE THE APPEALS BY THE ASSESSEE ARE ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 23 RD DAY OF JULY, 2019. SD/- SD/- ( JASON P. BOAZ ) ( N.V . VASU DEVAN ) ACCOUNTANT MEMB ER VICE PRESIDENT BANGALORE, DATED, THE 23 RD JULY, 2019. / D ESAI S MURTHY / COPY TO: 1. THE APP ELLA NT 2. THE R ESPON DENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUA R D F ILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.