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2019 (11) TMI 689 - AT - Income TaxTDS u/s 195 - Payments made to non residents - 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) - 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? - HELD THAT - We need to notice is as to what is simulator fee. A flight simulator is a device that artificially re-creates aircraft flight and the environment in which it flies, for pilot training, design, or other purposes. It includes replicating the equations that govern how aircraft fly, how they react to applications of flight controls, the effects of other aircraft systems, and how the aircraft reacts to external factors such as air density, turbulence, wind shear, cloud, precipitation, etc. Flight simulation is used for a variety of reasons, including flight training (mainly of pilots), the design and development of the aircraft itself, and research into aircraft characteristics and control handling qualities. Therefore flight simulator is essential part of training 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 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 (11) TMI 368 - ITAT BANGALORE 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. Retrospective amendment to the law - 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 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. CIT(A) erred in holding that FTS was taxable in India only because of the retrospective amendment to 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.
Issues Involved:
1. Whether the payments made by the assessee to non-residents for training services are in the nature of "Fees for Technical Services" (FTS) or "Royalty" under the Income Tax Act and relevant Double Taxation Avoidance Agreements (DTAAs). 2. Whether the assessee was liable to deduct tax at source under section 195 of the Income Tax Act on the payments made to non-residents. 3. Whether the retrospective amendment to Section 9 of the Income Tax Act affects the assessee's obligation to deduct tax at source. Issue-wise Detailed Analysis: 1. Nature of Payments as FTS or Royalty: - Payments to M/s. CAE Aviation, Dubai: The AO argued that the payments were for the use of simulators and imparting technical information, thus falling under the definition of "Royalty" as per Explanation 2, clause (iv) and (iva) of Section 9(1) of the Act and Article 12(3) of the DTAA between India and UAE. The CIT(A) disagreed, stating that the usage of simulators for training cannot be regarded as "Royalty" since it does not meet the criteria of uniqueness and non-availability elsewhere. The CIT(A) also noted that the DTAA between India and UAE does not define FTS, thus the payments should be considered under Article 7 as business profits, which are not taxable in India in the absence of a Permanent Establishment (PE). - Payments to M/s. Lufthansa, Germany: The AO classified the payments as both "Royalty" and FTS under Article 12(3) and 12(4) of the DTAA between India and Germany. The CIT(A) held that the payments for simulator usage do not qualify as "Royalty" and directed a bifurcation of payments into those for simulator usage and training services. The portion attributable to training services was considered FTS and taxable in India. - Payments to M/s. Alteon, Singapore: The AO considered the payments as "Royalty" and FTS under Article 12(3) and 12(4) of the DTAA between India and Singapore. The CIT(A) directed the AO to bifurcate the payments into simulator usage and training services, with the latter being taxable as FTS. 2. Obligation to Deduct Tax at Source under Section 195: - The AO held that the assessee was liable to deduct tax at source under Section 195 for all payments made to non-residents, treating them as either "Royalty" or FTS. The CIT(A) partially upheld this view for payments to Lufthansa and Alteon, considering the portion attributable to training services as FTS and taxable in India. However, the CIT(A) exempted payments to CAE Aviation, Dubai, from tax deduction obligations due to the absence of a PE in India and the DTAA provisions. 3. Impact of Retrospective Amendment to Section 9: - The AO relied on the retrospective amendment to Section 9 by the Finance Act, 2007, which clarified that income deemed to accrue or arise in India includes payments to non-residents irrespective of their place of business or the location of service rendering. The CIT(A) referred to the amendment and subsequent judicial interpretations but ultimately held that the retrospective amendment should not penalize the assessee for non-deduction of tax at source at the time of payment. The Tribunal supported this view, citing various judicial precedents that retrospective amendments should not impose a tax deduction obligation that did not exist at the time of payment. Conclusion: - The Tribunal dismissed the revenue's appeals, upholding the CIT(A)'s decision that payments to CAE Aviation, Dubai, are not taxable in India and do not attract tax deduction at source. - The Tribunal allowed the assessee's appeals, ruling that the retrospective amendment to Section 9 cannot impose an obligation to deduct tax at source for payments made before the amendment. Consequently, the assessee was not liable to deduct tax at source on payments to Lufthansa and Alteon for training services rendered outside India. - The Tribunal emphasized that tax deduction obligations should be based on the law in force at the time of payment, not on subsequent retrospective amendments.
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