Western India Regional Council of
The Institute of Chartered Accountants of India

(Setup by an Act of Parliament)

August 23, 2019

CA. Hinesh Doshi, CA. Ronak Soni

M/s. Kingfisher Airlines Ltd vs. The Deputy Director of Income Tax, International Taxation, (IT), Circle-1(1) [TS- 430-ITAT-2019(Bang)] dated 23rd July, 2019

Facts

The assessee company made payments to non-residents for training pilots and cockpit crew to Dubai, Germany and Singapore respectively.

The training facilities were all located outside India, the training was given in the said countries and payments for the same were also made outside India.

The assessee did not treat these services as fees for technical services (FTS) as it claimed the training given by the companies to be part of their routine business and it did not involve any transfer of any technology to employees of the assessee.

AO opined that these payments having charter of FTS u/s 9(1) (vii) as well as relevant DTAA between India and respective countries and hence, it treated the assessee as defaulter under section 201(1) and 201 (1A) for non-deduction of TDS.

Aggrieved, both assessee and revenue appealed before Bangalore ITAT.

Issue

Whether the payment made to foreign aviation academies be regarded as FTS or Royalty?

Held

In case of payment made to M/s. Lufthansa, Germany, ITAT noted that a flight simulator was an essential part of training imparted to the pilots and aircraft crew

ITAT held that without the imparting of training by the instructors, the hiring of simulator on its own did not have any purpose and hence it could not be said that the assessee paid royalty for use of simulator.

Relying on the case of ABB FZ –LLC, ITAT held that the payment was not in the nature of Royalty.

In case of payments made to M/s. Alteon Singapore, ITAT noted that even if the provision of explanation 2 to section 195 did not exist at the time when the assessee made such payments it was not possible for the assessee to foresee an obligation to deduct tax at source by a retrospective amendment to the law.

Relying on Kerala Vision Ltd, ITAT held that the liability to deduct TDS cannot be fastened on an assessee due to such retrospective amendment in law.

ITAT held that CIT (A) erred in holding that FTS was taxable in India and ITAT thus allowed assessee’s appeal.

Adidas India Marketing (P) Ltd vs. Income tax officer – Ward 1(3), New Delhi [TS-439-ITAT-2019 (Del] dated 29th July, 2019

Facts

The assessee company was engaged in the business of sourcing, distribution and marketing products of brand name “Adidas” in India.

During the survey by IT department, it was observed that there was loss of stock by fire and the assessee had received the claim from Indian Insurer in respect of fire insurance policy.

It was further observed that the German parent Company of the assessee, received insurance claim after deduction of claim received by the assessee in India from the Indian Insurer with respect to Global Insurance Policy (GIP) taken with overseas insurer.

AO made addition of insurance claim received abroad by the parent company in the hands of the assessee.

Aggrieved, the assessee appealed before Delhi ITAT.

Issue

Whether insurance claim received by the German parent company is taxable as income in the hands of assessee under Income Tax Act?

Held

ITAT noted that the insurance policy against loss of stock by fire taken by the assessee from Indian Insurer was to secure stock in trade, tangible asset, whereas GIP taken by the German parent company from overseas insurer was for the purpose of securing investment made in subsidiaries or erosion of financial interest held in subsidiary, an intangible asset.

ITAT held that the loss in economic value of the financial interest constituting insurable interest in the case of German parent company, which though had been computed with reference to loss of stock by the fire in the hands of the assessee, was distinct and separate from the insurance claimed by the assessee from the Indian insurer.

ITAT noted that the German parent company paid premium separately for GIP and no part of it had been allocated to the assessee or reimbursed by the assessee.

ITAT observed that assessee was not a party to the contract under GIP. The assessee had no right or obligation under the said GIP to receive the said insurance claim from foreign insurer and thus income cannot be assessed in the hands of the assessee.

Relying on SC decision in case of ED Sassoon & Co Ltd, ITAT ruled that, the claim of insurance received by German parent company was not taxable in the hands of the assessee either u/s. 5 or u/s. 9(1)(i) of the Act.

M/s. Faurecia Automotive Holding vs. DCIT (IT) Circle–1, Pune [TS- 417-ITAT 2019 (Pun] dated 8th July, 2019

Facts

The assessee French Co. received re-imbursement towards expat’s salary cost from its Indian counterpart for providing technical services through its employee.

TDS was deducted by the Indian entity from the total salary paid to the expatriate including the amount initially paid by the assessee in France but later on reimbursed by the Indian entity on cost to cost basis.

Revenue taxed this cost as FTS u/s. 9(1) (vii). Aggrieved, the assessee appealed before ITAT.

Issue

Whether the reimbursement of cost will be taxable as fees for technical services (FTS)?

Held

ITAT observed that the expatriate was engaged by the Indian entity as its CEO and was working under the supervision & control of the Indian entity. Further the remuneration was directly fixed by the Indian entity like any other employee.

ITAT also noted that the amount was already taxed as ‘salaries’ in the hands of expats wherein TDS was also deducted by Indian entity from the total salary paid to the expatriate including the amount initially paid by the assessee in France, but later on reimbursed by the Indian entity on cost to cost basis.

ITAT noted that as per explanation to Sec. 9(1)(vii) the amount so referred will be taxed in the hands of the real recipient viz., the expatriate and not the non-resident entity.

ITAT ruled that due to absent satisfaction of ‘make – available’ condition the payment received by the assessee from Indian counterpart towards provision of IT Support Services does not constitute royalty/FTS under the Income-tax Act or under Article 13 of India-France DTAA.

ITAT thus ruled in favour of the assessee.

Cummins Inc vs. DDIT (International Taxation -I), Pune [TS-458-ITAT-2019 (PUN)] dated 7th August, 2019

Facts

The assessee company, a tax resident of USA, received a sum from KPIT-GBS (company located in India) as consideration for grant of right to render BPO services to its group entities globally.

AO held that the sum received from KPIT-GBS is accrued in India u/s. 9(1)(i) and constitutes Agency PE in terms of DTAA and thus chargeable to tax in India.

On appeal before DRP, it held that sum received by assessee is accrued in India u/s. 9(1)(i), however constitutes Service PE instead of Agency PE in terms of DTAA

Aggrieved, the assessee appealed before Pune ITAT.

Issue

Whether sum received by non-resident entity for granting rights to render BPO services is taxable in absence of PE in India?

Held

ITAT noted that the existence of business connection in India, is sine qua non for an income to accrue or arise in India in terms of section 9(1)(i) of the Act. Such business connection can be established directly by the non-resident by doing business activity in India or indirectly through some dependent agent etc.

ITAT held that business connection is established for the assessee, however considering the net effect of section 9(1)(i) and DTAA, only such amount of business income of a non-resident can be charged to tax in India as is attributable to the carrying on of operations in India.

ITAT further held that even if there is a business income of a non-resident, the same would escape Indian taxation net if the assessee is not carrying out any operations in India or does not have a PE in India.

ITAT held that service PE is ordinarily constituted when the foreign enterprise renders services in India to its customers and such services are rendered through its own employees or other personnel.

ITAT reversed the order of DRP and held that there are no services, which have been provided by the assessee in India through its employees or other personnel for which a sum was received from KPIT-GBS and thus no service PE of the assessee is established in India.

ITAT held that the consideration received is not chargeable to tax in the absence of any business operations carried out in India as provided in Explanation 1(a) to Sec.9(1)(i) or existence of PE as per the Treaty.

ITAT thus allowed the appeal of the assessee.

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