KINGFISHER AIRLINES LTD. vs. DDIT ITA No.: 86 & 87/Bang./2011 and 143 & 144/Bang./2011

During the years under consideration, it had deputed its pilots and cockpit crew to non-resident companies for training on flight simulators. The ITAT held that since hiring of simulator by itself has no purpose, fee paid for simulator is not royalty. Further, 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.


The assessee was an Indian company engaged in the business of running an airline. During the years under consideration, 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.

The AO was of the view that, the main purpose of the assessee was to lease the simulator, which also included charges for training. The AO held that the payment was in the nature of ‘royalty’ u/s 9(1)(vi) of the Act.

Under India-UAE DTAA, the AO held that payment constituted ‘royalty’ under Article 12 of the India-UAE DTAA. As for payment to German Co, it was held that the payment was ‘royalty’ under Article 12(3) of the India-Germany DTAA and also covered under Article 12(4) as FTS. In respect of the Sing Co, the AO concluded that 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.

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. 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. In respect of the payments made to the German Co and the Sing Co, the CIT(A) concluded that they were in the nature of FTS.


Payment for simulator

The ITAT observed that the flight simulator is an essential part of training and merely because charges for simulator are separately quantified on an hourly basis did not mean that the assessee had hired the simulator or made payment for right to use the simulators. The ITAT observed that without imparting training by the instructors, hiring of the simulator on its own is of no purpose. The ITAT held that the charges paid by the assessee for use of simulator were not ‘royalty’.

Payment to UAE Co.

With respect to payment to the UAE Co, the ITAT observed that the question of payment being classified as FTS does not arise, since the India-UAE DTAA does not have an article relating to FTS. The ITAT observed that 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. The ITAT held that in the absence of the PE of a non-resident in India, business income cannot be taxed in India.

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