Flight Simulator Services Not Taxable under Section 9(1)(vii) as FTS in India: ITAT

While deciding the two connected appeals filed by the Ethiopian Airlines Group for AYs 2016–17 and 2017–18, challenging the taxability of income received for providing flight simulator and pilot training services, the Income Tax Appellate Tribunal, Delhi, allowed the appeals. The Ethiopian carrier had entered into an agreement with Flight Simulation Technique Centre (FSTC), a UAE-based company, to provide simulator services in Addis Ababa, which were ultimately used by pilots of Indian airline operators via its Indian group entity, M/s. Flight Simulation Technique Centre (P) Ltd. (FSTL).

The Indian Assessing Officer had held that Rs. 1.7 crore in revenue was taxable in India as “Fees for Technical Services” (FTS) under Section 9(1)(vii), read with Section 115A, and upheld this in the final assessment after DRP approval. However, the assessee contended that the services were provided outside of India, were not customised but rather belonged to standard facilities, and were covered by Article 7 of the India-Ethiopia DTAA, which states that business income is not taxable in India without a Permanent Establishment (PE). Aggrieved by the DRP’s directions upholding the Assessing Officer’s decision to tax the income of Rs. 1.70 crores received as FTS, the assessee filed the said appeals before the ITAT, Delhi.

Issue Raised: Whether the income received by Ethiopian Airlines from simulator services provided outside India can be treated as FTS and deemed to accrue or arise in India under Section 9(1)(vii) of the Income Tax Act, and whether such income is taxable under the Act and the India-Ethiopia DTAA.

ITAT Delhi’s Decision: The Hon’ble Tribunal agreed with the assessee’s claim that the services only involved using a standardised simulator facility in Addis Ababa and did not require any unique or exclusive technical input. The tribunal further noted that standard facilities, even when used for training, do not amount to technical services under Explanation 2 to Section 9(1)(vii). The tribunal highlighted the Supreme Court’s rulings in Kotak Securities Ltd. and the recent Delhi High Court ruling in SFDC Ireland Ltd. v. CIT, whereby it was clarified that the income is not subject to taxation in India, neither under domestic law nor under the DTAA, as the services were not provided there, i.e., within India, and no PE was established. The Revenue’s reliance on the amended Explanation to Section 9(2) was also rejected, as the services were neither consumed in India nor involved any technical customisation. Accordingly, the tribunal, allowing both the appeals, deleted the additions made therein by the AO.

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