The Delhi Bench of Income Tax Appellate Tribunal (ITAT) ruled that the income earned by Ethiopian Airlines from providing simulator training services to Flight Simulation Technique Services (FSTC), a Dubai-based company, was not taxable in India.

Ethiopian Airlines Group,appellant-assessee, had an agreement with a Dubai-based company, FSTC, to provide flight simulator and pilot training services. FSTC’s group company in India, Flight Simulation Technique Centre (P) Ltd. (FSTL), had signed contracts with airlines like Jet Airways, Vistara, Indigo, and GoAir to provide simulator training for pilots.

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FSTL routed the training services through FSTC, which in turn engaged the appellant for the simulator services in Adis Ababa. The appellant received ₹1,70,86,740/- for these services. The Assessing Officer (AO )treated this amount as fees for technical services (FTS) taxable in India, and the Dispute Resolution Panel (DRP) upheld the assessment.

The DRP looked into whether the payment made by an Indian company, FSTI, to Ethiopian Airlines (EA) was taxable in India as FTS.The assessee argued that the agreement was between EA and a UAE-based group company, not with FSTI directly. It claimed that since both parties were non-residents and services were provided outside India, the income was not taxable in India.

However, during a survey, it was found that FSTI India had actually made the payment to EA without deducting tax at source. The DRP noted that the simulator services were used to train pilots of Indian airlines, and though the services took place in Ethiopia, the payment came from India and benefited Indian entities.

The DRP held that this made the income taxable in India, as the services were used in India and the payment was from an Indian company. It also said the service involved technical expertise and fell under the definition of FTS.

The panel concluded that the income had a clear link to India and should be taxed here. It rejected the assessee’s arguments and directed the AO to treat the amount as taxable under Indian tax law.

The assessee aggrieved by the order appealed before the tribunal.

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The two member bench comprising Satbeer Singh Godara (Judicial Member) and S.Rifaur Rahman (Accountant Member) examined the detailed submissions made by both sides and found no merit in the lower authorities’ decision to treat the receipts from flight simulator and related services as taxable in India. It found that neither the assessee nor the Dubai-based entity had provided any services in India that could be taxed under Indian law.

It also disagreed with the Revenue’s reliance on the retrospective amendment to section 9(1)(vii) and the India-Ethiopia DTAA, noting that the services were not customised and did not fall under the definition of FTS.

The appellate tribunal observed that the simulators were standard facilities provided in Ethiopia and not tailored to any specific user. Citing rulings from the Delhi High Court in SFDC Ireland and the Supreme Court in Kotak Securities and A.P. Moller Maersk, it held that general facilities used by all customers cannot be considered technical services.

Based on this, the tribunal held that the receipts were not taxable as FTS and set aside the findings of the lower authorities and allowed the appeal of the assessee.

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