TMI Blog2009 (1) TMI 769X X X X Extracts X X X X X X X X Extracts X X X X ..... has met all the requirements of the Federal Aviation Act, 1958. It is also noted that the assessee is registered member of International Air Transport Association (IATA). Further it is submitted by the assessee that five flights a week were operated to and from India in the international traffic for transportation of cargo even in the first year of business in India. All these factual aspects could not be controverted by the ld DR. Therefore, considering the same, we are of the considered view that CIT (A) was justified in holding that the assessee was engaged in the business of transportation of cargo by air in the international traffic. In our view, the inland transportation is an integral part of the main activity of transportation of cargo in the international traffic provided there is live link between inland transportation and the main transportation in the international traffic. This aspect was examined by the Bench in the light of various commentaries in the case of Deputy DIT v. Safmarine Container Lines N. V. [ 2008 (7) TMI 444 - ITAT BOMBAY-L] . It was held in that case that inland transportation from customer s place at Ludhiana to Mumbai was an integral part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aircrafts owned/chartered/leased by other enterprises would be outside the scope of article 8(2) and consequently would not be exempt from taxation under article 8(1) unless such transportation falls under paragraph 4 of this article. Further, the inland transportation connected with such transportation would also not be exempt under article 8. However, such profits would be considered as business profits under article 7. Therefore, taxability or exemption in respect of such profits will have to be examined by the Assessing Officer in the light of article 7 of the treaty. (4) Where a space is booked with other airlines, the question whether transportation through such airlines can be said to be transportation by the aircraft chartered by the assessee needs to be examined by the Assessing Officer with reference to the first part of the definition given in article 8(2) in the light of material which may be placed before him. Since the meaning of the word chartered is not clear from the definition itself, the Assessing Officer would be justified in ascertaining the scope of such word in the light of the commentaries or other materials which may be placed before him. In vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reight: In respect of outbound shipments, if the customer calls the FEC customer service centre and makes a request for the cargo to be picked up, FEC intimates Blue Dart for pick-up of the freight. For regular shippers, Blue Dart picks-up the cargo from the consignor location. The carrier transports consignments to the warehouse/cargo complex/commercial clearance agent. At the warehouse/cargo complex, the cargo is sorted destination-wise. The sorted cargo is then carted to the airport. In the event that Blue Dart is a customer, Blue Dart directly delivers the cargo to FEC at the airport. At the airport, the consignments go through screening and customs clearance by customs authorities. FEC arranges for transportation of the consignments to the destination airport, where the consignments are again sorted and finally either delivered to the consignee, or are further transported to another destination. In respect of inbound shipments, the consignments reach the Indian airport, from where they are carted to the warehouse/cargo complexes/commercial clearance agent. The consignments are sorted at the warehouse/cargo complex/commercial clearance agent, from where the consignments ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourier. The relevant portions of paragraphs 1 to 3 of the above letter are being reproduced as under: 1. As submitted earlier, FEC is recognised as the largest cargo airline in the world with a fleet of over 650 aircrafts. FEC is known the world over for providing integrated value added air transportation services for time sensitive and time definite freight to various destinations around the world and is responsible for the delivery of the freight to the airport/ultimate destination, as the case may be. Considering that the goods to be delivered are time sensitive, it is a normal practice in the airline industry to occasionally utilise, when required, the services of other airlines for the carriage of cargo and of other agencies on behalf of the customers for the delivery of the goods from the airport to the consignee. Thus, as such FEC is an airline and in fact the largest cargo airline in the world. 2(1) We also wish to most respectfully submit the following arguments and facts, which would prove without doubt that FEC s operations in India are distinctly different from what is generally perceived as a typical courier operation. (f) Courier agencies are customers of airli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e specifically in the case of the Indo-US tax treaty. It would be pertinent to point out that Air India provides first class passengers certain ancillary facilities such as free airport to hotel pick-up and drop, hotel stay, valet services and meals which are separate activities not directly connected with air transporter, however clearly recognised as activities ancillary to air transportation. Thus, by extension if FEC delivers the shipment from the airport to the destination, the consignee, it is still engaging in the activity of transportation and not an unrelated activity. Thus FEC operations without doubt are airline operations and all its revenues generated in India are on account of the international transportation of goods, which are covered under article 8 of the Double Taxation Avoidance Agreement between India and the United States of America. Needless to state, a contrary view would be against the very spirit of the treaty. In paragraph 5 of the above letter, the assessee explained as to why during the assessment year 1998-99 it could not carry shipments on its own aircraft and was forced to pay other airlines for carrying its shipments even while it was operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e explanation of the assessee, the Assessing Officer was of the view that the assessee was carrying on an organised activity of providing courier service. Since it had branches in India through which it carried its activity, it was taxable in India under article 7 read with article 5 of the Indo-US treaty. The relevant observations of the Assessing Officer in this regard appearing at page 15 of the assessment order are quoted below: On going through the above, it is quite clear that the assessee is engaged in the business of time definite and time sensitive express cargo services which is popularly known as courier business. It is observed that under the arrangement with Blue Dart, the assessee is required to provide sufficient persons, equipments, vehicles and other facilities to deliver outside India consignments tendered to it by Blue Dart. All such consignments are delivered to the assessee at appointed airports within India as agreed between the assessee and Blue Dart. Blue Dart pays delivery charges to the assessee as per agreed terms based on weight of the consignments. The assessee is therefore engaged in delivering international consignments originating from India to va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t operation services (in connection with the abovementioned activity) to the customers, under any national or international law, so as to be in the business of courier operations. In Furniss Withy and Co. [1968] CTC 35 where a United Kingdom enterprise providing managing agency and stevedoring services in Canada for ships owned and chartered by the enterprise subsidiaries and affiliate, it was held by the Canadian Supreme Court that only profits derived from the services supplied to ships owned or chartered by the enterprise were exempt under article 8 of the Double Taxation Avoidance Agreement. Applying the same analogy in the instant case, it is clear that the profits derived from providing the abovementioned services, would not be exempt in India under article 8 of the Double Taxation Avoidance Agreement. It may also be added here that the assessee during the previous year relevant to the assessment year 1998-99, has carried express cargo on other airlines as a normal customer of the airlines. When the assessee s representative was asked to submit the agreements with other airlines for carriage of cargo, it has been stated that there is no written agreement with any of the air ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perate as an air carrier. The air transport agreement executed between India and the US which indicates that US airlines can operate in India as scheduled carriers provided they have received the designated mandate as being a designated carrier by a competent aeronautical authority of the US and in this connection, a copy of the Certificate of Public Convenience and Necessity issued to the appellant by the Department of Transportation, Government of the US indicating that the appellant has been authorised to engage in scheduled foreign air transportation of property and mail between the United States, on the one hand, and, inter alia, India on the other. The operating licence issued to the appellant by the Ministry of Civil Aviation, Government of India, which allowed it to operate in India as a scheduled cargo airline and the fact that the same was issued pursuant to filing of the above documents by the appellant with the Ministry of Civil Aviation, Government of India. The permission granted to the appellant by the RBI for setting up branches in India to undertake air cargo operations after recognising that the appellant is a designated US scheduled airline. Evidence th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. At the outset, learned counsel for the assessee submitted before us that the issue is covered by the decision of this Bench in the case of Balaji Shipping (UK) Ltd. [2009] 315 ITR (AT) 62 ; 25 SOT 325 wherein it has been held that the expression Profits from operation of ships appearing in article 9 of the Indo-UK treaty would include not only profits from operation of ships owned, chartered or leased but also profits from transportation of cargo through other ships wherein slots were chartered. He drew our attention to the fact that the assessee is a well known world wide airline having fleet of 650 aircrafts. It was also pointed out that five flights a week were operated by the assessee to and from India. However, for the reasons given in the letter dated March 23, 2001, the assessee could not operate more aircrafts in the assessment year 1998-99 from India and therefore interline agreements were entered into with other airlines for transportation of cargo on behalf of the assessee. According to him, such transportation was part of the assessee s main activity and therefore profits from such transportation were not taxable in India in view of the above decision of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on international taxation cannot be looked into for ascertaining the scope of the provisions of a treaty. He drew our attention to the submission of the Attorney General before the apex court appearing at page 660 of the report to submit that no such contention was raised on behalf of the Revenue. According to him, this judgment is only an authority for the proposition that where the term is defined under the domestic law then there is no need to refer to the OECD commentary. The question before the apex court was whether capital gains accruing to the assessee could be considered as income. It is in this context, their lordships observed that the word income was defined under the domestic law and therefore capital gain was to be treated as income claimed to be exempt under the Indo-Malaysian treaty. It was further submitted that the decision in the case of Delta Airlines Inc. [2009] 317 ITR (AT) 364 (Mumbai) ; [2008] 26 SOT 514 is contrary to its earlier decision in the case of Safmarine Container Lines N. V. [2009] 314 ITR (AT) 15 (Mumbai) ; [2008] 24 SOT 211 wherein the scope of article 8 of the Indo-US treaty was considered in the light of commentaries. Proceeding furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch airline and the assessee had to pay the charges irrespective of the booking of cargo. This amounts to slot arrangement or code sharing and therefore the same should be considered as direct activity as per the decision of the Bench in the case of Balaji Shipping (U. K.) Ltd. [2009] 315 ITR (AT) 62 (Mumbai) ; [2008] 25 SOT 325. Regarding the inland transportation, it was submitted that it was directly connected with main activity since such transportation related to the cargo which was to be transported in the international traffic. According to him such transportation would fall within the scope of article 8(2)(b) in view of the decision of this Bench in the case of Deputy DIT v. Safmarine Container Lines N. V. [2009] 314 ITR (AT) 15; [2008] 24 SOT 211. In support of this submission, he also referred to the decision of the Tribunal in the case of KLM Royal Dutch Airlines v. Deputy CIT [2008] 307 ITR (AT) 142 (Delhi) which has been upheld by the High Court of Delhi in DIT v. KLM Royal Dutch Airlines [2010] 325 ITR 300 ; [2008] 220 CTR 268. Lastly it was submitted that services of other airlines were availed of only for transporting the cargo to hub from where aircrafts of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lines was up to the hub only from where cargo was transported by the assessee s aircraft is not supported by any material. Even if the decision of the Bench in the case of Balaji Shipping (UK) Ltd. [2009] 315 ITR (AT) 62 (Mumbai) ; [2008] 25 SOT 325 is to be applied, the claim of the assessee cannot be allowed unless it is shown that there was linkage between the transportation of cargo by other airline and transportation of cargo from hub by the assessee s aircraft. Reliance has been placed on the decision of this Bench dated November 25, 2008 in the case of Deputy DIT v. Cia de Navegacao Norsul (I. T. A. No. 4964/M/ 05) [2008] 317 ITR (AT) 386, copy of which has been furnished. Regarding the interline agreements, it is submitted that copies of such agreements were never furnished before the lower authorities and therefore need verification. Further, no application has been made under rule 29 of the Income-tax Appellate Tribunal Rules for admission of the same. If such evidence is to be considered then the matter should be remitted to the Assessing Officer. It was also submitted that it was never the case of the assessee before the lower authorities that interline agreement amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal representative submitted that the assessee had initiated the proceedings for mutual agreement process (MAP) and the competent authority has expressed the view contrary to the stand of the assessee. Reference has been made to the letter dated May 3, 2007, issued by the Department of the Treasury, Internal Revenue Service, Washington D.C. to the assessee wherein the following opinion was expressed: Although we do not agree on the technical merits that FedEx India s income was not exempt we came to a mutual agreement with a view to assisting the taxpayer to avoid double taxation. Under the terms of the mutual agreement, FedEx India s profits from the transportation, pick-up and delivery of freight, cargo, and mail is exempt from Indian income tax under article 8 provided that the transport of said mail, documents and cargo is on FEC operated aircraft. The taxpayer s profits from the transportation pick-up and delivery of freight, cargo, and mail will not be exempt from Indian income tax under article 8 if the transport of said mail documents, and cargo is not on FEC operated aircraft. In view of the above, it is submitted by her that the appeal of the Revenue has to be accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in the business of transportation of cargo by air in the international traffic. Having held as above, the other aspect of the question is whether the benefit of article 8 can be denied on the ground that inland transportation undertaken by the assessee, in order to provide door-to-door facility, has been termed by the Assessing Officer as courier activity. In our view, the inland transportation is an integral part of the main activity of transportation of cargo in the international traffic provided there is live link between inland transportation and the main transportation in the international traffic. This aspect was examined by the Bench in the light of various commentaries in the case of Deputy DIT v. Safmarine Container Lines N. V. [2009] 314 ITR (AT) 15 (Mumbai) ; [2008] 24 SOT 211. It was held in that case that inland transportation from customer s place at Ludhiana to Mumbai was an integral part of the main activity of the transportation of the same in the international traffic through ships owned/chartered/leased by the assessee. Accordingly, the benefit of article 8 of the Indo-US treaty was allowed. Therefore, following the said decision, it is held that the ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the parties is, therefore, restricted to the profits derived by the assessee from the transportation of cargo through aircrafts belonging to other enterprises as well as profits attributable to the inland transportation. It is in this context that the decisions of this Bench are to be analysed. Therefore, the question arises whether there is any conflict between these two decisions. In the case of Balaji Shipping (UK) Ltd. [2009] 315 ITR (AT) 62 (Mumbai) ; [2008] 25 SOT 325, the Bench was required to interpret the provisions of article 9 of the Indo-UK treaty while in the case of Delta Airlines Inc. [2009] 317 ITR (AT) 364 (Mumbai) ; [2008] 26 SOT 514, it was required to interpret the provisions of article 8 in the Indo-US treaty. Therefore, it would be appropriate to reproduce the relevant provisions of both the treaties : Article 8 of Indo-US treaty Article 9 of Indo-UK treaty Shipping and air transport : Shipping : 1. Profits derived by an enterprise of a Contracting State from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in that State. 1. Income of an enterprise of a Cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of this article shall apply also to income derived from participation in a pool, a joint business or an international operating agency. 6. Gains derived by an enterprise of a Contracting State described in paragraph 1 from the alienation of ships, aircraft or containers owned and operated by the enterprise, the income from which is tax able only in that State, shall be taxed only in that State. 6. Gains derived by an enterprise of a contracting State from the alienation of ships or containers owned and operated by the enterprise shall be taxed only in that State if either the income from the operation of the alienated ships or containers was taxed only in that State, or the ships or containers are situated outside the other Contracting State at the time of the alie nation. A comparative study of the above provisions clearly indicates that article 9 of the Indo-UK treaty uses the expression profits from operation of ships but such expression has not been defined. On the other hand, in the Indo-US treaty, the expression profits from operation of ships or aircrafts in the international traffic has been defined in paragraph 2 of article 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax (Appeals), the Appellate Tribunal as well as the hon ble High Court held that in view of the treaty between India and Malaysia, such capital gains could not be taxed in India. Thus, the matter reached before the Supreme Court. It is in this context, the Attorney General of India appearing for the Revenue raised the following contention appearing at page 660 of 267 ITR : He further urged that tax on capital gains is a different kind of tax though brought within the fold of income-tax law in this country ; that under the principles of international law the fiscal jurisdiction of a State to tax any form of income generally arises from either the location of the source of income within its territory or by virtue of the residence of the assessee within its territory. However, in contrast to the State where income is source, the country of which the assessee is a resident is entitled to tax the assessee on its global income and in other words, the assessee is subject to unlimited fiscal liability in the State of residence. Similar view has been taken by the Karnataka High Court in CIT v. R. M. Muthaiah [1993] 202 ITR 508. Thus, the State of which the assessee is a resident has i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the domestic law could be applied. This means that meaning of such expression can be ascertained with reference to the other materials which may be by way of domestic law or the commentaries available at the time of execution of the agreement by the contracting parties as held by the apex court in the case of Azadi Bachao Andolan [2003] 263 ITR 706. Impliedly, it means that where any expression or term is defined then it would be unnecessary to refer to the commentaries or decisions of foreign jurisdiction as held by the apex court in the case of P. V. A. L Kulandagan Chettiar [2004] 267 ITR 654. Therefore, the decision of the Bench in the case of Delta Airlines Inc. [2009] 317 ITR (AT) 364 (Mumbai) ; [2008] 26 SOT 514 to the effect that commentaries on international law need not be looked into where the expression has been defined in the treaty itself is in accordance with the ratio laid down in the above decision. The contention of the assessee s counsel that the decision in the case of Delta Airlines Inc. [2009] 317 ITR (AT) 364 (Mumbai) ; [2008] 26 SOT 514 is contrary to the earlier decision of the Tribunal in the case of Deputy DIT v. Safmarine Container Lines N. V. [200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een exhaustively spelt out. Under these circumstances, it is imperative to go by the Commentaries for ascertaining the true purport of this expression. The perusal of the above shows that the principle laid down in paragraph 10 of the order has been reiterated by us in the case of Delta Airlines Inc. [2009] 317 ITR (AT) 364 (Mumbai) ; [2008] 26 SOT 514. As far as paragraph 15 is concerned, it has been stated clearly that the expression other activity directly connected with such transportation in article 8(2)(b) of the Indo-US treaty has not been further elaborated in the Double Taxation Avoidance Agreement and, therefore, the true intent could be ascertained by looking into the commentaries. This principle is not contrary to the earlier principles stated in paragraph 10. It only means that to the extent any term or expression is ambiguous then to ascertain its meaning the court can look into the commentaries on international taxation. Sometimes, an ambiguity can be in the words used by the contracting parties while drafting the treaty. Article 8(2) of the Indo-Belgium treaty defines the expression income derived from operation of ships or aircraft in the international traffi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umption that Parliament did not intend to act in breach of international law including the State treaty obligations. Similarly, in the case of T. N. Godavarman Thirumalpad v. UOI [2002] 10 SCC 606 it was observed that in the absence of any inconsistency regard must be had to, even in construing the domestic law. Therefore, these decisions do not support the contention of learned counsel for the assessee that commentaries should be looked into even where the expression or term has been specifically defined in the treaty. The decision of the Tribunal in the case of Lufthansa German Airlines v. Deputy CIT [2004] 90 ITD 310 (Delhi) also does not help the contention of the assessee inasmuch as the Tribunal was considering the provisions of article 8(4) of the Indo-German treaty which deals with the profits from the participation in a pool, a joint business or an international operating agency. Thus, the said decision cannot be considered for considering the scope of article 8(1) and (2) of the Indo-US treaty. Mr. Porus Kaka, learned counsel for the assessee has, during the course of argument, picked up few words and sentences in the order of the Tribunal in the case of Delta Airline ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain the intent of such word or words as in such cases external aid for interpretation may be necessary. But, if the language is clear and unambiguous then the scope of such expression or term cannot be enlarged or restricted by referring to the commentaries. Let us now examine the provisions of article 8 of the Indo-US treaty and adjudicate the issue before us. The provisions of article 8 are being reproduced even at the cost of repetition ([1991] 187 ITR (St.) 102, 110) : Shipping and air transport 1. Profits derived by an enterprise of a Contracting State from the operation by the enterprise of ships or aircraft in international traffic shall be taxable only in that State. 2. For the purposes of this article, profits from the operation of ships or aircraft in international traffic shall mean profits derived by an enterprise described in paragraph 1 from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft including (a) the sale of tickets for such transportation on behalf of other enterprises ; (b) other activity directly connected with such transportation ; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooked a specific space with Air India and the assessee has to pay the compensation irrespective of the actual transportation. According to him, such transportation through reciprocal arrangement would amount to pool arrangement described under paragraph 4 of article 8. Further, arrangement with Air India would amount to charter of aircraft partly and therefore, such arrangement would also qualify for exemption within the first part of definition itself. This aspect of the issue was neither raised before the Assessing Officer nor before the Commissioner of Income-tax (Appeals). Even otherwise, there was no occasion for these authorities to consider such aspect of the issue since the Assessing Officer had rejected the entire claim on the ground that activity of the assessee amounted to courier activity and the Commissioner of Income-tax (Appeals) allowed the entire claim of the assessee on the ground that the assessee was engaged in the business of transportation in the international traffic by air. The learned Departmental representative also pointed out that one of the agreements produced now was not in existence in the year under consideration. Accordingly, we are of the view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be outside the scope of article 8(2) and consequently would not be exempt from taxation under article 8(1) unless such transportation falls under paragraph 4 of this article. Further, the inland transportation connected with such transportation would also not be exempt under article 8. However, such profits would be considered as business profits under article 7. Therefore, taxability or exemption in respect of such profits will have to be examined by the Assessing Officer in the light of article 7 of the treaty. (4) Where the claim of the assessee does not fall within the scope of article 8(2), the claim of the assessee can be examined with reference to paragraph 4 of article 8 since it specifically provides that paragraph 1 would apply if the case of the assessee falls under paragraph 4 which includes profits from participation in a pool, a joint business, or an international operating agency. (5) Where a space is booked with other airlines, the question whether transportation through such airlines can be said to be transportation by the aircraft chartered by the assessee needs to be examined by the Assessing Officer with reference to the first part of the definition g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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