9911796707
TMI Blog2012 (5) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... in law, the ld. CIT(A) erred in directing the Assessing Officer to give benefit of Article 8 of the Indo-USA DTAA to the line-haul activity and exempt profits attributable to such activity." The Revenue has filed application for raising following additional grounds: "1. CIT(A) erred in not adjudicating on nature of Cargo business carried on by assessee in India and has failed to inquire into real nature of business activity of assessee in India." 2. The appellant prays that the order of the ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer restored. 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 3. The facts giving raise to the above appeal are as follows: The assessee is a non-resident company incorporated in the United States of America. The assessee is a cargo airline company engaged in the business of transportation of goods by air in the course of international traffic. The Reserve Bank of India, vide letter dated March 29, 2000 granted permission to the assessee to open branch office at Mumbai. While the assessee manages a substantial part of this transpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of transportation of goods by air in the course of international traffic. The assessee carries out the activities of transportation of goods in the course of international traffic either through its own airlines or arranges for the same through other airlines. While the assessee manages a substantial part of this transportation using its own fleet of aircraft, it needs to use the services of other airlines to carry the goods which cannot be carried by the assessee's own fleet of aircraft. The assessee submitted that line haul activity i.e. the activity of transportation of goods through other airlines is an integral part of its own air transport business. Further, these activities have been carried out by the assessee for the purpose of carrying the goods for its own customers in the course of international traffic. Therefore, these activities squarely fall within the scope of Article 8 of the DTAA. The Assessee submitted that it was operating non-scheduled flights in India by taking prior approvals on a flight to-flight basis and later it received a general approval on 21-10-1999 for a structured schedule of flights. The Reserve Bank of India granted permission to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is transportation using its own fleet of aircraft, it needed to use the services of other airlines to carry the goods, which cannot be carried by the Assessee's own fleet of aircraft. In view of the above, assessee submitted that the activities of arranging for the transportation of goods through other airlines are an integral part of it's business of international air transportation and hence, not chargeable to tax in India in view of Article 8 of the DTAA. The assessee also referred to the commentary by Philip Baker on Article 8 at page 203. On the said page Philip Baker has given an example of activities closely connected with direct operation of aircraft wherein, an airline arranged for onward sea passages for its passengers with shipping lines and the commission earned from that activity was considered as business of operating aircraft. In view of the above, it was submitted that the activities of the assessee in relation to the transportation of cargo through other airlines for its own customers is covered under Article 8 and hence should not be considered as taxable in India as per the provisions of the DTAA. 7. The assessee contended that the income arising out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the revised commentary on Article 8 of the OECD Model tax Convention, which according to him supports the view that the line haul activity is directly connected with the operation of aircraft in international traffic. In this regard, he referred to paragraph 6 of the OECD revised commentary, wherein it has been pointed out that: "6. Profits derived by an enterprise from the transportation of passengers or cargo otherwise than by ships or aircraft that it operates in international traffic are covered by the paragraph to the extent that such transportation is directly connected with the operation, by that enterprise, of ships or aircraft in international traffic or is an ancillary activity. One example would be that of an enterprise engaged in international traffic that would have some of its passengers or cargo transported internationally by ships or aircraft operated by other enterprises, e.g. under code-sharing or slot-chartering arrangements or to take advantage of an earlier sailing. 10. The CIT(A) also referred to the commentaries by Klaus Vogel and Philip Baker. He referred to Mr. Philip Baker's Commentary on Double Taxation Conventions and International Law, wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. It also obtained approval from the Reserve Bank of India to establish branch offices at Mumbai, New Delhi, Calcutta and Chennai for undertaking the airline cargo operations. It was the plea of FEC since the goods to be delivered are time sensitive, it is a normal practice in the airline industry to utilize, when required, the services of other airlines for the carriage of cargo. The AO denied the benefit of Article 8 of the Indo-USA DTAA to the Assessee on the ground that the assessee has not operated its own aircrafts and, therefore, the income earned by it cannot be considered to have been earned from the operations of aircrafts. The question before the Tribunal was as to whether the benefit of article 8 can be denied to the Assessee. The contention of the assessee was that the entire freight revenue received by the assessee should be exempted from tax in view of the decision of the Mumbai Bench in the case of Dy. DIT v. Balaji Shipping (UK) Ltd. [2008] 25 SOT 328 (Mum.). The contention of the revenue was that profits attributable to the transportation of cargo through other airlines in view of the specific definition of the expression "profits from the operation of ships or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the international traffic" has been defined in paragraph 2. According to this para, the said expression has been defined in two parts. The first part defines the scope of the main or direct activity of transportation in the international traffic while the second part includes certain activities other than the main activity of transportation in inter-national traffic. The perusal of the first part reveals that main or direct activity is restricted to the transportation of passenger/cargo/mail etc., in the international traffic by the owners, charterers or lessees of ships or aircrafts. Therefore, such transportation through aircrafts by the assessee neither as owner nor as charterer or lessee would be outside the scope of such expression. The alternate contention of the assessee that such transportation would fall within para 2(b), in our opinion, is also without force since para 2(b) includes other activity directly connected with such transportation. The words "such transportation", in our opinion, would only mean the transportation referred to in first part of the definition. Therefore, transportation in the international traffic through other airlines would be outside the scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable for interpreting the covenants of tax treaties between the contracting states; (ii) the words or expression used in the treaties, if not defined in the treaties itself, should be understood in the sense in which the contracting states understood at the time the treaty was executed i.e., contemporaneous thinking; and (iii) contemporaneous thinking can be gathered from the provisions of domestic laws of the contracting states and in the absence thereof from the various commentaries available at the time of such contract. The Tribunal thereafter held: "Perusal of paragraph 4 of the said commentary shows that two kinds of profits are covered by Article 8 of OECD Cormmentary which is similarly worded. In the first category are those profits which are directly obtained by the enterprise from the transportation of cargo/passengers in the international traffic by the ships whether owned or leased or at the disposal of such enterprise. It also covers profits from activities directly connected with such operation. In the second category are the profits from the activities which are not directly connected with operation of ship but are ancillary to such operation. Paragraph 4.2 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational space and international waters. They also pass through several different countries, making it impossible to apportion income between different tax jurisdictions. This being the international thinking the provisions of Article 8 of the Indo-USA DTAA has to be interpreted holistically in keeping with the aforesaid international thinking. It was his submission that the OECD commentaries referred to in the decision of the Tribunal in the case of Federal Express (supra) also suggest that income from the activity of using other aircraft for transportation of cargo from India to Assessee's hub across the globe for onward transportation should be held to be income covered by Article 8 of the Indo-USA DTAA. It was also submitted that factually in the case of the Assessee cargo was transported from India to Assessee's nearest hub and therefore the use of other carriers for transportation of cargo from India to Assessee's hub outside India has to be regarded as ancillary to transportation of cargo in international traffic. It was submitted that the view expressed by the Tribunal in the case of Balaji Shipping (supra) was followed in the case of Safmarine Container Lines N. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpression used in the treaty and the local law are identical. Our attention was drawn by him to the discussion by OECD Committee on Fiscal in para 7 which says that an enterprise that transports passengers or cargo by ships or aircrafts operating in international traffic which undertakes to have those passengers or cargo picked up in the country where the transport originates or transported or delivered in the country of destination by any mode of inland transportation operated by other enterprise shall be considered as an example of the activities, directly connected with the operation of ships or aircrafts in the international traffic. 18. Finally reference was made to the decision of the Hon'ble Delhi High Court in the case of DIT v. KLM Royal Dutch Airlines [2010] 325 ITR 300 [2009] 178 Taxman 291 (Delhi). The assessee in the said case was a company incorporated in the Netherlands. The profits from international traffic were taxable in the Netherlands, that being the place of effective management. The assessee had obtained licence to use certain premises situated in Mumbai from the Airports Authority of India, specifically for the purpose of cargo handling and the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y & 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 ship owned or chartered by the enterprise were exempt under article 8 of the DTAA. It was his submission that international thinking has been that the income must have connection with operation of aircraft or ship owned, taken on lease or on charter. It was further submitted by him that Article 8 of the Indo-USA DTAA is differently worded than the OECD Model Convention (MC). He referred to para-39 of the OECD Commentary on Article 8 of MC wherein the fact that USA has reserved its right to tax profits from shipping and air transport business has been made clear in the following words: "39. The United States reserves the right to include within the scope of paragraph-1 income from the rental of ships and aircraft on a full basis, and on a bareboat basis if either the ships or aircraft are operated in international traffic by the lessee, or if the rental income is incidental to profits from the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Indo USA DTAA has adopted a departure from the OECD Model MC and other MC by defining what is "Profits from the operation of ships or aircraft in international traffic" only shows that a restricted meaning had to be given, as was done by the Tribunal in the case of Federal Express (supra). 21. We have given a careful consideration to the rival submissions. Many of the submissions made by the learned counsel for the Assessee have already been met by the Tribunal in the case Federal Express (supra). The argument regarding the tribunal not following its own ruling in the case of Balaji Shipping (supra) and not placing reliance on OECD Commentaries have been met by the Tribunal in the case of Federal Express (supra). The Tribunal in the said decision after referring to the difference in the wordings between India-UK Treaty which was subject matter of decision in the case of Balaji Shipping (supra) observed as follows: (a) On the argument that there was a conflict of view expressed by the Tribunal in the case of Balaji Shipping (Supra) and Delta Airlines Inc. (supra), the Tribunal held as follows: "31. A comparative study of the above provisions clearly indicate that art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situated." As per the facts narrated in the judgment, the assessee had sold certain immovable properties situated at Malaysia which resulted in short-term capital gains of Rs. 18,130. This income was taxed in India by the Assessing Officer. However, the CIT(A), the Appellate Tribunal as well as 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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms addressed in the OECD or in any of the decisions of foreign jurisdiction or in any other agreements." 34. The crux of the above observations is that wherever any expression is not defined in the Treaty then the expression defined 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 (supra). 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 (supra). Therefore, the decision of the Bench in the case of Delta Airlines Inc. (supra) 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." In para-39, the issue has further been elaborated as follows: "....39. In view of the above dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny of the decisions of foreign jurisdiction or in any other agreements". The review petition filed against this judgment also stands dismissed in CIT v. P.V.A.L. Kulandagan Chettiar [2008] 300 ITR 5 (SC). Under these circumstances, we are of the considered opinion that the commentary on the Model Convention can be taken assistance of only if the language of the treaty is drafted loosely or in an inclusive way or it does not unearth the intention of the Contracting States in a lucid manner." However, in para 15, the Tribunal observed as under : "15. We have considered the rival submissions and perused the relevant material on record. From the language of article 8 it clearly emerges that the income derived from the operation of ships in international traffic shall also include income from "any other activity directly connected with such transportation". This expression has not been further elaborated in the DTAA inasmuch as such other activities have not been exhaustively spelt out. Under these circumstances, it is imperative to go by the Commentaries for ascertaining the true purport of this expression." Perusal of the above shows that the principle laid down in para 10 of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue in this appeal. 23. We have considered the decision of the Hon'ble Delhi High Court in the case of KLM Royal Dutch Airlines (supra), we are of the view that the said decision was rendered on the facts of that case and on the basis of the India-Netherlands DTAA. The relevant clause of the said DTAA regarding income from business of shipping is different. Apart from the above, the lease of the premises by the AAI was for handling cargo. In those circumstances, the Hon'ble Court took the view that income in question was linked to the business of aircraft. The decision of the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (Supra) is again a case where the Hon'ble Court held that looking into commentaries of Treaties was justified where the expression used in the local law and the treaty are one and the same. We are of the view that the said decision is not of any help to the case of the Assessee before the Tribunal. The decision in the case of Ram Jethmalani (supra) is a reiteration of the ratio in the case of Union of India v. Azadi Bacho Andolan [2003] 263 ITR 706/132 Taxman 373 (Delhi) which has already been considered by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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