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TMI Blog2022 (5) TMI 412X X X X Extracts X X X X X X X X Extracts X X X X ..... to deal with the quantum appeals. QUANTUM APPEALS ITA No. 216/Del/2000 for AY: 1996-97 ITA No. 217/Del/2000 for AY: 1997-98 ITA No. 1691/Del/2008 for AY: 1998-99 ITA No. 1692/Del/2008 for AY: 1999-00 ITA No. 1693/Del/2008 for AY: 2000-01 ITA No. 1694/Del/2008 for AY: 2001-02 ITA No. 1695/Del/2008 for AY: 2002-03 3. Before we proceed to deal with the issues arising in the appeals, it is necessary to observe, assessee's appeals in assessment years 1996-97 and 1997-98 were earlier disposed of by the Tribunal vide order dated 9th September, 2005. The appeals were allowed in favour of the assessee on the limited legal and jurisdictional issue that notices issued under section 142(1)(i) after the end of the relevant assessment years being invalid, the assessments made pursuant thereto are also invalid. Against the aforesaid decision of the Tribunal, the Revenue went in appeal before Hon'ble Jurisdictional High Court. Vide order dated 21.11.2006, in ITA No. 1303/2006, the Hon'ble Jurisdiction High Court remanded the matter back to the Tribunal for deciding the appeals on merit. This is how the appeals came up for hearing before us. 4. The first common issue arising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g services and engineering and aircraft handling services, being incidental to operation of aircraft in international traffic, is not taxable in India. After considering the submissions of the assessee, the Assessing Officer agreed that the income/profit earned by assessee from operation of aircraft in international traffic is covered under Article 8(1) of the Tax Treaty, hence, not taxable in India. However, insofar as income/profit earned by the assessee from other airlines while providing baggage screening services and engineering and aircraft services, he held it as separate business activity, hence, cannot be considered to be either directly connected to operation of aircraft in international traffic for transportation of passengers and goods or incidental to the activity. Thus, he concluded that the amount received by the assessee from other airlines towards baggage screening services and engineering and aircraft handling services being not covered under Article 8 would be taxable in India under Article 7 of the DTAA as business profit, since, the assessee has Permanent Establishment (PE) in India. While coming to such conclusion, the Assessing Officer held that expenses clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational traffic shall be taxable only in that State or profit from any other activity directly connected with transportation of passengers, mail, livestock or goods would also qualify for exemption from taxation in India under Article 8 of the Treaty. He submitted, Tax Treaty between countries are drafted broadly adhering to either OECD Model or UN Model or US Model. However, some variation is made based on negotiations between the countries on the taxability of various kinds of activities and services. Making a comparative analysis of OECD Model Convention, UN Model Convention and US Model Convention, learned counsel for the assessee submitted all of them have expressed that ancillary and incidental activities connected to operation of aircraft in international traffic also qualify for beneficial treatment under Article 8(2). Drawing our attention to Article 8(2) of India - USA Treaty, he submitted, it specifically provides that profits derived from operation of aircraft in international traffic shall include any activity directly connected with such transportation. Whereas, he submitted no such provision is contained in India-Japan Treaty. He submitted, in India-Japan treaty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout the services being rendered by the assessee to itself and to other airlines, it will not be possible for any aircraft to be air-borne with passengers or goods. He submitted, apart from utilizing these services for its own operation, it provides such services to other airlines to fully utilize its technical manpower as well as the equipment. In this context, he also referred to commentary of Klaus Vogel. He submitted, since the baggage screening and technical and engineering services provided to other airlines are preparatory and auxiliary services related to transportation of passengers and goods, the profit derived from such activities can only be taxed in the country of residence under Article 8(1) read with Article 8(2) of the Treaty. Thus, he submitted, the income earned by the assessee from baggage screening, technical and engineering services provided to other airlines would not be taxable in India. 6.2. Without prejudice, he submitted, even otherwise also such income is not taxable in India, since, the assessee is a member of a pool in terms of Article 8(4) of India - USA DTAA. Drawing our attention to Article 8(4) of the Treaty, he submitted, profit derived by an en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. He submitted, assessee has also received reciprocal services from other IATP member airlines. He submitted, while providing services to other airlines, the assessee did not employ any additional manpower to render the services and the manpower employed was to the extent required for baggage handling and aircraft maintenance of its own aircraft landing in and taking off from Delhi. This, according to learned counsel for the assessee, clearly demonstrates that the provision of services to other airlines was not carried out on commercial lines, hence, cannot be treated as separate business activity. He submitted, for providing such services, assessee has entered into specific agreement in Form No. 55/53 of the IATP, which are standard agreements entered into between the members of IATP for receiving and rendering services. Referring to OECD Model Convention, he submitted, where an airlines enterprise agrees under an IATP agreement to provide spare parts or maintenance services to other airlines landing at a particular location, activities carried out pursuant to that agreement will be ancillary to the operation of aircraft in international traffic. He submitted, the only requiremen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in case of British Airways Vs. DCIT, (2002) 80 ITD 90 (Delhi). He submitted, even in case of Delta Airlines, whose business in India was taken over by the assessee subsequently, the Tribunal has held that the income received from providing ground handling services and other services to other airlines are not covered under Article 8 of India-USA DTAA. Thus, he submitted, the profit derived from these activities, being neither directly connected to assessee's business of operating aircraft in international traffic nor being ancillary or incidental to the said activity, would not come within the ambit of Article 8(1) and 8(2). He submitted, assessee's case will not also be covered under Article 8(4) as there is no pooling arrangement in real sense of the term, as, there is neither pooling of funds nor resources between the members. Therefore, he submitted, the income derived by the assessee from provision of baggage screening services and technical and aircraft handling services to other airlines are not covered under Article 8 of the Tax Treaty. He submitted, since, the assessee has a permanent establishment in India, the receipts will be taxable under Article 7 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning to be given to the terms of the Treaty in their context and in the light of its object and purpose. Referring to the decision of KLM Royal Dutch Airlines (supra), he submitted, technical explanation given by one of the Treaty partners, i.e., US Treasure Department could be used as an aid to interpretation. In this context, he also referred to a decision of the Tribunal in case of DDIT Vs. Preroy A.G., 39 SOT 187 (Mum.). Thus, he submitted, while interpreting Article 8 of the India-USA Tax Treaty, reliance can be placed on the OECD Commentary and Technical Explanation to the US Model Convention issued by the Treasure Department of US. To buttress his submission that all ancillary and incidental activities relating to operation of airlines in international traffic come within the ambit of Article 8, learned counsel for the assessee relied upon a decision of the Hon'ble Bombay High Court in case of DIT Vs. Balaji Shipping UK Ltd. [2012] 253 CTR 460 (Bombay). 9. We have patiently and carefully heard the parties and have given a thoughtful consideration to the detailed submissions made, both, orally as well as in writing, in the light of ratio laid down in the judicial precede ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /revenues between them falling to be taxed in both jurisdictions. 9.2. Therefore, the provisions of a Treaty relating to taxation of a particular item of income may differ from country to country as treaties are negotiated at political level between two countries based on various considerations, including commercial consideration. Keeping in perspective these salutary principles, we will proceed to deal with the issue. 9.3. As discussed earlier, the main thrust of assessee's contention is, the income derived from baggage screening services and aircraft handling services provided to other airlines, being ancillary and incidental to its main activities of transportation of passengers, goods etc. by air will also fall within the four corners of Article 8(1) read with Article 8(2) of the Tax Treaty. For this purpose, it is necessary to look into Article 8 of India-USA DTAA which read as under: ARTICLE 8 SHIPPING AND AIR TRANSPORT 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. 2. For the purposes of this Article, profits from the operation of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered to be coming within the expression "profits derived by an enterprise from operation of ships or aircraft in international traffic": (a) the sale of tickets for such transportation on behalf of other enterprises; (b) other activities directly connected with such transportation; and (c) the rental of ships or aircraft incidental to any activity directly connected with such transportation. 9.5. If the provisions contained under Article 8 of India-US Tax Treaty are juxtaposed to similar provisions contained under UN Model Convention, OECD Model Convention and US Model Convention, it can be seen that the expression 'other activity directly connected with such transportation' as incorporated in clause (b) of Article 8(2) of India-USA Tax Treaty is absent in OECD Model Convention, UN Model Convention and US Model Convention. Thus, essentially, Article 8(2) of India-USA Tax Treaty narrows down the scope and ambit of expression 'profits from the operation of ships or aircraft in international traffic' by restricting it to specific activities. For this reason, if we may say so, the meaning of expression 'profits from operation of ships or aircraft in interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;. Therefore, any activity which can aid and assist the transportation of passengers, mail, livestock or goods etc. by the assessee by air or sea can come within the ambit of 'other activity directly connected to such transportation'. As given by way of illustration by the Assessing Officer, such activity can be the operation of bus service connecting a town with its airport for transporting the passengers, transportation of goods by truck connecting a depot with a port or airport etc. These activities, undoubtedly, aid and assist the transportation of passenger, mail, goods, livestock etc. by the assessee itself, hence, would come within the ambit of Article 8(1) read with Article 8(2) of India-USA Tax Treaty. 9.8. Thus, according to our understanding, the use of expression 'other activity directly connected with such transportation' in Article 8(2)(b) of the India-USA Tax Treaty restricts the applicability of Article 8(1) only to a specific category of profit/income which is directly connected to the transportation of passengers, mail, livestock or goods etc. by the enterprise by air or sea. Article 31(1) of the Vienna Convention on the law of treaties, 1969 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provide such services to other airlines, in no manner, assessee's activity of transportation of passenger, mail, goods, livestock etc. would be affected. In fact, the assessee itself has stated that when not required by the assessee for its own transportation activity, for optimum use of the equipments and manpower deployed at IGI airport, the services are provided to other airlines. These facts make it clear that, either provision or non provision of certain services to other airlines will not at all have any impact on assessee's activity of transportation of passenger, mail, goods, livestock etc. That being the case, in our considered opinion, the profit derived by the assessee from baggage screening services and aircraft handling services provided to other airlines will not come within the ambit of 'other activity directly connected to such transport' as provided under Article 8(2)(b) of India-USA Tax Treaty. Hence, would not be covered under Article 8(1) of the Tax Treaty. Thus, assessee's claim under Article 8(1) read with Article 8(2)(b) must fail. 9.11. Having held so, it is necessary to examine assessee's claim that it will, otherwise, also be cove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) Services provided by other airlines to the assessee. (iii) The relevant extract of International Airlines Technical Pool (IATP) manual. (iv) Specimen of ground handling agreements entered into buy the assessee with other airlines. 9.13. On perusal of the IATP agreement, a copy of which is at page 29 of the paper-book, it is noticed that the assessee became a participant of the IATP pool in November, 1967. There are various other airlines that are part of the pool, though, from different time periods, to name a few, Air Portuguese, Romanian Air Transport, Thai Airways International Public Company Ltd., Royal Jordanian Airlines, Turkish Airlines Inc., US Airways Inc., Virgin Atlantic Airways Ltd. There is no dispute that the IATP was created based on IATP manual. The IATP manual further provides that provider and user of services should jointly establish a detail specification of users required services. The manual also specifies various categories of agreement in specific form, such as, standard ground handling agreement has to be as per Form 55 or Form 53. 9.14. It is also universally recognized that the largest pool of airlines know to aviation industry is the IATP and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... procal basis, in terms of Article 8(4), such profit can only be taxed in the country of residence of the enterprise, in the present case USA. While dealing with identical issue relating to taxability of profit derived from participation in a pool, the Hon'ble Jurisdictional High Court in DIT Vs. KLM Royal Dutch Airlines (supra) interpreting pari materia provision contained under Article 8(3) of the India-Netherland Tax Treaty has held as under: "30. The Assessees participated in the IATP pool and earned certain revenues from such activities and also incurred expenditure. There is, in the opinion of the Court, clear reciprocity as to the extension of services; IATP membership is premised upon each participating member being able to provide facilities for which it was formed (line services, OMR services, etc.) of a required mandated standard. As there was reciprocity in the rendering and availing of services, there was clearly participation in the pool; in terms of the two DTAAs (Indo-German and India-Netherlands) the profits from such participation were not taxable in India. 31. The terms of the India-UK DTAA as contrasted with the DTAA between India and Germany are dissimil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees were required for handling other airlines' operation for generating income. 32. Having regard to these facts, this Court is of opinion that the amplification of the term "operation of aircraft" in Article 8(1) through Article 8(3), i.e. "...3. For the purposes of this article the term "operation of aircraft" shall include transportation by air of persons, live-stock, goods or mail, carried on by the owners or lessees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprise, the incidental lease of aircraft on a charter basis and any other activity directly connected with such transportation..." had the effect of limiting the nature of activities that could be comprehended in the pool envisioned in Article 8(2): in other words, the expanded meaning of operation of aircraft included those activities in Article 8(3) through the extended definition and no more. On the other hand, there is no such limitation in the DTAAs in question, in these cases. This constituted the most significant difference between the two sets of cases on the one hand, and British Airways (supra) on the other. For these reasons, this Court rejects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle 8(4) of the India-USA Tax Treaty. Therefore, the additions made in different assessment years under dispute are hereby deleted. 10. Thus, in nutshell, assessee's claim of exemption under Article 8(1) read with Article 8(2)(b) is rejected. Whereas, its claim under Article 8(1) read with Article 8(4) is allowed. 11. In view of our foregoing decision, the other ground raised by the assessee concerning attribution of expenditure to the PE have become academic, hence, not required to be adjudicated. For this reason also, the grounds raised on the levy of interest under section 234A and 234B of the Act have also become infructuous. However, in principle, we accept assessee's contention that no interest under section 234B can be levied as the liability is on the payer to deduct tax at source and not on the assessee to pay the advance tax. This is so, in view of the ratio laid down by the Hon'ble Supreme Court in case of DIT Mitsubishi Corporation [2021] 130 taxmann.com 276 (SC). 12. In the result, the appeals are partly allowed. PENALTY APPEALS ITA No. 954/Del/2014 for AY: 1998-99 ITA No. 955/Del/2014 for AY: 1999-00 ITA No. 956/Del/2014 for AY: 2000-01 ITA No. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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