TMI Blog2022 (5) TMI 412X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. On a reading of Article 8(4), we are unable to find any restrictive covenant indicating that the reciprocity in services must be in the same country. Therefore, once the assessee derives profit from participating in a pool on reciprocal 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. Also in case of Air France Vs. ACIT . [ 2020 (6) TMI 1 - ITAT DELHI] the Bench has gone a step further by holding that services provided and received from non-I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services received from other airlines, whether, would be covered under Article 8 of India-USA DTAA is a highly debatable issue on which more than one view is possible. Therefore, consequent to additions made on such a debatable issue, no penalty under section 271(1)(c) of the Act can be imposed, alleging furnishing of inaccurate particulars of income. For this reason also, penalty imposed under Section 271(1)(c) of the Act needs to be deleted. Assessee appeal allowed. - ITA Nos. 216/Del/2000, 217/Del/2000, 1691/Del/2008, 1692/Del/2008, 1693/Del/2008, 1694/Del/2008, 1695/Del/2008, 954/Del/2014, 955/Del/2014, 956/Del/2014, 957/Del/2014 and 958/Del/2014 - - - Dated:- 12-4-2022 - SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER Assessee by : Sh. Ajay Vohra, Sr. Advocate Sh. Anshul Sacchar, Advocate Sh. Saksham Singhal, Advocate Department by : Sh. Sanjay Kumar, Sr. DR ORDER Per Saktijit Dey , JM Captioned appeals relate to the same assessee and arise out of separate appellate orders of learned first appellate authority pertaining to assessment years 1996-97, 1997-98, 1998-99, 1999-2000, 2000-01, 2001-02 and 2002-03. 2. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IGI) Airport, New Delhi, in December, 1995. During the same time, Delta Airlines, another USA based company, engaged in the business of operation of airlines closed its operation in India. The baggage screening, including equipment and fixtures at IGI Airport which was earlier in possession of Delta Airlines was taken over by the assessee. Subsequently, the assessee also acquired its own technologically advanced equipments. In course of assessment proceeding in assessment year 1996-97, the Assessing Officer noticed that in course of investigation carried out by the zonal unit of Directorate of Revenue Intelligence (DRI) in assessment year 1996-97, it was found that assessee had earned revenue of more than Rs. 1 crore in India which was not offered to tax. Basis such information, the Assessing Officer called upon the assessee to explain the reason for not showing such income. In response to the query raised by the Assessing Officer, the assessee submitted that in addition to income earned by it from operation of airlines in international traffic for carriage of passengers and goods, it has also earned income from other airlines in India by providing baggage screening services and en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax Treaty. Thus, he confirmed the additions made by the Assessing Officer. 5.3. As regards the allowance of expenses attributable to the PE, learned Commissioner (Appeals) held that since the expenditure incurred is in relation to operation of aircraft in international traffic, there is no need to treat the services rendered to other airlines as a separate business activity and apportion part of the expenditure to that account. Thus, he held that assessee is not entitled for deduction of expenditure on apportionment basis. 6. Sh. Ajay Vohra, learned Senior Counsel, appearing of the assessee drew our attention to Article 8 of India-USA DTAA and submitted that as per paragraph 1, profit derived by an enterprise of Contracting State from operation of aircraft in international traffic can only be taxed in the country of residence. He submitted, since, the assessee is a tax resident of USA, the profit derived from operation of its airline business is taxable only in USA. Laying emphasis on paragraph 2 of Article 8, he submitted, apart from profit derived from transportation by carriage of passengers, mail, livestock or goods, either as owner or lessees or charterers, the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the statement of performance of US Model Convention as issued by Treasury Department of US Government, which reads as under: Finally, certain non-transport activities that are an integral part of the services performed by a transport company are understood to be covered paragraph 1, though they are not specified in paragraph 2. These include, for example, the performance of some maintenance or catering services by one airline for another airline, if these services are incidental to the provision of those services by the airline for itself. 6.1. Learned counsel submitted, the baggage screening services and technical engineering services provided by the assessee to other airlines are sine qua non for the operation of aircraft or transportation of passengers and goods by air. As various countries, including India, have made Rules keeping in view the safety and security of passengers, airports and aircraft which make it mandatory that every person boarding an aircraft and every baggage or cargo carried in an aircraft must undergo screening to ensure that they do not carry or contain any firearms, explosives etc. Further, without maintenance of the aircraft at the ground l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various stations in support of aircraft operations. He submitted, the IATP Manual clearly states that the organization is dedicated to a spirit of cooperation between members which extends the mutual assistance and support in a common effort to maintain a high degree of technical performance in aircraft operations. He submitted, as a pool member of IATP for the services provided and received, there is no actual payment by the airlines rendering or receiving services and only notional credits and debits are made through pool accounting mechanism, i.e., IATA Clearing House. Explaining the functions of pool, he submitted, under the IATP there are various pools formation for various categories of services which are denoted by different alphabets. By way of illustration, he submitted, for example pool 'D' relates to ground handling equipment, pool 'F' relates to technical facilities and services, pool 'L' relates to line maintenance, etc. He submitted, the services rendered relating to baggage and cargo cleaning and aircraft maintenance fall within the ambit of 'L' Pool. He submitted, Form 53 of the IATP is a contract that is used for technical facilitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITD 310 (Delhi) vi. DCIT Vs. KLM Royal Dutch Airlines (ITA No. 403 404/Del/2010, Dt. 19.11.2010) (Delhi - Trib.) vii. KLM Royal Dutch Airlines Vs. DIT (ITA No. 4811/Del/2010, dt. 28.01.2011) (Delhi - Trib.) viii. Daimler Chrysler India Pvt. Ltd. Vs. DCIT, 120 TTJ 803 (Pune - Trib.) ix. DDIT Vs. Safmarine Container Lines N.V., 120 ITD 71 (Mumbai - Trib.) 7. Sh. Surender Pal, learned Departmental Representative submitted, insofar as the profits directly derived by the assessee from operation of aircraft in the international traffic, the Assessing Officer has not disputed that such income is covered under Article 8(1) of the Tax Treaty. He submitted, the profit/income derived by the assessee from baggage screening, technical and engineering services provided to other airlines at international airport in Delhi in no way are connected to operation of aircraft in international traffic. He submitted, passengers or goods travelling in other airlines are not transported by the assessee. He submitted, receipts from baggage screening services and technical and engineering services provided to other airlines do not form part of the cost of ticket that the assessee cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 8. CIT Vs. R.M.P. Plasto (P.) Ltd. [184 Taxman 372 (SC)/[2009] 313 ITR 397 (SC)/[2009] 227 CTR 635] 9. K.P. Madhusudhanan Vs. CIT [[2001] 118 Taxman 324 (SC)/[2001] 251 ITR 99 (SC)/[2001] 169 CTR 489 (SC) 10. Delta Airlines, Inc. Vs. ADIT, [2015] 57 taxmann.com 1 (Mumbai - Trib.) 11. ADIT Vs. Delta Airlines Inc. (ITA No. 2801/Mum/2002 Ors., dt. 29.09.2008) 8. In rejoinder, learned counsel for the assessee submitted, the ratio laid down by the Tribunal in case of British Airways (supra) is not applicable to assessee's case. Rather, assessee's case is similar to the case of KLM Royal Dutch Airlines (supra). In this context, he drew our attention to a chart showing distinguishing features of both the decisions. Further, he submitted, the decision rendered by the Tribunal in case of ADIT Vs. Delta Airlines Inc., 26 SOT 514 (Mum.) would not be applicable to assessee's case, as, in case of Delta Airlines the Tribunal held that neither the OECD Commentary, nor the US technical explanation could be looked into while considering the scope of paragraph 2 of Article 8 of India-USA Tax Treaty. He submitted, OECD Commentary definitely holds a persuasive v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raft operated by the assessee. The only point of dispute between the assessee and Revenue is with regard to the income earned by the assessee from providing baggage screening services and aircraft handling services to other airlines at IGI airport, Delhi. The departmental authorities have observed that the income derived by the assessee from providing these services to other airlines do not come within the ambit of Article 8(1) read with Article 8(2) of the Tax Treaty, as, these are not activities which are directly connected to transportation of passengers, goods etc. by air by engaging assessee's aircraft. 9.1. Before we proceed to deal with the disputed issue, it is necessary to bear in mind that interpretation of Bilateral Treaties entered into by two sovereign nations cannot be made in the mode or manner adopted for interpreting statutory legislation. This observation has been made by the Hon'ble Supreme Court in case of Union of India Vs. Azadi Bachao Andolan, [2003] 132 taxmann.com 373 (SC). While dealing with the issue of interpretation of a Tax Treaty, the Hon'ble Supreme Court has further observed that while interpreting the provisions of any international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontainers) used in connection with the operation of ships or aircraft in international traffic shall be taxable only in that State. 4. The provisions of paragraphs 1 and 3 shall also apply to profits from participation in a pool, a joint business, or an international operating agency. 5. For the purposes of this Article, interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 (Interest) shall not apply in relation to such interest. 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 taxable only in that State, shall be taxed only in that State. 9.4. On a careful reading of Article 8 of the Tax Treaty, as reproduced above, it is to be seen that as per paragraph 1 of Article 8, profits derived from the operation of ships or aircraft in international traffic shall be taxable only in the country of residence of the entity/enterprise engaged in the business of operation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity' has to be read in conjunction with 'directly connected with such transportation'. The words 'such transportation' certainly, in turn, refers to transportation by sea or air respectively of passenger, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircrafts. In other words, profits derived from other activity directly connected to transportation by sea or air of passengers, mail, livestock or goods by the assessee itself would come within the ambit of profit from operation of ships or aircrafts in international traffic, as per Article 8(1) read with Article 8(2). 9.7. Interestingly, the expression 'other activity directly connected with such transportation' as incorporated in Article 8(2)(b) is not found in similar provision contained in India-Germany, India-Japan and India-Netherlands DTAA, which were referred to before us by learned counsel for the assessee at the time of hearing. Thus, if we read Article 8(2) of India-USA Tax Treaty contextually in conjunction with paragraph 1 of Article 8 of the treaty, it is to be seen that in addition to transportation of passengers, mail, livestock or goods by s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 8(1) read with Article 8(4) by participating in a pool. Hence, in our humble opinion, they are not applicable for deciding whether the profit derived from providing baggage screening services and aircraft handling services to other airlines would come within the ambit of Article 8(2). Insofar as, the decision of the Hon'ble Bombay High Court in case of DCIT Vs. Balaji Shipping UK Ltd. (supra). The facts of the case reveal that the assessee was operating vessels for carriage of cargo from India to international ports. However, since the vessels chartered by the assessee did not ply the Indian territorial waters, the assessee entered into slot hire agreement with another entity under which the other entity provided container slot spaces on the feeder vessels operated by it to transport the cargo of the assessee from Indian ports to the international ports or hubs from where the cargo was transported by charter vessels of the assessee for onward journey to the final destination. Thus, as could be seen from the aforesaid facts, ultimately, by entering into the slot hire agreement the assessee transported its own cargo from India to the final destination. Therefore, the Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... read with Article 8(1) of the Tax Treaty. It is the say of the assessee that the only pool known to the international aviation industry is IATP and the assessee, being a member of the pool, having provided services to other airlines on reciprocal basis, the profit from baggage screening services and aircraft handling services can only be taxed in USA, the country of residence, in terms of Article 8(1) of the Treaty. The learned Commissioner (Appeals) has negated assessee's claim under Article 8(4) primarily for the following reasons: (a) The assessee failed to furnish any evidence of existence of IATP and had not filed names of airlines who are members of the pool. (b) Assessee could not prove that it had become a member of IATP by contributing assets for baggage screening and aircrafts handling services acquired by it from M/s. Delta Airlines in 1995. (c) Assessee could not file any evidence to show that the equipment for baggage screening and aircraft handling services was under common control and management of IATP. (d) Assessee failed to furnish any evidence to show that identical services/facilities were received by the assessee from other airlines in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by a particular airline in a particular station, which on its own it cannot avail, such service is provided by another airline who may be having the facilities at that airport. Similarly, the other airline can avail the service on reciprocal basis at another airport where it may not be having the facilities on its own. As per the mechanism under IATP, actual payment is not made by the airlines for rendering or receiving the services, but only notional credits or debits are made through pool accounting mechanism, i.e., IATA Clearing House. It is observed, being a member of the pool, assessee has entered into ground handling agreements with various other airlines and provided and received services on reciprocal basis at different airports. To demonstrate the aforesaid fact, the assessee has furnished the documentary evidences indicating services provided to other airlines and availed from other airlines. Thus, aforesaid documentary evidences and materials on record contradict the finding of learned Commissioner (Appeals) that the assessee failed to furnish any evidence to demonstrate the existence of IATP or the fact that it has become a pool member or it has provided and availed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form part and parcel of the operation of British Airways pertaining to the operation of aircrafts in international traffic. There is no such finding in the present appeals. (iii) British Airways' services and facilities in India to the other airlines was a commercial activity. The excess/idle capacity was provided to various airlines at a price. The services provided in terms of the IATP manual are not based on any consideration paid or received; a system of credits has been created for IATP members. (iv) British Airways has a branch office in India, which constituted a Permanent Establishment ( PE ) in India, and, therefore, the income derived from PE in India was taxable as the same was not covered under DTAA. (v) Article 8(2) of DTAA between India and UK provided that paragraph I of Article 8 shall likewise apply in respect of participation in pools of any kind. The words pools of any kind was interpreted by the ITAT by taking the dictionary meaning of the word pool . These are missing in the two DTAAs in question. (vi) Article 8(3) of DTAA between India and UK provided that the terms operation of aircraft shall include ..3. For the purposes of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from non-IATP members will also come within the ambit of Article 8. Thus, the materials on record not only demonstrate the existence of a pool in terms of Article 8(4), i.e., IATP pool but they also demonstrate that the assessee is a member of the pool and being a member has provided and received services from airlines on reciprocal basis. Thus, in our considered opinion, the profit derived from providing baggage screening services and aircraft handling services to other airlines as a participant of IATP pool would be covered under Article 8(1) read with Article 8(4) of India-USA Tax Treaty. The ratio laid down in the decisions relied upon by leaned counsel for the assessee, particularly, the decision of Hon'ble Jurisdictional High Court in case of DIT Vs. KLM Royal Dutch Airlines (supra) clearly support this view. Pertinently, while deciding the issue in case of DIT Vs. KLM Royal Dutch Airlines (supra) the Hon'ble Jurisdictional High Court took note of the fact that in India-UK DTAA the words used are 'pools of any kind', which are different from the expression used in Article 8(3) of India-Netherland DTAA. At the cost of repetition, we must observe, Article 8(4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t survive. Accordingly, for this very reason, we delete the penalty imposed in all the assessment years under dispute. Even, otherwise also, the income from baggage screening services and aircraft handling services received from other airlines, whether, would be covered under Article 8 of India-USA DTAA is a highly debatable issue on which more than one view is possible. Therefore, consequent to additions made on such a debatable issue, no penalty under section 271(1)(c) of the Act can be imposed, alleging furnishing of inaccurate particulars of income. For this reason also, penalty imposed under Section 271(1)(c) of the Act needs to be deleted. Accordingly, we do so. 14. The result of the appeals are as under: Sl. No. QUANTUM APPEALS Assessment Year Result 1. ITA No.216/Del/2000 1996-97 Partly Allowed 2. ITA No.217/Del/2000 1997-98 Partly Allowed 3. ITA No.1691/Del/2008 1998-99 Partly Allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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