Treaty relief for airline code-sharing receipts denied where the assessee was not owner, lessee, or charterer of the aircraft.

Article 8 of the India-USA tax treaty applies only to profits from operation of aircraft in international traffic by the owner, lessee or charterer, and code sharing or booking seats on third-party aircraft did not qualify because the assessee neither operated nor chartered those aircraft, nor established a true pool arrangement. The receipts were therefore held ineligible for treaty exemption. On profit attribution, the global profitability rate required factual verification because only expenses attributable to the Indian permanent establishment could be considered, so the matter was remanded. Interest under section 234B also required fresh examination, with a direction not to levy it if the income was subject to tax deduction at source.

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Issues: (i) Whether receipts from code sharing and use of third-party aircrafts were eligible for exemption under Article 8 of the India-USA tax treaty as profits from operation of aircraft in international traffic, including as chartering or participation in a pool. (ii) Whether the global profitability rate adopted for attribution of profits to Indian operations required modification. (iii) Whether interest under section 234B was chargeable.

Issue (i): Whether receipts from code sharing and use of third-party aircrafts were eligible for exemption under Article 8 of the India-USA tax treaty as profits from operation of aircraft in international traffic, including as chartering or participation in a pool.

Analysis: Article 8 grants exemption only to profits derived from operation of ships or aircraft in international traffic, and paragraph 2 confines that expression to transportation by the owner, lessee, or charterer. The receipts in question arose from code sharing arrangements under which the assessee merely booked space or seats on flights operated by other airlines, without owning, leasing, or chartering the aircraft concerned. The arrangements were held not to be slot charter or space charter because there was no exclusive allotment, no fixed space, and no inextricable linkage with a further leg operated by the assessee. The alternative plea of a pool arrangement also failed because the agreements were bilateral commercial arrangements and did not show a true pooling of resources, funds, and profits.

Conclusion: The receipts from code sharing and third-party carrier arrangements were not exempt under Article 8 and the denial of treaty benefit was upheld.

Issue (ii): Whether the global profitability rate adopted for attribution of profits to Indian operations required modification.

Analysis: Under the profit attribution principles applicable to a deemed separate enterprise, only expenses relevant to the Indian permanent establishment could be considered. The assessee had not furnished sufficient particulars to show that the excluded expenditure was attributable to Indian operations. The matter therefore required factual verification by the assessing authority.

Conclusion: The issue was remanded to the assessing authority for fresh determination of profits attributable to the permanent establishment.

Issue (iii): Whether interest under section 234B was chargeable.

Analysis: The levy of advance tax interest depends on whether the relevant income was subject to tax deduction at source. The record did not establish that the receipts were subject to tax deduction at source, so the question had to be examined afresh by the assessing authority.

Conclusion: The issue was remanded to the assessing authority with a direction not to charge interest if the income was found to have been subject to tax deduction at source.

Final Conclusion: The treaty exemption claim on code sharing receipts failed, but the issues of profit attribution and interest were sent back for reconsideration, resulting in a partial allowance of the appeal.

Ratio Decidendi: For Article 8 relief, the profit must be derived from transport carried on by the assessee as owner, lessee, or charterer, and a mere space booking or code sharing arrangement with another airline does not by itself constitute chartering, a pool, or operation in international traffic.

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