2004 (2) TMI 287 - AT - Income Tax

Assessee's Profits from IATP Pool Participation Deemed Non-Taxable in India Under DTAA with Germany Articles 8(1) & 8(4.

Lufthansa German Airlines. Versus Deputy Commissioner Of Income-Tax.

The ITAT reviewed the DTAA between India and Germany, focusing on Articles 8(1) and 8(4), which exempt profits from aircraft operations in international ... Taxability of Income from Technical Facilities under International Airlines Technical Pool (IATP) - Double Taxation Agreement Between India And Germany - Whether the profits of the appellant was due to participation in a pool - HELD THAT:- Admittedly, if it was so then the profits will not be liable to tax in India. The aims and objectives of participation in IATP have been mentioned earlier. We find that the appellant has rendered services/facilities to three airlines and has availed the services of one airline. On extending services to the other airlines, the appellant has received a sum of Rs. 49.64 lakhs and on availing the services, it has paid the sum of Rs. 45.50 lakhs. Thus, there was reciprocity between the members of the pool. But in the case of British Airways, we find that it has rendered services to more than 16 airlines and has not availed services from any other airlines in India. It was only one way traffic. Thus, there was no reciprocity between the British Airlines and the other airlines and, therefore, the ITAT has held that in the case of British Airways, there was no reciprocity and, therefore, it could not be said to be participation in a pool. We also find that in the case of British Airways [2001 (9) TMI 242 - ITAT DELHI-A], the ITAT has held that the services rendered by that airline was in the nature of commercial activities and, therefore, was in the nature of business activities. For coming to this conclusion, the ITAT had noted that the British Airlines had employed excess staff for such purposes. Volume of receipts which is in crores for providing services also suggested that the providing of services by British Airways was a commercial activity. But in the case of the appellant, it has not been proved by the revenue that the extra staff was employed for providing services to other airlines. We have also noted that the services rendered and availed were as per IATP manual and, therefore, the profit was not taxable inIndiain view of Article 8(4) of DTAA. We have also noted that as per Article 8(4) of DTAA between India and Germany, the profit from the participation 'in a pool' will not be taxable in India. But Article 8(2) of DTAA between India and UK talks of 'participation in pool of any kind by enterprises engaged in air transport'. The use of the word 'pools' envisages that there could be several pools or understanding i.e. more than one. Here the word 'pool' does not indicate a pool which is internationally recognized. The use of the word 'pools any kind' clearly indicates that it was in the nature of commercially understood meaning. But in the international aviation industry, there is only one pool i.e. IATP. Certainly, in the case of British Airways, it was not a case of participation in a pool. In the appellant's case, it is participation in IATP only. This was the reason that the IT AT has to find out the meaning of the word 'pool' in the case of British Airways. Moreover, in the case of British Airways, it was 'pools of any kind' but in the case of the appellant, it was not a pool of any kind but only IATP. Thus, the facts in the case of British Airways were altogether different then the facts of the appellant's case and the view taken by the ITAT in the case of British Airways is not applicable in the case of appellant as the facts are entirely different. We have also noted that British Airways has rendered services to Atlas Air Corporation which is not a member of IATP. The services rendered to that airline could not be bound by IATP manual. Looking to the above distinguishing features, we hold that the appellant's profit due to participation in a pool was covered under Article 8(4) of the DTAA between India and Germany and such profit cannot be brought to tax inIndia. We, therefore, allow the ground of appeal and delete the addition sustained by the CIT(A). In the result, the appeal filed by the assessee is allowed. Issues Involved:1. Constitution of Special Bench2. Taxability of Income from Technical Facilities under IATP3. Interpretation of DTAA between India and Germany4. Comparison with British Airways CaseSummary:1. Constitution of Special Bench:At the outset, the assessee moved an application for the constitution of a Special Bench, citing substantive questions of law. However, the department objected, and the assessee withdrew the proposal during the hearing. Consequently, the request for a Special Bench was rejected.2. Taxability of Income from Technical Facilities under IATP:The primary issue was the addition of Rs. 38.61 lakhs by the CIT(A), holding that extending technical facilities under the International Airlines Technical Pool (IATP) arrangement to other IATP member airlines was neither part of the business operation of aircraft in international traffic nor constituted participation in a pool, thereby making the profit from such activity taxable in India. The assessee, Lufthansa German Airlines, argued that the amount received from various IATP Member Airlines for services rendered in India was not taxable in India. The Assessing Officer, however, held that such amounts were taxable, reasoning that these services were separate business activities not covered under 'Air Transport Services' and were rendered to other airlines, not part of the face value of the ticket, and thus not air transport operations.3. Interpretation of DTAA between India and Germany:The assessee contended that under Article 8(1) of the DTAA between India and Germany, profits from the operation of aircraft in international traffic are taxable only in the contracting state where the place of effective management is situated, which in this case was Germany. Article 8(4) extended this provision to profits from participation in a pool, joint business, or international operating agency. The assessee argued that the IATP was the only recognized pool in international aviation, and the services provided/received under this arrangement were minimal technical facilities necessary for flight safety, thus falling under the DTAA provisions.4. Comparison with British Airways Case:The revenue relied on the ITAT decision in the British Airways case, where similar claims were negated. However, the assessee distinguished its case, arguing that unlike British Airways, which only rendered services without availing any, Lufthansa both rendered and availed services, indicating reciprocity. The agreements were on IATP Form 53, and the handling charges were as per the IATP manual, unlike British Airways, which did not conform to IATP rules and had separate commercial agreements.Judgment:The Tribunal examined the DTAA between India and Germany, noting that Article 8(1) and 8(4) provided exemptions for profits from the operation of aircraft in international traffic and participation in a pool. The IATP was recognized as the only international pool in aviation, and the services rendered/availed by the assessee were within the scope of IATP manual, indicating participation in the pool. The Tribunal found that the facts of the British Airways case were different, as it involved commercial activities without reciprocity and non-compliance with IATP rules. Consequently, the Tribunal held that the assessee's profits from participation in the IATP pool were not taxable in India under Article 8(4) of the DTAA between India and Germany, and the addition sustained by the CIT(A) was deleted. The appeal filed by the assessee was allowed.