Tax treaty exemption for airline collection commission denied; foreign travel tax receipts, accrual taxation, and deduction claim rejected.

An international airline's commission for collecting foreign travel tax was held not to fall within the treaty exemption for profits from the operation of aircraft in international traffic, because the tax was collected as an agent for the Government and the commission arose from a separate collection activity, not from fare or ticket earnings. The assessee's cash-system accounting did not prevent taxation of Indian-source accrued income, since non-resident income accruing in India remains assessable on accrual basis. The claim for deduction of payments to an outside agency for collection-related services was also rejected because the expenditure was not shown to relate to foreign travel tax collection.

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Issues: (i) Whether commission receivable by an international airline for collecting foreign travel tax was exempt under the double taxation avoidance arrangement covering earnings from the operation of aircraft in international traffic; (ii) Whether the income could be taxed only on receipt because the assessee maintained accounts on the cash system; (iii) Whether the deduction claimed in respect of payments made to an outside agency for collection-related services was allowable.

Issue (i): Whether commission receivable by an international airline for collecting foreign travel tax was exempt under the double taxation avoidance arrangement covering earnings from the operation of aircraft in international traffic.

Analysis: The exemption extended to earnings derived from the operation of aircraft, including the sale of tickets and activities directly connected with such transportation. Foreign travel tax, however, was levied on the passenger and not on the carrier. The carrier collected it only as an agent of the Government, and the amount collected did not form part of the fare or ticket sale proceeds. Since the commission arose from a separate collection activity and not from the operation of aircraft, it did not fall within the exempt category.

Conclusion: The commission was not exempt and was taxable.

Issue (ii): Whether the income could be taxed only on receipt because the assessee maintained accounts on the cash system.

Analysis: The assessee was a non-resident deriving income from India. In such a case, the income accruing from India is assessable on accrual basis, and the cash system of accounting does not displace that principle. The relevant authority accepted that a non-resident could not avoid taxation of accrued income merely by invoking a cash method of accounting.

Conclusion: The cash-system contention was rejected and the income was taxable on accrual.

Issue (iii): Whether the deduction claimed in respect of payments made to an outside agency for collection-related services was allowable.

Analysis: The claim was not seriously pressed, and the finding that the payment was not shown to be relatable to foreign travel tax collection was held to be reasonable.

Conclusion: The deduction claim was rejected.

Final Conclusion: The department succeeded on all material issues, and the commission earned for collection of foreign travel tax was held chargeable to tax, with the assessee's alternative accounting and deduction contentions failing.

Ratio Decidendi: Where a carrier collects a tax imposed on passengers as an agent of the Government, the collection does not become part of the carrier's trading receipts from the operation of aircraft; and a non-resident's Indian-source accrued income remains taxable notwithstanding maintenance of cash-basis accounts.

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