2024 (11) TMI 815 - AT - Income Tax

US airline code sharing receipts qualify for India-USA Tax Treaty Article 8 exemption despite PE status

The ITAT Mumbai held that receipts from code sharing arrangements by a US airline company qualify for exemption under Article 8 of the India-USA Tax ... Article 8 of the India US Double Taxation Avoidance Agreement - profits from operation of aircraft in international traffic - charterer includes slot/space charter - code sharing treated as analogous to slot charter - inextricable linkage / direct nexusArticle 8 of the India US Double Taxation Avoidance Agreement - profits from operation of aircraft in international traffic - code sharing treated as analogous to slot charter - charterer includes slot/space charter - inextricable linkage / direct nexus - Whether receipts from code sharing arrangements are exempt from Indian taxation under Article 8 of the India US DTAA - HELD THAT: - The Tribunal held that receipts derived by the assessee from transporting passengers under code sharing arrangements are to be treated as 'profits from operation of aircraft in international traffic' and hence fall within Article 8 of the India US DTAA. Applying the jurisprudence on slot/space chartering in shipping (including the decisions of the jurisdictional High Court in Balaji Shipping and subsequent Tribunal authorities), the Tribunal found that: (i) chartering may include chartering of space or slot and need not involve charter of the whole aircraft; (ii) code sharing where the assessee issues the ticket for the entire journey under its unique code and the third party carrier transports passengers on behalf of the assessee is analogous to slot charter and operates on a principal to principal basis; and (iii) in the facts of the year under appeal the requisite direct nexus or inextricable linkage between the third party leg and the assessee's operation is established by the materials (including sample agreements and ticketing codes) before the Tribunal. The Tribunal further observed that OECD commentary and aspects of the US Model support treating code sharing/slot charter arrangements as activities directly connected with international traffic, and noted that the US competent authority agreed that such receipts should be exempt (MAP response). In view of these legal and factual findings the Tribunal allowed the assessee's claim for exemption under Article 8 and held that related arguments on alternative computation methods and consequential interest/penalty became academic. [Paras 30]Receipts from code sharing arrangements are covered by Article 8 of the India US DTAA and are not taxable in India; the assessee's grounds on this issue are allowed.Final Conclusion: The appeal is allowed: the Tribunal holds that the assessee's receipts from code sharing arrangements qualify as profits from the operation of aircraft in international traffic under Article 8 of the India US DTAA and therefore are exempt from Indian tax for AY 2018 19; consequential issues of computation, interest and penalty are rendered academic or consequential. Issues Involved:1. Denial of benefit of exemption under Article 8 of the India-USA Tax Treaty.2. Disregarding alternative methodology for computing taxable income.3. Enhancing the Global Profitability Rate on a pro-rata basis.4. Levy of interest under Section 234A and Section 234B of the Income Tax Act.5. Initiation of penalty proceedings.Detailed Analysis:1. Denial of benefit of exemption under Article 8 of the India-USA Tax Treaty:The primary issue was whether the receipts of the assessee under code-sharing arrangements are covered by Article 8 of the DTAA between India and the USA and thus not taxable in India. The AO allowed the benefit under Article 8 for transportation undertaken entirely through the assessee's own aircraft but denied it for receipts under code-sharing agreements. The AO held that such receipts do not satisfy the condition of Article 8(1) as there is no operation of aircraft in international traffic by the assessee relevant to such receipts. The Tribunal, however, found that code-sharing arrangements have a direct nexus with the main business of operation of aircraft and thus qualify for exemption under Article 8. The Tribunal relied on the decision of the Bombay High Court in similar cases and concluded that the transportation of passengers under code-sharing arrangements falls within the ambit of 'operation of aircrafts' as defined in Article-8(2) of the India-US DTAA. Consequently, the receipts under code-sharing arrangements are exempt from taxation in India.2. Disregarding alternative methodology for computing taxable income:The assessee argued for an alternative methodology for computing taxable income, suggesting that the revenue in relation to transportation through third-party carriers should be considered as an agreed percentage of the total value of tickets booked. However, the Tribunal's decision on the applicability of Article 8 rendered this argument academic, as the receipts under code-sharing arrangements were deemed exempt from taxation.3. Enhancing the Global Profitability Rate on a pro-rata basis:The AO computed the income chargeable to tax by applying the assessee's Global Profitability Rate (GPR) to the Code-share Revenue. However, since the Tribunal ruled that the receipts under code-sharing arrangements are exempt under Article 8, the issue of enhancing the GPR on a pro-rata basis became irrelevant.4. Levy of interest under Section 234A and Section 234B of the Income Tax Act:The Tribunal noted that the issue of interest under Section 234A and 234B is consequential to the main issue of taxability under Article 8. Since the main issue was resolved in favor of the assessee, this ground did not require separate adjudication.5. Initiation of penalty proceedings:The Tribunal found the issue of penalty proceedings to be premature and thus did not warrant separate adjudication.Conclusion:The Tribunal allowed the appeal of the assessee, granting exemption under Article 8 of the India-US DTAA for receipts under code-sharing arrangements, thereby rendering other grounds academic or premature. The decision was pronounced in open court on 07-11-2024.