The assessee, a foreign airline company and tax resident of the...

The assessee, a foreign airline company and tax resident of the USA, engaged in the business of operating aircraft in international traffic, obtained approval from DGCA to undertake scheduled air services in India under the India-US Air Transport Agreement (ATA). It established a branch office in India for booking air passenger tickets and air freight, constituting a Permanent Establishment (PE) in India. The issue pertained to the taxability of income in India from code-sharing arrangements with third parties, where the assessee only booked tickets while the actual transportation was done by third parties. The coordinate bench had previously denied the benefit of exemption under Article 8 of the India-USA Tax Treaty for such receipts. However, the ITAT held that the profits derived from transporting passengers under code-sharing arrangements should be treated as profits from the operation of aircraft, exempt under Article 8, for the following reasons: (i) code-sharing falls within the ambit of "charterer" and "operation of aircraft" as defined in Article 8(2); (ii) passengers are transported on behalf of the assessee by third-party airlines on a principal-to-principal basis; and (iii) the transportation is inextricably linked. Accordingly, the receipts under code-sharing arrangements are covered under Article 8 and cannot be taxed in India.