Facts of the case were:

-  Since the assessee (KLM) was taxable in the Netherlands, it had not filed any returns.

-  However, the Assessing Officer, while conducting the assessment proceedings with regard to CSC, came to learn that as per the accounts between the parties, the assessee had received certain amounts from CSC under the head 'expenses payable being warehouse rent adjusted against revenue received'.

-  The exact nature of the transaction was that the assessee was required to pay licence fee / rent to Airport Authority of India for use of the space for cargo handling.

-  The assessee had entered into an agreement with CSC for handling its cargo at Bombay.

-  The payment made by the assessee to CSC was after adjustment of the licence fee / rent paid by KLM to Airport Authority of India.

-  This adjustment was treated by the department as income of the assessee chargeable to tax in India under Article 6 of the said Double Taxation Avoidance Agreement.

In this matter, ITAT held that:

"The arrangement between the assessee and the CSC was that the rent payable to Airport Authority of India, though payable by the assessee in the first instance, was recovered from the charges payable by the assessee to CSC. From this, the Tribunal concluded that the recovery of the said charges towards licence fee/ rent did not arise from any activity outside the activity of cargo handling in international traffic. The Tribunal concluded that such adjustment was directly and inextricably linked to the cargo handling business of the assessee. The only effect was that the ultimate expense payable by the assessee to CSC got reduced and that the recovery of licence fee / rent was not in the course of a separate business of renting out the premises.

In response to an appeal by revenue, Delhi High Court, after detailed discussion, upheld the decision of ITAT and confirmed the deletion of additions made by the Assessing Officer and the Commissioner of Income Tax (Appeals).

 

(For full text of judgment - visit 2008 -TMI - 31360 - DELHI HIGH COURT)

Characterisation of adjusted licence fee as business receipt - treated as linked to cargo handling, not separate rental income. The recovery of licence fee/rent by adjustment against charges payable to a cargo handling contractor was part of the contractual charge structure for cargo handling and was inextricably linked to the carrier's cargo handling activity, thereby constituting an element of that business's income stream rather than a separate rental business.