TaxTMI 
TaxTMI 
2004 (2) TMI 287
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....n of Rs. 38.61 lakhs by the CIT(A) by holding that extending technical facilities under the International Airlines Technical Pool (IATP) arrangement to another IATP member airline was neither part of business operation of aircraft in international traffic nor constituents participation in a pool and by further holding that profit from such activity was taxable in India. 4. Briefly, the facts of the case are that Lufthansa German Airlines is an international airline with its head and controlling office at "Von-Gablenze-Strabe 2-6, D-50679 Cologne, Germany" and a branch office in India at 56 Janpath, New Delhi. The assessee is in the business of operation of aircraft in the international traffic and these activities also carried out in India in as much as the assessee operates aircraft in international traffic from, and to, Indian airports at New Delhi, Mumbai and Chennai. 5. The assessee is also a member of "International Airlines Technical Pool" (IATP). As an IATP member the appellant extends minimal technical facilities (line maintenance facilities) to other IATA member airlines at New Delhi airport. The appellant has extended these facilities to Aeroflot, Malaysian Airlines and....
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....to the extent available." 7. When the assessee filed the return of income, it was claimed that the amount received from various IATP Member Airlines for above services rendered in India was not taxable in India. However, the Assessing Officer held that such amount received by the assessee in India was taxable due to following reasons: 1. These services are separate business activities and are not covered under 'Air Transport Services'. 2. These services are rendered by Lufthansa German Airlines to other airlines. 3. The receipt from this service is not recovered by Lufthansa German Airlines from the passenger and is not part of the face value of the ticket. 4. These services are incidental to Lufthansa German Airlines for its own flights but when the same is rendered to other airlines it is not an air transport operation. 5. The business of Lufthansa German Airlines will not be affected if they do not render these services to other airlines. Its aircrafts will fly and normal traffic will continue. 6. The OECD commentary has also clarified that separate business activities are not covered under air transport operation. 7. These services are rendered by Lufthan....
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....icle 8(1) of the DTAA provided that profits from the operation of ships or aircrafts in international traffic shall be taxable only in the contracting state in which the place of effective management of the enterprises is situated. 11. It was argued that there is no dispute that effective management of the assessee is situated in Germany. It was stated that sub-clause (4) of Article 8 of DTAA provided that the provisions of sub-clause (1) shall also apply to the profits from the participation in pool, a joint business of an international operating agency. In other words, the profits derived from participation in a pool will be taxable in the country of effective management. It was claimed that under the international traffic, there is no pool other than IATP. The ld. counsel stated that due to participation in the IATP, the various services/facilities have to be provided/availed to and from the participating members. The precise nature of these facilities/services have already been mentioned earlier in the body of the order. 12. In view of the participation in the pool, the assessee enters into separate agreements with the members of IATP for availing/giving these services / faci....
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....lar airlines. But in the case of the assessee, it was not so. The services were given to different parties whereas the services have been obtained from different parties. Thus, there was no joint umbrella and no joint command. However, Ld. Counsel fairly conceded that expenditure relatable to the permanent establishment could be allowed as deduction. But he hastened to add that as no details of expenses incurred by the assessee were furnished by it before the Assessing Officer inspite of specific query, the Assessing Officer/CIT(A) were justified in allowing expenses to the extent of Rs 9,00,000. 16. In his counter reply, the ld. Counsel for the assessee Shri Dinesh Vyas, Advocate stated that the appellant's case was entirely different from the facts of British Airways. He stated that sub-clause (2) of Article 8 of DTAA between India & UK was different than sub-clause (4) of Article 8 of DTAA between India and Germany. He stated that in the case of British Airways, it was one way traffic, inasmuch as, it has rendered services to many airlines in India but did not avail services in India from any other airline. These facts have also been stated by the ITAT in paras 19 and 52 of....
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....hereas the appellant was covered under the IATP. 20. Ld. Counsel further stated that scope of DTAA, between India and Germany was quite wide. Article 8(4) covered the income of not only by way of profit in participation of the pool but also the joint business. But in DTAA between India and UK, the exemption was not available to joint business. He also stated that British Airways was not working under any umbrella whereas the appellant was working under the international umbrella of IATP. The facts being opposite to each other, the ratio laid down by the ITAT in the case of British Airways cannot be applied to the appellant's case. Regarding the revenue's observations to the effect that the appellant did not furnish the figures of expenses incurred by it, the ld. Counsel stated that the Assessing Officer has asked for the information of additional cost which was incurred for rendering the services. In reply, the appellant has submitted that no additional cost was incurred by it in rendering such services. However, the amount received by the assessee for rendering the services and the amount spent by the assessee for availing the services was already on record of the Assessi....
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....ed that it had rendered services to other airlines and has received services from other airlines. As there was reciprocity in rendering the services and availing the services, it amounted to participation in the pool and as per DTAA between India and Germany, the profits from such participation was not taxable in India. However, the revenue relying on the decision of the ITAT in the case of British Airways has held that income on account of participation in the pool for rendering services/facilities at IGI Airport, New Delhi was not exempt in terms of DTAA. 26. We have, therefore, examined the terms of DTAA between India and UK and between India and Germany. After going through the contents of both the agreements and the order of the ITAT in the case of British Airways, we find that the decision of the ITAT was based on the following facts: (i) British Airways has provided engineering and ground handling services at IGI Airport, New Delhi to 11 other airlines, at Chennai to 5 other airlines and certain other airlines at Mumbai. It has not availed any services/facilities from any airlines in India. Thus, there was no reciprocity in the agreement entered into between British Airwa....
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....ed fact that there is "IATP manual". It appears that in the case of British Airways, only certain extracts to IATP manual were filed which did not prove the existence of an IATP manual which was internationally recognized. When there is IATP manual, there was no need of interpreting the word "pool". It is so because the manual also says "no part of the manual may be amended without prior agreement of the member countries of the IATP". The facilities and services to be rendered to member airlines have been clearly demarcated in the manual. In case any other services are rendered that will fall outside the IATP manual. 29. As mentioned earlier, the IATP is an organization of airlines formed for the purposes of providing reciprocity, technical support at line station throughout the world. The primary goal of IATP is generating economic savings to participating airlines by minimizing investment otherwise required. The word 'participating airlines" clearly indicates the reciprocity amongst the members of IATP. It is not necessary that the services should be rendered to the same airline who has given the service. In other words, the Airlines A could render facilities/services to Air....
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....tes to "business profits". Article 7(1) reads as under: "The profits of enterprises of a contracting state shall be taxable only for the state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprises may be taxed in the other state but only so much of them as is attributable to that permanent establishment." 32. But a very significant provision has been made in sub-clause (7). This clause reads as under: "Where profits include items of income which are dealt with separately in other articles of this agreement, then the provisions of those articles shall not be effected by the provisions of this article." 33. The above-said article/clause makes it abundantly clear that the word "permanent establishment" is not attached to the profits which are included in other articles. As the profits from "operation of ships or aircrafts in international traffic" is covered by Article 8, the permanent establishment cannot be a ground for bringing to tax the profits from participation in the pool. By way of separate Article 8, the profits in re....
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....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. 38. We also find that in the case of British Airways, 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 in India in view of Article 8(4) of D....