TaxTMI 
TaxTMI 
2009 (1) TMI 769
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....o services to and from India. It also obtained approval from the Reserve Bank of India to establish branch offices at Mumbai, New Delhi, Calcutta and Chennai for undertaking the airline cargo operations. These approvals were obtained in the assessment year 1998-99 and therefore, the assessment year 1998-99 is the first year of operation in India. The activity of the assessee was described under two categories, viz., airport to airport and door-to-door. Such activities were explained by the assessee in paragraph 1 of its submission dated January 18, 2001 as under: Door-to-door transportation of freight: "In respect of outbound shipments, if the customer calls the FEC customer service centre and makes a request for the cargo to be picked up, FEC intimates Blue Dart for pick-up of the freight. For regular shippers, Blue Dart picks-up the cargo from the consignor location. The carrier transports consignments to the warehouse/cargo complex/commercial clearance agent. At the warehouse/cargo complex, the cargo is sorted destination-wise. The sorted cargo is then carted to the airport. In the event that Blue Dart is a customer, Blue Dart directly delivers the cargo to FEC at the airport.....
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....h performs the actual deliveries or pick-up within India. However, no monitoring within India was applied when the freight is delivered at the airport. Considering the above explanation of the assessee, the Assessing Officer was of the view that it was engaged in the business of courier activities and not in the business of operation of aircrafts in the International Traffic. Accordingly, the assessee was asked to show cause as to why the benefit of article 8 should not be denied to it. The assessee, vide letter dated March 23, 2001, submitted that it could not be treated as a courier. The relevant portions of paragraphs 1 to 3 of the above letter are being reproduced as under: "1. As submitted earlier, FEC is recognised as the largest cargo airline in the world with a fleet of over 650 aircrafts. FEC is known the world over for providing integrated value added air transportation services for time sensitive and time definite freight to various destinations around the world and is responsible for the delivery of the freight to the airport/ultimate destination, as the case may be. Considering that the goods to be delivered are time sensitive, it is a normal practice in the airline ....
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....consignee. The same is recognised in article 8 of both the UN model and the OECD model, relevant extracts from the commentaries of which are reproduced hereinbelow and which clearly and unambiguously state that the activity of delivering to the consignee inland is part of international air traffic as it is an ancillary activity. 'Profits of an enterprise .... in that State' Clearly door-to-door delivery is not something unconnected to international transportation and is recognised the world over as an activity within the scope of article 8 of bilateral tax treaties and more specifically in the case of the Indo-US tax treaty. It would be pertinent to point out that Air India provides first class passengers certain ancillary facilities such as free airport to hotel pick-up and drop, hotel stay, valet services and meals which are separate activities not directly connected with air transporter, however clearly recognised as activities ancillary to air transportation. Thus, by extension if FEC delivers the shipment from the airport to the destination, the consignee, it is still engaging in the activity of transportation and not an unrelated activity. Thus FEC operations without doubt....
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....of other airlines for express export shipments. It must be kept in mind that the above arrangement of utilising the services of other airlines with which FEC had interline arrangements was only for cargo shipments which required express customs clearance and the traditional airport to airport cargo was at all times carried on FEC aircraft. Accordingly, in order to ensure that FECs consignments were delivered in a timely manner to the consignees, FEC had utilised the services of other passenger airlines for the transportation of its shipments." After considering the explanation of the assessee, the Assessing Officer was of the view that the assessee was carrying on an organised activity of providing courier service. Since it had branches in India through which it carried its activity, it was taxable in India under article 7 read with article 5 of the Indo-US treaty. The relevant observations of the Assessing Officer in this regard appearing at page 15 of the assessment order are quoted below: "On going through the above, it is quite clear that the assessee is engaged in the business of time definite and time sensitive express cargo services which is popularly known as courier bus....
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....n aircrafts, the source of income is not from the operation of the aircraft but from undertaking courier activities. There is no direct connection between the so called activities which are named above and the operation of aircrafts of the assessee. In order to receive the income in respect of the aforesaid activities, the assessee needs to neither have an aircraft nor even be in the business of aircraft operation for the purpose of transportation in international traffic. The assessee is not thrust with any legal responsibility of providing any of the aircraft operation services (in connection with the abovementioned activity) to the customers, under any national or international law, so as to be in the business of courier operations. In Furniss Withy and Co. [1968] CTC 35 where a United Kingdom enterprise providing managing agency and stevedoring services in Canada for ships owned and chartered by the enterprise subsidiaries and affiliate, it was held by the Canadian Supreme Court that only profits derived from the services supplied to ships owned or chartered by the enterprise were exempt under article 8 of the Double Taxation Avoidance Agreement. Applying the same analogy in t....
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....ds in international traffic and therefore, is an activity ancillary or incidental to such air transport. Further, such ancillary activity was not peculiar to the assessee since other airlines were also offering such facilities. In support of its contention, the assessee furnished certain documents mentioned below : The 'Air Carrier Certificate' issued to the appellant by the federal aviation administration, the Government of the US certifying that the appellant has met all the requirements under the Federal Aviation Act, 1958, and is thus authorised to operate as an air carrier. The air transport agreement executed between India and the US which indicates that US airlines can operate in India as scheduled carriers provided they have received the designated mandate as being a designated carrier by a competent aeronautical authority of the US and in this connection, a copy of the 'Certificate of Public Convenience and Necessity' issued to the appellant by the Department of Transportation, Government of the US indicating that the appellant has been authorised to engage in scheduled foreign air transportation of property and mail between the United States, on the one hand, and, inter....
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....be answered. Aggrieved by the orders of the Commissioner of Income-tax (Appeals), the Revenue has preferred these appeals by raising the following common ground : "On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in holding that the assessee is eligible for benefits of the Indo-US Double Taxation Avoidance Agreement and is in the business of operation of aircrafts as per article 8 of the Double Taxation Avoidance Agreement, without appreciating the nature of business of the assessee." At the outset, learned counsel for the assessee submitted before us that the issue is covered by the decision of this Bench in the case of Balaji Shipping (UK) Ltd. [2009] 315 ITR (AT) 62 ; 25 SOT 325 wherein it has been held that the expression "Profits from operation of ships" appearing in article 9 of the Indo-UK treaty would include not only profits from operation of ships owned, chartered or leased but also profits from transportation of cargo through other ships wherein slots were chartered. He drew our attention to the fact that the assessee is a well known world wide airline having fleet of 650 aircrafts. It was also pointed o....
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....[2009] 317 ITR (AT) 364 (Mumbai); [2008] 26 SOT 514 has wrongly held that commentaries cannot be looked into while determining the scope of the expression "profits from operation of ships or aircraft in international traffic" used and defined in article 8 of the Indo-US treaty for the reasons given hereafter. It was submitted by him that the Tribunal has taken the view on the basis of the decision of the hon'ble Supreme Court in the case of CIT v. P. V. A. L Kulandagan Chettiar [2004] 267 ITR 654 (SC) which nowhere lays down that commentaries on international taxation cannot be looked into for ascertaining the scope of the provisions of a treaty. He drew our attention to the submission of the Attorney General before the apex court appearing at page 660 of the report to submit that no such contention was raised on behalf of the Revenue. According to him, this judgment is only an authority for the proposition that where the term is defined under the domestic law then there is no need to refer to the OECD commentary. The question before the apex court was whether capital gains accruing to the assessee could be considered as income. It is in this context, their lordships observed that ....
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....interline agreements with other airlines and therefore, such transportation was part of direct activity of transportation in the international traffic. He also produced the copies of such agreements with Air India, Lufthansa and Emirates Airlines. It was pointed out by him that arrangement with Emirates and Lufthansa Airlines was reciprocal and therefore such arrangement would otherwise amount to pool arrangement falling under article 8(4) of the said treaty. Regarding Air India, it is pointed out that a particular space is booked with such airline and the assessee had to pay the charges irrespective of the booking of cargo. This amounts to slot arrangement or code sharing and therefore the same should be considered as direct activity as per the decision of the Bench in the case of Balaji Shipping (U. K.) Ltd. [2009] 315 ITR (AT) 62 (Mumbai) ; [2008] 25 SOT 325. Regarding the inland transportation, it was submitted that it was directly connected with main activity since such transportation related to the cargo which was to be transported in the international traffic. According to him such transportation would fall within the scope of article 8(2)(b) in view of the decision of this ....
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....2009] 315 ITR (AT) 62 (Mumbai) ; [2008] 25 SOT 325 the Bench had considered article 9 which deals exclusively with the shipping activity but article 8 which deals with airlines activity was not considered by the Bench. According to her, article 8 of the Indo-UK treaty is differently worded and Bench could not have come to the same conclusion if the language in article 8 would have been mentioned in article 9 of that treaty. Proceeding further, she submitted that the explanation of the assessee that transportation of cargo by other airlines was up to the hub only from where cargo was transported by the assessee's aircraft is not supported by any material. Even if the decision of the Bench in the case of Balaji Shipping (UK) Ltd. [2009] 315 ITR (AT) 62 (Mumbai) ; [2008] 25 SOT 325 is to be applied, the claim of the assessee cannot be allowed unless it is shown that there was linkage between the transportation of cargo by other airline and transportation of cargo from hub by the assessee's aircraft. Reliance has been placed on the decision of this Bench dated November 25, 2008 in the case of Deputy DIT v. Cia de Navegacao Norsul (I. T. A. No. 4964/M/ 05) [2008] 317 ITR (AT) 386, copy....
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....pping (UK) Ltd. (supra) and therefore, exemption cannot be denied. Regarding the decision of the Tribunal in the case of British Airways Plc. v. Deputy CIT [2002] 80 ITD 90 (Delhi), it is submitted that the Tribunal has taken a different view in the case of Lufthansa German Airlines v. Deputy CIT [2004] 90 ITD 310 (Delhi) which was not considered in the case of Delta Airlines Inc. [2009] 317 ITR (AT) 364 (Mumbai) ; [2008] 26 SOT 514. Before parting with the arguments of both the parties, it is mentioned that the learned Departmental representative submitted that the assessee had initiated the proceedings for mutual agreement process (MAP) and the competent authority has expressed the view contrary to the stand of the assessee. Reference has been made to the letter dated May 3, 2007, issued by the Department of the Treasury, Internal Revenue Service, Washington D.C. to the assessee wherein the following opinion was expressed: "Although we do not agree on the technical merits that FedEx India's income was not exempt we came to a mutual agreement with a view to assisting the taxpayer to avoid double taxation. Under the terms of the mutual agreement, FedEx India's profits from the tr....
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....assessee is registered member of International Air Transport Association (IATA). Further it is submitted by the assessee that five flights a week were operated to and from India in the international traffic for transportation of cargo even in the first year of business in India. All these factual aspects could not be controverted by the learned Departmental representative. Therefore, considering the same, we are of the considered view that the Commissioner of Income-tax (Appeals) was justified in holding that the assessee was engaged in the business of transportation of cargo by air in the international traffic. Having held as above, the other aspect of the question is whether the benefit of article 8 can be denied on the ground that inland transportation undertaken by the assessee, in order to provide door-to-door facility, has been termed by the Assessing Officer as courier activity. In our view, the inland transportation is an integral part of the main activity of transportation of cargo in the international traffic provided there is live link between inland transportation and the main transportation in the international traffic. This aspect was examined by the Bench in the lig....
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....e. Paragraph 2 provides that profits from the operation of ships or aircraft in the international traffic shall mean profits derived by an enterprise from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners/lessees/ charterers of the ships or aircraft. In view of these clear provisions it is held that profits attributable to the transportation of cargo, mail, etc. by the aircrafts owned, chartered or leased by the assessee cannot be taxed in India. Thus, the dispute between the parties is, therefore, restricted to the profits derived by the assessee from the transportation of cargo through aircrafts belonging to other enterprises as well as profits attributable to the inland transportation. It is in this context that the decisions of this Bench are to be analysed. Therefore, the question arises whether there is any conflict between these two decisions. In the case of Balaji Shipping (UK) Ltd. [2009] 315 ITR (AT) 62 (Mumbai) ; [2008] 25 SOT 325, the Bench was required to interpret the provisions of article 9 of the Indo-UK treaty while in the case of Delta Airlines Inc. [2009] 317 ITR (AT) 364 (Mumbai) ; [2008] 26 SOT 514, ....
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....railers and related equipment for the transport of containers) used for the transport of goods or merchandise. 5. For the purposes of this article, interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of article 11 (Interest) shall not apply in relation to such interest. 5. The provisions of this article shall apply also to income derived from participation in a pool, a joint business or an international operating agency. 6. Gains derived by an enterprise of a Contracting State described in paragraph 1 from the alienation of ships, aircraft or containers owned and operated by the enterprise, the income from which is tax able only in that State, shall be taxed only in that State. 6. Gains derived by an enterprise of a contracting State from the alienation of ships or containers owned and operated by the enterprise shall be taxed only in that State if either the income from the operation of the alienated ships or containers was taxed only in that State, or the ships or containers are situated outside the other Contracting State at t....
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....ich, inter alia, included a question "whether the capital gains should be taxable only in the country in which the assets are situated". As per the facts narrated in the judgment, the assessee had sold certain immovable properties situated at Malaysia which resulted in short-term capital gains of Rs. 18,130. This income was taxed in India by the Assessing Officer. However, the Commissioner of Income-tax (Appeals), the Appellate Tribunal as well as the hon'ble High Court held that in view of the treaty between India and Malaysia, such capital gains could not be taxed in India. Thus, the matter reached before the Supreme Court. It is in this context, the Attorney General of India appearing for the Revenue raised the following contention appearing at page 660 of 267 ITR : "He further urged that tax on capital gains is a different kind of tax though brought within the fold of income-tax law in this country ; that under the principles of international law the fiscal jurisdiction of a State to tax any form of income generally arises from either the location of the source of income within its territory or by virtue of the residence of the assessee within its territory. However, in contra....
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....ty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the Income-tax Act, it would be unnecessary to refer to the terms addressed in the OECD or in any of the decisions of foreign jurisdiction or in any other agreements." The crux of the above observations is that wherever any expression is not defined in the treaty then the expression defined in the domestic law could be applied. This means that meaning of such expression can be ascertained with reference to the other materials which may be by way of domestic law or the commentaries available at the time of execution of the agreement by the contracting parties as held by the apex court in the case of Azadi Bachao Andolan [2003] 263 ITR 706. Impliedly, it means that where any expression or term is defined then it would be unnecessary to refer to the commentaries or decisions of foreign jurisdiction as held by the apex court in the case of P. V. A. L Kulandagan Chettiar [2004] 267 ITR 654. Therefore, the decision of the Bench in the case of Delta Airlines Inc. [2009] 317 ITR (AT) 364 (Mumbai) ; [2008] 26 SOT 514 to the effect that commentaries on international law need not be looked ....
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....he relevant material on record. From the language of article 8 it clearly emerges that the income derived from the operation of ships in international traffic shall also include income from 'any other activity directly connected with such transportation'. This expression has not been further elaborated in the Double Taxation Avoidance Agreement inasmuch as such other activities have not been exhaustively spelt out. Under these circumstances, it is imperative to go by the Commentaries for ascertaining the true purport of this expression." The perusal of the above shows that the principle laid down in paragraph 10 of the order has been reiterated by us in the case of Delta Airlines Inc. [2009] 317 ITR (AT) 364 (Mumbai) ; [2008] 26 SOT 514. As far as paragraph 15 is concerned, it has been stated clearly that the expression "other activity directly connected with such transportation" in article 8(2)(b) of the Indo-US treaty has not been further elaborated in the Double Taxation Avoidance Agreement and, therefore, the true intent could be ascertained by looking into the commentaries. This principle is not contrary to the earlier principles stated in paragraph 10. It only means that to ....
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....'s Union for Civil Liberties v. UOI [2005] 2 SCC 436 wherein it has been held that international treaties and instructions have been relied upon by the Supreme Court for statutory interpretation where the terms of any legislation are not clear or are reasonably capable of more than one meaning. It was also observed that in the absence of any law to the contrary, there is prima facie presumption that Parliament did not intend to act in breach of international law including the State treaty obligations. Similarly, in the case of T. N. Godavarman Thirumalpad v. UOI [2002] 10 SCC 606 it was observed that in the absence of any inconsistency regard must be had to, even in construing the domestic law. Therefore, these decisions do not support the contention of learned counsel for the assessee that commentaries should be looked into even where the expression or term has been specifically defined in the treaty. The decision of the Tribunal in the case of Lufthansa German Airlines v. Deputy CIT [2004] 90 ITD 310 (Delhi) also does not help the contention of the assessee inasmuch as the Tribunal was considering the provisions of article 8(4) of the Indo-German treaty which deals with the prof....
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....ty. Under those circumstances, external aid for interpretation need not be resorted to by reference to the commentaries on international law or decisions of foreign jurisdiction. However, it is clarified that if there is any ambiguity in the word or words used in the definition then, reference can definitely be made to such commentaries and decisions of international courts, in order to ascertain the intent of such word or words as in such cases external aid for interpretation may be necessary. But, if the language is clear and unambiguous then the scope of such expression or term cannot be enlarged or restricted by referring to the commentaries. Let us now examine the provisions of article 8 of the Indo-US treaty and adjudicate the issue before us. The provisions of article 8 are being reproduced even at the cost of repetition ([1991] 187 ITR (St.) 102, 110) : Shipping and air transport "1. Profits derived by an enterprise of a Contracting State from the operation by the enterprise of ships or aircraft in international traffic shall be taxable only in that State. 2. For the purposes of this article, profits from the operation of ships or aircraft in international traffic shall ....
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.... airlines would be outside the scope of article 8(2). We hold accordingly. However, another contention has been raised by learned counsel for the assessee to the effect that the assessee has made reciprocal arrangement with other airlines. In support of the same, he has placed copies of agreements with Emirates and Lufthansa Airlines. It is also submitted that the assessee has booked a specific space with Air India and the assessee has to pay the compensation irrespective of the actual transportation. According to him, such transportation through reciprocal arrangement would amount to pool arrangement described under paragraph 4 of article 8. Further, arrangement with Air India would amount to charter of aircraft partly and therefore, such arrangement would also qualify for exemption within the first part of definition itself. This aspect of the issue was neither raised before the Assessing Officer nor before the Commissioner of Income-tax (Appeals). Even otherwise, there was no occasion for these authorities to consider such aspect of the issue since the Assessing Officer had rejected the entire claim on the ground that activity of the assessee amounted to courier activity and th....
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....ee would fall within the scope of article 8 and therefore, profits attributed to the same cannot be taxed in India. Further, the profits from inland transportation directly connected with such transportation would also not be taxable in India. (3) That the transportation of cargo in the international traffic through the aircrafts owned/chartered/leased by other enterprises would be outside the scope of article 8(2) and consequently would not be exempt from taxation under article 8(1) unless such transportation falls under paragraph 4 of this article. Further, the inland transportation connected with such transportation would also not be exempt under article 8. However, such profits would be considered as business profits under article 7. Therefore, taxability or exemption in respect of such profits will have to be examined by the Assessing Officer in the light of article 7 of the treaty. (4) Where the claim of the assessee does not fall within the scope of article 8(2), the claim of the assessee can be examined with reference to paragraph 4 of article 8 since it specifically provides that paragraph 1 would apply if the case of the assessee falls under paragraph 4 which includes p....