TaxTMI 
TaxTMI 
TaxTMI 
2015 (5) TMI 681
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....dertake scheduled air services in India. The assesee was also granted approval by Reserve Bank of India (RBI) to establish branches in India for undertaking activities related to booking of air passengers and air freight. A return of income was filed on September 28, 2010 declaring nil income from business operations and interest of Rs. 1,56,469/- earned on fixed deposits was offered to tax. During the course of assessment proceedings, the assessee was asked to furnish details of the revenue attributable to the usage of third party carriers for carriage of cargo and passengers and was asked to show cause as to why such revenue may not be taxed. The assesee submitted the requisite details and its arguments along with the agreements entered with such third party carriers for carriage of cargo and passengers while claiming that such revenues cannot be taxed in India due to exemption under Article 8 of the Indo-US treaty. The A.O. however has not agreed with the claim of the assesee. The AO, as per the draft assessment order, has proposed to assess the business income of the assessee at Rs. 2,15,32,280/- by applying the global profitability rate of 2.5% to the total revenues of Rs. 85,....
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....s, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft (Article 8(2). Further, these provisions shall also apply to profits from participation in a pool, a joint business, or an international operating agency (Article 8(4). The revenues under question are the revenues generated from utilization by the assessee of services of other airlines for transport of its passengers or cargo. Since the assessee itself is not involved in operation of these aircrafts in international traffic, the requirement of Article 8(1) itself is not fulfilled. The assessee has 'Interline Cargo Special Prorate Agreements' with other airlines for carriage of cargo and 'Code-sharing agreements' with other airlines for carriage of passengers. These agreements provide for space sharing for cargo and seat sharing for passengers at agreed rates. There is no chartering of aircrafts. The agreements of the assessee with other airlines are in respect of booking of space for the assessee's cargo or booking of seats for assessee's passengers. 7. The A.O. also held that though the assessee has, in the alternative claimed that arrangements with the third party carriers tantamou....
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....ned. We have also gone through the provisions of art. 8 of Indo-US treaty. Para 1 provides that profits from the operation of ships or aircrafts in the international traffic shall be taxable only in the State of residence. Para 2 provides that profits from operation of ships or aircrafts 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 aircrafts. 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. 30. 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. (supra), the Bench ....
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....med by the Bombay High Court and relied upon by the assessee] and has also distinguished the facts of both the cases. The Tribunal has also distinguished the provisions of Article 8 of Indo-US and Article 9 of indo-UK Tax Treaty. Even otherwise, from the agreements of the assessee with other airlines, it is evident that there is no arrangement in the nature of "slot charter" between the assessee and such other airlines. It may be noted that the decision of Mumbai Tribunal in the case of Federal Corporation has been accepted by the said assessee and issue has been settled under Mutual Agreement Procedure (MAP) between Indian and US Governments (to avoid double taxation). 10. Since the A.O. held that the revenues generated from third party carriers are liable to be taxed in India in the hands of the assessee, he computed the percentage of profitability of the assessee at 2.52% [as against the gross global profitability of (-) 3.57% declared by the assessee] by adding back the following items to the assesse's 'profit before tax': - Other expenses and - Restructuring and Merger Related Expenses 11. The assessee has objected to modification of its global profitability percentage by ....
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....rhad where it has been held that space booking / slot charter is 'charter': * Page 23 - 6th line "The containers transported through feeder vessels have been sent by way of slot charter or space charter arrangement. " * Page 24 - first line " ... The Department has held that the chartering of some space or slot charter arrangement cannot be equated with chartering of a complete ship....... ............. The assessee's case on the other hand has been that the word charterer" also includes space charterer or slot charterer and the same cannot be segregated from the meaning of operation of ships. Heavy reliance has been placed on the concept of charterer given by the Hon'ble Bombay High Court in Balaji Shipping U.K Ltd. (supra) .... " * Page 25 - para 20 "20. For the shipping income, the Para-2 categorically envisages that for the purpose of Article-8, profits from the operation of ships in the international traffic means, profit derived by an enterprise from the transportation by sea of goods carried on by the "owner" or "lessee" or "charterer" of ships. Thus, the profits from the "operation of ships" have been qualified by the words carried on by the "owner" ....
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....ent or arrangement to acquire the right to use a vessel or a ship for the transportation of a good on a determined voyage, either the whole of the ship or part of the ship or some space of the ship in a charter party agreement; and iii) Thirdly, the word "charterer" includes a voyage charter of a part of a ship or a slot, as it is also arrangement or agreement to hire a space in a ship owned and leased by other persons. Thus, in our opinion, the word "charterer" should not be confused from the word "owner" or "lessee" or having control of the ship or as an operator of the ship. The operation of ship can be done as a charterer, which includes part of a ship or particular space in a ship. " * Page 37 - 6th line " ... Thus, the view taken by the Assessing Officer for denying the benefit under the present Article-8 is not tenable as per our discussion in the forgoing paragraphs, that chartering of some space or slot charterer in a ship is actually a part and parcel of charter of a ship ... " * Page 39 - Para 31 "31. Thus, in our conclusion, we hold that transportation of cargo in the container belonging to the assessee from Indian Port i.e., Port of booking to the Hub Port throug....
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....mmercial co-operation and should not be given a narrow interpretation as given by the AO and the DRP in its order by only referring to pooling of funds and sharing of profits. The assessee shares a reciprocatory arrangement with the third party carriers, and therefore such an arrangement would amount to pool under Article 8(4) of the India US tax treaty. On perusal of the agreements entered with third party carriers, it can be observed that the element of reciprocity is embedded in these arrangements. Further, the observation of the AO and DRP is on the premise that the arrangement is not in the nature of 'pooling' whereas the word used in the treaty is 'pool' and not 'pooling'. The word 'pooling' has a different connotation as compared to the word 'pool'. 18. On the other hand, the Dr. Narender Kumar, the ld. CIT-DR appearing on behalf of the Revenue contended that the profits 'derived' from activity of 'operations' of ship/aircraft in 'international traffic' under Article 8 will not cover the receipts under code sharing agreement. As per the ld. D.R. Article 8(1) is the substantive provisions granting the exemption. What is exempt under Ar....
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....red aircrafts. 20. It was further contended by the ld. D.R. that though the profit from sale of tickets is deemed to be included u/s 8(2)(a) as profits derived from operation of aircraft in International traffic but that will come into play only when the assessee first satisfies the substantive Article 8(1) r/w 8(2) also in respect of the very same voyage for which it has earned profit on sale of ticket for an international voyage. As already demonstrated earlier, the receipts for activities under Article 8(2)(a)/(b)/(c) are only for enlarging the scope of profits but the qualifying conditions have to be still independently fulfilled under Article 8(1)& 8(2) to claim the benefit of receipts falling in Article 8. The ld. D.R. further contended that the Ld. AR while arguing that the ITAT decision in earlier years in assessee's own case was not applicable, himself admitted that the impugned receipts in this year were not in the nature of ancillary receipts. Rather it was his argument that such receipt would fall into the main activity of transportation in International traffic as a charterer. This means that the assessee has to satisfy the twin condition of (i) operation in internati....
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....IT(A) are, therefore, reversed on this issue and consequently, denial of exemption by the AO is upheld ". From perusal of this para it is evident that it is mandatory for an assessee to carry the main activity of transportation in international traffic itself as required under Article 8(1) and 8(2) as owner/lessee/charterer and once it is satisfied then only any ancillary activity as described in para 2(b) of Article 8 can be also brought into the ambit of profits from such transportation. Thus nexus qua each voyage in international traffic is a must to the transportation by assessee as owner/lessee/charterer. If the assessee does not carry transportation itself qua any particular voyage as owner/lessee/charterer, then qua such voyage it would fall out of main articles 8(1)( and 8(2) even though it may qualify under Article 8 for other voyages wherein it has transported as owner/lessee/charterer. The receipts in question are in respect of code sharing voyages where the assessee has not at all carried operation in International traffic even partly. Therefore this decision shall also apply to facts of present assessee, where no transportation is carried out by assessee as charterer ....
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....f the feeder vessel carrying the cargo from Mumbai port to destination in South Africa i.e., Durban. Therefore, profits attributable to such voyage would be outside the scope of article 8 of Indo-Brazil treaty even though the assessee may be engaged in the business of transportation of goods in the international traffic." The case of DDIT vs. CIE DE NAVEGACAO (supra) was also considered by Hon'ble Bench in case of MISC Berhard. At para 30 page 37 Hon'ble Bench in MISC Berhard observed that the assessee has failed to link and establish the voyage wise transportation, whether the feeder vessels were actually loading the goods into the mother vessels, which the assessee had claimed. Thus by implication the Hon'ble ITAT in case of MISC Berhard opined that it is only because of presence of a undisputed in extricate and direct link qua each voyage between feeder vessels and mother vessels that the assessee(MISC Berhard) was held as a charterer but for which the decision in case of DDIT vs. CIE DE NAVEGACAO would have held the ground. In the instant case also not only there is no evidence which has been placed on record or claimed for any linkage between feeder voyage from India to Hub p....
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....passengers carried under code sharing arrangement from India to intermediary destinations have been transported further by assessee airlines from such intermediary destinations to final destinations. However from the facts mentioned in A.O's order, DRP directions and arguments taken by learned A.R. it appears that complete transportation under code sharing arrangement took place from origin to final destination in single stretch and nothing is placed on record to show that such destinations were only interim destinations. iv. Even if there is break of voyages at intermediary destination, but nothing has been produced before the AO/CIT(A)/ITAT to show that destinations to which all passengers/cargo were carried from India under code sharing were further transported to final destination by assessee's airlines. v. Mere fact that the assessee was operating its airline also from such intermediary destinations to final destinations will not automatically prove that that the all such passengers/cargo which were carried from India under code sharing to intermediary destinations were transported to final destinations by assessee's airline only. vi. To call a particular voyage as an opera....
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....ssessee were transferred to mother vessels i.e., the ships owned by the assessee and from thereon, the cargos / containers were transported by its own ships to the final destination port. The entire voyage from India Port to Hub Port and from there to final destination port, is inextricably linked and cannot be segregated as held by the Assessing Officer and the learned Commissioner (Appeals). He further submitted that the Assessing Officer has, in fact, admitted that the assessee has furnished proof to substantiate the linkage of the voyage performed on feeder vessels and mother vessels (i.e., ships owned by the assessee). The Revenue's case is that since the feeder vessel is not owned / leased by the assessee, therefore, the benefit of Article - 8, cannot be given on the goods carried through the feeder vessel is not a correct interpretation of Article - 8(2). The carriage of goods from the feeder vessel is nothing but a charter only, in a sense that the assessee has booked space charter / slot charter for its containers which are owned by it."........ 28. The ld. CIT - DR further submitted that in case of present assessee, it has not been shown that one leg of the voyage is car....
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....llowing the ratio of decision of MISC Berhard (supra). Further, just because the shipping and airline business are little different in so far as mode of transport, the condition of establishing the linkage cannot be dispensed with when the Article 8 under which the relief is being claimed does not make any such distinction between the shipping and airline business. If the contention of Ld AR is accepted then how can he rely on the case of MISC Berhard to support his claim of benefit under Article 8. 30. The alternate contention of Ld AR that the profits are eligible for exemption under Article 8(4) as the profits derived from 'pool' arrangement, is also not tenable for following reasons;- "As per the dictionary meaning of 'pool' as illustrated by Ld AR during hearing it would clearly suggest that a 'pool' means combining of several persons of their separate resources in one large operation (concise law dictionary). Thus a 'pool' requires several persons coming together to contribute and combine their resources for a large business and then share the resources amongst them. In the present case the arrangement are only bilateral arrangements and not several persons have come togeth....
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....of cargo and passengers from India. For such code sharing voyages, the aircrafts used by third party carriers are neither owned nor leased or chartered by the assessee i.e. Delta Air lines Inc but under the code sharing agreement the assessee was booking its customers for international traffic on the flights operated by such third parties from India. The receipts in respect of such bookings made by assessee under the code sharing agreement have also been claimed as exempt form taxation in India under Article 8 of DTAA between India and USA on grounds that cargo/passengers booked under code sharing arrangement from India will also be covered by international traffic. The AO and the DRP has held such receipts are not covered under Article 8 as the code sharing agreement could not be said to be in the nature of a charter arrangement as envisaged under the DTAA. The basic question to be decided is whether the code sharing arrangement with third party in which assessee was booking tickets for its customers can be said to be slot/space charter arrangement on specific facts of the instant case so as to make it eligible for benefit under Article 8 of DTAA. 32. For better understanding of ....
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.... There is no dispute in respect of profit derived by assessee by transportation by its owned/leased/chartered aircrafts. It is only the receipts under code sharing agreements with the third parties where the assessee has only booked the tickets and the actual transportation is done by third parties ship or aircraft that such receipts cannot be said to be the profits "derived" from international voyage carried by the assessee by entering into code sharing agreements. The receipts for activities under Article 8(2)(a)(b)(c) are only for enlarging the scope of profits from other related activities but the qualifying condition of such transportation through ship or aircraft owned/leased or chartered by assessee have to be still independently fulfilled under Article 8(1) & (2) to claim the benefit of receipts falling under Article 8. In assessee's own case the Tribunal held that the receipts from other activities connected to such transport falling under Article 8(2)(b) without having any receipts which qualify under Article 8(1) & 8(2) are not eligible for benefit of Article 8. The Tribunal in assessee's own case reported at 124 ITD 114 (Mumbai) observed at para 13 that Article 8(2)(b) ....
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....uation like transportation to Hub Port and from there to final destination port nor there is any inextricable link between such transportation, therefore, the principle laid down in the case of MISC Berhad (supra) cannot be applied to the facts of the instant case. 34. There is nothing on record to suggest that assessee had entered into agreement with the third party in the nature of slot charter/space charter so as to qualify under Article 8(2). The right of the assesse to book flights under code sharing agreements with other third parties is not exclusive unlike the charter agreement. The assessee has no fixed space/slot for which the booking rights are exclusively with assessee only. The number of seats/space which can be booked by assessee is also not fixed under the code sharing agreement. The role of the assessee in respect of bookings so made under code sharing agreement is essentially in the nature of booking agent and not as a charterer. Nothing was placed on record in support of ld. AR's contention that the cargo/passengers carried under code sharing arrangement was upto intermediary destinations only and thereafter assessee had transported further by its owned airlines ....
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....sharing arrangement cannot be said to be in nature of space/slot charter." 35. To arrive at conclusion that the shipping activity of assessee from Indian Port to Hub Port was in the nature of charter arrangement and covered under Article 8, precise observation at para 14 in page No. 17 of the Tribunal order reads as under:- "For the purpose of its transportation of cargo, the assessee used the services of feeder vessels operated by third parties by using space charter/ slot charter from Indian Port to Hub Port. At the Hub Port, the containers which were owned by the assessee were transferred to mother vessels i.e., the ships owned by the assessee and from thereon, the cargos / containers were transported by its own ships to the final destination. port. The entire voyage from India Port to Hub Port and from there to final destination port, is inextricably linked and cannot be segregated as held by the Assessing Officer and the learned Commissioner (Appeals). He further submitted that the Assessing Officer has, in fact, admitted that the assessee has furnished proof to substantiate the linkage of the voyage performed on feeder vessels and mother vessels [i.e., ships owned by the as....
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....f one has to call the arrangement as space/slot charter following the ratio of decision of MISC Berhard (supra). 37. Now coming to the alternative contention of the ld. A.R. that the profits are eligible for exemption under Article 8(4) insofar as profits were derived from "pool" arrangement. 38. We have considered the rival contentions. Arrangement of "pool" requires several persons coming together to contribute and combine their resources for a large business and then share the resources amongst them. However in the present case the arrangement was only bilateral arrangements and not several persons have come together. Nothing was brought on record to indicate that the common funds and resources were brought together in a pool which is shared by members of the pool. However, the assessee has only entered into code sharing arrangement, it is also not a case that assessee and third party both are contributing the air craft in a pool which are shared by both. However in the instant case third party is contributing its aircraft and the assessee is only using the resources of third party by booking seats in the aircraft. Thus the arrangement does not meet principle of pool arrangeme....