TaxTMI 
TaxTMI 
2017 (2) TMI 157
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....ICE S. RAVINDRA BHAT 1. The question of law, that arises from both the appeals, to be determined by the Court is: "Whether profits of the assessees from providing technical services to other airlines is covered by Articles 8(1) and 8(4) of the Double Taxation Avoidance Agreement between India and Germany, and by Articles 8(1) and 8(3) of the Double Taxation Avoidance Agreement between India and Netherlands?" 2. The facts in brief, in both the appeals are as follows: Both the assessees (hereafter referred to as "Lufthansa" and "KLM", and collectively, the "Assessees") are international airlines with headquarters and controlling offices in Cologne, Germany and Amsterdam, Netherlands respectively and branch offices in India. They operate aircraft in the international traffic business; these activities are also carried out in India inasmuch as they operate aircraft in international traffic from, and to, various Indian airports. Both the Assessees are members of the International Airlines Technical Pool ("IATP" or the "Pool"). As IATP members they extend minimal technical facilities (line maintenance facilities) to other International Air Transport Association ("IATA") member a....
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....e in accordance with the carrier's instructions and (xx) provide engineering facilities, tools and special equipment to the extent available. 4. The Assessees filed their returns of income and claimed that the amounts received from various IATP member airlines for the above services rendered in India were not taxable in India. However, the Assessing Officer ("AO") in their cases held that such amounts received by them in India were taxable, holding that these activities were not covered under the term "Air Transport Services"; the services were given to other airlines by the Assessees, the receipt from which was not recovered from their passengers and was not part of the face value of the ticket. The AO held that these services were incidental to the Assessees for their own flights, but when rendered to other airlines they were not air transport operation; the assessees' business would not be affected if they did not render them to other airlines. The AO also relied on the Organization for Economic Co-operation and Development's ("OECD") commentary to hold that separate business activities are not covered under air transport operation. In view of these findings, the AO co....
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....y, the word "PE" finds place only in relation to business. The word "PE" has not been used in relation to profits from operation of ships or aircrafts in international traffic. The word "International Traffic" has also been defined in Article 3(1)(i) of the DTAA which reads as under: "The term 'international traffic'; means any transport by a ship or aircraft operated by an enterprise which has its place of effective management in a contracting state except when the ship or aircraft is operated solely between places in the other contracting state." 37. We have therefore examine as to whether the profits of the appellant was due to participation in a pool. Admittedly, if it was so then the profits will not be liable to tax in India. The aims and objectives of participation in IATP have been mentioned earlier. We find that the appellant has rendered services/facilities to three airlines and has availed the services of one airline. On extending services to the other airlines, the appellant has received a sum of Rs. 49.64 lakhs and on availing the services, it has paid the sum of Rs. 45.50 lakhs. Thus, there was reciprocity between the members of the pool. But in the case....
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.... be several pools or understanding i.e. more than one. Here the word "pool" does not indicate a pool which is internationally recognized. The use of the word "pools any kind" clearly indicates that it was in the nature of commercially understood meaning. But in the international aviation industry, there is only one pool i.e. IATP. Certainly, in the case of British Airways, it was not a case of participation in a pool. In the appellant's case, it is participation in IATP only. This was the reason that the ITAT has to find out the meaning of the word "pool" in the case of British Airways. Moreover, in the case of British Airways, it was "pools of any kind" but in the case of the appellant, it was not a pool of any kind but only IATP. Thus, the facts in the case of British Airways were altogether different then the facts of the appellant's case and the view taken by the ITAT in the case of British Airways is not applicable in the case of appellant as the facts are entirely different. We have also noted that British Airways has rendered services to Atlas Air Corporation, which is not a member of IATP. The services rendered to that airline could not be bound by IATP manual. 4....
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....e. It was highlighted that the ground handling services provided on commercial terms were only with a view to generate revenues from spare capacity and there was no existence of any pool regarding ground handling services since neither the assets and nor the personnel of the various airlines were brought together at any international airport. 9. Counsel for the Revenue argued that the position would have been different if IATP had come to India, pooled the resources of various airlines at the airports, rendered services to willing airlines and thereafter distributed profits to the participants. The crux of the matter, according to the Revenue, therefore was, not that separate agreements could be entered into amongst the various airlines in respect of facilities at one airport belonging to one airline and fixing the price of the service, but the bringing together of the infrastructure of various airlines together at one place with a view to render services and share profits from the pooled assets. 10. The Revenue also argues that since Article 8 (4) of the Indo-German DTAA and Article 8 (3) of the Indo Dutch DTAA (hereafter referred to as the "pool provisions") are amplificati....
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....tering into separate agreements with IATP members for extending and availing the services to the airlines members participating in the pool. Such agreements were entered on the IATP Form-53 and the handling charges were as per the IATP manual. The Assessees entered into agreements and extended services to various other airlines, such as Malaysian Airlines, Austrian Airlines, Aeroflot, Virgin Atlantic, Air Canada, Alitalia, in airports in India. The Assessee airlines also received similar services in other Indian airports from other participating members. No consideration was paid on account of these services; only notional credits and debits were given through the pool accounting mechanism i.e. IATA clearing house. The services and facilities,which the assessees provide, are in the nature of line maintenance facilities with a predominant objective of assisting other IATP member airlines for collaboration among the air transport enterprises. Such technical facilities are mandatory and non-derogable from the point of view of flight safety requirements, which cannot wait till aircrafts returns to their base, such as the place where the airline concerned has its own in-house facility. ....
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....ly meant for rendering the services to other airlines. The entire extra or idle staff was deployed for rendering the services. Thus, in the case of British Airways, it was an organized activity of rendering services. In the case of the assessee, there was no question of any additional deployment or permanent establishment. 14. Counsel urged that IATP provides Form No. 53 as the format agreement between two participating airlines; the British Airways did not conform to the pool rules and, therefore, it did not enter into agreement using those formats. Therefore, the agreements entered into by British Airways and other airlines were not covered under IATP rules, whereas the Assessees were covered by the IATP. Article 8(4), besides covered income not only by way of profit in participation of the pool, but also the joint business. But in the Indo-UK DTAA, exemption was not available to joint business. Importantly, British Airways did not work under any umbrella arrangement, whereas the Assessees were working under the international umbrella of IATP. For these reasons, British Airways (supra) was not an apt authority, as correctly deduced by the ITAT. 15. The counsel for the Asses....
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....any kind notwithstanding the nomenclature used in the agreements. Thus, the true position which emerges from this discussion is that there should first of all be a pool, in fact, in the sense that the assets or personnel are brought together for some kind of joint venture, whose profits are shared in some manner by the participants. That is not the case here. From experience, it was found that certain airlines had accumulated excess capacity in respect of ground handling services at some stations, while some other airlines did not have such facilities on some of the airports. It would have been quite difficulty for each airline to have ground facilities at each line station. Maintenance of such facilities would have involved considerable lay out making some of the airlines unprofitable. Therefore, a mechanism was formed through IATP under which airlines, which did not have ground facilities at some line stations, could use the existing facilities of another airline. But that did not bring either the personnel or the equipment of the airlines under a joint command. That also did not mean that the profits from such activities were shared by the participants. In fact, separate agreeme....
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....ion "pools" is to be interpreted in line with the British Airways (supra). 21. The decision in British Airways (supra) was by a two-member bench; both agreed on the concept of pooling- however, there were separate opinions. The presiding member, after considering the dictionary meaning of the expression "pool" stated that: "63. Article 8(2) in our opinion speaks of the same type of activity giving rise to profits earned by the enterprise participating in a pool for earning the profits derived from international traffic. In other words, what is done by an enterprise singly in Article 1 is done by the same enterprise jointly with others by participating in a pool. We have in the earlier part of this order discussed at length the concept of "Pools" and nothing more is tobe said so we move on to Article 8(3). 64. Article 8(3) expands the meaning of the term "operation of aircraft" to include transportation by air of (1) persons (2) livestock goods or mail carried on by the owners or lessees or charterers of aircraft (3) sale of tickets for such transportation on behalf of other enterprises (4) incidental lease of aircraft on a charter basis (5) any other activity directly conn....
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.... IATP Organization Definition The IATP is a non-profit, independent, non-political global organization based on a democratic culture with equal opportunities for all member Airlines and their delegates. Technical Resources Definition Technical Resources includes, but not limited to, aircraft spare parts, line maintenance, ground handling equipment, aircraft recovery kits and technical training." 23. During the course of hearing, counsel for the assessees had relied upon extracts of the IATP manual issued in 1996. The manual states that from 24 members in 1962, IATP membership had grown from 24 to 121 (96 members and 25 guests). The IATP manual states that it is an organization of airlines formed for the purpose of providing reciprocal technical support and line stations throughout the world. This technical support includes aircraft spare parts, ground and ramp handling equipment and manpower. The primary goal of IATP is to generate economic setting savings to participant airlines by minimizing investments otherwise required for purchase of equipment and spare parts, for positioning at various stations in support of aircraft operations. The IATP Articles of Association w....
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.... residence of the airline i.e. where it is principally incorporated and headquartered; equally the concept of ensuring pooling provisions along with joint businesses has been consistently followed in all later OECD model DTAA conventions. 25. Though not in any manner binding, the OECD commentary on Article 8 (1) reflects this intention: "4. The profits covered consist in the first place of the profits directly obtained by the enterprise from the transportation of passengers or cargo by ships or aircraft (whether owned, leased or otherwise at the disposal of the enterprise) that it operates in international traffic. However as international transport has evolved, shipping and air transport enterprises invariably carry on a large variety of activities to permit, facilitate or support their international traffic operations. The paragraph also covers profits from activities directly connected with such operations as well as profits from the activities, which are not directly connected with the operation of the Enterprises ships or aircraft in international traffic as long as they are ancillary to such operation. 4.1 If the activity carried on is primarily in connection with th....
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....ple, enterprises engaged in international transport may enter into pooling arrangements for the purposes of reducing the costs of maintaining facilities needed for the operation of their ships or aircraft in other countries. For instance, where an airline enterprise agrees, under an International Airlines Technical Pool agreement, to provide spare parts or maintenance services to other airlines landing at a particular location (which allows it to benefit from these services at other locations), activities carried on pursuant to that agreement will be ancillary to the operation of aircraft in international traffic." 27. From the above discussion it is quite clear that the airline business requires not only huge capital deployment in acquisition of assets but also a continued maintenance and operations regime that is cost intensive. Like in any other industry, these costs are absorbed in the operation and are effectively factored in. That an airline carries on these activities as a part of its airline operation is not disputed and is rather considered a given by the Revenue. However, its argument essentially is that participation in a pool means that the activities that an airline....
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....the context: 1. (a) Any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; 2. (b) Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; 3. (c) Any relevant rules of international law applicable in the relations between the parties. 4. A special meaning shall be given to a term if it is established that the parties so intended." 29. Thus, while interpreting tax treaties and conventions, the emphasis is upon the context- in the instrument itself, and "any subsequent agreement between the parties" as to the interpretation of the treaty or the application of its provisions. The expression "profit from the operation of ship or air-craft in international traffic" has not been defined in the Indo-Dutch DTAA, or in the Indo-German DTAA. In Article 8(3) of the DTAA between India and UK, it is explained. This is a significant distinction between these three sets of DTAA. The position in the Indo-German DTAA and Indo-Dutch DTAA on the one hand is similar, whereas, in the case of the Indo-UK DTAA, there is a difference. The ITAT w....
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....d to various airlines at a price. The services provided in terms of the IATP manual are not based on any consideration paid or received; a system of credits has been created for IATP members. (iv) British Airways has a branch office in India, which constituted a Permanent Establishment ("PE") in India, and, therefore, the income derived from PE in India was taxable as the same was not covered under DTAA. (v) Article 8(2) of DTAA between India and UK provided that paragraph 1 of Article 8 shall likewise apply in respect of participation in pools of any kind. The words "pools of any kind" was interpreted by the ITAT by taking the dictionary meaning of the word "pool". These are missing in the two DTAAs in question. (vi) Article 8(3) of DTAA between India and UK provided that the terms "operation of aircraft" shall include "..3. For the purposes of this article the term "operation of aircraft" shall include transportation by air of persons, live-stock, goods or mail, carried on by the owners or lessees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprise, the incidental lease of aircraft on a charter basis and any othe....