AI Drafter 
TaxTMI 
TaxTMI 
2022 (5) TMI 412
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....#39;the Act'). At the outset, we propose to deal with the quantum appeals. QUANTUM APPEALS ITA No. 216/Del/2000 for AY: 1996-97 ITA No. 217/Del/2000 for AY: 1997-98 ITA No. 1691/Del/2008 for AY: 1998-99 ITA No. 1692/Del/2008 for AY: 1999-00 ITA No. 1693/Del/2008 for AY: 2000-01 ITA No. 1694/Del/2008 for AY: 2001-02 ITA No. 1695/Del/2008 for AY: 2002-03 3. Before we proceed to deal with the issues arising in the appeals, it is necessary to observe, assessee's appeals in assessment years 1996-97 and 1997-98 were earlier disposed of by the Tribunal vide order dated 9th September, 2005. The appeals were allowed in favour of the assessee on the limited legal and jurisdictional issue that notices issued under section 142(1)(i) after the end of the relevant assessment years being invalid, the assessments made pursuant thereto are also invalid. Against the aforesaid decision of the Tribunal, the Revenue went in appeal before Hon'ble Jurisdictional High Court. Vide order dated 21.11.2006, in ITA No. 1303/2006, the Hon'ble Jurisdiction High Court remanded the matter back to the Tribunal for deciding the appeals on merit. This is how the appeals came....
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....amount received from other airlines for providing baggage screening services and engineering and aircraft handling services, being incidental to operation of aircraft in international traffic, is not taxable in India. After considering the submissions of the assessee, the Assessing Officer agreed that the income/profit earned by assessee from operation of aircraft in international traffic is covered under Article 8(1) of the Tax Treaty, hence, not taxable in India. However, insofar as income/profit earned by the assessee from other airlines while providing baggage screening services and engineering and aircraft services, he held it as separate business activity, hence, cannot be considered to be either directly connected to operation of aircraft in international traffic for transportation of passengers and goods or incidental to the activity. Thus, he concluded that the amount received by the assessee from other airlines towards baggage screening services and engineering and aircraft handling services being not covered under Article 8 would be taxable in India under Article 7 of the DTAA as business profit, since, the assessee has Permanent Establishment (PE) in India. While coming....
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....containers used in connection with the operation of ships or aircraft in international traffic shall be taxable only in that State or profit from any other activity directly connected with transportation of passengers, mail, livestock or goods would also qualify for exemption from taxation in India under Article 8 of the Treaty. He submitted, Tax Treaty between countries are drafted broadly adhering to either OECD Model or UN Model or US Model. However, some variation is made based on negotiations between the countries on the taxability of various kinds of activities and services. Making a comparative analysis of OECD Model Convention, UN Model Convention and US Model Convention, learned counsel for the assessee submitted all of them have expressed that ancillary and incidental activities connected to operation of aircraft in international traffic also qualify for beneficial treatment under Article 8(2). Drawing our attention to Article 8(2) of India - USA Treaty, he submitted, it specifically provides that profits derived from operation of aircraft in international traffic shall include any activity directly connected with such transportation. Whereas, he submitted no such provisi....
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....he operation of aircraft for transportation of passenger and goods. He submitted, without the services being rendered by the assessee to itself and to other airlines, it will not be possible for any aircraft to be air-borne with passengers or goods. He submitted, apart from utilizing these services for its own operation, it provides such services to other airlines to fully utilize its technical manpower as well as the equipment. In this context, he also referred to commentary of Klaus Vogel. He submitted, since the baggage screening and technical and engineering services provided to other airlines are preparatory and auxiliary services related to transportation of passengers and goods, the profit derived from such activities can only be taxed in the country of residence under Article 8(1) read with Article 8(2) of the Treaty. Thus, he submitted, the income earned by the assessee from baggage screening, technical and engineering services provided to other airlines would not be taxable in India. 6.2. Without prejudice, he submitted, even otherwise also such income is not taxable in India, since, the assessee is a member of a pool in terms of Article 8(4) of India - USA DTAA. Drawi....
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....baggage screening services provided in India are to airlines which are members of IATP. He submitted, assessee has also received reciprocal services from other IATP member airlines. He submitted, while providing services to other airlines, the assessee did not employ any additional manpower to render the services and the manpower employed was to the extent required for baggage handling and aircraft maintenance of its own aircraft landing in and taking off from Delhi. This, according to learned counsel for the assessee, clearly demonstrates that the provision of services to other airlines was not carried out on commercial lines, hence, cannot be treated as separate business activity. He submitted, for providing such services, assessee has entered into specific agreement in Form No. 55/53 of the IATP, which are standard agreements entered into between the members of IATP for receiving and rendering services. Referring to OECD Model Convention, he submitted, where an airlines enterprise agrees under an IATP agreement to provide spare parts or maintenance services to other airlines landing at a particular location, activities carried out pursuant to that agreement will be ancillary to ....
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.... in international traffic for transportation of passengers/goods. He submitted, the issue now stands well settled by virtue of the decision of the Tribunal in case of British Airways Vs. DCIT, (2002) 80 ITD 90 (Delhi). He submitted, even in case of Delta Airlines, whose business in India was taken over by the assessee subsequently, the Tribunal has held that the income received from providing ground handling services and other services to other airlines are not covered under Article 8 of India-USA DTAA. Thus, he submitted, the profit derived from these activities, being neither directly connected to assessee's business of operating aircraft in international traffic nor being ancillary or incidental to the said activity, would not come within the ambit of Article 8(1) and 8(2). He submitted, assessee's case will not also be covered under Article 8(4) as there is no pooling arrangement in real sense of the term, as, there is neither pooling of funds nor resources between the members. Therefore, he submitted, the income derived by the assessee from provision of baggage screening services and technical and aircraft handling services to other airlines are not covered under Artic....
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....sis Centre of Excellence (P.) Ltd. Vs. CIT, 432 ITR 471 (SC). He submitted, as per Article 31 of the Vienna Convention of the Law of Treaties, 1969, Treaties are to be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the Treaty in their context and in the light of its object and purpose. Referring to the decision of KLM Royal Dutch Airlines (supra), he submitted, technical explanation given by one of the Treaty partners, i.e., US Treasure Department could be used as an aid to interpretation. In this context, he also referred to a decision of the Tribunal in case of DDIT Vs. Preroy A.G., 39 SOT 187 (Mum.). Thus, he submitted, while interpreting Article 8 of the India-USA Tax Treaty, reliance can be placed on the OECD Commentary and Technical Explanation to the US Model Convention issued by the Treasure Department of US. To buttress his submission that all ancillary and incidental activities relating to operation of airlines in international traffic come within the ambit of Article 8, learned counsel for the assessee relied upon a decision of the Hon'ble Bombay High Court in case of DIT Vs. Balaji Shipping UK Ltd. [2012] 253 CTR 460 (B....
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....basis. The main function of a double taxation avoidance treaty should be seen in the context of aiding commercial relations between treaty partners as being essentially a bargain between two treaty countries as to the division of tax/revenues between them falling to be taxed in both jurisdictions. 9.2. Therefore, the provisions of a Treaty relating to taxation of a particular item of income may differ from country to country as treaties are negotiated at political level between two countries based on various considerations, including commercial consideration. Keeping in perspective these salutary principles, we will proceed to deal with the issue. 9.3. As discussed earlier, the main thrust of assessee's contention is, the income derived from baggage screening services and aircraft handling services provided to other airlines, being ancillary and incidental to its main activities of transportation of passengers, goods etc. by air will also fall within the four corners of Article 8(1) read with Article 8(2) of the Tax Treaty. For this purpose, it is necessary to look into Article 8 of India-USA DTAA which read as under: ARTICLE 8 SHIPPING AND AIR TRANSPORT 1.....
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....is expression means, profit derived from transportation by sea or air of passengers, mail, livestock or goods carried on by the owners or lessees or charterer of ships or aircrafts. However, in addition to transportation of passengers, mail, livestock or goods, the following three activities are also considered to be coming within the expression "profits derived by an enterprise from operation of ships or aircraft in international traffic": (a) the sale of tickets for such transportation on behalf of other enterprises; (b) other activities directly connected with such transportation; and (c) the rental of ships or aircraft incidental to any activity directly connected with such transportation. 9.5. If the provisions contained under Article 8 of India-US Tax Treaty are juxtaposed to similar provisions contained under UN Model Convention, OECD Model Convention and US Model Convention, it can be seen that the expression 'other activity directly connected with such transportation' as incorporated in clause (b) of Article 8(2) of India-USA Tax Treaty is absent in OECD Model Convention, UN Model Convention and US Model Convention. Thus, essentially, ....
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....activities, viz., sale of tickets for such transportation on behalf of other enterprise and the rental of ships or aircrafts incidental to any activity directly connected with such transportation have been specifically included within the meaning of 'profits from the operation of ships or aircrafts in the international traffic'. Therefore, any activity which can aid and assist the transportation of passengers, mail, livestock or goods etc. by the assessee by air or sea can come within the ambit of 'other activity directly connected to such transportation'. As given by way of illustration by the Assessing Officer, such activity can be the operation of bus service connecting a town with its airport for transporting the passengers, transportation of goods by truck connecting a depot with a port or airport etc. These activities, undoubtedly, aid and assist the transportation of passenger, mail, goods, livestock etc. by the assessee itself, hence, would come within the ambit of Article 8(1) read with Article 8(2) of India-USA Tax Treaty. 9.8. Thus, according to our understanding, the use of expression 'other activity directly connected with such transportation'....
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...., in the facts of the present appeals, the profit derived by the assessee from baggage screening services and aircraft handling services provided to other airlines is in no way connected to assessee's activity of transportation of passengers, mail, livestock or goods etc. by air in its own aircrafts. In fact, if the assessee does not provide such services to other airlines, in no manner, assessee's activity of transportation of passenger, mail, goods, livestock etc. would be affected. In fact, the assessee itself has stated that when not required by the assessee for its own transportation activity, for optimum use of the equipments and manpower deployed at IGI airport, the services are provided to other airlines. These facts make it clear that, either provision or non provision of certain services to other airlines will not at all have any impact on assessee's activity of transportation of passenger, mail, goods, livestock etc. That being the case, in our considered opinion, the profit derived by the assessee from baggage screening services and aircraft handling services provided to other airlines will not come within the ambit of 'other activity directly connected ....
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....rtmental authorities, the assessee had furnished certain additional evidences before the Tribunal vide letter dated 2nd April, 2018. Vide order dated 17.05.2018, the Tribunal had admitted the additional evidences as part of record. The additional evidences filed by the assessee are as under: (i) Documents showing services provided by the assessee to other airlines. (ii) Services provided by other airlines to the assessee. (iii) The relevant extract of International Airlines Technical Pool (IATP) manual. (iv) Specimen of ground handling agreements entered into buy the assessee with other airlines. 9.13. On perusal of the IATP agreement, a copy of which is at page 29 of the paper-book, it is noticed that the assessee became a participant of the IATP pool in November, 1967. There are various other airlines that are part of the pool, though, from different time periods, to name a few, Air Portuguese, Romanian Air Transport, Thai Airways International Public Company Ltd., Royal Jordanian Airlines, Turkish Airlines Inc., US Airways Inc., Virgin Atlantic Airways Ltd. There is no dispute that the IATP was created based on IATP manual. The IATP manual ....
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....as not only provided services to various other airlines but has also availed services from other airlines, though, may not be in India but at various other airports. 9.15. On a reading of Article 8(4), we are unable to find any restrictive covenant indicating that the reciprocity in services must be in the same country. Therefore, once the assessee derives profit from participating in a pool on reciprocal basis, in terms of Article 8(4), such profit can only be taxed in the country of residence of the enterprise, in the present case USA. While dealing with identical issue relating to taxability of profit derived from participation in a pool, the Hon'ble Jurisdictional High Court in DIT Vs. KLM Royal Dutch Airlines (supra) interpreting pari materia provision contained under Article 8(3) of the India-Netherland Tax Treaty has held as under: "30. The Assessees participated in the IATP pool and earned certain revenues from such activities and also incurred expenditure. There is, in the opinion of the Court, clear reciprocity as to the extension of services; IATP membership is premised upon each participating member being able to provide facilities for which it was forme....
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....f 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, other activity directly connected with such transportation "These terms are not present in the two DTAAs in the present set of appeals. (vii) After meeting the requirement of its own flights, the services of employees were required for handling other airlines' operation for generating income. 32. Having regard to these facts, this Court is of opinion that the amplification of the term "operation of aircraft" in Article 8(1) through Article 8(3), i.e. "...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 other activity directly connected with such transportation..." had the effect of limiting the nature of activities that ....
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...., more or less, identically worded. For this very reason also, we are unable to subscribe to the view expressed in case of British Airways (supra) and Delta Airlines (supra), insofar as, they relate to claim of exemption of profit from participation in pool. 9.17. Thus, to conclude, we hold that the profit derived from providing baggage screening services and aircraft handling services to various other airlines in India will not be taxable in India under Article 8(1) read with Article 8(4) of the India-USA Tax Treaty. Therefore, the additions made in different assessment years under dispute are hereby deleted. 10. Thus, in nutshell, assessee's claim of exemption under Article 8(1) read with Article 8(2)(b) is rejected. Whereas, its claim under Article 8(1) read with Article 8(4) is allowed. 11. In view of our foregoing decision, the other ground raised by the assessee concerning attribution of expenditure to the PE have become academic, hence, not required to be adjudicated. For this reason also, the grounds raised on the levy of interest under section 234A and 234B of the Act have also become infructuous. However, in principle, we accept assessee's contention that....