TaxTMI 
TaxTMI 
2024 (11) TMI 815
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.... 4. Levy of interest under Section 234A and Section 234B of the Act - Ground No.4 (4.1) 5. Initiation of penalty proceedings - Ground No.5 (5.1) 2. The assessee also raised the following additional grounds "Disregarding the evidence establishing linkage for the purpose of Article 8 of the India-US Tax Treaty 1. The Lower Authorities erred in disregarding the evidence submitted by the Appellant. establishing transportation linkage between India and an interim destination, followed by transportation to a final destination outside India through a combination of third-party carrier and aircrafts owned/leased/chartered by the Appellant, and consequently, erred in not granting the exemption under Article 8 of the India-US Tax Treaty. Erroneous determination of taxable Income under Article 7 of the India-US Tax Treaty 2. Without prejudice to the Cost-Plus Method being the Most Appropriate Method, if profits attributable to the PE are to be computed in accordance with Rule 10 of the Income-Tax Rules, 1962, the Lower Authorities failed to appreciate that the Appellant's revenue in relation to the transportation through third-party car....
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.... "ARTICLE 8 Shipping and air transport 1. Profits derived by an enterprise of a Contracting State from the operation by that 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 mean profits derived by an enterprise described in paragraph 1 from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft including - (a) the sale of tickets for such transportation on behalf of other enterprises; (b) other activity directly connected with such transportation; and (c) the rental of ships or aircraft incidental to any activity directly connected with such transportation. 3. Profits of an enterprise of a Contracting State described in paragraph 1 the use, maintenance, or rental of containers (including trailers, barges, and related equipment for the transport of containers) used in connection with the operation of ships or aircraft in international traffic shall be taxable only ....
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....e in the case of MISC Berhad vs ACIT [2014] 47 taxmann.com 50 (Mumbai - Trib.) relied on by the assessee stating that the said decision is rendered in the context of India- UK DTAA iii. the link between the goods transported in other ships under slot sharing with the operation of ships owned by the assessee in the case of MISC Berhad (supra) was not called for by the AO in assessee's case and therefore deciding against the assessee on that ground is not tenable. iv. the contention that the profits attributable to the usage of third-party carriers under a code-sharing arrangement are not profits derived from operation in international traffic, under Art. 8(1) read with Art. 8(2) is against the decision of ratio laid down by the Hon'ble Bombay High Court. 8. The ld AR submitted that for the year under consideration, the assessee has submitted the details establishing the link between the flights of other airlines used for transporting passengers under code sharing arrangement with the operations of the assessee. The ld AR brought to attention that the application made by the assessee for invoking Mutual Agreement Procedures("MAP") is rejected by the US au....
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....istake apparent on record. Therefore the ld AR submitted that the issue of applicability of Article 8 for the receipts under code-sharing arrangement was not raised in the MA and hence the argument of the ld DR is not correct. 11. We heard the parties and perused the material on record. From the perusal of the facts as enumerated herein above it is clear that the limited issue for our consideration in this appeal is whether the receipts of the assessee under code sharing arrangements are covered by Article 8 of the DTAA between India and USA and accordingly not taxable in India. It is relevant to note that in assessee's own case for AY 2010-11 ([2015] 57 taxmann.com 1 (Mumbai - Trib.)), the coordinate bench has considered the same issue and held that the receipts under code sharing arrangements cannot avail the benefit of Article 8 of India-US DTAA and accordingly taxable in India. The relevant observations of the coordinate bench in assessee's own case for AY 2010-11 is extracted below - 31. It is clear from the provisions of Article 8 (1) that it is the substantive provisions granting the exemption to an enterprise of a contracting state from the operation by ....
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....transportation of passengers by the assessee as owner/lessee/charterer of the aircraft would fall within the ambit of para 2(b) of Article 8 and consequently the activity relatable to the transportation of passengers by other airlines would be outside the scope of such provisions. It was further held that the activity of third party charter handling and maintenance would also be outside the ambit of para 2(b) of Article 8. Similar view has been taken by the co-ordinate Bench in the case of British Airways Plc. wherein expression under Article 8 of Indo- UK Treaty (which is similarly worded) was denied in respect of the various services provided through other airlines. The contention of the ld. AR was that since the assessee is an airline, admittedly operating in international traffic, therefore income from cargo/passengers through third airlines is also covered under Article 8 of DTAA. Heavy reliance was placed by the ld. AR on the decision of Tribunal in the case of MISC Berhard (supra) wherein the assessee used the services of feeder vessels operated by third parties by using space charter/slot charter from Indian Port to Hub Port only and from where the cargo were transferred to....
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.... present case. However, nothing has been produced before the A.O./DRP/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. Merely the fact that assessee in some instances operating its airline from such intermediary destinations will not automatically prove that passengers/cargo which were carried from India under code sharing to intermediary destinations were transported to final destinations by assessee's airline only. Nothing was brought on record to support the contention that there was inextricable link between voyage from India to interim destination by third parties under code sharing agreement and from interim destination to final destination by assessee's owned/chartered/leased aircraft. In this regard, it is important to bring on record the relevant observation by the ITAT in the case of MISC Berhard (supra) vide para No. 29, page 36 of its order:- "From the above observations, it can be understood that the facility of slot hire agreement with the feeder vessels to complete the voyage is not merely an auxiliary or incidental activit....
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....h legs of journeys. In the result, the receipts to the extent of code sharing arrangement cannot be said to be profits derived from operation in international traffic under Article 8-(1) read with Article 8-(2). The decision in the case of MISC Berhard (supra) is distinguishable on facts, therefore, cannot be applied to the present case. 12. On perusal of the above findings of the Tribunal, it is observed that the key principles on the basis of which the coordinate bench has decided the issue against the assessee are - a. The Assessee's income derived by booking of seat/space under a code-sharing agreement is not income derived from operation of aircraft in international traffic through an owned/ leased/ chartered aircraft. b. Code-sharing agreements are not in the nature of space/slot charter, in absence of an inextricable linkage of both legs of journey. c. In result, the profits attributable to the usage of third-party carriers under a code-sharing arrangement are not profits derived from operation in international traffic, under Art. 8(1) read with Art. 8(2). 13. The coordinate bench further held that the code-sharing arrangement will not get co....
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....prise may not ply the ships owned or chartered or otherwise controlled or managed by it in respect of certain routes. It would however, on account of the business exigencies, be required to carry cargo on such routes. Business expediency could arise on account of a number of reasons and different situations such as obliging regular clients, or cultivating new ones. If it were not to do so, it may well loose clientele. Ships owned or chartered or otherwise controlled or managed by an enterprise may not be available on the particular route on a given day or for a particular period. The enterprise may already have entered into contracts or may even be required to enter into contracts for the carriage of goods on that route on that day or during that period. The trade would expect, the enterprise to perform its contracts and/or ensure there is no break in its services. This it can do by availing slot hire agreements. Their refusal or failure to do so, may well affect their business and reputation adversely. 27. By availing the facility of slot hire agreements, the enterprise does not arrange the shipment on behalf of the owner of the said vessel, but does so on its own account....
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....ctually a part and parcel of charter of a ship. Under the charterer agreement, there is no ownership or control of entire ship because the risk under the charter party agreement or arrangement is upon the owner of the ship who generally assumes an operational risk for transporting the cargo of the person who has hired the ship and the hirer agrees to pay for conveyance of goods on a determined voyage. The risk of the assessee is towards its customers from whom he has agreed to transport the cargo/goods from the destination port of booking to the final destination port. Thus, in our opinion, such a strict interpretation of the word "charterer" as adopted by the Department cannot be sustained. 30.*** 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 through feeder vessel by way of space charter/slot charter arrangement, falls within the ambit of the word "charterer" and, therefore, it cannot be segregated from the scope of "operation of ships" as defined in Article-8(2) of the Indo-Malaysian treaty. In the present case, the voyage between the Indian Port....
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....e enterprise of the operation of ships. While holding so, the Hon'ble High Court has included both the scenarios (i) where the goods are transported by an enterprise by availing of the slot hire facility obtained by it on the ship of another from a port in India upto a hub port abroad and from there transporting the goods further to their final destination upon a ship owned or chartered or otherwise controlled by it and (ii) where the goods are transported by the assessee from a port in India directly to their final destination to a port abroad by availing a slot hire facility obtained by it on the ship of another. 17. It is also relevant to mention here that Article 9 of India-UK DTAA does not define the "profits from operation of Ship or Aircrafts in international traffic" whereas Article 8 of India-US DTAA defines the same as "profits derived from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft". Therefore the revenue in assessee's case contended that the decision of the Bombay High Court in Balaji Shipping's case is not applicable to asse....
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.... code specific to the assessee, so that the assessee holds itself out as providing service to destinations where it does not otherwise operate or in segments where it operates infrequently. The typical way in which the tickets are booked under code sharing arrangement is explained as below - 20. From the above it is clear that though the passengers are transported through airlines not operated by the assessee, the tickets until the final destination are issued by the assessee (bearing specific codes). The journey can happen entirely in the third party airline or a part of the journey by third party airline and the rest by the assessee. The code sharing arrangements allow airlines to offer service to the segments where they do not operate their own flights thereby without additional equipment, resources, and costs the airlines can increase their revenue. Under code sharing arrangements, the passengers are provided with wide range of choices though the tickets are booked through single airline therefore the customer base of the airline increases. Therefore in our considered view, the revenue earned through transporting passengers using third party airlines either entirely or part ....
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....are booked, the third party airlines takes the responsibility of ensuring that the passengers of the assessee are transported to the destination which would mean that the those number of tickets / passengers are blocked by the assessee in the third party airlines. Accordingly we unable agree with this contention of the revenue. 22. One more contention of the revenue is that under code sharing arrangement, the aircrafts are operated by third parties and therefore it would not fall under Article 8(1) where the assessee is required to be in the operation of aircraft in international traffic. In this regard we notice that the Hon'ble Bombay High Court in the case of Balaji Shipping (supra) has held that slot chartering agreement would amount to operation of ship. When we applying the said ratio to the similar arrangement of code sharing it would amount to operations of aircraft in international traffic by the assessee and accordingly would be covered under Article 8(1) of India-US DTAA. Further the Hon'ble Bombay High Court in the case of Balaji Shipping (supra) also held that under slot chartering the arrangement is on a principle to principle basis i.e. the transportation ....
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....Y 2008-09 in assessee's own case the coordinate bench held that the benefit under Article 8(2)(b) of India US DTAA cannot be claimed unless the ancillary services have a direct nexus to the operation of aircraft in international traffic. The said decision was rendered in the context of receipts towards services rendered by the assessee such as screening, security, charter handling etc., to other airline operators. Therefore the same is distinguishable from the issue under consideration here i.e. receipts from code sharing arrangement whether can be considered to be part of the operation of aircraft in international traffic. Accordingly with due respect we are unable to agree with the reliance placed by the coordinate bench in assessee's case for AY 2010-11 in this regard. 25. During the course of hearing the ld AR argued that the OECD Model Convention specifically mentions that the receipts from slot chartering and code sharing would be covered under Article 8 and drew our attention to the relevant clauses of the said model. It is relevant to mention here that the DTAA between US and other countries follow the US Model of DTA conventions. Therefore in our considered view....
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....h international traffic wherein it is stated that - 6. Profits derived by an enterprise from the transportation of passengers or cargo otherwise than by ships or aircraft that it operates in international traffic are covered by the paragraph to the extent that such transportation is directly connected with the operation, by that enterprise, of ships or aircraft in international traffic or is an ancillary activity. One example would be that of an enterprise engaged in international transport that would have some of its passengers or cargo transported internationally by ships or aircraft operated by other enterprises, e.g. under code-sharing or slot-chartering arrangements or to take advantage of an earlier sailing. Another example would be that of an airline company that operates a bus service connecting a town with its airport primarily to provide access to and from that airport to the passengers of its international flights. 27. We also notice that Model Technical Explanation Accompanying the US Model mentions that when negotiations happen between other countries and US while entering into Treaty, the Model Tax Convention on Income and on Capital, published by the Orga....
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....ssengers under code sharing arrangement by the assessee is to be treated as profits from operation of aircrafts for the reason that - i. the transportation of passengers either fully or party in third party aircrafts in a specific journey by way of a code sharing arrangement, would fall within the ambit of the word "charterer" and, accordingly would be within the scope of "operation of aircrafts " as defined in Article-8(2) of the India US DTAA. ii. The passengers under code sharing arrangements are transported on behalf of the assessee by the third party airlines under the code sharing arrangement on a principal to principal basis where the ticket for the entire journey is issued by the assessee bearing specific code. Hence the same would fall within the scope of "operation of aircrafts" iii. The transportation of passengers by the assessee under code sharing arrangement either fully or partly in a third party aircrafts is inextricably linked which is established in assessee's case here Accordingly the receipts of the assessee under code sharing arrangement are covered under Article-8, of India US DTAA and cannot be taxed in India. The grounds inc....