Income Tax Appellate Tribunal - Delhi
Klm Royal Dutch Airlines vs Dcit on 31 March, 2008
ORDER
Deepak R. Shah, Accountant Member
1. Both these appeals by assessee are directed against the order of CIT(A)-XXX, New Delhi dated 29.11.2001.
2. Though several grounds are raised, the contention of appellant (herein referred to as 'KLM') is that it is not subject to tax in India in terms of Article 8 of the DTAA between India and Netherland. It is also contended that the receipt by way of recovery of rent from CSC India P. Ltd. (in short 'CSC') in respect of rent payable to Airport Authority of India (in short 'AAI') is not chargeable to tax and even if so, the rent paid to AAI is to be reduced from the rent recovered from CSC which brings the taxable income to nil.
3. The appellant is a company incorporated in Netherland. The main activity of the assessee is operation of aircrafts in international traffic i.e. transport of passenger and cargo in and out of India. In respect of cargo business, KLM has obtained licence to use the premises situated at Shed No. 12, FACT Building, Bombay measuring 503.50 sq. mts. and space on third floor Satellite Building at Cargo Complex, Bombay measuring 50 sq. mts. The said premises were licensed to be used as warehouse and office respectively. Originally the license was for the period 14.9.92 to 13.9.95 and further renewed from 14.9.95 to 13.9.98. The license was specifically granted for the purpose of cargo handling and the licensee i.e. the appellant was not to use the premises for any purpose other than that for which the license has been granted. The assessee entered into an agreement with CSC for handling the cargo in India on its behalf. The agreement was entered into on 1st April, 1997. As per the said agreement, the appellant was to pay for management, supervision, document handling, physical handling and tracking and tracing export and import cargo at Bombay. For this purpose, the appellant was to pay CSC a sum @ Rs. 9 per ton of the cargo handled. During the assessment proceedings, the AO made enquiries with CSC. CSC replied to the queries and also filed copy of account of appellant in its books. The AO noted that as per the accounts of appellant in the books of CSC, the appellant had received some amounts from CSC for which the narration mentioned is "expenses payable being warehouse rent adjusted against revenue received". The appellant was asked to produce the copy of agreement with CSC. The agreement was not produced. The assessee was, therefore, issued a show cause notice as to why the payments by CSC to the appellant be not treated as income from other sources. In reply thereto, the assessee submitted as follows:
KLM and Airport Authority of India entered into a License Agreement for a space at the IGI airport. For the space available, we had made an arrangement with CSC India P. Ltd. to use the space on same amount of rent which is paid by the KLM to the airport authorities. KLM makes the payment as per agreement and CSC reimburses their share on a monthly basis without any adjustment. You have already noticed from the books of accounts presented before your goodself that the amount is just a reimbursement to KLM without any profit or income accruing to KLM by the said arrangement. It is merely a mode of payment to the licensor by CSC and contra entry in the books of account of KLM. Any proposal to treat this amount as an income in the hands of KLM or as income of an associate enterprise will be against the principle of natural justice. It will be worth mentioning that the license fee agreed between a company and the airport authorities are an open rate which is the market rate at the airport building of India offered to companies and agents who are engaged in airline and passage/cargo handling activities. Other companies who are engaged in the cargo and passenger handling activities are also offered at the same market rate by the airport authorities. In other words, the rent charged by the airport authorities are not different between the handling agent and airline. Also kindly note that the handling rate charged by CSC to KLM included the cost element of this rental space paid by them at then market rate.
The AO did not find the contention acceptable for the reason that the assessee has not submitted any rent agreement between it and CSC. Thus, the payment received by appellant from CSC cannot be termed as rent as per Para 4A of Annexure 1 declaring the general terms and conditions of license agreement between appellant of the said premises to any third party. In this way, the claim of assessee that the payment received from CSC is reimbursement of rent is incorrect. The receipt is taxable in any case because the assessee is using the premises for its own business purposes and, therefore, it cannot claim that whatever it is receiving from CSC is being paid to AAI and therefore, there is no income component. Any other receipt from any other company cannot be termed as reimbursement of rent. The income received from CSC is taxable as these services are separate business activity and are not covered under 'air transport services'. The income accrues and arises in India and therefore, taxable in India. As per the Model Commentary on DTAA, if an airline extends its services which is a separate business activity, the same are not covered under Article 8. He accordingly held that receipt from CSC is taxable as income from other sources.
4. Learned CIT(A) held that the appellant KLM has violated the terms of license agreement. There is no evidence of written consent of the authority on record to allow CSC to use the premises. When the appellant had been allowed under the aforesaid license to have the space for cargo handling and instead of using it for the assigned purpose, the said area was in possession and occupation of CSC. Thus, the appellant did not carry out any activity in the allotted space and it had exploited the space unauthorizedly to earn income from CSC. The activity of allowing unauthorized use of space licensed under agreement to CSC cannot be said to be an activity falling within the purview of Article 8 of DTAA. Learned CIT(A) held that as per Article 8 of the DTAA between India and Netherland, only those profit derived from operation of aircraft in international traffic by transporting its passengers and goods is covered and is to be taxed in the country where effective management of the enterprise is situated. Article 8 have to be construed in the light of the language used therein and the provision contained in Model Commentaries or the example given therein will not extend the scope of the words used in DTAA. The correct position will be that only so much of the profits will not be liable to tax in the source country which are covered under Article 8 notwithstanding the fact that there is unity of control and management, finance and the operations. On plain reading of Article 8, there is no paragraph or Clause which exempts the income derived from unauthorized exploitation of license. Hence, the same is taxable as income from other sources. The amount received cannot be considered as reimbursement. An amount became reimbursed only when it is incurred on behalf of the party reimbursing. The amount being not in the nature of reimbursement nor having been incurred in the course of earning or making income from unauthorized exploitation of space, the contention for deduction of such expenditure is not tenable. The payment by the appellant to AAI is in respect of activities for handling cargo whereas the appellant allowed unauthroisedly space to be used by CSC and claimed same amount from the said company. Thus, this does not qualify for deduction Under Section 37(1) of the Act. The assessee is now in further appeal before us.
5. Learned Counsel for assessee Shri Salil Aggarwal submitted that as per Para 1 of Article 8 of DTAA between India and Netherland, profits from the operation of aircraft in international traffic shall be taxable only in the State in which the place of effective management of the enterprise is situated. Therefore, learned CIT(A) was in error when he interpreted this clause so as to exempt only those profits which are derived from operation of aircraft in international traffic. This was opined in Para 3.3 of the appellate order, which is an incorrect finding. Para 1 of Article 8 nowhere mentions the words "derived from". Though there is no written agreement between KLM and CSC in the years under appeal, the basic understanding was that CSC shall handle all the cargo for and on behalf of KLM at Bombay airport for which it will be paid remuneration @ Rs. 9 per ton of cargo handled. It was also an understanding that the rent payable to AAI will be payable by CSC. This is clear not only from the copy of account of appellant in the books of CSC but also from various other correspondence where it shows that the amount payable to CSC was reduced to the extent of rent payable to AAI. The amount deducted from CSC is exactly the same which was paid by appellant to the AAI. For this purpose, attention was invited to pages 31 & 32 of the paper book. Even the narration by CSC against expenses payable is "being warehouse rent adjusted against revenue received". The copy of account of KLM in the books of CSC is from pages 84 to 86 of the paper book. There is no allegation either against appellant by AAI that it has allowed unauthorized use of premises to CSC or the use by CSC is for the purpose other than for which the license has been granted. CSC is a wholly owned subsidiary of CSC Holding, BV Netherland. For setting up the CSC India as subsidiary, necessary approval was obtained from Secretariat of Industrial Approvals (SIA), Government of India, which is at pages 114 & 115 of the paper book. The permission granted by Ministry of Industry, Government of India by letter dated 24.11.94 granted to CSC Holding, BV, Netherland was for the purpose of setting up a wholly owned subsidiary to carry on the business of transportation, carriage and warehousing of cargo and to provide cargo handling and logistic services to customers in India and the location was at Bombay, Maharashtra. Instead of handling the cargo itself, the KLM allowed CSC to use the premises and there is no violation of any of the license agreement between KLM and AAI. The license has been renewed from time to time by AAI and till date AAI has never raised any objection of having used the premises other than that for which the license has been granted.
6. Shri Aggarwal further submitted that the business of assessee is only operation of aircraft in international traffic i.e. transport of passengers and cargo and all activities connected therewith. Thus, all the profits from such activities, as per Para 1 of Article 8 of DTAA will not be taxable in India as admittedly the place of effective management of KLM is not situated in India. He invited our attention to the OECD commentary on Article 8 of the Model Treaty. In the said commentary in Para 4.1, it is opined that any activity carried on primarily in connection with transportation of passengers or cargo should considered to be directly connected with such transportation. In Para 4.2, it is opined that activities, which make minor contribution relevant to the activity of the operation of aircraft in international traffic and are so conclusively related to such operation that they should not be regarded as separate business and should be considered to be ancillary to the operation of aircraft in international traffic. Thus, even if some ancillary activities connected to the business of operation of aircraft in international traffic is carried on, the same will receive identical treatment and can be subject to tax only in the country where effective management is situated.
7. Shri Aggarwal further submitted that even if the recovery of rent is to be treated as income, and even if the same is held taxable under the head 'income from other sources', deduction permissible therein i.e. Section 57(iii) be allowed. The assessee on one hand received amount by way of recovery of rent and on the other hand, identical sum was paid to AAI towards the rent of the premises. This will cancel the income and expenses against each other and hence, nothing is taxable in India.
8. Lastly, Shri Aggarwal submitted that except for the years under appeal, at all times, the contentions of appellants have been upheld. For Asstt. Years 1998-99 and 1999-2000, though notices Under Section 147 were issued, proceedings were dropped on 31.3.2005. For Asstt. Year 2000-01, once again, notice Under Section 147 was issued and no addition was made in the assessment on this point. Once again for Asstt. Year 2001-02, no order is passed Under Section 143(3) even after issue of notice Under Section 147 and the proceedings were dropped on 31.3.2005. On no earlier occasions such additions were ever made. Thus, applying the principle of consistency, the addition only for the years under appeal is not sustainable. Reliance is placed on the decision in the case of CIT v. Rajiv Grinding Mills 279 ITR 86.
9. Learned DR Shri Devender Shankar, on the other hand, strongly relied upon appellate order. He firstly invited our attention to Article 8 or the Indo-Netherland DTAA extracted herein:
Air Transport:
1. Profits from the operation of aircraft in international traffic shall be taxable only in the state in which the place of effective management of the enterprise is situated.
2. For the purpose of this article:
(a) profits from the operation in international traffic of aircraft include profits derived from the rental on a bareboat of aircraft it opened in international traffic if such rental profits are incidental to the profits described in paragraph 1.
(b) Interest on funds connected with the operation of aircraft in international traffic shall be regarded as profits derived from the operation of such aircraft and the provisions of Article 11 shall not be apply in relation to such interest.
3. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency.
On the basis of above wordings in the DTAA Shri Devender Shankar submitted that the word attributable and derived from have not been defined in the treaty. However, in terms of paragraph 3 of article 3 in terms not otherwise defined in DTAA will have meaning which it has under the lines that contracting state relating to taxes which are subject to the convention. The terms "attributable" in article 7 and the word "derived from" in article 8 will accordingly have to be adopted as defined by the Supreme Court with respect to the I.T. Act. In this context attention is invited to the following case laws:
i) CIT v. Sterling Foods 237 ITR 579 (SC);
ii) Pandian Chemicals v. CIT 262 ITR 278 (SC);
iii) Pandian Chemicals v. CIT 233 ITR 496 (Madras);
iv) Nirma Industries (Special bench) 95 ITD 199.
Therefore in terms of the treaty what has been excluded from the income of the airlines is profits derived from operation of aircraft and no other income can be excluded. Whereas all other incomes will have to be included in final income as "income attributable to PE". Thus, the profits received from the operation of technical services to the other airlines is not covered under Article 8. Moreover, in terms of Article 7, profits have to be computed subject to the limitation of domestic law of the contracting state in which permanent establishment is situated (paragraph 5 of Article 7). Paragraph 2 of article 8 indicates that para 1 will apply in respect of participation in pools of any kind by the enterprise engaged in air transport. This refers to' the cases where one airlines carries passengers of other airlines on a code sharing basis in absence of adequate sitting space available when the tickets are booked where the passengers are transported through aircrafts not actually owned by them. This does not apply to providing technical and maintenance services of aircraft, as it cannot be considered profits derived from operation of aircraft in international traffic. Even otherwise if a wide definition of pool is taken the other airlines who are receiving technical services should also provide repairs and maintenance infrastructure so as to constitute a pool which is not the case at present.
10. Shri Shankar went on to submit that in terms of para 3 of article 8 the definition mentions that operation of aircraft shall include certain associated activity but that too has to be directly connected with such transportation. The term shall include is a total definition and not to be equated with the interpretation of inclusive definition where the words 'includes' is used in domestic law. In view of the fact and clear cut language of the treaty as indicated above, there is no need to import any other meaning or words which have not been used in the DTAA. For this purpose attention is invited to following case laws with regard to interpretation of fiscal statute:
i) CIT v. Boots 214 ITR 175 (Bombay);
ii) IPCA Laboratories v. DCIT 266 ITR 521;
iii) Smt T. Lata Shyam v. CIT 108 ITR 345 (SC);
iv) Orissa State Working Corporation v. CIT 237 ITR 589 (SC);
v) Aztec Software and Technology v. ACIT 294 ITR 33 (SB) Delhi.
Shri Shankar also submitted that the dependence on OECD commentary is uncalled for when the statute and the treaty provide a very clear provision with distinct meaning. The following also need to be considered:
(a) The article 8 of the OECD Model Draft and the Indo Netehrland DTAA have different formulation.
(b) India is not a member of OECD and, therefore, Indian views are not accounted for. OECD Commentary is merely description of views of the member countries;
(c) The OECD commentary has been modified on a number of occasions. The commentary as it stood at the time of entering into Indo-Netherland DTAA may have some persuasive value but subsequent changes to the commentary may not be taken to be applicable even by the farthest stretch of imagination.
The High Courts and Supreme Court under the writ jurisdiction can take guidance from OECD commentary to fill up the blanks in statute in the case of ambiguity or a perceived validity or provide any missing link in the statute. However, the Tribunal does not hold such a jurisdiction. Sliri Shankar also submitted that world over doubt has been raised as to whether Model Tax Commentaries can be used in interpretation of country specific treaties. It has been opined by renowned author like Trank Van Brunchot, former judge of the Netherland Supreme Court and Dr. Klaus Vogel that the OECD Model commentaries are necessary but by no means an easy travel companion for the judiciary. They stem from governments only - no parliament or taxpayers are involved. Before looking at the OECD Model and Commentaries for help, courts should be aware of the fact that Government is talking to them, unchecked by democratic counterparts. The wording of treaty is not always as clear as it could be. It is opined that if the court then calls on the OECD Models and Commentaries for help, it goes to the devil for confession. If such opinion is given by none other than the judge of a Supreme Court of Netherland and likes of Dr. Klaus Vogel, international acclaimed author, the court should do well by not relying upon such model commentaries. Shri Shankar also submitted that the income from rental could be assessed as 'income from business or other sources'. In this case the deduction of expenses is not permissible as the expenses incurred, as per assessee's own claim are related directly to earning an income, which is exempt. Since these are exempt and taxable income do not include the receipt, the provisions of Section 14A shall be attracted. As all the expenses have been incurred and directly relatable to earnings of exempt income, no expense shall be attributable to the earning of rental income. This follows from the decision of ITAT, Delhi Bench (Third Member) in the case of Wimco Seedlings v. DCIT 107 ITD 267 (Delhi).
11. In reply, learned Counsel for assessee submitted that amount recovered in respect of rent paid to AAI is not income in any sense. Hon'ble Supreme Court has itself relied upon the OECD Model Commentary in the case of Azadi Bachao Aandolan 263 ITR 706 at page 741. The assessee cannot be treated as involved in the activity of leasing of space. There is a direct nexus between recovery of rent from CSC and payment of rent to AAI which will square up against each other leaving no surplus in the hands of the assessee. KLM was allotted space at cargo complex only because it is engaged in the business of international air traffic which it has carried on, for which it has paid rent and has recovered the same from CSC. Thus, there cannot be said to be any income arising for allowing CSC to use space in respect of the business of handling cargo on behalf of KLM.
12. We have carefully considered relevant facts, arguments advanced and the case laws cited. There is no dispute to the fact that KLM is engaged in the business of operation of aircraft in international traffic. It is also not the case of AO that profit from the operation of aircraft in international traffic is to be brought to tax under Article 7 of the Indo-Netherland Treaty. Article 8 of Indo-Netherland DTAA prescribes that 'profits from the operation of aircraft in international traffic shall be taxable only in the state in which the office of effective management of the enterprise is situated". It is also admitted fact that the effective management of KLM is situated in Netherland and the income from handling cargo has not been brought to tax in India. The limited question that arises is whether the recovery of rent from CSC is the income of KLM chargeable to tax in India. Profits from the operation of aircrafts will include transportation of passengers as well as cargo. For handling the cargo to be transported on its aircrafts, KLM was allotted space at Cargo Complex, Bombay by AAI. The license in this regard has been renewed from time to time and as per pages 116 & 117 of the paper book, the agreement in this regard is in force till 21.4.99 i.e. even beyond the period of financial years involved in these appeals. There is no written agreement on record between KLM and CSC for the years under appeal. However, the agreement w.e.f. 1.4.97 has been placed on record which is at page 72 to 76 of the paper book. The copy of account of KLM in the books of CSC is at pages 84 to 86 of the paper book. CSC has credited the account of KLM by the amount of warehouse rent payable by CSC. The KLM in the first instance pays the rent to AAI. As per the arrangement between KLM and CSC, KLM pays to CSC charges for handling cargo @ Rs. 9 per ton. From the account of the appellant in the books of CSC, it is noticed that the warehouse rent is not paid by cheque to KLM but is only adjusted against the amount receivable from KLM. This is made explicitly clear from the statement of payment received by CSC from KLM for the financial year 1995-96 at page 88 of the paper book. On the basis of the said account and on the basis of subsequent agreement, it can be held that the arrangement between KLM and CSC is that the rent payable to AAI though payable by KLM at first instance is to be recovered from the charges payable to CSC. Thus, the recovery of rent is not arising from an activity de horse the activity of handling cargo in international traffic. The only activity of KLM in India is to operate its aircraft and, therefore, transport the passengers and cargo. All the activities connected therewith, namely, handling the cargo by outsourcing the same is part of the larger activity of operation of aircraft in international traffic. The license granted by AAI to India is only for handling the cargo at Cargo Complex, Mumbai and the space is to be used as warehouse or office. Instead of assessee itself handling the cargo by employing its own personnel, the activities are outsourced by assigning the same to CSC. Thus, the recovery of rent out of amount payable to CSC for handling cargo is directly and inextricably linked to the cargo handling business by transporting the same through its aircrafts. To the extent of recovery only the ultimate expense payable by assessee gets reduced. Recovery of rent is not in the course of separate business of leasing the premises. At no point of time even the AAI ever alleged that the premises are used for any purpose other than that for which the license has been granted. At least this is not on record and the license is being renewed from time to time. If AAI has never alleged, learned CIT(A) was, therefore, in error in holding that "it has violated the terms of license agreement and the appellant exploited the space unauthoriscdly to earn from the CSC". To this extent, the finding given by CIT(A) in para 3 of his order is contrary to the facts and hence, to be excluded. But for the assessee allotted a space at Cargo complex by AAI and but for assessee availing the services of CSC for handling cargo in its behalf, the assessee could not have received the sum for handling cargo on its aircraft in international traffic. Thus, all the activities are linked to each other and there is no scope to dissect the activities by excluding the recovery of rent from CSC as a separate source of income for appellant in India. KLM did not carry on its business operations in India by availing the premises on lease and by sub letting the same leave apart unauthorisedly. Thus, there is no merit in the contention of learned DR that the said income should be taxed under Article 6 of the DTAA in relation to income from immovable property. KLM was having license to use the space at Cargo Complex and admittedly, the same was used for handling cargo. Recovery of rent from CSC has merely reduced its overall expenses in relation of handling of cargo by CSC and is not a separate source of income for KLM. We, therefore, hold that the asses see did not derive any income other than the profits from the operation of aircrafts in international traffic and hence, in terms of Article 8, the same is not subject to tax as admittedly effective management of KLM is not situated in India. Thus, the additions made in this regard are to be deleted.
13. We also find that the alternate contention raised should also have been accepted. KLM firstly paid the license fees to use the premises for which it was required to pay rent to AAI. Since the work of handling cargo was outsourced, CSC was using the space to handle the cargo on behalf of KLM. KLM recovered the rent payable to AAI. Thus, even if recovery of rent is receipt on one hand, identical amount was paid to AAI which is an expense directly in relation to the receipts by way of recovery of rent. Since the recovery of the identical amount is what was paid to AAI, the same are set off against each other and in that view of the matter, no taxable income remain. Recovery of rent from CSC was treated as income from other sources. If that be the case, the assessee is entitled to deduction Under Section 57(iii) being expenditure wholly and exclusively for the purpose of making or earning such income. But for payment of rent to AAI, the assessee could not have availed the space and but for availing the space, the assessee could not have authorized CSC to use the said space. In this way there is a direct nexus between two activities and hence, receipt from one will set off against the expenses on other. Therefore, it is incorrect to hold that expenses are incurred in the course of activities of operation of aircraft and receipt are de horse such activity. On these grounds also, the assessee succeeds and hence, no income can be brought to tax as income from other sources.
14. The contention of learned Counsel for assessee that for all the subsequent years, no additions are made in this regard, do not lead us to anywhere. It is not the case of the assessee that in earlier years the additions were not made. Since the additions were made for the first time for the years under appeal, the principle of consistency or estoppel as propounded by Hon'ble Delhi High Court in the case of Rajiv Grinding Mills cannot be applied in these appeals.
15. Reliance by learned DR on various decisions like Sterling Foods, Pandian Chemicals are misplaced as the words "derived from" is not finding place in Para 1 of Article 8 of DTAA. In Para 1, what is prescribed is "profits from the operation of aircraft in international traffic". Thus, there is no reason to give a restricted meaning to the profits from operation of aircraft in international traffic on the basis of various judicial pronouncements which are in relation to claim of deduction Under Section 80HH, 801 etc. under the Income-tax Act. It is also to be noted that the decision of Hon'ble Supreme Court while interpreting the words in Income-tax Act cannot be applied while interpreting the treaties. The treaties are not to be taken as words of statutes and are to be interpreted under the common parlance meaning without unnecessarily restricting the purpose for which such treaties are entered into. Hence, we do not deem it fit to discuss various case laws relied by learned DR. We have also not relied upon the commentaries to arrive at a finding but the finding is based on interpretation of the language used in the treaty only. For the reasons stated above, the appeals of assesses are to be allowed.
In the result, appeals are allowed.
Pronounced in the open court on 31st March, 2008.