Income Tax Appellate Tribunal - Mumbai
United Parcel Service Co., Mumbai vs Department Of Income Tax on 28 February, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "L",
MUMBAI
BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI N.K. BILLAIYA(A.M)
ITA NO. 2808/MUM/2006(A.Y. 1999-2000)
ITA NO.2809/MUM/2006(A.Y. 2000-2001)
ITA NO.3611/MUM/2005(A.Y. 2001-2002)
The DDIT (IT) 2(1)/ADIT(IT) 2(2), United Parcel Service Co.,
Room No.116, Scindia House, Plot No.6-A, Shyam Nagar,
Ballard Estate, N.M.Road, Vs. Off. Jogeshwari vikroli Link
Mumbai - 38. Road, Majas Village,
(Appellant) Jogeshwari (E) Mumbai - 60
PAN:AAACU 5523H
(Respondent)
Appellant by : Shri Jitendra Yadav
Respondent by : S/Shri Poras Kaka, Manish Kant,
& Prashant Bhojwani
Date of hearing : 28/02/2012
Date of pronouncement : 14/03/2012
ORDER
PER N.K. BILLAIYA(A.M) ITA No. 2808/Mum/2006 is an appeal filed by the revenue against the order dated 21/2/2006 of CIT(A)-VI, Mumbai relating to assessment year1999-2000. ITA No.2809/Mum/06 is an appeal filed by the revenue against the order dated 21/2/2006 of CIT(A) VI, Mumbai relating to assessment year 2000-01. ITA No.3611/Mum/2005 is an appeal by the revenue against the order dated 28/2/2005 relating to assessment year 2001-02. Since common issue are involved in all these appeals they were heard together and we deem it appropriate to pass a common order.
2 ITA NO. 2808/MUM/2006(A.Y. 1999-2000)ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002)
2. We shall take up for consideration ITA No.3611/Mum/05 for A.Y 2001-02. The original grounds of appeal raised by the revenue is as follows:
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the Assessing Officer to give benefit of Article 8 of the Indo-USA DTAA to the line-haul activity and exempt profits attributable to such activity."
The Revenue has filed application for raising following additional grounds:
"1. CIT(A) erred in not adjudicating on nature of Cargo business carried on by assessee in India and has failed to inquire into real nature of business activity of assessee in India."
2. The appellant prays that the order of the ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer restored.
3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary."
3. The facts giving raise to the above appeal are as follows:
The assessee is a non-resident company incorporated in the United States of America. The assessee is a cargo airline company engaged in the business of transportation of goods by air in the course of international traffic. The Reserve Bank of India, vide letter dated March 29,2000 granted permission to the assessee to open branch office at Mumbai. While the assessee manages a substantial part of this transportation using its own fleet of aircraft, it needs to use the services of other airlines to carry the goods which cannot be carried by the assessee's own fleet of aircraft. The assessee filed its Return of income for the assessment year 2001-02 on October 29, 2001 under section 139 of the Act declaring nil taxable income. The assessee claimed that its income is not chargeable to tax in view of Article 8 of the lndo-USA Double Tax Avoidance Agreement ('DTAA'). During the course of assessment proceedings, the assessee was asked, inter alia, to furnish a note about the nature of business activities undertaken by the 3 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) assessee and explain why income from operations carried out by way of transportation of goods through other airlines should not be taxable in India. In response to that, during the course of various hearings, the assessee filed the requisite particulars as requested. The asseseee also filed a detailed submission, vide letter dated March 3, 2004, regarding the non-taxability of income arising out of the activities carried out by the assessee for arranging the transport of goods through other airlines in view of Article 8 of the DTAA. Income arising out of such activity are known as line-haul charges. Line- haul charges are incurred while sending or receiving shipments, courier as well as cargo, by airlines other than UPS airline. Linehaul services are used for providing service to customers where UPSCO airlines do not cover certain destinations within the required timeframe. It includes all or some of the following:
1. Charges agreed upon by the courier operator and airline i.e. Cost per kg. Between origin A and destination B
2. Cost of ticket for on board courier
3. Handling charges at origin and destination airports including manpower costs.
4. Other miscellaneous charges if any (delivery order charges, terminal fee etc. The AO in his assessment order did not agree with the assessee's contentions and held that line-haul activity i.e. the activity of transportation of goods in the course of international traffic through other airlines is a separate activity and not covered under Article 8 of the DTAA. The AO estimated 10% of the total line-haul expenses incurred during the previous year as the income attributable to this activity in India.
4. Before CIT(A) the assessee submitted that it is engaged in the business of transportation of goods by air in the course of international traffic. The assessee carries out the activities of transportation of goods in the course of 4 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) international traffic either through its own airlines or arranges for the same through other airlines. While the assessee manages a substantial part of this transportation using its own fleet of aircraft, it needs to use the services of other airlines to carry the goods which cannot be carried by the assessee's own fleet of aircraft. The assessee submitted that line haul activity i.e. the activity of transportation of goods through other airlines is an integral part of its own air transport business. Further, these activities have been carried out by the assessee for the purpose of carrying the goods for its own customers in the course of international traffic. Therefore, these activities squarely fall within the scope of Article 8 of the DTAA. The Assessee submitted that it was operating non-scheduled flights in India by taking prior approvals on a flight to-flight basis and later it received a general approval on 21-10-1999 for a structured schedule of flights. The Reserve Bank of India granted permission to the Assessee on 29.3.2000 to open a branch office at Mumbai for carrying on the airline activities. During the period when the Assessee had to operate non-schedule flights it had to transport goods through other airlines in the course of international traffic. According to the Assessee this was integral part of the business of the Assessee and was for the purpose of transporting the goods of Assessee's own customers. The Assessee also highlighted that such use of other airlines was only for a part of the transport route viz., to another hub of the Assessee and from the hub the goods would be transported in Assessee's scheduled flights available from the hub to the ultimate destination.
5. In this regard, the Assessee also referred to paragraph 2 of Article 8 of the India-USA DTAA, which reads as under:
"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 I 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 -5 ITA NO. 2808/MUM/2006(A.Y. 1999-2000)
ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002)
(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."
The assessee submitted that the above paragraph, which defines the scope of income covered by Article 8 of the DTAA, also covers even the activities of international air transport where the goods are not carried by enterprise through its own aircraft. For example, Clause (a) covers sale of tickets for such transportation on behalf of other enterprises. This activity does not involve any air transportation through the enterprises own fleet of aircraft either owned or leased. Similarly, Clause (b) enhances the scope of paragraph 2 by including activities other than transportation of goods through own or leased aircraft, provided such activities are directly connected with its air transportation business.
6. The Assessee submitted that its customers entrusted the assessee with the responsibility to transport the goods in different parts of the world at any given time. While the assessee managed a substantial part of this transportation using its own fleet of aircraft, it needed to use the services of other airlines to carry the goods, which cannot be carried by the Assessee's own fleet of aircraft. In view of the above, assessee submitted that the activities of arranging for the transportation of goods through other airlines are an integral part of it's business of international air transportation and hence, not chargeable to tax in India in view of Article 8 of the DTAA. The assessee also referred to the commentary by Philip Baker on Article 8 at page
203. On the said page Philip Baker has given an example of activities closely connected with direct operation of aircraft wherein, an airline arranged for onward sea passages for its passengers with shipping lines and the commission earned from that activity was considered as business of operating aircraft. In view of the above, it was submitted that the activities 6 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) of the assessee in relation to the transportation of cargo through other airlines for its own customers is covered under Article 8 and hence should not be considered as taxable in India as per the provisions of the DTAA.
7. The assessee contended that the income arising out of the activities carried out by the assessee for arranging the transport of goods for its own customers through other airlines is an integral part of assessee's business of international air transportation and hence covered under Article 8 of the DTAA. Accordingly, the same should not be considered as taxable in India but only in the USA.
8. The CIT(A) held that to claim the benefits of Article 8 of the DTAA between India and USA, an enterprise has to fulfill two criteria. Firstly, the enterprise should be engaged in 'international traffic' and, secondly the enterprise should be engaged in 'operation of aircraft'. Paragraph 2 of Article 8 further clarifies that for the purposes of this Article, the operation of ships or aircraft in international traffic shall mean profit 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) profits derived from the sale of tickets for such transportation on behalf of other enterprises; (b) profits derived from other activity directly connected with such transportation; and
(c) profits derived from the rental of ships or aircraft incidental to any activity directly connected with such transportation. According to him, what needs to be seen is whether the Assessee falls in the purview of the above definition. Having regard to the facts of the case, including the Operating Permit issued to the Assessee, he was of the view that it was established beyond doubt that the Assessee was in the business of operation of aircraft for transportation of cargo which is carried on either through own aircraft or other airlines engaged in international traffic. He was also of the view that it 7 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) is the requirement that to get the benefits under DTAA that the Assessee has to own or charter the aircraft. The CIT(A) held that the Assessee used the services of the other enterprise for the transportation of cargo in the international traffic for its own customers in the course of its own business of operation of aircraft in international traffic. Such activities constitute integral part of the Assessee's business of operation of aircraft in international traffic and cannot be considered as a separate activity.
9. The CIT(A) also referred to the final version of the revised commentary on Article 8 of the OECD Model tax Convention, which according to him supports the view that the linehaul activity is directly connected with the operation of aircraft in international traffic. In this regard, he referred to paragraph 6 of the OECD revised commentary, wherein it has been pointed out 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 traffic 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
10. The CIT(A) also referred to the commentaries by Klaus Vogel and Philip Baker. He referred to Mr. Philip Baker's Commentary on Double Taxation Conventions and International Law, wherein at page 203 on the discussion on the issue he had given example of activities closely connected with direct operation of aircraft wherein, an airline arranged for onward sea passages for its passengers with shipping lines and the commission earned from that activity was considered as income from business of operating ships. He also referred to the decision of the Hon'ble Delhi Tribunal in the case of British 8 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) Airways vs. DCIT [2002] reported in 80 ITD 90, wherein it was held that where Assessee arranges the transportation of goods in international traffic through other airlines for its own customers, such activity (line-haul activity) cannot be considered as a separate activity.
11. For the above reasons, the CIT(A) held that the Assessee is entitled to the benefit of Article 8 of India-USA DTAA even with respect to the profits, derived from the linehaul activity and accordingly, the profits derived therefrom would be taxable only in USA and not in India. Aggrieved by the order of the CIT(A), the Revenue has preferred the present appeal before the Tribunal.
12. At the outset we will deal with the admission of additional grounds sought to be raised by the Assessee before the Tribunal. The additional grounds sought to be raised is part and parcel of the grievance projected by the Revenue in the original ground of appeal. The AO has in the assessment order held that line hauling activity is a separate activity and would not amount to activity of operation of aircraft in India or directly related to such operations. Therefore the additional ground is admitted for adjudication.
13. The DR submitted that the ITAT Mumbai in the case of ACIT Vs. Federal Express Corporation 125 ITD 1 (Mum) on identical facts as it prevails in the case of the Assessee has held that line-haul charges are not income from operation of aircraft entitled to the benefits of ARTICLE 8 Of Indo-USA DTAA. The assessee in that case was Federal Express Corporation (FEC) a non-resident company incorporated under the laws of United States of America. It was engaged in the integrated air and ground transportation of time sensitive and time definite shipments to various destinations around the world. It also provides door-to-door delivery service for international shipment. It was granted approval by the Director General of Civil Aviation to 9 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) operate air cargo services to and from India. It also obtained approval from the Reserve Bank of India to establish branch offices at Mumbai, New Delhi, Calcutta and Chennai for undertaking the airline cargo operations. It was the plea of FEC since the goods to be delivered are time sensitive, it is a normal practice in the airline industry to utilize, when required, the services of other airlines for the carriage of cargo. The AO denied the benefit of Article 8 of the Indo-USA DTAA to the Assessee on the ground that the assessee has not operated its own aircrafts and, therefore, the income earned by it cannot be considered to have been earned from the operations of aircrafts. The question before the Tribunal was as to whether the benefit of article 8 can be denied to the Assessee. The contention of the assessee was that the entire freight revenue received by the assessee should be exempted from tax in view of the decision of the Mumbai Bench in the case of DDIT Vs. Balaji Shipping (UK) Ltd. 117 TTJ (Mumbai) 865. The contention of the revenue was that profits attributable to the transportation of cargo through other airlines in view of the specific definition of the expression "profits from the operation of ships or aircraft in international traffic" given in article 8(2) of Indo-U.S. Treaty. The Revenue placed reliance on the later decision of the Mumbai Bench in the case of ADIT (IT) Vs. Delta Airlines Inc. 317 ITR (AT) 364(Mum) wherein it has been held that since the expression "profits from the operation of aircraft in the international traffic"
has been defined in para 2 of article 8, such expression should not be given extended meaning in the light of various commentaries as was sought to be canvassed by the Assessee. The tribunal held in favour of the Revenue. The following were the relevant observations of the Tribunal:
"40. Let us now examine the provisions of article 8 of Indo-US Treaty and adjudicate the issue before us. The provisions of article 8 are being reproduced even at the cost of repetition :
"Shipping and air transport.-(1) Profits derived by an enterprise of a Contracting State from the operation by the enterprise of ships or aircraft in international traffic shall be taxable only in that State.10 ITA NO. 2808/MUM/2006(A.Y. 1999-2000)
ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) (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 from 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 in that State.
(4) The provisions of paragraphs 1 and 3 shall also apply to profits from participation in a pool, a joint business, or an international operating agency."
As per para 1 of the article 8, the profits from the operation of aircrafts in the international traffic derived by the assessee cannot be taxed in India. However, the expression "profits from the operation of ships or aircraft in the international traffic" has been defined in paragraph 2. According to this para, the said expression has been defined in two parts. The first part defines the scope of the main or direct activity of transportation in the international traffic while the second part includes certain activities other than the main activity of transportation in inter-national traffic. The perusal of the first part reveals that main or direct activity is restricted to the transportation of passenger/cargo/mail etc., in the international traffic by the owners, charterers or lessees of ships or aircrafts. Therefore, such transportation through aircrafts by the assessee neither as owner nor as charterer or lessee would be outside the scope of such expression. The alternate contention of the assessee that such transportation would fall within para 2(b), in our opinion, is also without force since para 2(b) includes other activity directly connected with such transportation. The words "such transportation", in our opinion, would only mean the transportation referred to in first part of the definition. Therefore, transportation in the international traffic through other airlines would be outside the scope of article 8(2). We hold accordingly."
11 ITA NO. 2808/MUM/2006(A.Y. 1999-2000)ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002)
14. According to the learned DR the aforesaid decision is applicable to the present case as the facts and circumstances prevailing in the case of the Assessee are identical and the Agreement (DTAA) considered in the aforesaid decision and the agreement (DTAA) applicable in the present case being one and the same viz., Indo-USA DTAA.
15. The learned Counsel for the Assessee however submitted that the view expressed by the Tribunal in the case of Federal Express (supra) is contrary to the view expressed by the Tribunal in the case of Balaji Shipping (supra), DDIT Vs. Safmarine Container Airlines N.V. 121 TTJ 50 (Mum), DDIT(IT) Vs. Delmas France 121 TTJ (Mumbai) 501, JDIT(OSD) (IT) Vs. M/S.ANL Container Line Pvt.Ltd. 2008 TIOL-625-ITAT-Mum and Delta Airlines Inc. (supra) and therefore the question whether profits attributable to the transportation of cargo through other airlines would not be taxable in India in view of the specific definition of the expression "profits from the operation of ships or aircraft in international traffic" given in article 8(2) of Indo-U.S. Treaty has to be referred to a special bench. In the case of Balaji Shipping (supra), the Tribunal had to deal with the question as to whether income from carriage of freight through the feeder vessel belonging to others for ultimate transport to place of destination was integral part of the business of the assessee of transportation of goods in international traffic. Factually it was found that the Assessee collected cargo from Indian port and drew Bill of Lading for the entire transportation i.e., from the port of loading to the port of destination. The Charterer ship of the assessee did not come to the Indian port but the cargo was being collected from Indian port and transported to the hub port at Dubai. For this purpose, connecting carrier agreements had been entered into with several parties from Indian ports to hub port only. It was also factually found that the Assessee had chartered two ships and was found to be transporting goods in international traffic. The answer to the question was dependent on the scope of the expression "operation of ships"
12 ITA NO. 2808/MUM/2006(A.Y. 1999-2000)ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) used in Article 9 of the Indo-UK Treaty. The Tribunal firstly held that (i) rule of interpretation for interpreting a statute are not applicable for interpreting the covenants of tax treaties between the contracting states; (ii) the words or expression used in the treaties, if not defined in the treaties itself, should be understood in the sense in which the contracting states understood at the time the treaty was executed i.e., contemporaneous thinking; and (iii) contemporaneous thinking can be gathered from the provisions of domestic laws of the contracting states and in the absence thereof from the various commentaries available at the time of such contract. The Tribunal thereafter held:
" Perusal of paragraph 4 of the said commentary shows that two kinds of profits are covered by Article 8 of OECD Cormmentary which is similarly worded. In the first category are those profits which are directly obtained by the enterprise from the transportation of cargo/passengers in the international traffic by the ships whether owned or leased or at the disposal of such enterprise. It also covers profits from activities directly connected with such operation. In the second category are the profits from the activities which are not directly connected with operation of ship but are ancillary to such operation. Paragraph 4.2 defines the scope of ancillary activities. According to this para, ancillary activity is that activity which makes a minor contribution relative to the activity of operation of ship and such activity must be so closely related that it should not be regarded as separate business or source of income. Paragraphs 5 onwards discuss about various activities to which paragraph 4 can be applied. Paragraph 6 covers the profits derived by an enterprise from the transportation of passengers/cargo otherwise than by ships that it operates in the international traffic to the extent such transportation is directly covered with the operation of ships in the international traffic by that enterprise. This covers a situation where the assessee is unable to transport the passengers/cargo from its own ship but transports the same through ships operated in international traffic operated by the other enterprises. This has been explained by giving an example also. According to this example, some of the passengers/cargo may be transported internationally by ships operated by other enterprises under slot chartering arrangement. In our view, this paragraph would cover the facts of the present case since the assessee not only transports its cargo through the ships chartered by it but also transports the cargo in the international traffic by the ships operated by other enterprises under slot chartering 13 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) arrangement. Since Article 8 of OECD Model Convention and Article 9 of Indo-UK Treaty are similarly worded. Paragraph 6 of OECD Commentary discussed above would apply in defining the scope of Article 9(1) of Indo-UK Treaty as per the rule of contemporaneous exposition discussed in the earlier part of the order. Accordingly it is held that the freight income earned by the assessee on account of transportation of cargo in the international traffic by ships operated by other enterprises under slot chartering arrangement would be taxable only in State of residence and consequently, such income would be exempt from taxation under the Indian Income-tax Law."
16. According to the learned counsel for the Assessee, the international thinking is that income from all activities connecting with shipping and airlines needs to be taxed only in the country of residence of the Assessee. This is because of the difficulty in attributing income to different countries as the aircraft or ship travels in international space and international waters. They also pass through several different countries, making it impossible to apportion income between different tax jurisdictions. This being the international thinking the provisions of Article 8 of the Indo-USA DTAA has to be interpreted holistically in keeping with the aforesaid international thinking. It was his submission that the OECD commentaries referred to in the decision of the Tribunal in the case of Federal Express (supra) also suggest that income from the activity of using other aircraft for transportation of cargo from India to Assessee's hub across the globe for onward transportation should be held to be income covered by Article 8 of the Indo-USA DTAA. It was also submitted that factually in the case of the Assessee cargo was transported from India to Assessee's nearest hub and therefore the use of other carriers for transportation of cargo from India to Assessee's hub outside India has to be regarded as ancillary to transportation of cargo in international traffic. It was submitted that the view expressed by the Tribunal in the case of Balaji Shipping (supra) was followed in the case of Safmarine (supra), Delmas France(supra), M/S.ANL Container Lines Pvt.Ltd. (supra). However the Tribunal took a different in the case of Federal Express (supra) and Delta Airlines Inc.(supra) which 14 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) according to him was not proper. To resolve this conflict of opinion expressed in the aforesaid decisions, a special bench has to be constituted. He submitted that the bench may consider making a reference to the Hon'ble President for constituting a special bench to resolve the conflict views expressed in the aforesaid decisions.
17. In this regard reference was made to Article 31 of the Vienna Convention on the Law of Treaties, 1969 which provides in Article 31 (1) that treaties shall 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. He took very strong objection to the observations of the Tribunal in the decision rendered in the case of Federal Express (Supra) and Delta Airlines Inc.(Supra) to the effect that where any expression or term is defined in a treaty then it would be unnecessary to refer to the commentaries or decisions of foreign jurisdiction. He reiterated the submission made earlier that treaties have to be interpreted in a holistic way keeping in view the international thinking as expressed in international commentaries. In this regard he referred to the decision of the Hon'ble Supreme Court in the case of Ram Jethmalani & others Vs. Union of India and others W.P.(Civil) No.176 of 2009 dated 4.7.2011 wherein the Hon'ble Supreme Court after referring to the decision in the case of Azadi Bachao Andolan 2004 (10) SCC 1 observed that treaties are drafted by diplomats and not lawyers, leading to sloppiness in drafting also implies that care has to be taken to not render any word, phrase, or sentence redundant, especially where rendering of such word, phrase or sentence redundant would lead to a manifestly absurd situation, particularly from a constitutional perspective. Reference was made by the learned counsel for the Assessee to the decision of the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. Vs. DIT 332 ITR 340 (Delhi) wherein the Hon'ble Delhi High Court had taken the view that international 15 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) commentaries can be relied upon for interpreting terms of a treaty when the expression used in the treaty and the local law are identical. Our attention was drawn by him to the discussion by OECD Committee on Fiscal in para 7 which says that an enterprise that transports passengers or cargo by ships or aircrafts operating in international traffic which undertakes to have those passengers or cargo picked up in the country where the transport originates or transported or delivered in the country of destination by any mode of inland transportation operated by other enterprise shall be considered as an example of the activities, directly connected with the operation of ships or aircrafts in the international traffic.
18. Finally reference was made to the decision of the Hon'ble Delhi High Court in the case of DIT Vs. KLM Royal Dutch Airlines 325 ITR 300 (Delhi). The assessee in the said case was a company incorporated in the Netherlands. The profits from international traffic were taxable in the Netherlands, that being the place of effective management. The assessee had obtained licence to use certain premises situated in Mumbai from the Airports Authority of India, specifically for the purpose of cargo handling and the assessee was not to use the premises for any other purpose. The assessee entered into an agreement with C for handling the cargo in India on its behalf. Under the agreement the assessee was liable to pay C for management, supervision, document handling, physical handling and tracking and tracing export and import cargo at Mumbai. The payment made by the assessee to C was after adjustment of the licence fee / rent paid by it to the Airports Authority of India and the adjustment was treated by the Department as income of the assessee chargeable to tax in India under article 6 of the Double Taxation Avoidance Agreement between India and the Netherlands. On appeal, the Appellate Tribunal dis-agreeing with the Assessing Officer and the Commissioner (Appeals), held that the recovery of the charges towards licence fee/rent did not arise from any activity outside the activity of cargo handling in international traffic, that such adjustment 16 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) was directly and inextricably linked to the cargo handling business of the assessee, and that the recovery of licence fee/rent was not in the course of a separate business of renting out the premises. The Tribunal also held that the assessee did not carry on any business operations in India by letting out the premises on lease or by sub-letting them and that the provisions of article 6 of the Double Taxation Avoidance Agreement were not applicable. The additions made by the Assessing Officer and the Commissioner of Income-tax (Appeals) were consequently deleted. On appeal by the Revenue, the Hon'ble Delhi High Court dismissed the appeal by holding that the Tribunal had correctly appreciated the law and no substantial question of law arose for consideration. According to the learned counsel for the Assessee, the decision of the Tribunal in the case of Federal Express (supra) and Delta Airlines Inc.(supra) are contrary to the decision of the Hon'ble Delhi High Court and therefore the same should not be followed.
19. The learned DR submitted that submissions made by the learned counsel for the Assessee on the decision of Federal Express (supra) being contrary to earlier decisions of the Tribunal have already been met by the Tribunal in the case of Federal Express (supra) and in this regard he drew our attention to the relevant paragraphs of the order in the case of Federal Express (supra). It was also submitted that in Furniss Withy & Co. [1968] CTC 35, where a United Kingdom enterprise providing managing agency and stevedoring services in Canada for ships owned and chartered by the enterprise subsidiaries and affiliate, it was held by the Canadian Supreme Court that only profits derived from the services supplied to ship owned or chartered by the enterprise were exempt under article 8 of the DTAA. It was his submission that international thinking has been that the income must have connection with operation of aircraft or ship owned, taken on lease or on charter. It was further submitted by him that Article 8 of the Indo-USA 17 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) DTAA is differently worded than the OECD Model Convention (MC). He referred to para-39 of the OECD Commentary on Article 8 of MC wherein the fact that USA has reserved its right to tax profits from shipping and air transport business has been made clear in the following words:
"39. The United States reserves the right to include within the scope of paragraph-1 income from the rental of ships and aircraft on a full basis, and on a bareboat basis if either the ships or aircraft are operated in international traffic by the lessee, or if the rental income is incidental to profits from the operation of ships or aircraft in international traffic. The United States also reserves the right to include within the scope of the paragraph, income from the use, maintenance or rental of containers used in international traffic."
It was his submission that Article 8 (2) of the Indo USA DTAA has adopted a departure from the OECD Model MC by defining what is "Profits from the operation of ships or aircraft in international traffic". In this regard he also drew our attention to Technical Explanation to US-India DTAA wherein on the scope of Article 8 (2) of Indo-USA DTAA has been explained as follows:
"Paragraph 2 defines profits from the operation of ships or aircraft in international traffic as profits derived by an enterprise described in paragraph 1 from the transportation by sea or air respectively of passengers, mails, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft. Such transportation includes the sale of tickets for such transportation on behalf of other enterprises, other activity directly connected with such transportation, and rental of ships or aircraft incidental to any activity directly connected with such transportation. Thus, income of an enterprise from the rental of ships or aircraft constitutes profits from the operation of ships or aircraft in international traffic only if it is incidental to the operation by the enterprise of ships or aircraft in international traffic. For Example, under the convention only bareboat leasing that is incidental to the operation by the enterprise of ships in international traffic is within the scope of Article 8. This provision is narrower than the provision in the US Model, which covers not only rental profits that are incidental to transportation activities of the lessor but also any rental profits derived from the operation of ships or aircraft in international traffic by the lessee.18 ITA NO. 2808/MUM/2006(A.Y. 1999-2000)
ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002)
20. It was submitted that similarly a narrower meaning has to be given to profits from the business of operating aircraft as defined in Article 8 (2) of the Indo-USA DTAA. Finally our attention was drawn to the fact that Article 8 dealing with profits of shipping and air transport business have been differently worded in the OECD MC, UN MC, US MC and India-USA DTAA and there are different commentaries by the internationally renowned author Klaus Vogel. The fact that Article 8 (2) of the Indo USA DTAA has adopted a departure from the OECD Model MC and other MC by defining what is "Profits from the operation of ships or aircraft in international traffic" only shows that a restricted meaning had to be given, as was done by the Tribunal in the case of Federal Express (supra).
21. We have given a careful consideration to the rival submissions. Many of the submissions made by the learned counsel for the Assessee have already been met by the Tribunal in the case Federal Express (supra). The argument regarding the tribunal not following its own ruling in the case of Balaji Shipping (supra) and not placing reliance on OECD Commentaries have been met by the Tribunal in the case of Federal Express (supra). The Tribunal in the said decision after referring to the difference in the wordings between India-UK Treaty which was subject matter of decision in the case of Balaji Shipping (supra) observed as follows:
a) On the argument that there was a conflict of view expressed by the Tribunal in the case of Balaji Shipping (Supra) and Delta Airlines Inc.(supra), the Tribunal held as follows:
"31. A comparative study of the above provisions clearly indicate that article 9 of Indo-U.K. Treaty uses the expression "profits from operation of ships" but such expression has not been defined. On the other hand, in the Indo-U.S. Treaty, the expression "profits from operation of ships or aircrafts in the international traffic" has been defined in para 2 of article 8. Since the expression "profits from 19 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) operation of ships" was not defined in Indo-U.K. Treaty, this Bench in the case of Balaji Shipping (U.K.) Ltd. (supra), following the judgment of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 and the decision of the Tribunal in the case of Metachem Canada Inc. v. Dy. CIT [2006] 100 ITD 251 (Mum.), held that such expression should be construed in the manner in which the contracting parties understood at the time of execution of the Treaty i.e., in the light of the commentaries of International Law available at the time of execution of the agreement. On the other hand, the Tribunal while disposing the appeal of Delta Airlines Inc. (supra), following the decision of the Supreme Court in the case of P.V.A.L. Kulandagan Chettiar (supra), held that the expression "profits from operation of ships or aircraft" in the international traffic must be understood in the sense in which it has been defined in para 2 of article 8. Thus, in our opinion, there is no conflict between these two decisions. Therefore, following the decision of the Bench in the case of Delta Airlines Inc. (supra), it is to be held that benefit of article 8 would be available to the assessee to the extent the activity carried on by the assessee falls within the parameter of the definition given in article 8(2) of the Indo-U.S. Treaty."
b) On the argument of the learned counsel for the Assessee that while interpreting treaties international commentaries are relevant cannot be disregarded, the Tribunal held as follows:
"32. The contention of the learned counsel for the assessee that the ratio laid down by the Bench in the case of Delta Airlines Inc. (supra) is not in accordance with the decision of the Hon'ble Supreme Court in the case of P.V.A.L. Kulandagan Chettiar (supra), in our opinion, is without force. In that case two questions were raised by the Hon'ble Supreme Court which, inter alia, included a question "whether the capital gains should be taxable only in the country in which the assets are situated." As per the facts narrated in the judgment, the assessee had sold certain immovable properties situated at Malaysia which resulted in short-term capital gains of Rs. 18,130. This income was taxed in India by the Assessing Officer. However, the CIT(A), the Appellate Tribunal as well as Hon'ble High Court held that in view of the Treaty between India and Malaysia, such capital gains could not be taxed in India. Thus, the matter reached before the Supreme Court. It is in this context, the Attorney General of India appearing for the revenue raised the following contention appearing at page 660 of 267 ITR :
"He further urged that tax on capital gains is a different kind of tax though brought within the fold of income-tax law in this 20 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) country; that under the principles of international law the fiscal jurisdiction of a State to tax any form of income generally arises from either the location of the source of income within its territory or by virtue of the residence of the assessee within its territory. However, in contrast to the State where income is source, the country of which the assessee is a resident is entitled to tax the assessee on its global income and in other words, the assessee is subject to unlimited fiscal liability in the State of residence. Similar view has been taken by Karnataka High Court in CIT v. R.M. Muthiah [1993] 202 ITR 508. Thus, the State of which the assessee is a resident has inherent jurisdiction to tax the assessee's income from property situated in another State. However, since it is generally recognized that the State of source in respect of immovable property has a closer economic connection with the income from that property, the treaties generally provide that tax may be imposed by the State of source in respect of such property and shall be allowed as a credit in the State of residence; that it needs to be emphasised that there is no bar under the international law for the State of residence to impose tax on income from property situated in another State and whether there is such a bar under the treaty depends upon the correct interpretation of its provisions."
33. A perusal of the above arguments clearly shows that the interpretation of the provisions of the treaty was the subject- matter before the Hon'ble Supreme Court. It is pertinent to note that the above contention was turned down by the Hon'ble Supreme Court by observing as under :
"The contention put forth by the learned Attorney General that capital gains is not income and, therefore, is not covered by the treaty cannot be accepted at all because for purposes of the Act capital gains is always treated as income arising out of immovable property though subject to different kind of treatment. Therefore, the contention advanced by the learned Attorney General that it is not a part of the treaty cannot be accepted because in the terms of the treaty wherever any expression is not defined the expression defined in the Income- tax Act would be attracted. The definition of "income" would, therefore, include capital gains. Thus, capital gains derived from immovable property is income and, therefore, article 6 would be attracted."
Again at page 672, it was observed as under :
21 ITA NO. 2808/MUM/2006(A.Y. 1999-2000)ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) "Taxation policy is within the power of the Government and section 90 of the Income-tax Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the Income-tax Act, it would be unnecessary to refer to the terms addressed in the OECD or in any of the decisions of foreign jurisdiction or in any other agreements."
34. The crux of the above observations is that wherever any expression is not defined in the Treaty then the expression defined in the domestic law could be applied. This means that meaning of such expression can be ascertained with reference to the other materials which may be by way of domestic law or the commentaries available at the time of execution of the agreement by the contracting parties as held by the Apex Court in the case of Azadi Bachao Andolan (supra). Impliedly, it means that where any expression or term is defined then it would be unnecessary to refer to the commentaries or decisions of foreign jurisdiction as held by the Apex Court in the case of P.V.A.L. Kulandagan Chettiar (supra). Therefore, the decision of the Bench in the case of Delta Airlines Inc. (supra) to the effect that commentaries on international law need not be looked into where the expression has been defined in the Treaty itself is in accordance with the ratio laid down in the above decision."
In para-39, the issue has further been elaborated as follows:
"....39. In view of the above discussion, it is held that where any expression or term has been defined in the treaty itself, than the scope of such expression or term should be understood in the sense in which it is defined in the treaty. Under those circumstances, external aid for interpretation need not be resorted to by reference to the commentaries on international law or decisions of foreign jurisdiction. However, it is clarified that if there is any ambiguity in the word or words used in the definition then, reference can definitely be made to such commentaries and decisions of international Courts, in order to ascertain the intent of such word or words as in such cases external aid for interpretation may be necessary. But, if the language is clear and unambiguous then the scope of such expression or term cannot be enlarged or restricted by referring to the commentaries.......22 ITA NO. 2808/MUM/2006(A.Y. 1999-2000)
ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002)
c) On the argument of the Assessee that the decision in the case of Delat Airlines Inc. (supra) is contrary to the tribunals decision in the case of Safmarine Containers Lines N.V. (supra)
"35. The contention of the assessee's counsel that the decision in the case of Delta Airlines Inc. (supra) is contrary to the earlier decision of the Tribunal in the case of Safmarine Containers Lines N.V. (supra) is also without force. Para 10 of the order in the case of Safamarine Containers Lines N.V. (supra) reads as under :
"Now, we will examine the amount in dispute in the context of DTAA. Both the sides have taken shelter of commentary on article 8 by OECD and Klause Vogel. At this juncture, it would be relevant to note that the DTAA is the main document and has to be considered for examining the taxability or otherwise of an item of income in the respective States. If the language of DTAA is clear and does not admit of any doubt, there is no need for referring to the OECD Model and commentaries, etc. The Hon'ble Supreme Court in CIT v. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR 654 has held in penultimate para that "taxation policy is within the power of the Government and section 90 of the Income-tax Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the Income-tax Act. It would be unnecessary to refer to the terms addressed in the OECD or in any of the decisions of foreign jurisdiction or in any other agreements". The review petition filed against this judgment also stands dismissed in CIT v. P.V.A.L. Kulandagan Chettiar [2008] 300 ITR 5 (SC). Under these circumstances, we are of the considered opinion that the commentary on the Model Convention can be taken assistance of only if the language of the treaty is drafted loosely or in an inclusive way or it does not unearth the intention of the Contracting States in a lucid manner."
However, in para 15, the Tribunal observed as under :
"15. We have considered the rival submissions and perused the relevant material on record. From the language of article 8 it clearly emerges that the income derived from the operation of ships in international traffic shall also include income from "any other activity directly connected with such transportation". This expression has not been further elaborated in the DTAA inasmuch as such other activities have not been exhaustively 23 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) spelt out. Under these circumstances, it is imperative to go by the Commentaries for ascertaining the true purport of this expression."
Perusal of the above shows that the principle laid down in para 10 of the order has been reiterated by us in the case of Delta Airlines Inc. (supra). As far as para 15 is concerned, it has been stated clearly that the expression "other activity directly connected with such transportation" in article 8(2)(b) of Indo-U.S. Treaty has not been further elaborated in the DTAA and, therefore, the true intent could be ascertained by looking into the commentaries. This principle is not contrary to the earlier principles stated in para 10. It only means that to the extent any term or expression is ambiguous then to ascertain its meaning the Court can look into the commentaries on International Taxation. Sometimes, an ambiguity can be in the words used by the contracting parties while drafting the treaty. Article 8(2) of the Indo- Belgium Treaty defines the expression "income derived from operation of ships or aircraft in the international traffic". The main part of sub- clause (b) defines the scope of the direct activity of transportation in the international traffic while the second part includes the activity other than the main activity of transportation in the international traffic. The Bench was concerned with the second part of the definition which included "other activity directly connected with such transportation". The meaning of such other activity was not clear and, therefore, the Bench proceeded to ascertain its meaning by looking into the commentaries. It is in this context a part of such expression was considered in the light of the OECD Commentary. In the case of Delta Airlines Inc. (supra) also the Bench was concerned with the second part of the definition in article 8(2) and since the assessee was carrying on activity which had no nexus with the direct activity of transportation in the international traffic, it was held that the assessee was not entitled to the benefit under article 8(2)(b) of Indo-U.S. Treaty with reference to the profits derived from the activity of screening the baggage belonging to the customers of other airlines. Thus, in our considered opinion, there is no inconsistency between the above two decisions of the Tribunal......
22. We are of the view that the view expressed by the Tribunal as above is a possible view on the issue. We do not find any grounds which would compel us to take a different view so as to make a request to the Hon'ble 24 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) President to consider constituting a special bench to decide the issue in this appeal.
23. We have considered the decision of the Hon'ble Delhi High Court in the case of KLM Royal Dutch Airlines (supra), we are of the view that the said decision was rendered on the facts of that case and on the basis of the India- Netherlands DTAA. The relevant clause of the said DTAA regarding income from business of shipping is different. Apart from the above, the lease of the premises by the AAI was for handling cargo. In those circumstances, the Hon'ble Court took the view that income in question was linked to the business of aircraft. The decision of the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (Supra) is again a case where the Hon'ble Court held that looking into commentaries of Treaties was justified where the expression used in the local law and the treaty are one and the same. We are of the view that the said decision is not of any help to the case of the Assessee before the Tribunal. The decision in the case of Ramjethmalani & others (supra) is a reiteration of the ratio in the case of Azadi Bacho Andolan (supra) which has already been considered by the Tribunal in the case of Federal Express (supra).
24. We are of the view that the claim of the assessee does not fall within the scope of article 8(2) of Indo-USA DTAA. Nevertheless, the claim of the assessee can be examined with reference to paragraph 4 of article 8 since it specifically provides that paragraph 1 would apply if the case of the assessee falls under paragraph 4 which includes profits from participation in a pool, a joint business, or an international operating agency. It was so done in the case of Federal Express (supra). In this regard, the AO will also examine the question as to where a space is booked with other airlines, the question whether transportation through such airlines can be said to be transportation by the aircraft chartered by the assessee with reference to the 25 ITA NO. 2808/MUM/2006(A.Y. 1999-2000) ITA NO.2809/MUM/2006(A.Y. 2000-2001) ITA NO.3611/MUM/2005(A.Y. 2001-2002) first part of the definition given in article 8(2) in the light of material which may be placed before him. Since the meaning of the word 'chartered' is not clear from the definition itself, the Assessing Officer would be justified in ascertaining the scope of such word in the light of the commentaries or other materials which may be placed before him. In view of the above discussion, the order of the CIT(A) is modified and the matter is restored to the file of the Assessing Officer to reframe the assessments as per the observations and guidelines given above. In view of the above conclusion, the grievance of the revenue projected in the additional ground of appeal does not require adjudication. The appeal of the Revenue is allowed for statistical purposes.
25. The parties agreed that the other two appeal of the Revenue are identical in all aspects. Therefore for the reasons given while deciding the appeal for AY 01-02, the other two appeals are also allowed for statistical purposes.
26. In the result, all the appeals are allowed for statistical purposes.
Order pronounced in the open court on the 14th day of Mar .2012 Sd/- Sd/-
(N.V.VASUDEVAN) (N.K.BILLAIYA ) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated. 14th Mar. 2012
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"A" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.