Delhi High Court
British Airways Plc. vs Dy. Cit on 24 September, 2001
Equivalent citations: (2001)73TTJ(DEL)519
ORDER
R.M. Mehta, V.P. Both the parties are in appeal against the consolidated order passed by Commissioner (Appeals), the assessment years being 1996-97 to 1998-99. The following connected common grounds are raised in both the appeals As per assesseds grounds :
"1. The learned Commissioner (Appeals) (Commissioner (Appeals)) has erred on facts and in law in :
(i) upholding the action of the assessing officer in taxing the receipts from engineering and ground handling services as taxable income in India;
(ii) not accepting that the engineering and ground handling services are covered under article 8 of the Double Tax Avoidance Agreement between India and UK (DTAA for short), and are therefore, taxable only in the country of residence of the appellant and not in India;
(iii) not accepting that the engineering and ground handling services are activities directly connected with the transportation by air of persons, livestock, goods or mail, and therefore, fall within the meaning of term "operation of aircrafts", the profits from which are not taxable in India in terms of article 8 of the DTAA;
(iv) not accepting that the activity of rendering engineering and ground handling services are in pursuance of participation in pools of any kind, and therefore, the profits arising there from are exempt under para 2 of article 8 of the DTAA;
(v) arbitrarily estimating the alleged income from engineering and ground handling services at 70 per cent of the gross receipts without fully considering all the elements of expenditure incurred by the appellant on earning such income, as against the claim of the appellant that income is not taxable in India.
2. The view taken and the reasoning relied upon by the learned Commissioner (Appeals) in not accepting that the income from engineering and ground handling services is covered under article 8 of the DTAA are vitiated and bad in law, and are based on the learned Commissioner (Appeals) not correctly appreciating the principles of interpretation of statutes.
3. On the facts, evidence and material already on record and/or admitted, the learned Commissioner (Appeals) should have held that :
(i) the rendering of engineering and ground handling services are inextricably linked with the operation of the aircrafts as there is complete interconnection, interlacing, and interdependence between the two services, and therefore, such services are part of one of the same business of operation of aircrafts :
(ii) in any case, since the engineering and ground handling services are rendered in pursuance of agreements executed under the International Airlines Technical Pool which regulates the rendering of such services all over the world by different airlines, such services are rendered by way of participation in pools;
(iii) and consequently the income from such services is not taxable in India under the DTAA.
4. In any case and without prejudice to other grounds, the learned Commissioner (Appeals) should have held that the order of the learned assessing officer is null and void as the same had been passed in contravention of the principles of natural justice, the assessing officer having failed to allow full and proper opportunity while estimating the income of the appellant.
5. In any case and without prejudice to other grounds, the learned Commissioner (Appeals) should have sent the matter back to the assessing officer for computing the income afresh after providing proper opportunity to the appellants as the estimation of income made by the assessing officer was without any basis and much too high and excessive, instead of himself arbitrarily estimating the income at 70 per cent of the gross receipts which estimate also is much too high and excessive.
6. The learned Commissioner (Appeals) has also erred in confirming the charging of interest under sections 234A, 234B and 234C in the present case."
As per revenues ground :
"On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in enhancing deduction from gross receipts (a.) 30 per cent despite the fact that the assessed did not produce any evidence regarding the actual expenses incurred either before the assessing officer or during the appellate proceedings."
2. The assessed in this case is a company incorporated in the United Kingdom and its main activity is "Air transport service". The term "Air transport service" has been defined in the Aircraft Rules of 1937, as follows :
"Air transport service means a service for the transport by air of persons, mails or any other thing, animate or inanimate for any kind of remuneration whatsoever, whether such service consists of a single flight or series of flights."
3. We would also set out article 8 of the Double Taxation Avoidance Agreement (hereinafter referred to as DTAA) between India and United Kingdom, which is as follows :
"1. Profits derived from the operation of aircraft in international traffic by an enterprise of one of the Contracting States shall not be taxed in the other Contracting State.
2. The provisions of para 1 of the article shall likewise apply in respect of participation in pools of any kind by enterprises engaged in air transport.
3. For the purposes of this article the term operation of aircraft shall include transportation by air of persons, livestock, goods or mail, carried on by the owners or lessees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprise, the incidental lease of aircraft on a charter basis and any other activity directly connected with such transportation.
4. Gains derived by an enterprise of a Contracting State from the alienation of aircraft owned and operated by the enterprise, the income from which is taxable only in that State, shall be taxed only in that State."
4. Before we proceed further we would like to mention that British Airways filed returns of income for the three assessment years under consideration on the same date i.e., 30-11-1998. During the course of the assessment proceedings it was noticed that the company rendered technical/engineering/traffic/handling services to other airlines and for which qualified engineers and technicians were employed. It was also noticed as a fact that the company had a separate engineering set up in all the metropolitan cities and the engineers certified the airworthiness of the aircraft of certain other airlines before their take off. As per the agreements between the airlines the payment for the aforesaid services were made on per flight basis in US Dollars and the same was cleared through IATA clearance house for services rendered in India. The following services were rendered by British Airways in India to other carriers/airlines :
"2.2 Communications :
2.2.1 (a) Compile.
(b) Dispatch and receive.
All messages in connection with the services performed by the handling company, using the carriers originator code or double signature procedure, as applicable. Inform the Carriers representative of the contents of such messages.
2.2.2 Maintain a message file containing all above-mentioned messages pertaining to each flight for ninety days."
"6.3 Ramp to flight dock communication :
R.6.3.1 Provide headsets.
6.3.2 Perform camp to flight deck communication :
(a) on arrival.
(b) on departure.
(c) for other purposes."
"8.1 Fuelling and/or Defuelling."
8.1.1 Liaise with fuel suppliers 8.1.4 Supervise fuelling/defuelling operations.
8.1.5 Check the delivered fuel quantity.
8.1.6 Drain water from aircraft fuel tanks.
8.2 Replenishing of oils and fluids 8.2.1 Liaise with suppliers.
8.2.2 Supervise replenishing operations.
8.2.3 (a) Provide
(b) Operate special replenishing equipment."
"Section 9. Aircraft maintenance :
9.1 Routine Services :
9.1.1 Perform line inspection in accordance with the carriers current instructions.
9.1.2 Enter in the aircraft log and sign for the performance of the line inspection.
9.1.3 Enter remarks in the aircraft log regarding defects observed during the inspection.
9.1.4 Perform pre-flight check immediately before aircraft departure.
9.1.5 Provide skilled personnel to assist the flight crew or ground staff in the performance of the inspection.
R.9.2 Non-routine Services :
R.9.2.1 Rectify defects entered in the aircraft log as reported by the crew or revealed during the inspection, to the extent requested by the carrier.
However, major repairs must be especially agreed upon between the carrier and the handling company.
R.9.2.2 Enter in the aircraft log and sign for the action taken.
R.9.2.3 Report technical irregularities and actions taken to the carriers maintenance base in accordance with the carriers instructions.
R.9.2.4 Maintain the carriers technical manuals handbooks, catalogues, etc. R.9.2.5 Provide engineering facilities, tools and special equipment to the extent available."
"R.9.3 Material handing : .........................
R.9.3.2 Provide periodic inspection of the carriers spare parts and/or spare power plant.
R.9.3.3 Provide suitable storage space for accommodation of the carriers spare parts and/or special equipment.
5. According to the assessing officer the income derived by British Airways from these operations was taxable in India due to the following reasons :
"1. These services are separate business activities and are not covered under Air Transport Services.
2. These services are rendered by British Airways to other airlines.
3. The receipt from this service is not recovered by British Airways from the passenger and is not part of the face value of the ticket.
4. These services are incidental to British Airways for its own flights but when the same is rendered to other airlines it is not an air transport operation.
5. The business of British Airways will not be effected if they do not render these services to other airlines. Its aircrafts will fly and normal traffic will continue.
6. The OECD commentary has also clarified that separate business activities are not covered under air transport operation.
7. These services are rendered by British Airways to other airlines by exploiting their manpower which is idle at the time when there is not flight, and can, in noway, be termed as air transport operation.
6. The assessing officer was also of the view that the income of British Airways from the aforesaid activities accrued and arose in India and was, therefore, taxable and he made a specific reference to the assesseds letter enclosed along with the income-tax return wherein it had agreed that the income was taxable in India and in fact self-assessment tax had also been paid. The submission of the assessed, however, was that the said income was exempt under article 8 of the DTAA between India and UK and in support of the aforesaid stand letter dated 3-9-1998 was filed. The assessing officer has set out at length the various submissions made by the assessed in the said communication and has also given his own views for rejecting the same. For purposes of the present order, we need only summarize the submissions and the reasons of the assessing officer as under :
"(i) clause (1) of article 8 mentions profits derived from operations of aircrafts in international traffic; and clause (3) gave examples of activity included within the definition i.e. sale of tickets for transportation on behalf of other enterprises incidental lease of aircraft on a charter basis and any other activity directly connected with such transportation. Further on the basis of exchange of notes between two Governments on 25-1-1993, it has been confirmed that interest arising from take investment/deposit of receipts arising directly from the operation of aircraft in international traffic was also included within the exemption. The plea, in other words, was that it was clear from the wording of the treaty that exemption extended to income beyond ticket and cargo receipts.
(ii) As against the aforesaid the assessing officer took the view that the article was very clear regarding what was exempt and what was not and it even went to the extent of giving example as to what was taxable and what was exempt. According to the assessing officer the activity under consideration had not been included in the definition of article 8 and so was the position for the exchange of notes between the two Governments. The further observation of the assessing officer was that the activity was not of an insignificant nature that the same was overlooked. The assessing officer was also of the view that certification of airworthiness of the aircraft of British Airways by its own engineers was an activity directly connected to air transportation, but if the same activity was done for other airlines and money received on a fixed basis as per clearly defined terms and conditions under a contract the same did not come under the term "Air Transport Service" vis-a-vis the commentary on the model OECD treaty to take into account only the profits earned from the carriage of passengers and cargo would be unduly restrictive and the provision, therefore, would cover other clauses of profit as well i.e. those which by reason to their nature or their close relationship with the profits directly obtained from transport may also be placed in the same category. The assessed cited certain examples in support of its submissions.
7. The assessing officer at para 7 of the assessment order observed that the assessed had not mentioned about the examples given in the OECD commentary and he in fact referred to the following two examples, which were termed as "incidental" :
"1. The operation of a bus service connecting a town with its airport; and 2. Transportation of goods by truck connecting a depot with a port or airport."
According to the assessing officer the scope of article 8 extended only to those activities which were rendered by the airlines to its own passengers/customers for cargo or mail. In referring to the aforesaid two examples the assessing officer opined that in order to compete in the market and render the bus services to its customers, if an airline extended its services from the airport to the town or vice versa with the help of a bus service, then the same was covered under article 8 of the treaty. In referring to the same commentary the assessing officer observed that separate activities were not to be considered as treaty-protected. He also referred to the example of a hotel being treated as a separate business. The assessing officer in turn referred to the Commentary of Double Tax Conventions by "Klaus Vogel" wherein it had been observed as under :
"In addition to the transportation of passengers and freight typically included in the term operation of ships or aircraft. Article 8 extends to cover all activities connected with such transportation services. These are primarily preparatory and auxiliary activities related to transportation, such a services of agencies selling passage tickets on behalf of the enterprise concerned or on behalf of third enterprises. Therefore, profits from the activities of legally dependent agencies of shipping or air transport enterprises, together with any other profits, made by them, are taxable at the place of management."
8. The assessed in fact has relied on the same commentary and according to the assessing officer the commentary itself stated that separate business activities were not covered under section 8. According to the assessing officer the commentary further stated that keeping a hotel will come under article 8 only "if the hotel provides no persons other than the enterprise" passengers with night accommodation directly connected with their passage and if the cost of such accommodation are included in the price of passage ticket. It was reiterated by the assessing officer that the aforesaid activities if rendered by the airline to its passengers would extend the scope of the treaty, but if the same are rendered to any other person including passengers of other airlines then the same was not covered under art 8.
9. The assessed contended that ground handling and engineering services were activities related to air transportation and the facilities for ground handling and engineering services were not business units, but support finance for the British Airways International Airline business. The further plea was that the company was in India to carry out its international airline business and the activities in question were inextricably linked to the direct operation to the service. According to the assessed it had complete infrastructure in place and was, therefore, in a position to accommodate other carriers, who have engaged in international airline business. It was further stated that the receipts from these activities were more in the nature of cost recoveries than income or profit. Further there was no separate accounting for these finances and the assessed was not in a position to identify and separate the profits from its total profits.
10. These pleas were rejected by the assessing officer on the ground that the activities in question constituted separate business activities to the extend that they were rendered to other airlines and the receipts were on an hourly basis as per the terms and conditions entered into with other carriers depending on the nature of services offered. That it was not correct to contend that the receipts were recoveries on account of costs and the company in fact earned huge profits and 15 per cent profit had been offered for taxation.
11. Some other facts which are relevant to the decision in these appeals are now adverted to and these are that British Airways was not filing any income-tax return earlier and on 9-6-1998, it was issued a notice requiring it to furnish details and amounts received outside India from activities carried on in India. On a subsequent date i.e. 30-8-1998, the assesseds authorized representative appeared and submitted a reply wherein it was stated that British Airways received payment directly in London through IATA clearing for engineering and traffic handling services provided by it to other airlines. The particulars of these airlines were provided to the assessing officer and which pertained to two stations i.e.; Delhi and Chennai. As observed by the assessing officer the details of engineering and traffic handing services for Calcutta and Bombay were not furnished. The case was fixed up on a number of occasions subsequently and either adjournments were sought or the authorized representative appeared and sought time "to examine the case of taxability of other services in India". It is relevant to note that on 24-9-1998. One Mr. Mike Rawlings, Corporate Tax Manager of British Airways, appeared and was told that the income derived from engineering/technical handling was taxable in India, As a consequence of the aforesaid meeting between the assessing officer and Mr. Mike Rawlings the assessed filed letter dated 13-10-1998, stating "British Airways is ready to pay taxes on 10 per cent deemed profit basis." The aforesaid offer was made on the following lines :
"1. That British Airways does not carry out handling for other carriers as a separate business, nor does it account for it as such.
2. Cost related to those recoveries are intrinsically linked to the British Airways worldwide operation and it is not possible to identify profit.
3. Most agreements are based on mutual provision of services with other carriers elsewhere in countries where British Airways does not have the capability to carry out its engineering and traffic handling any uplift to include profit margin will result in similar uplift by payment of British Airways.
4. In reaching agreements British Airways has to look to U.K. credit for Indian tax paid so that treating article 27 mutual agreements procedures does become an issue.
The offer is made with a view to reaching early conclusion of the dispute following our oral offer have carried out further research which shows that British Airways published accounts for the last two years reflect operating profits returns between 5.83 per cent and 6.53 per cent and section 44BBA of the Indian Income Tax Act, 1961 provides for a 5 per cent deemed profit for these International Airlines operating in India, who do not have the benefit of tax treaty protection, in the light of that evidence, I believe the offer is not unreasonable."
12. On a subsequent appearance before the assessing officer on 21-10-1998, Mr. Mike Rawlings requested for some time to pay the taxes and file returns for the three years in question further stating that British Airways was ready to pay @ 15 per cent deemed profit for all the three years vis-a-vis the date when it started engineering and traffic handling in India. The assessing officer allowed time up to 30-11-1998, on which date the returns for the three years were filed, as follows :
Asst. yr.
Profit Rs.
Taxes paid Rs.
1996-97 82,28,492 99,37,241 1997-98 99,58,172 93,97,153 1998-99 1,08,71,953 64,48,808 (with interest)
13. The subsequent discussion in the orders passed by the assessing officer for the assessment years in question pertained to computation of the taxable income. It is noted that the assessing officer asked the assesseds representative to furnish information about the expenditure incurred for rendering the engineering/technical handling services, but other than plead that the same be taken at 15 per cent of the gross receipts, the representative did not come up with any other information or details. It may be mentioned that for the various assessment years the assessed furnished his own calculation and to make the matter clear, we refer to the assessment order for assessment year 1996-97 wherein at para 21 is the assesseds calculation of income and taxes payable as under
"Income from business and profession Rs.
Engineering service receipts 5,42,39,447 Traffic handling receipts 6,17,169 Gross receipts 5,48,56,616 Deemed to be income (@ 15 per cent of the gross receipts) 82,28,492 Tax on above (55 per cent) 45,25,671 Interest on above (refer sheet below) :
234A 21,72,322 234B 28,96,429 234C 3,42,820 54,11,571 Total tax and interest payable :
99,37,241 Taxes paid.
Self assessment tax paid (30-11-1998) 99,37,241 Tax payable/refundable. "
14. The aforesaid computation was rejected by the assessing officer on the following lines and he in turn proceeded to calculate the assesseds taxable income as follows :
"From the above computation, it is clear that the assessed has paid the taxes under self-assessment tax. The assessed in his return submitted "British Airways operations in India is limited to international traffic and as per DGCA rules is not permitted to indulge in domestic traffic, the profits related to British Airways operations in India as per normal source rules under the Act, may be said to be arising in India and hence taxable in India.
In view of the above said discussion, the income of the assessed is to be computed as business income which the assessed himself has agreed as per the provisions of article 7 of the Indo U.K. DTAA. British Airways has branch offices in India which constitute a permanent establishment and, therefore, the income related to engineering and traffic handling is taxable in India as the same is not covered under article 8 of DTAA.
Further, for doing this operation the airline enter into a separate agreement and the charges are based on per flight basis. Most of the work done is visual inspection by the engineer and any replacement of defective component is replaced at IATP and therefore, there is no cost of consumables. Once the flight lands, the engineer makes a visual inspection and signs the log book, that the aircraft is fit to fly. If there is any defect, it can be repaired, it is repaired and consumable are replaced at IATP and even the time till it is replace the other carrier pays the rental charges.
All these facts were confronted to Mr. Mike Rawlings and the AR of British Airways and they were explained that actually there is no additional cost incurred by British Airways for engineering/traffic handling. However, they were given an opportunity to explain and give details of additional cost incurred if any to substantiate their claim that they have incurred some cost. They have maintained a continued silence on this point.
To sum up it is clear that British Airways is deriving income through separate business activity which is not covered under air transport operations. If British Airways does not do such services its business of transporting passengers and goods will not be affected. This is a separate business, totally independent in nature due to an independent contract entered between British Airways and other carriers.
Since British Airways has not given details of additional cost and the activity is related to visual inspection, virtually the cost incurred to earn this income is very less.
British Airways has two flights a day from Delhi and therefore, has to maintain a round-the-clock set-up for its maintenance. They have employed four engineers, ten mechanics and two storekeepers for the maintenance of its set up. One set of employees cannot do both the flights as one comes at eleven in the morning and the other comes in the night. The assessed has not furnished any detail of additional cost despite repeated reminders.
Out of the above, 2 engineers are required to handle the flight of British Airways itself and one additional engineer is required for leave, etc. However, if a most liberal view is taken, at the most salary of two engineers and other related cost may be attributable to the income of the assessed. Similarly, five mechanics are required for handling BA flights, rest can be attributable to the income generated by British Airways through the handling of other airlines.
A store keeper is necessary for the upkeep of consumables, etc. And therefore, at the most the salary of one store keeper can be attributed to the income generated by British Airways through engineering/handling.
With the above said proposition, if the salary of an engineer on a cost to company basis be taken as Rs. 50,000 a month, the total expenditure comes to Rs. 12 lacs. Similarly, the cost to company on one mechanic comes to Rs. 20,000 maximum. On this basis the total expenditure for five mechanics for one year comes to Rs. 12 lacs, salary of one store keeper on a cost to company basis cannot be more than Rs. 20,000 per month.
The total of the above expenditure comes to Rs. 26,40,000. Similarly the (sic-same) may be spent in Bombay and Calcutta and Madras together.
The total cost incurred by British Airways in all the four metros comes to Rs. 79,20,000.
The assessed has claimed that, it has incurred head office expenses, the same is to be allowed as per the provisions of section 44C, which is 5 per cent of the adjusted total income.
5 per cent of Rs. 4,61,36,616 = Rs. 23,05,830.80 The above said calculation is inconformity with the number of flights of British Airways and the number of flights of other carriers handled by British Airways.
In view of the above said facts income of the assessed is computed as follows :
Rs.
Engineering services receipts.
5,42,39,447 Traffic handling receipts 6,17,169 Gross receipts 5,48,56,616) Less : Expenses as discussed above 1,02,26,830 Total taxable income 4,46,29,786"
15. For the remaining two assessment years identical reasoning and calculations were made both by the assessed as also by the revenue. Being aggrieved with the view taken by the assessing officer to subject to tax the receipts from the rendering of technical, engineering and traffic handling services to other airlines as also the computation thereof, the assessed filed appeals before the Commissioner of Income-tax (Commissioner (Appeals)).
16. All the three appeals were disposed of by means of a consolidated order and a perusal of the same shows that the arguments "advanced before the assessing officer were reiterated at length, but for purposes of disposing of the present appeals, we find it necessary to highlight the following.
There was no dispute about the assessed having a permanent establishment (hereinafter called PE) within the meaning of article 5 to the DTAA in India whereby income derived from the PE was liable to be taxed in India, but under para 9 of article 7 where profits included items of income dealt with separately in any other article than the provisions of those articles were to prevail. The assesseds case was that its income was covered under article 8 whereas the revenues case was to the contrary,
17. It was contended before the Commissioner (Appeals) with reference to the judgment of the Honble Supreme Court in the cage of CIT v. National Tal Traders (1980) 14 CTR (SC) 348 : (1980) 121 ITR 535 (SC) that all parts of a statute or section were to be read as a whole and every clause was to be construed with reference to the context and other clauses thereof so that the construction sought to be placed was in consonance with the enactment of the statute, It Was submitted that agreements for avoidance of double taxation/grant of relief were entered into by the Government of India with the Government of any other foreign country under the legislative sanction of section 90 of the Income Tax Act, 1961 and which provided that where a specific provision has been made in DTAA then that provision was to prevail over the general provisions made in the Income Tax Act. According to the assessed the provisions of the DTAA were more beneficial to it and it was, therefore, contended that such provisions be applied.
18. In referring to paras 1 and 2 of article 8 it was submitted on behalf of the assessed that these were sin-War to article 8 of the OECD Model Taxation Convention on Income & Capital, 1977 and article 8-B of the UN Model Taxation Convention between the Developed and Developing Countries, 1980. In regard to the OECD Model Double Taxation Convention on Income & Capital, 1977, the observations of Klaus Vogel were referred to wherein it was mentioned that the term "pool", "joint business" and "international operating agency" are not defined in the Convention. The terms are taken from the International Air Service Transit Agreement of 7-12-1994. In that agreement, they typify various forms of international co-operation by air transport enterprises which may take place in technological as well as commercial fields. Such co-operation ranges from pooling of supply of spare parts at airports, via the alternating operation of certain flight routes, to the merger of enterprises". Reference was made to observations regarding the mode and method of the pooling arrangement and it was mentioned that "various forms of international cooperation exist in shipping or air transport. In this field, international cooperation is secured through pooling agreements or other Conventions of similar kind which lay down certain rules for apportioning the receipts (or profits) from the joint business. In referring to the UN Model Taxation Convention 1980 it was pointed out that the profits from the business of operation of aircraft in international traffic by an enterprise was taxable in the state where the effective management of the enterprise was situated. According to the assessed participation in a. pool, joint business or international operating agency also amounted to operation of aircraft in international traffic.
19. With specific reference to the facts of the assesseds case it was pointed out by its counsel that British Airways was one of the leading operators of aircrafts in international flights for carriage of passengers and cargo and it had been a member of the International Air Transport Association (hereinafter called IATA) and IATP Organisation. It. was explained that IATP was formed for the purpose of providing reciprocal technical support at line stations throughout the world and the support included spare parts, ground and ramp handling equipment and manpower. According to the assessed the primary aim of IATP was to generate economic savings and it was dedicated to the spirit of mutual cooperation and high degree of technical performance. It was explained that under the agreement the parties provided certain technical facilities and services as may be available with them at a particular airport for use by other parties on reciprocal basis, Such agreements, according to the assessed were "pool agreements" entered into for providing technical services and facilities on the basis of "Standard Ground Handling Agreement" (hereinafter called SGHA). It was stated that British Airways had provided engineering and ground handling services at the International Airport of Delhi to 11 other airlines and at Chennai to 5 airlines and certain other airlines at Mumbai. According to the assessed similar services had been availed of by British Airways from Qantas Airlines and Cathay Pacific Airlines at international airports in Manila and Taipei.
20. It was explained that the main purpose of the IATP agreements was to pool and share technical resources, infrastructure facilities and man power with a view to achieve economic savings by reducing costs. It was further submitted that the service and facilities provided by British Airways to the other airlines did not involve any separate and distinct business activity from its business of operating aircraft in international traffic. The plea was that there was unity of management, control and finances which were interconnected, interlaced and interdependent. In placing reliance on the decision of the Honble Supreme Court in the case of CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC) it was contended that the services provided by British Airways to other airlines did not constitute a separate or distinct business activity. It was also the further submission that the term "operation of aircraft" included any other activity directly connected with such transportation and it was specifically pointed out that providing ground handling services to its own aircraft as also the aircraft of any other airline was an activity directly connected with the transportation by air of persons, livestock, goods, etc. It was the subsequent argument that the revenues generated from these services were exempt from tax in India vide paras 1 and 3 of art 8. Attention was also invited to the meaning of the word "pool" in various dictionaries and it was argued that the expression "participation in pools of any kind" meant sharing in operational sphere as also the commercial sphere for mutual benefit. It was further argued that para 2 of article 8 was of wide amplitude and it was not circumvented or restricted or subjected to any condition or qualification.
21. The case of the assessing officer, who was present before the Commissioner (Appeals), on the other hand was that there was a separate establishment and a separate office set up to monitor ground handling services and the plea was to the effect that the various establishments at international airports in India did not form part and parcel of the operations of British Airways pertaining to the operation of aircraft in international traffic and such establishments constitute separate offices. It was submitted by the assessing officer that over a period of time British Airways had developed substantial infrastructure and the extra facilities were used to provide ground handling services to the aircraft of other airlines. As regards the service to its own aircrafts and passengers the assessing officer accepted that these could be covered under the expression "other activity" directly connected with such transportation but when it came to exploiting excess activity for earning revenues by rendering similar services to other airlines these could not be said to be activities directly connected with such transportation. It was emphasized that even if the assessed did not render such services to other airlines it could continue to carry on its business. The plea, in other words, was that para 1 of article 8 read with para 3 of the same article contained in its ambit only such ancillary activities which were necessary to transport its own passengers, livestock, etc. and exploitation of excess capacity by providing services to other airlines constituted a separate business and not covered under para 1 read with para 3,
22. It is noticed from the order of the Commissioner (Appeals) that the assessing officer in support of the revenues case also referred to the representation of the Association of European Airlines (hereinafter called AEA) of the OECD to the effect that It is desirable to extend further the exemption in article 8 to activities carried on by the airline through a spare capacity of assets or personnel in the relevant jurisdiction even though those activities are not directly connected with operation of the airlines own aircrafts." It was also mentioned in the said representation that the AEA was concerned about the profits derived by an international airline from the use of its assets and from services performed by its personnel during the period in which the assets and/or the personnel are not required for the purposes of carrying on the enterprises own ships or aircrafts in international traffic, Examples of such profits were given such as the provision to other airlines, shipping enterprises of goods or services by enterprises engineers cargo handlers, catering staff and customer services personnel whose presence in the other state was necessary for the enterprise to operate its own ships or aircraft in the international traffic, but who are not occupied full-time in doing so. According to the assessing officer it was not the understanding of the AEA or the OECD that exploitation of excess capacity of assets or personnel leading to revenues was exempt from tax in the jurisdiction in which the services were rendered.
23. As regards the submissions made on behalf of the assessed about the operation of a pool the argument Was that the term "pool" involved an idea of bringing together the assets or the personnel of various airlines with the intention to carry on joint business and to share profits from the pool, It was submitted that the services rendered under IATP agreements did not constitute services on reciprocal basis as it could happen that the assessed may receive services from another airline, but it may not render any services to the said airline. The plea, in other words, was that there was no reciprocal agreement/arrangement by which services rendered to one airline were reciprocated by similar services from the same airline. It was reiterated that the ground handling services provided on commercial terms were only With a view to generate revenues from spare capacity and there was no existence of any pool regarding ground handling services since neither the assets and nor the personnel of the various airlines were brought together at any international airport. According to the assessing officer the position would have been different if IATP had come to India, pooled the resources of various airlines at the airports, rendered services to willing airlines and thereafter distributed profits to the participants The crux of the matter, according to the assessing officer was, therefore, not that separate agreements could be entered into amongst the various airlines in respect of facilities at one airport belonging to one airline and fixing the price of the service, but the crux of the matter was bringing together the infrastructure of various airlines together at one place with a view to render services and share profits from the pooled assets.
24. As regards the computation of profits it was submitted by the learned counsel that these have been quantified at 81.38 per cent, 82.98 per cent and 83.42 per cent of the gross receipts from ground handling services for assessment years 1996-97, 1997-98 and 1998-99, respectively. It was submitted that the assessing officer had been in a hurry to complete the assessments in March, 1999 whereas the time limit expired on 31-3-2000. The complete sequence of events was narrated beginning with the filing of the returns, issue of statutory notices, the progress of the hearings, the adjournments asked for as also various other submissions made with reference to the computation of profits. It is noted from para 5.1 of the order of the Commissioner (Appeals) that the assessed after filing the returns took the stand by a written communication that its income was not taxable in the source country and which was reiterated in another written communication, but thereafter a conditional offer was made to get 10 per cent of the gross receipts taxed in India and which was further revised to 15 per cent.
Attention of the assessing officer was invited to section 44BBA which contained special provisions for computing profits and gains of business of operation of aircraft in the case of a non-resident and which contained a deeming provision regarding the income of a non-resident engaged in the aforesaid activities to be taken at 5 per cent of the aggregate of the amount paid or payable in or out of India and the amount received or deemed to be received in India on behalf of such assesseds. The plea, in other words, was that it was not necessary to draw up a separate profit & loss account in respect of the PE in India.
25. As against the aforesaid the assessing officer issued notice under section 143(2) asking the assessed to justify its return of income. It was pointed out before the Commissioner (Appeals) that the assessing officer had carried out an inspection of the facilities provided by the assessed behind its back and observations made in the assessment order about the activities so carried on were not communicated to it. According to the assessed there were a number of discrepancies in the assessment orders and which could have been explained, if necessary, queries had been raised. Some of these were as under :
"(i) The assessing officer had mentioned that defective components were replaced by IATP whereas this was not correct since IATP did not participate in the pool activities and there was no question of replacing the defective components and such replacement in fact had been made by the airlines using the facilities of the assessed; " and "(ii) The number of employees employed by the assessed at various airports had not been correctly worked out."
The arguments on behalf of the assessed were as under :
"(1) Provisions of rule 10 should have been invoked for computing the assesseds income and which provided that income can either be worked out at such percentage of turnover as accruing or arising or the amount which bears the same proportion to the profits and gains of business of such person, as the receipts so accruing or arising were to the total receipts of the business.
(2) That the assessed did not maintain any separate account for operations in India and the assessing officer ought to have determined the profits either under section 44BBA or under rule 10.
(3) On the assumption that the PE was a source of high profit it would have paid equally high amounts for getting similar services outside India and both kinds of payment got reflected in the overall profit and thus, the percentage of the world-wide profit to the turnover was a reliable indicator for determining the profits of the PE.
(4) The assessing officer did not grant proper opportunity while estimating the income and the assessment orders be treated as null and void as they violated principles of natural justice."
26. As against the aforesaid submissions the assessing officer in para 5.2 of the order of the Commissioner (Appeals) explained the manner in which the assessments had been conducted and framed. It was the argument that provisions of section 44BBA and rule 10 did not apply to the facts of the case and the instant case was covered under section 44C which dealt with the deduction of head office expenses in the case of non-residents. According to the assessing officer the assessed did not incur any substantial expenditure for providing ground handling services to other airlines as the requisite infrastructure and personnel were available with it for providing similar services to its own aircraft. It was stated before the Commissioner (Appeals) that substantial deduction on account of expenditure against the receipts from ground handling services had been allowed and there was a further deduction in respect of head office expenditure under section 44C. The plea, in other words, was that no further expenditure was required to be allowed as was the case sought to be made out on behalf of the assessed.
27. In considering the rival submissions the Commissioner (Appeals) at the outset, rejected the arguments of the assessed with reference to article 265 of the Constitution of India observing that the same had not been elaborated. Coming thereafter to the issue on merits, the Commissioner (Appeals) on consideration of various paragraphs of article 8 of the DTAA, at the outset, observed that the same had been written with the "enterprise" as the central theme and not with the "activity" as the main theme. The view, in other words, was that the entire issue had to be considered from the point of view of the activities of the enterprise. In referring to para 1 of the article the Commissioner (Appeals) was of the view that profits of an airline operating aircrafts in international traffic were taxable in the country where the management was located, but such profits would arise to the airline only when it transported its passengers or cargo in international traffic. According to him, vis-a-vis para 1 of article 8 no profit could arise to an airline from transportation by another airline of that airlines passengers or cargo. Coming to para 3 of the article, which defined the term "operation of aircraft", the Commissioner (Appeals) observed that this included transportation by air of persons, livestock, goods or mail, carried on by the owners or lessees or chatterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprises, the incidental lease of aircraft on a charter basis and any other activity directly connected with such transportation. According to the first appellate authority the said paragraph placed an artificial meaning on the expression "operation of aircraft". It was further observed by the Commissioner (Appeals) that the assessed had sought to cover his case under the term "any other activity directly connected with such transportation", but according to him, this view was not tenable on a combined reading of paras 1 and 3. According to the Commissioner (Appeals) the words "such transportation" in para 3 were to be given the same meaning as the term "transportation" used in para 1 the carriage of its own passengers and cargo.
The view, in other words, was that activities directly connected with the transportation of own passengers and cargo were taxable in the country of residence/management and such activities could include :
"(i) Servicing of its own aircraft at the airport;
(ii) Carrying its passengers from the airport to the city and vice versa; and
(iii) Accommodating the passengers in the transit lounge or a hotel."
The view of the Commissioner (Appeals), in other words, was that providing ground handling services/engineering services to the aircraft of other airlines could not be said to be an activity directly connected with the transportation of the passengers and the cargo of the enterprise. It was further observed by the Commissioner (Appeals) that the article had specifically taken note of the sale of tickets as an exempted activity, but no mention had been made of the provision of ground handling services to aircrafts of other airlines. According to him it was an accepted proposition of law that a fiction, ended the moment its purpose was accomplished and it could not be carried further. The further observation was to the effect that if the sale of tickets was included in the artificial meaning, then the ground handling services could have also been included, but which was not done. According to the Commissioner (Appeals) the fiction should not be read in a statute when it did not exist at all.
28. In coming to the reliance placed by the assessed on the provisions contained in OECD model, UN model and US model, the Commissioner (Appeals) observed that it was true that article 8 had artificially extended the meaning of the expression "operation of aircraft" to a number of activities which included sale of tickets on behalf of a third party, but such an extension had not been granted to ground handling services rendered to the aircraft of other airlines. He was of the view that since the expression had been defined in article 8, it was not necessary to look at any other treaty or consider the examples given under such other treaties to ascertain the true meaning of this expression. To re-emphasize the Commissioner (Appeals) observed that providing services to other airlines under SGHA was not an activity directly connected with the passengers and cargo of the assessed and it was a clear case of exploitation of the excess capacity and personnel with an intention to generate revenues. According to the Commissioner (Appeals) even if such services had not been rendered to other airlines the assessed would have continued to carry on its business.
29. At this stage, we may mention that the assessing officer in the assessment order had used the expression "separate business" in respect of the services rendered by the assessed to other airlines. According to the Commissioner (Appeals) the use of this expression was not apt, but (sic-by) further examining article 8 he held that para 3 of article 8 referred to certain activities which were preparatory or auxiliary to the main activity of transportation of passengers and cargo and these had also been exempted. He, therefore, held that the words "separate business" would mean such activities whose revenues were not exempt under article 8 from taxation in the source country. The Commissioner (Appeals) cited an example whereby an assessed operated aircraft in international traffic and also undertook number of other activities and there was a common management and financial set up in respect of all such activities. According to the Commissioner (Appeals) it could not be held that the whole of the profit of the enterprise would be exempt from tax in the source country under article 8 since only such profit would not be liable to be taxed under the said article as was derived from the activities mentioned therein and this would be true even when there was uniformity of control, management, finance and operations. According to the Commissioner (Appeals) there was nothing in article 8 which would lead to the conclusion that income derived from rendering services to other airlines was exempt from tax in the source country. In view of the aforesaid the Commissioner (Appeals) held that the income derived from rendering engineering services/ground handling services to aircraft of other airlines was not exempt vis-a-vis paras 1 and 3 of article 8 and the said revenues being a clear case of exploitation of excess activity through a permanent establishment the same were taxable in India. Dealing thereafter with the submissions of the assessed that its case was also covered under para 2 of the article i.e. participation in pools, the Commissioner (Appeals) referred to the Commentary on OECD Model by Klaus Vogel. The conclusions thereafter were as under :
"Thus, a pool has to be a kind of joint venture, whose revenues or profits are apportioned between or among members. These views are quite distinct and different from the views expressed by Shri. Ranganathan in his opinion. The IATP agreement does not envisage bringing together of the assets or personnel under joint command, nor it envisages apportioning of receipts or profits. Therefore, it cannot be said that the impugned agreements constitute pools of any kind notwithstanding the nomenclature used in the agreements. Thus, the true position which emerges from this discussion is that there should first of all be a pool, in fact, in the sense that the assets or personnel are brought together for some kind of joint venture, whose profits are shared in some manner by the participants. That is not the case here. From experience, it was found that certain airlines had accumulated excess capacity in respect of ground handling services at some stations, while some other airlines did not have such facilities on some of the airports. It would have been quite difficult for each airline to have ground facilities at each line station. Maintenance of such facilities would have involved considerable layout making some of the airlines unprofitable. Therefore, a mechanism was formed through IATP under which airlines, which did not have ground facilities at some line stations, could use the existing facilities of another airline. But that did not bring either the personnel or the equipment of the airlines under a joint command. That also did not mean that the profits from such activities were shared by the participants. In fact, separate agreements were entered into by each providing airline with the availing airline for rendering and receiving services. It would have been a totally different matter if IATP would have brought these facilities under a common umbrella. That would have amounted to a pool, in fact. But that is not the case. Each airline, including the appellant, continues to own and manage its manpower and equipment at each station. As these facilities were found to be idle for considerable period of time, it was found profitable to use them to render services to other airlines with a view to generate revenues. It is no doubt true that the price for a service is fixed by the IATP. But, fixation of price is not the sine qua non of the existence of a pool. Besides this, it is quite contradictory first to say that the establishments were part and parcel of the appellants business, which could not be severed as separate establishments, and then to say that an unsevered part was pooled with other establishments. In view of this, it is held that it cannot be said that the income of the appellant from the-said activities is not taxable in India. It is further held that the revenues so generated represent the income of the appellant from the PE in India and, therefore, the same are taxable in India."
30. Coming now to the computation of income the Commissioner (Appeals) referred to certain factual aspects i.e. the non-substantiation by the assessed of its estimate of profit at 15 per cent of the gross receipts and the inspection made by the assessing officer whereby it was noticed that the service rendered involved merely the visual inspection of the aircraft. AS against the aforesaid the arguments on behalf of the assessed before the Commissioner (Appeals) were to the effect that the profit had been computed at a very high percentage i.e., 82 per cent of the gross receipts whereas the total "world income" was 7 per cent of the gross receipts. The plea was to the effect that provisions of section 44BBA and rule 10 had been ignored. The case of the assessing officer, on the other hand, was that provisions of section 44-C were attracted.
31. In considering the aforesaid the Commissioner (Appeals), at the outset, observed that the assesseds counsel did not furnish the annexures to the SGHA which gave the complete list of services rendered and neither did he furnish details or working of the actual expenditure incurred by the assessed in India in earning the revenue with reference to the ground handling services on the plea that no separate accounts were maintained.
32. Before proceeding to give a decision on the arguments of both sides on the computation of income, the Commissioner (Appeals) proceeded to decide two other preliminary issues raised on behalf of the assessed and these being :
"(i) The time in which the assessment had been concluded vis-a-vis the limitation provisions; and
(ii) There had been a violation of principles of natural justice."
Both the aforesaid pleas were rejected by the Commissioner (Appeals) with the further observation that the lacuna, if any, in the order of the assessing officer stood cured since a full hearing had been given by the first appellate authority, whose powers were co-terminus with that of the Income Tax Officer. In this respect the judgment of the Honble Supreme Court in the case of CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC) was followed.
33. In proceeding further the Commissioner (Appeals) rejected the assesseds argument for application of provisions of section 44BBA on the ground that this referred to the carriage of passengers or cargo whereas the matter under consideration pertained to the income earned from provision of technical services to the aircraft of other airlines. He was also of the view that provisions of rule 10 were not relevant for determining the assesseds taxable income. In the final analysis, considering the facts of the case as also the other arguments advanced, the Commissioner (Appeals) directed the assessing officer to recompute the assesseds taxable income on the following lines :
"The last issue to be decided is regarding the actual computation of income. From the assessment order, it is seen that the learned assessing officer had allowed salary of two engineers and one mechanic on estimated basis, the appellant has furnished the details of the personnel employed by it in various establishment on para 75 of the paper book. It is seen that in all the four establishments, the appellant had employed four SMMs (nomenclature not explained), ten engineers, one deputy SMM, 23 mechanics, two secretaries, eight store men and 11 drivers or cleaners. The appellant had not furnished the salaries paid to these categories of employees. He has also not furnished the bifurcation of the expenses incurred on these employees in terms of expenses on own aircraft and expenses of aircraft of other airlines. He has also not furnished the data regarding the number of own flights and the flights of other airlines handled by it. All these factors do lead to strong inference that the appellant does not even want to furnish the details which it could have furnished on general argument that separate accounts were not maintained. The assessed merely wants to rely upon the arguments rather than the facts, while the computation of income is basically a question of fact. Therefore, it is obvious that its income will have to be calculated on estimate basis. It also seems to be clear that the establishments are sources of high income as the receiving airlines do not have existing facilities to cater to their own aircraft. The expenses in India will be the expenses on the aforesaid personnel, depreciation of the equipment and other incidental expenses. The spare parts used, if any, are to be replaced by the receiving airline. But, as mentioned earlier, the appellant has not furnished any details of the expenses. It is also true that the learned assessing officer has not taken into account all the activities. Therefore the profits will be somewhat less than the profits computed by the learned assessing officer. In a situation like this, the profits will have to be computed on an estimate basis. In absence of any data whatsoever furnished by the appellant, the expenses incurred by the appellant in India are taken at 30 per cent of the gross receipts. Thus, 70 per cent of the gross receipts are taken to be the profits of the appellant. From such profit the learned assessing officer shall allow a further deduction of 5 per cent of the adjusted profit under section 44C as head office expenses."
34. It is in the aforesaid circumstances that both the parties have filed the present appeals before the Tribunal, the assessed being aggrieved with the action of the Commissioner (Appeals) in opining that the income from ground handling services/engineering services rendered to other airlines was taxable in India and further the computation of income vis-a-vis the directions of the tax authorities was inappropriate, the sole grievance on the part of the revenue being the directions of the Commissioner (Appeals) for computing the taxable income.
35. The learned counsel for the appellant reiterated at length the arguments already advanced before the tax authorities, but highlighted for our consideration the following and which we set out in the sequence in which these have been tendered :
(i) The assessed did not acquiesce to the taxability of the amount in question;
(ii) The income derived from ground handling/engineering services rendered to other airlines could not be treated as a separate activity de hors the air transportation business;
(iii) Vis-a-vis IATP smaller pools could be formed under the larger pools envisaged by the aforesaid agreement;
(iv) The Commissioner (Appeals) had not treated the rendering of ground services to other airlines as a separate business and the department was not in appeal to the Tribunal against such a view;
(v) The assessed had certain staff for servicing its own aircraft and it was only during the intervening period when such staff was not required/was free then their services were supplied to other airlines;
(vi) The assessing officer had accepted in the assessment order that the assessed used its own staff for rendering services to other airlines;
(vii) The approach to article 8 of the DTAA by the department was improper and misconceived and principles of interpretation applied equally to DTAAs as they did to provisions of law. In other words, DTAAs acquired the same status as an enactment;
(viii) The object of the. DTAA could not be ignored;
(ix) In sub-cl. (3) of article 8 the word "include had been used and this meant that the definition could not be exhaustive and the further use of the word "including" meant that the same interpretation was required to be given for all the three limbs. Further earlier limb of the definition was enterprise based whereas the second limb was activity based;
(x) The last part of sub-cl. (3) used the words "any other activity" and this envisaged something done prior to transportation and further the sale of tickets on behalf of another enterprise was mentioned and this necessarily meant that this was not catering to ones own passengers;
(xi) The effective management of the airline was in UK and all other incidental activity which necessarily may not be for its own passengers was also covered under the activities of international transportation by air;
(xii) Vis-a-vis the DTAA directly related activity was exempt from the purview of taxation;
(xiii) The DTAA between India and UK was on the OECD model (reference made to para 166 para 4, of the paper book vis-a-vis sub-cls. 4 to 61;
(xiv) Vis-a-vis the "doctrine of updating construction" the activities earlier were quite restricted, but in the present times they are to be given a wider meaning;
(xv) Intention of the court should be to promote the object of the legislation and in the present case the DTAA by taking into account all developments;
(xvi) Article 8 (3) defined only those activities which were contained in article 8 (1);
(xvii) There was no separate business with reference to the services rendered to other airlines, but it was an integral part of the business already carried on by the assessed airlines;
(xviii) An airline was exempt from tax when it carried on the activity of selling tickets but an outsider was not so exempt as he was not engaged in air transport business;
(xix) Ground handling services were not charged separately and these formed part and parcel of the price of the ticket; and (xx) Article 8 (1) in the DTAA between India and the UK was on the same lines as the agreement with USA.
(xxi) Article 8 (2) referred to "any pool" and the Commissioner (Appeals) observed that a "pool" presupposes a joint venture", but the meaning which was required to be given to the term "pool" was what was mentioned in a dictionary and what would be understood by people who participated in the activity. That a commercial meaning be adopted. Reference made to para 131 of the paper book when the dictionary meaning of the word "pool" was analysed;
(xxii) Cooperation between various airlines constituted a pool under the over-all agreement and the view of the Commissioner (Appeals) that pool meant only a joint venture was not correct;
(xxiii) The principle of pooling also applied to ground handling equipment and reference was made to the mission statement at per para 200 & 201 of the paper book : and (xxiv) The opinion of Justice Ranganathan, former Judge of the Supreme Court was in favor of the assessed and the same was required to be considered in disposing of the present appeals".
36. The learned counsel for the appellant after the aforesaid arguments moved on to the question of computation of the taxable income and after reiterating the arguments already tendered before the tax authorities, he proceeded to highlight the following :
(i) Adequate material had been placed on record to support the returned figures for each of the assessment years under appeal;
(ii) The amount offered to tax at 15 per cent of the receipts was adequate and this had been done only to buy peace with the department rather than to enter into prolonged litigation;
(iii) No adequate opportunity had been allowed by the assessing officer initially and thereafter by the Commissioner (Appeals) to enable the assessed to substantiate the figures;
(iv) Consent between the parties could not lead to any amount being taxed since it was the law which was to determine whether a particular item was taxable or not;
(v) On the assumption that the amount earned on ground handling services provided to other airlines was taxable in India, then the matter could be restored back to the file of the assessing officer for determining the correct taxable income;
(vi) section 44BBA spoke of taxation at 5 per cent and this was analogous to article 8(1); and
(vii) If part of the income was exempt and a part subject to taxation, then there need not be any apportionment of expenses between the taxable portion and the portion which was exempt.
37. In support of the aforesaid arguments, the learned counsel referred at length to the compilation filed during the course of the hearing and he further placed reliance on various commentaries pertaining to DTAA, agreements and conventions pertaining to international air traffic and lastly, the following reported judgments :
1. SIL Import, USA v. Exim Aides Silk Exporters, Bangalore AIR 1999 SC 1609;
2. State of Tamil Nadu v. Pyare Lal Malhotra AIR 1976 SC 800;
3. CIT v. Podar Cement (P) Ltd. & Ors. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC);
4. Snam Progetti S.P.A. v. Addl. CIT (1981) 132 ITR 70 (Del);
5. CST v. Jaswant Singh Charan Singh (1967) 19 STC 469 (SC);
6. Avadh Sugar Mills Ltd. v. STO (1973) 31 STC 469 (SC);
7. Bolani Ores Ltd. v. State of Orissa AIR 1975 SC 17;
8. Rajasthan State Warehousing Corporation v. CIT (2000) 159 CTR (SC) 132 (2000) 242 ITR 450 (SC);
9. Aditya Mills Ltd. v. Union of India AIR 1988 SC 2237; and
10. Black Diamond Beverages & Anr. v. CTO & Ors JT 1997 (8) SC 128.
38. On behalf of the revenue, the learned senior counsel vehemently supported the orders passed by the tax authorities. It was submitted and highlighted that :
(i) The issue before the Tribunal was whether on a plain and literal construction article 8 and 7 of the DTAA it could be held that the receipts in question were not liable to be taxed in India;
(ii) There was no room or scope for any liberal or equitable construction since it was not an exemption which was being granted, but it was being determined whether India had got the right to tax the amount in question;
(iii) That the disputes were not to be settled on a reference to commentaries, but on an interpretation of the clauses of the DTAA;
(iv) The matter was of substantial interest since other airlines operating in India in international traffic also derived similar type of income;
(v) That profits derived from operation of aircraft was the essence of article 8(1) and article 8(3) referred to activities carried on by an airline involved in international traffic;
(vi) That the clause restricted itself to "transportation" and nothing else and a liberal interpretation be made. Further, the clause was enterprise based as also activity based, but the latter mentioned only those activities, which were specifically meant and none others;
(vii) That the term "shall include" meant a restricted meaning and only specified items were to be taken into account and nothing else was to be included. If the term used was "means" or "includes" then something else could also be included;
(viii) Raising an argument with reference to both articles i.e. 8 (1) and 8 (3) was taking a contradictory stand and the assessed had to restrict itself/rely on either one or the other;
(ix) The, term "likewise apply" was relevant for article 8 (2) and this referred to an arrangement for sharing profits by persons "engaged in air transport";
(x) That there could be no reciprocity in pooling arrangements and the assessed in the present case had not placed on record copy of any agreement/arrangement between itself and other airlines for providing or obtaining ground/engineering services :
(xi) That till date the assessed had not specified the exact services, which were being rendered to other airlines;
(xii) The rules of interpretation of a statute should not be applied to DTAA as it was an agreement between the two parties and rights and liabilities had to be decided strictly on the terms of the agreement;
(xiii) Similarly the concept of intention would not apply;
(xiv) The concept of "same business" had no relevance to the point at issue;
(xv) There were two kinds of profits-one defined in article 8 and the other in article 7 reliance was specifically placed on article 7(1), 7(2), 7(5) and 7(9);
(xvi) That vis-a-vis the aforesaid article it was the right of India to tax profits of the nature arising to the assessed;
(xvii) Article 8 (1) decided which state had a right to tax the profit/income, article 8(2) extended the scope of profit and article 8(3) extended the scope of the activity by including "pools" which generated profit;
(xviii) That the entire article had to be read and not a part thereof and that provisions of services to other airlines was not indicated/specifically mentioned.
(xix) The term "pool" meant something, which generated profit and an IATP pool did not generate profit. Further, the assessed had not provided any evidence/copies of agreements with other airlines to ascertain the nature of services rendered; and (xx) There is no pool of any kind in existence vis-a-vis the facts of the assesseds case and the stand taken since the pool contemplated was one for deriving profits from operation of aircraft and nothing else.
39. In support of the aforesaid the learned senior counsel on behalf of revenue relied on the judgment in the case of CIT v. Sterling Foods (1999) 153 CTR (SC) 439 : (1999) 237 ITR 579 (SC) and he also referred to 187 ITR 110 (St) and 194 ITR 249 (St).
40. Coming to the other issue in the appeals i.e., the quantum of profits the learned senior counsel accepted that some expenditure was attributable to the income earned, but in the absence of any details having been filed by the assessed there was no option, but to work out an estimate. It was submitted that the Emirates airlines had agreed to pay tax on 70 per cent of the gross income claiming only 30 per cent as expenditure. According to him reciprocity was not the concept of the pool since this meant something which stipulated sharing of profits. According to the learned senior-counsel no special staff was required for rendering ground/engineering services and only the fitness of the aircraft was certified after visual inspection. In supporting the estimate made by the assessing officer, the counsel urged that the matter should not be set aside as prayed for by the assesseds counsel and in continuation of these arguments, he opposed the relief given by the Commissioner (Appeals). The further submission was to the effect that section 44BBA was not applicable to the aircraft owned by the assessed as this provision was applicable only to a non-resident. Section 44C, according to him, was also not relevant and the plea subsequently was that the Commissioner (Appeals) erred in allowing 5 per cent expenditure under this non-applicable provision.
41. In reply to the submissions on behalf of the revenue the learned counsel for the assessed submitted/reiterated the following :
"(1) The wording of article 8 as also the intention supported/fortified the assesseds case;
(2) DTAAs/treaties are a kind of mini legislation and all rules of interpretation would, therefore, apply;
(3) OECD model indicated broad outlines and two countries could enter into an agreement within these parameters;
(4) The terminology of article 8,was most relevant for deciding the issue and the assessed was not pleading its case on grounds of magnanimity, equality or patriotism, (5) Article 8(1) spoke of the profits derived from operation of aircraft and since this was a very narrow concept it had to be expanded to rope in other activities and art (3), therefore, had to be enacted;
(6) Reliance was placed on the second limb of article 8(3) and not the first and the use of the term shall include made it exhaustive. The second limb did not include the words owners as was done in the first limb. That the words such transportation had been used twice in the second limb. This meant that the activities detailed in the second limb need not necessarily be carried on by the owners, (7) The object and intention of the legislature was important and had to be looked into;
(8) Nature of services rendered by the assessed to other airlines were duly explained to the assessing officer and it was not correct on the part of the revenue to allege that such details were not furnished or that agreements were not placed on record (refer to para 95 of the paper book and para 2 of the assessment order);
(9) Exemption envisaged in article 8(1) was applicable to article 8(2) as well and there was no limit or ambiguity in article 8(2) as it mentioned pools of any kind and not necessarily profit earning pools;
(10) The revenue had considered that IATP was a pool and, therefore, article 8(1) applied to every kind of pool;
(11) In other treaties joint venture and pool were mentioned separately, but if both were to be considered as one and the same thing, then separate mention need not be there;
(12) Vis-a-vis article 9, sub-article (5) para 33 of the compilation pool was different then a joint venture;
(13) The income of the type under consideration represented profits earned from the pool, but sought to be claimed as exempt; and (14) Para 6.4 of the order of the Commissioner (Appeals) categorically stated that there had been reciprocity in the arrangement;"
42. Coming to the quantum of profits, the learned counsel for the assessed more or less highlighted the earlier submissions and on the assumption that some part of the gross receipts were required to be taxed, he stuck to the correspondence exchanged between the parties suggesting income to be taken at 15 per cent although the main submission was that nothing was taxable under the relevant clauses of the DTAA-It was also the submission of the learned counsel that detailed accounts were never asked for by the Commissioner (Appeals) and as of today these were available with the assessed and another opportunity be allowed to substantiate the facts and figures before the assessing officer. The learned counsel also referred to the hurry in which the assessments had been completed whereas substantial time was available. He also referred to the order for assessment year 1996-97 wherein the assessing officer had asked the assessed to pay up the demand within 7 days. It was also the submission of the learned counsel that the assessing officer went behind the back of the assessed to the airport to ascertain the facts and figures and nothing was confronted to the assessed thereafter.
43. We have considered the rival contentions and also perused the material on record to which our attention was invited by the parties. The decisions cited at the Bar have also been considered. At the outset, we refer to section 90 of the Income Tax Act, 1961 (hereinafter called the Act) as follows :
"90 (1) The Central Government may enter into an agreement with the Government of any country outside India :
(a) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessed to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessed.
Explanation .................."
44. Two things emerge the first being that agreements may be entered into with the Government of a foreign country for (i) avoiding double, taxation of the same income; (ii) for granting relief in respect of income which undergoes the levy of tax in both the countries; (iii) exchange of information for preventing tax evasion or avoidance and recovery of tax and the second being that where there is an agreement between two countries than the provisions of the Act would apply to the extent they are more beneficial to the assessed.
45. In other words, tax agreements are meant to facilitate economic relations between countries and these form a concrete and reliable basis for tax relations between the contracting countries. Section 90(2) of the Income Tax Act in fact gives an option to an assessed to choose whichever provision is more beneficial to it whether of the agreement or the Act and he can seek application at the same time of the provisions of both the agreement and the Act considering the benefits thereof. In the present case the assessed has not relied on any provision of the Income Tax Act, which supports its stand and the issue has to be decided on the basis of the DTAA.
46. Every agreement is binding on the parties to it and it keeps the status of an "agreement" irrespective of what are the provisions of the Act when the agreement is entered into and what is inserted subsequently into the Act. The agreement can in fact be described as a "special law" which would always supersede the general law i.e. the Act in this case. Further, tax agreements are entered into in good faith between the contracting countries and each of them is bound to fulfill faithfully and sincerely the terms of the agreement.
47. Keeping the above in mind one has to consider the argument of assesseds counsel that the agreement be accorded the same status as a legislation and the intent, purpose and object be considered. As against this the learned senior counsel for the revenue contended that the matter be decided with reference to the relevant clauses of the agreement and that there was no scope for any liberal or equitable construction. We agree with the learned senior counsel on behalf of revenue to hold that the agreement being in the nature of a special law overrides the Act except where the provisions of the latter are beneficial and after such an option an assessed cannot ask for any favorable or liberal interpretation contending that income of such and such type from services rendered in India is not taxable under the agreement.
48. In preparing a DTAA and signing it the representatives of both contracting countries apply their minds and at that stage everything is thrashed out and discussed. Each is aware of its, obligations and liabilities and one cannot later on at the assessment stage contend something, which is contrary to the agreement. In a DTAA there is no legislative intent, no speech of the mover of the bill and, therefore, a strict interpretation is to be made of the terms of the agreement and nothing is to be assumed and read into the agreement although a DTAA can be treated as a "special law". In other words rules of interpretation of a statute would not apply and the DTAA itself has to be interpreted, but in strict terms.
49. In view of the aforesaid the argument of the learned counsel for the assessed about the "doctrine of updating construction" and considering latest developments must fail since there is no scope to read something in a DTAA which is not there.
50. We endorse the stand of the learned senior counsel for revenue that a DTAA determines the rights of the state i.e. India in this case to tax a particular receipt and that happens to be the income of British Airways from ground handling/engineering services rendered to other airlines at various airports in India.
51. Another argument, which was advanced on behalf of the assessed was that there was no separate business with reference to such services rendered to other airlines and the decision of the Commissioner (Appeals) to hold so not being challenged by the revenue. We really do not understand what difference this would make because even in the case of an assessed who carries on various types of activities with common control and finances it can be contended with reference to facts and law that so and so receipt is not taxable. What is interpreted here is legislation whereas in the present case taxability or otherwise has to be decided in accordance with the DTAA on a strict interpretation.
52. Dealing at this stage with the arguments of the learned counsel for the assessed about the formation of "pools" vis-a-vis clause (2) of article 8, this in our opinion envisages cooperation between various airlines to carry on identical activities by pooling their resources and dividing the resultant profits. This may involve provision of services to each other or to persons outside the pool, No facts of the aforesaid nature emerge from the record in the present case since the income earned by the assessed is from various other airlines for providing engineering services for their aircraft, etc. There is nothing to show that similar type of services have been availed of by the assessed from any other airline although it is submitted so. In other words we have to hold that a pool does not exist and the question of participation thereof within the meaning of article 8 (2) does not arise.
53. Before we conclude this part of the order, we find it necessary to understand the meaning of the term/expression "pool" as follows :
"(1) As per the New Websters Dictionary of the English language pool as noun is defined as a combination of individuals or organizations formed for the purpose of speculation as for manipulating the prices of stocks ....................., a combination of interests or funds for common advantage, a service or facility shared by a number of people, as a car pool.
Pool as verb means to put as interests or money, into a pool or common stock or fund.
(2) As per Words and Phrases Legally Defined, Pool is defined thus : the definitions of the word Pool show that in order to constitute a Pool there must be an aggregation of interest or a throwing of revenue or property into one common fund or a sharing of interest in that fund by all on an equal or previously agreed basis Canadian Fur Auction Sales Co (Quebec) Ltd. v. Neely (1954) 11 W.W.R. (N.S.) 254.
(3) As per Strouds Judicial Dictionary, a stock exchange Pool is an arrangement between two or more persons for selling or buying some particular class of stock, shares or securities and apportioning the result among themselves ................
(4) As per Oxford Shorter English Dictionary, Pool as verb means to put (resources etc.) in a common stock of fund; share in common, combine for the common benefit."
54. We are afraid the assessed does not fit into any of the above expressions vis-a-vis the activity under, consideration.
55. The learned counsel made another submission during the hearing and that was that the ground handling services formed part and parcel of the price of the ticket. This is not supported by evidence or material.
56. Learned counsel in fact contended before us that "Pooling" be understood as per the "Mission Statement" of IATP appended at per para 200 to 207 of the paper book. He referred to the following at para 201 :
"Most airlines would like to have critical spare parts available at down route locations to avoid excessive disruption to schedules if aircraft defects arise. Spare parts are expensive and airlines must balance the risk of needing a spare against the cost.
IATP airlines exchange information on their fleets, their route networks and availability of spare particles In this way, an airline may share access to a spare part provided by another airline by paying a share of the cost. Thus IATP airlines enjoy a wider availability of spares at lower cost and the opportunity to receive regular payment for spares which they hold. This is the basic principle of pooling. To become a member of IATP an airline must be willing to provide spares as well as share.
The principle of pooling is also applied to ground equipment. An airline that holds an item of equipment at a down route location can obtain payment by sharing the equipment with other airlines."
57. This was also considered by the Commissioner (Appeals) who opined that irrespective of the nomenclature used in the IATP Mission Statement there was no bringing together of the assets or personnel under a joint command and nor was there any apportionment of profits. According to the Commissioner (Appeals) a mechanism was formed through the IATP under which airlines which did not have ground facilities at some stations could utilize the existing facilities of other airlines, but the necessary prerequisites for constituting a pool i.e. bringing together of resources under a joint command and sharing of profits were missing. The position according to the Commissioner (Appeals) would have been different if the IATP would have brought together the facilities under a common umbrella containing the two aforesaid features and this would have brought into existence a pool.
58. We agree with the view taken by the Commissioner (Appeals) and further hold that there are no smaller pools within the larger pools envisaged by the IATP document as canvassed by the learned counsel and which could meet the twin requirements of article 8(2). In coming to the conclusion that we have arrived at, due note is taken of various model, conventions, commentaries, etc. to which the parties had adverted during the course of the hearing. The relevant extracts placed on the paper books filed by the parties have been thoroughly perused.
59. Another argument advanced was that the assessed had its own staff for servicing its aircraft and it was only during the intervening period when such staff was free then their services were supplied to other airlines. We do not think that the ground handling services to other airlines are of such a casual nature since it is an accepted fact between the parties that there are agreements between the assessed and other airlines for rendering of such services, the assessed had qualified engineers and technicians at various metropolitan cities in the country to render such services which are briefly explained as certifying the ah-worthiness of aircrafts of other airlines before take off, but the services rendered appear to encompass many more activities which are detailed at per para 6 to 8 of the present order.
60. No doubt the Commissioner (Appeals) has not held the aforesaid to be a separate business activity but it is quite clear that rendering services to other airlines is an organized and planned activity to earn income and the tax authorities have rightly opined that such services rendered to own aircraft do not involve any taxable event, but imparting the same to other airlines does result in taxable income from a planned commercial activity. It has in fact been observed that non-rendering of such services would not have any impact on the working of the assesseds own airline. We agree with the observations and the ultimate view expressed by the tax authorities.
61. We now come to article 8 itself with its separate clauses and on which have centered the arguments of both the parties.
62. Coming to article 8(1) there is no confusion or ambiguity since it exempts from the pale of taxation in a contracting state the profit earned by the enterprise of the other contracting state from the operation of aircraft in international traffic if the enterprise has effective management in the contracting state.
63. Article 8(2) in our opinion speaks of the same type of activity giving rise to profits earned by the enterprise participating in a pool for earning the profits derived from international traffic. In other words, what is done by an enterprise singly in article 1 is done by the same enterprise jointly with others by participating in a pool. We have in the earlier part of this order discussed at length the concept of "Pools" and nothing more is to be said so we move on to article 8(3).
64. Article 8(3) expands the meaning of the term "operation of aircraft" to include transportation by air of (1) persons : (2), livestock goods or mail carried on by the owners or lessees or charterers of aircraft; (3) sale of tickets for such transportation on behalf of other enterprises; (4) incidental lease of aircraft on a charter basis; (5) any other activity directly connected with such transportation.
65. Both the parties are agreed that this clause is both activity based as also enterprise based, but "transportation" by aircraft of human beings and specified goods and even the term "any other activity" has to be considered with reference to such "transportation" as aiding it, supporting it and incidental thereto. The tax authorities have referred to three such activities, namely :
(i) the operation of a bus service connecting a town with its airport;
(ii) transportation of, goods by truck connecting a depot with the airport; and
(iii) maintenance and running of a hotel by the airlines strictly for the use of its passengers for night accommodation and if the cost thereof is included in the price of the ticket and the hotel does not cater to any other category of persons
66. The above examples in our opinion do aptly qualify for inclusion in the category of "any other activity directly connected with such transportation" and by no stretch of imagination would it include the engineering/ground handling services provided by the assessed to other airlines.
67. It is clear from the discussion of the various clauses that the activities, which are tax exempt in India are specified and determined and there is no scope for an interpretation which could bring something more into the fold,
68. We now advert to the various decisions relied upon by the parties.
On behalf of the assessed (1) AIR 1999 SC 1609 :
The question here was one of the notice to be given by the payee to the drawer of a cheque which had been dishonoured and under consideration were the provisions of s, 138 of the Negotiable Instruments Act. The appellant in the case had issued certain cheques to the respondent and on their presentation they were returned dishonoured with the reason "no sufficient funds". On receipt of such intimation respondent sent a notice to the appellant company by fax on l l-6-1996, and on the next day the respondent sent the same notice by registered post also which was served on the appellant on 25-6-1996. The respondent filed a complaint on 8-8-1996, and the question before the court was whether the complaint was filed within a period of 30 days from the date of accrual of the cause of action. The case of the appellant (drawer of cheque) was that cause of action accrued on the expiry of 15 days from 11-6-1996, the date on which the fax notice was sent to appellant the receipt of which was owned by the appellant. The respondent, on the other hand, contended that 15 days could be counted only from 25-6-1996, the date when the appellant (drawer of cheque) received the notice sent by registered post and the cause of action would have arisen only on 11-7-1996, The plea, in other words, was that the complaint, which was filed on 8-8-1996 was within time.
69. The High Court took the view that cause of action would arise only on the expiry of 15 days from the date, which the complainant knows to be the date of service of notice and held that the complaint was within limitation. On the matter traveling to the Honble Supreme Court, their Lordships took the view that on the date when the notice sent by fax reached the drawer of the cheque the period of 15 days had started running and on the expiry of that period the offence, was completed unless the amount had been paid in the meantime. Further, if no complaint was filed within one month there from the payee would stand, forbidden from launching the prosecution thereafter due to the clear provision contained in section 142 of the Act. In the instant case written notice was sent by fax on ll-6-1996, and the appellant had admitted its receipt on the same date. Therefore, the last day when the respondent could have filed the complaint was 26-7-1996, but the complaint was filed only on 8-8-1996, so the court had no jurisdiction to take cognizance on the said complaint.
70. We really do not understand as to how the aforesaid judgment of the Honble Supreme Court advances the case of the assessed. Their Lordships on the facts of the case have interpreted the words "giving notice in writing" to hold that the same was not required to be restricted to be the customary mode of notice through postal service or even by personal delivery as the legislature must be presumed to have been aware of modern devices and equipment already in vogue and also in store for future and by this their Lordships referred to technical advancement such as fax, e-mail, etc. It was probably one of the arguments of the learned counsel that we must consider the "doctrine of up-dating construction", by giving a wider meaning to the agreement considering the present time when there had been so much technological advancement in the field. We are afraid that the aforesaid submission with reference to the decision relied upon (supra) is not applicable in the light of the view which we have already expressed to interpret the agreement specifically on the terms stated and strictly holding that rules of interpretation to a statute would not apply.
71. AIR 1975 SC 17 The issue before their Lordships was whether dumpers, tractors, etc. were motor vehicles and taxable under the relevant State Motor Vehicles Taxation Acts. Their Lordships considered various State Motor Vehicles Taxation Acts before amendment and after amendment and ultimately held that dumpers and lorries though registerable under the Motor Vehicles Act were not taxable under the Bihar Taxation Act as long as they were working solely within the premises of the respective owners, but insofar as tractors were concerned they were neither registered under the Motor Vehicles Act nor taxable under the relevant State Taxation Act. We do not find the aforesaid judgment of the Honble Supreme Court to be helping the assessed in any manner and although in the said judgment various sections of the relevant Acts have been interpreted in a particular manner, we do not find the same to be applicable in the present case.
72. AIR 1976 SC 800 This judgment pertains to the principles of interpretation of statutes and deals with the provisions of the Central ST Act, but in the view that we have already expressed as to how the DTAA is to be interpreted vis-a-vis article 8(1), (2) and (3), we do not find this judgment of any help to the assessed.
73. AIR 1988 SC 2237 This case pertains to the provisions of the Central Excises & Salt Act (1 of 1944) read with the Central Excise Rules, 1944, and the issue before their Lordships was whether manufacture took place where two plies of polyster spun yarn PP and one ply of rayon filament yarn RF which are doubled together and the resultant yam is referred to as PPRF yarn that resultant yam is a separate and distinct item and, therefore, taxable under tariff item 68 notwithstanding that duties are already paid on polyster spun yarn and rayon filament yarn.
74. Their Lordships held that excise duty was a duty on manufacture of goods and not on sale and manufacturing was complete as soon as by the application of one or more processes, raw material underwent some change. It was the view of the court that on transformation into a new commodity as a separate and distinct commodity having its own character and use "manufacture" took place. We do not understand the application of the aforesaid judgment of the Honble Supreme Court to the facts of the present case.
75. 19 STC 469 (SC) This was a case pertaining to the ST Acts and their Lordships on the facts of the case and considering the relevant terms in the enactments held that in interpreting items in the ST Acts resort should be had not to the scientific or technical meaning of such terms, but to their popular meaning or meaning attached to them by those dealing in them i.e. to say to their commercial sense. In the view that we have already taken to interpret the DTAA in a strict manner, we do not find the aforesaid judgment to be relevant in the present case.
76. 31 STC 469 (SC) This was also a matter pertaining to U.P. ST Act and their Lordships took the view that for the true meaning of the term "oilseeds" the court had not to refer to dictionaries, but to ascertain the meaning ascribed to it in commercial parlance. This is also not applicable in the present case.
77. 31 STC 302 (SC) This case is identical to those already considered including the two just preceding and is, therefore, not found to be relevant to the facts of the case vis-a-vis the specific provisions of the DTAA under consideration.
78. JT 1997 (8) SC 128 This was once again a case pertaining to interpretation and their Lordships took the view that meaning of "sale price" was to be given its ordinary or popular or natural meaning and it was not controlled by the word "include" in the second part of section 2(d) of the relevant ST Act. In the view that we have already taken with reference to how a DTAA is to be interpreted this decision would not be applicable.
79. Rajasthan State Warehousing Corpn. v. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC) The issue before their Lordships was where the business was one and indivisible; expenditure could not be apportioned and part relating to income, which was exempt could not be disallowed. This decision probably has been cited with reference to the arguments by the parties on the computation of assesseds taxable income. This aspect of the matter will be dealt with by us in the latter part of the order.
80. Snam Progetti S.P.A. v. Addl. CIT (1981) 132 ITR 70 (Del) This was the case of an Italian company carrying on business as engineers and contractors in the field of petroleum and petro-Chemical plants and during the relevant period it was engaged in executing huge contracts running into millions of dollars, which necessitated availability of large liquid funds. Excess business funds were placed in short-term deposits with the bank and interest income was earned thereon. For the assessment year 1970-71 the assessed incurred a net business loss of Rs. 122 lakhs and in the assessment year 1971-72 the assessed earned a profit of Rs. 30 lakhs and interest income of Rs. 5,00,000 and the question was whether business loss for 1970-71 carried forward should also be set off against the interest income. Their Lordships of the Honble Delhi High Court took the view that the assessed had not come from Italy to make bank deposits in India, but had come to carry on business and the income earned by it by depositing spare funds in banks and earning interest income, there from would also be business income and for the purpose of set off it could not be treated as separate from business income. This decision is also, in our opinion, not relevant and does not advance the assesseds case.
81. CIT v. Podar Cement (P) Ltd. & Ors. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC) :
This judgment has been relied upon by the learned counsel with reference to his arguments on "updating construction", It was his argument that we should not go strictly by the provisions of the DTAA, but should also take into account subsequent changes in the social conditions, the advancement and technology, etc., but we have already held in the earlier part of the order that these facts are not required to be considered.
On behalf of the revenue :
82. CIT v. Sterling Foods (1999) 153 CTR (SC) 439 : (1999) 237 ITR 579 (SC) The assessed in this case was engaged in processing prawns and other sea foods, which it exported and had some import entitlements granted by the Central Government under an Export Promotion Scheme. The assessed was entitled to use the import entitlements itself or sell the same to others. It sold such import entitlements that it had earned to others and its total income for the assessment year 1979-80 included the sale proceeds for such import entitlements and it claimed relief under section 80HH of the Income Tax Act, 1961 in respect of the sale proceeds of these import entitlements. The Tribunal took the view that such relief could not be granted although for earlier years the High Court had held that the income which the assessed made by selling the import entitlements was not a profit and gain which it had derived from its industrial undertaking.
83. On a reference for assessment year 1979-80 the Division Bench of the Honble High Court held in favor of the assessed on the basis of the retrospective amendment to section 28 of the Act by the Finance Act, 1990, making such receipts taxable as business profits.
84. On appeal to the Honble Supreme Court, their Lordships reversed the view of the High Court on the ground that the source of import entitlement was not the industrial undertaking of the assessed and the source could only be said to be the Export Promotion Scheme of the Central Government where under the export entitlement became available. Their Lordships were of the view that the amended provisions of s, 28 made no difference and ultimately the court held that the receipt from the sale of import entitlement could not be included in the income of the assessed for the purposes of computing the relief under section 80HH. This judgment has been cited by the learned senior counsel for the revenue for canvassing a strict interpretation to the terms of the DTAA and not at par with the principles of interpretation, which sometimes are applied to a statute.
85. In the final analysis, we hold that the main common issue in the assesseds appeals pertaining to the taxability of the amount received by rendering ground/engineering services to other airlines is decided against the assessed. The common ground in the various appeals is, therefore, rejected.
86. As regards the computation of the taxable income in all the years under appeal in respect of which both the parties are in appeals before the Tribunal, we after considering the rival submissions, are of the view that the assessed could be allowed another opportunity to substantiate its returned figures. It has been categorically stated before us by the learned counsel for the appellant that relevant facts and figures are available with the assessed and it would be in a position to support the returned figures in the years under appeal. The learned senior counsel for the revenue although initially opposing the aforesaid request ultimately stated that there would be no objection on the part of the revenue if further opportunity was allowed to the assessed to place before the assessing officer relevant facts and figures in support of its claim for expenditure to be allowed against the gross revenues earned.
87. In view of the facts stated aforesaid, we set aside the orders passed by the Commissioner (Appeals) vis-a-vis the point at issue and the matter is restored back to the file of the assessing officer for all the three years under appeal asking him to, allow reasonable opportunity to the assessed to prove its facts and figures with whatever evidence it can.
88. The only other common ground in the assesseds appeals pertains to the charging of interest under sections 234A, 234B and 234C. This is treated as consequential and the matter is restored back to the file of the assessing officer to be decided with reference to the quantum of income worked out and with reference to the relevant provisions of law.
89. In the result, the appeals of both the parties are treated as partly allowed, for statistical purposes, Ms. Diva Singh, J.M. I have gone through the draft order of the learned AM, I am in full concurrence with this conclusion for restoring the Issue back to the file of the assessing officer for an the years under appeal and directing the assessing officer to allow reasonable opportunity to the assessed to place on record its facts and figures. In coming to the same conclusion, I would like to state my reasons for restoring the issue back to the file of the assessing officer separately.
2. The facts have been dealt with at length by my learned brother. In order to recapitulate them briefly and for the sake of convenience, I would like to draw attention to certain salient factors due to which I am in concurrence with the conclusion of my learned brother that the issue deserves to be restored back,
3. It is a matter of fact that the assessed is a company incorporated in the United Kingdom whose main activity is to render air transport services for passengers and cargo. There is also no dispute over the issue that the assessed has rendered technical engineering and traffic handling services to other airlines. It is further a matter of record that the standard services rendered by the assessed to other carriers are defined in International Airlines Technical Poot (hereinafter called as IATP) ground handling services. For these services, the assessed charged an undisclosed amount in US dollars on a per flight basis the payment of which is fixed as per IATP. It is also a matter of record that the payments for such services were made through IATA clearing house.
4. On a consideration of entire facts and circumstances, my learned brother has held that the same is taxable as it is a distinct and separate business activity which is not treaty protected under the DTAA entered into between India and U.K.
5. Before proceeding further, I would like to briefly advert to the sequence of events in order to highlight the past conduct and vacillating stand taken by the assessed before the assessing officer as well as the Commissioner (Appeals).
6. As far back as 9-6-1998, the assessing officer required the assessed to give the following information :
1. Details of receipt and expenses in India.
2. Copies of SPM for the month of March, 1998.
3. Please specify the receipts, if any, received by you abroad for your activities in India.
7. In reply to this, in the context of information sought for Serial No. 3, it was submitted by Shri A.K. Bhatnagar, Accounting Supdt for North India of British Airways :
"There are no receipts received by us abroad for our activities in India."
8. Then again on 27-7-1998, apart from various other information, the following was specifically sought for by the assessing officer :
"(v) Whether BA receives any payment abroad (globally) for the services rendered by it in India."
9. Thereafter, the case was adjourned at the request of the assessed a few times and on 21-10-1998, the assessed made a further request for adjournment as per order sheet entry dated 21-10-1998. Thereafter, on 13-1-1999, the order sheet entry of the assessment record shows that a further request for adjournment was made by the assessed. Thereafter, notice under section 143(2) was issued on 25-2-1999, for 5-3-1999, and on the said date, no details were filed. The assessing officer thereafter issued notice under section 131(1) for 12-3-1999, on which date, again an adjournment was sought which was rejected vide order sheet dated 15-3-1999.
10. During the proceedings before the assessing officer, initially the stand of the assessed was that the revenues generated by excess/surplus/idle capacity of engineers etc. is not taxable in India by virtue of the fact that it is treaty protected. The argument has also been taken that the services provided by the British Airways to other airlines is on a reciprocal pool arrangements envisaged by IATP. The assessing officer was not satisfied with the explanation offered by the assessed. Thereafter, it was contended by the assessed that with a view to avoid lengthy litigation on both the sides, the British Airways agreed to file returns of incomes showing income at the rate of 15 per cent of gross receipts. On doing so, the assessing officer in return asked the assessed to justify the basis of receipt income of 15 per cent on gross receipts. Thereafter, the assessing officer computed the income of the assessed in the manner already reproduced in para 14 at per para 15, 16, 17 & 18 of the order of my learned brother.
11. Aggrieved by this, the assessed has taken recourse to various arguments before the Commissioner (Appeals) and before us and contended inter alia, that adequate time was not given to him and the same was estimated arbitrarily. The said arguments of the assessed have already been decided by my learned brother by holding that adequate time and opportunity has been given to the assessed by the Commissioner (Appeals) and in the said circumstances, by virtue of the fact that the powers of the Commissioner (Appeals) are co-terminus with the powers of the assessing officer, the said ground has already been disposed of by my learned brother. I am fully in concurrence with that conclusion on the facts of the case.
12. On examination of the assessment proceedings as referred to above, I would like to state here that it cannot be said that the assessed has not had adequate opportunity. In fact, this is a case where more than adequate opportunity has been afforded to the assessed which the assessed has treated in a casual and non-cooperative manner since simply being present without requisite information or sending someone for seeking adjournment cannot be said to be either being cooperative and nor can it be said to be a case of sufficient compliance. The proceedings before the assessing officer have been treated in a very casual manner where all efforts have been made to initially deny and thereafter to block information and force the revenue authorities to make whatever estimate they can in the absence of facts and figures.
13. The rules of natural justice find place in legal jurisprudence on the principles of equity and equity demands that one who knocks on the doors of Courts/Tribunals should come with clean hands. In the present facts and circumstances of the case, there can be no doubt that the revenue authorities have given more than reasonable opportunity in order to accommodate the assessed who has casually initially offered 10 per cent of his gross receipts in India and thereafter, increased to 15 per cent and thereafter refused to justify the basis of the offer contending that his consent will not give rise to a taxable event. Fully agreeing with the submission that the taxable event will arise only under the law of the land and not by any consent or agreement entered into or understood to be entered into by the assessed, the fact remains that the assessed has not brought on record any information in support thereof of the amount arbitrarily offered for tax while blocking all efforts to arrive at a correct determination of his taxable income arising out of its engineering/ground handling services rendered to other airlines in India.
14. The matter is being restored back despite holding that the assesseds conduct does not allow it to argue its case from the premises of violation of principles of natural justice, only for the reason that being conscious of the fact that the Tribunal is the highest fact-finding authority under the scheme of the Income Tax Act of 1961 and thus, in the particular case, any serious and bona fide effort of the assessed to bring on record necessary information should not be blocked even at this belated stage as the purpose of correctly determining the taxability of an income would be in the interests of both the assessed as well as the revenue. Thus, applying the legal maxim that justice should not only be done but also seen to be done, the restoration is being made.
15. While restoring the issue to the file of the assessing officer with the direction to make the assessment de novo in accordance with law and also being conscious of the fact that the present facts and circumstances of the case, a restoration without a specific and speaking direction would not be in consonance with the settled proposition of law as laid down by the apex court in Kapur Chand Shrimal v. CIT (1981) 24 CTR (SC) 345 : (1981) 131 ITR 451 (SC), it is felt that a speaking direction is necessary to ensure that this time, the assessed willfully cooperate with the revenue authorities and duly place all necessary evidence on record. The said direction is warranted, in my opinion, in appreciation of the peculiar facts of the case, where in the initial round before the assessing officer, the assessed has taken recourse to various arguments and principles of natural justice, etc. without addressing the specific requirement which it was called upon to meet all along i.e. the nature of the services provided by the British Airways to various airlines and the amount earned in Dollars per flight by the British Airways. Despite taking recourse to various legal arguments and judicial principles, the assessed, it is noted; has not come clean with full facts and figures.
16. At the cost of stating settled principles of natural justice which have been evolved by equity Courts in order to overcome/mitigate the rigours of procedural law, the fact should not be lost sight of, that, the doors of equity in the form of action or interference on account of violation of natural justice are open to those who approach the Courts with clean hands. In order to invoking the principles of natural justice, the conduct of the party invoking them has a very crucial and deciding role to play and interference on this count is not undiscriminately warranted in each and every case. Anyone who complains that an action is in violation of principles of natural justice and prays for interference on that count is presumed to knock on the doors of Courts/Tribunal with clean hands and only then, if equity demands, can the well-known principles of natural justice can be pressed into action.
17. Thus, in the situation, it is necessary to state that in the facts of the case where the assessed has not placed on record any evidence, the assessing officer was fully justified in computing the taxable income of the assessed in the manner computed by him. Taking note of the consistent stand of the assessed that the British Airways incurred no extra cost to maintain engineers/technicians who in their spare idle time provided services to certain other airlines on payment and that even if these services were not provided to the other airlines, the British Airways anyway was required to meet the personnel for servicing their fleet. I am of the view that the assessing officer has been more than reasonable in reducing the expenditure on salaries, etc. of these personnel to half of an estimate basis in the face of the stand of the assessed that all the engineering/ground handling personnel were anyway required for its own fleet.
18. It is also necessary to bring on record that the assessing officer has all along been asking for details of expenses incurred which have not been given by the assessed. In fact, at para 20 of the assessment order, the assessing officer was fully justified :
"The corporate profit & loss account and balance sheet of the British Airways group is a printed document and certainly all the details may not be available, but it does not mean that profit of engineering activity cannot be calculated as a separate business activity. In a balance sheet incomes are grouped together but if we go to the books of accounts, the details can be obtained which the assessed never agreed to provide."
(emphasis by underlining, italicised in print, by J.M.)
19. The balance sheet prepared and placed before the assessing officer by the British Airways by itself will not throw any light on the issue at hand as the purpose for preparing the same does not envisage a situation where as income which is not treaty protected and made via LWA clearing houses or other mode on account of rendering engineering and ground handling services in India may not be required to be stated/reflected separately. The accounts prepared as per the Company Law requirements in Britain and British Accounting Standard Board may not necessitate that this income should be reflected distinctly in the balance sheet but the fact remains that if the books of accounts are made available and payments received through IATA clearing houses etc. are considered the information sought would be easily available.
20. I would, at this juncture, refer to the findings arrived at by the learned Commissioner (Appeals) at para 19, para 16 which for ready reference is being reproduced hereunder :
"6.7 The last issue to be decided is regarding the actual computation of income. From the assessment order, it is seen that the learned assessing officer had allowed salary of two engineers and one mechanic on estimated basis. The appellant has furnished the details of the personnel employed by it in various establishments on para 75 of the paper book. It is seen that in all the four establishments, the appellant had employed four SMMs (nomenclature and explained), ten engineers, one deputy SMM, 23 mechanics, two secretaries, eight store men and 11 drivers or cleaners. The appellant had not furnished the salaries paid to these categories of employees. He has also not furnished the bifurcation of the expenses incurred on these employees in terms of expenses on own aircraft and expenses of aircraft of other airlines. He has also not furnished the date regarding the number of own flights and the flights of other airlines handled by it. All these factors do lead to strong inference that the appellant does not even want to furnish the details which it could have furnished on general argument that separate accounts were not maintained. The assessed merely wants to rely upon the arguments rather than the facts, while the computation of income is basically a question of fact. Therefore, it is obvious that its income will have to be calculated on estimate basis. It also seems to be clear that the establishments are sources of high income as the receiving airlines do not have existing facilities to cater to their own aircraft. The expenses in India will be the expenses on the aforesaid personnel, depreciation of the equipment and other incidental expenses. The spare parts used, if any, are to be replaced by the receiving airline. But, as mentioned earlier, the appellant has not furnished any details of the expenses. It is also true that the learned assessing officer has not taken into account all the activities. Therefore, the profits will be somewhat less than the profits computed by the learned assessing officer. In a situation like this, the profits will have to be computed on an estimate basis. In absence of any data whatsoever furnished by the appellant, the expenses incurred by the appellant in India are taken at 30 per cent of the gross receipts. Thus, 70 per cent of the gross receipts are taken to be the profits of the appellant. From such profit the learned assessing officer shall allow a further deduction of 5 per cent of the adjusted profit under section 44C as head office expenses."
(emphasis by underlining, italicised in print, by J.M.)
21. A perusal of the above paragraph of the impugned order clearly brings out the fact that the Commissioner (Appeals) in the situation where assessed is arguing his case on legal grounds sans fact, came to the conclusion that an estimate has to be made and also appreciating that the activity for the assessed is a source of high income as receiving airlines do not have facilities to cater to their aircraft, there was no material or basis relying on which the Commissioner (Appeals) could come to the conclusion that the profits of the assessed will be somewhat less than what is computed by the learned assessing officer and thereafter to reduce the expenses by 30 per cent of the gross receipts.
22. After referring to the above, I would merely like to confine myself to the reasons for restoration which, despite the conduct of the assessed, we have arrived at the same conclusion that it is fair and proper to both the parties concerned to finally have the full facts and figures on record before deciding the amount to be taxed. The restoration is justified in view of this fact and as has also been observed by my learned brothers, in the draft order, that the learned authorised representative in his alternative argument has contended that if the issue of taxability is decided against him, restoration of the same to the file of the assessing officer may be made as now he is in a position to give full facts and figures.
23. However, since the restoration is being ordered in view of the aforesaid submission of the learned authorised representative thus, while making the restoration, I would like to state that the same is being made on the condition that full facts and figures will be made available to the assessing officer by the assessed. It may be further clarified, that necessary details pertaining to the exact and particular arrangement with each and every airline entered into by the British Airways with them should be brought on record. This would necessarily bring on record the nature of the services provided to the particular airline as it may differ from airline to airline. The amount fixed for the said payment by IATP and actually paid to the British Airways in US Dollars would also be placed on record and this may include either necessary evidence of payment through IATA clearing or any other mode of payment adopted by the concerned airlines. As such, the restoration is made at the cost of reiterating, only on the condition that the British Airways will fully cooperate with the revenue authorities in order to enable it to determine the taxable income of the assessed in India, failing which the assessing officer is at liberty to complete the assessment with whatever material is available on record after giving the assessed an adequate opportunity.
24. I would also like to address the argument of the assessed which has been rejected by my learned brother, i.e. 15 per cent was offered by the assessed to buy peace with the department and this consent of the assessed will not decide the taxability of an amount for which the assessed pressed article 265 of the Constitution of India into action. Fully agreeing with the rejection of this argument by my learned brother, I would like to further address the ground of the assessed in the following manner. There is no dispute over the fact that no tax can be levied or collected unless and until authorised by law of the land as has been made clear in article 265 of the Constitution. There is also dispute over the issue that the taxability of an amount is not decided by way of consent of any of the parties concerned. The ground of the assessed would presuppose a situation that although the amount offered for tax is not taxable, so justification of the offer cannot be questioned as that would be violation of article 265 of the Constitution and thus, the revenue authorities are to blindly accept whatever arbitrary amount an assessed decides to offer for tax. The ground is misconceived and deserves to be rejected out rightly. No doubt a taxing event will not take place on the basis of an offer but when the taxing event is held to have occurred, then the amount offered for tax has to be substantiated with facts and figures. Thus, where it is eminently borne out that a taxable event has taken place and the assessed has been deliberately uncooperative and hampered the assessment proceedings by not giving any facts and figures and instead, initially offered 10 per cent of his gross receipts in India and thereafter, increased it to 15 per cent, the recourse to article 265 of the Constitution accordingly does not help the assessed in any manner,
25. Appreciating the fact that the assessing officer is not deciding a lis between the parties concerned, in fact he has a dual role to perform while acting as the investigating authority at one point of time and thereafter functioning as the adjudicating authority under the Income Tax Act in order to arrive at the correct taxable income of the assessed in a judicious way. The assessed, in the garb of pressing for violation of principles of natural justice at one hand and violation of article 265 of the Constitution of India on the other hand, cannot be allowed to dictate to the revenue authorities to accept unquestioningly what has suited the assessed to offer.
26. Thus, on account of these aforementioned reasons, the question of offering by the assessed a certain amount to be taxed in order to buy peace in the present circumstances would tantamount to allowing the assessed to dictate to the revenue authorities the manner in which the assessment is to be made.
27. For the same reason, as I have already observed, the learned Commissioner (Appeals) without any facts and figures was not justified in granting relief to the assessed.
28. Having thus elaborated on the misconceived stand of the assessed, I would like to state that the endeavor at the Tribunal is also to determine the taxable income of the assessed in a fair, judicious and proper manner. Consequently, keeping this into consideration, the matter is being restored back to the file of the assessing officer in order to enable him to arrive at the correct taxable income which is fair both to the assessed as well as the revenue. Thus, being guided by the principle that justice should not only be done but also seen to be done, there is no cogent reason to block the evidence simply relying on the past conduct of the assessed. Thus, being of the view that if the assessed even at this belated stage is able to prove its bona fides and shows its willingness to cooperate with the department and enable it to determine the correct taxable income, then the evidence by way of full facts and figures should not be blocked and deserves to be brought on record.
29. In reference to the arguments addressed at length by the learned authorised representative on the inception/incorporation of IATP in order to address reciprocity of its members in order to justify the existence of a pool, 11 would like to further add that while fully agreeing with the reasoning and conclusion of my learned brother, that as understood in the normal parlance, there is no evidence of pooling of either resources, finance, personnel or profits, and that there is no element of reciprocity also embedded in the arrangement of British Airways with other airlines at Bombay, Delhi, Chennai and Calcutta in India or for that matter there is no element of joint command or apportionment of profits.
30. I would further elaborate this to say that the services provided by the British Airways to other airlines in India is not a casual service but is, in fact, an organized and planned activity which, when directed towards the maintenance of its own fleet of aircrafts, does not lead to any taxable event but, when directed towards the other airlines, even if no extra cost is incurred by the British Airways as has been the consistent stand of the assessed that it actually is utilising its idle, spare and surplus capacity, this would result in a taxable event.
31. This planned and organized service is a commercial activity and is not treaty protected by virtue of the fact that the DTAA is clear on the issue that under article 5, income derived from the permanent establishment in India is taxable the exception to this rule is carved out in para 9 of article 7 where the profits include items of income dealt with separately in any other article then the provisions of those articles will prevail. The assessed has tried to take shelter from article 8.1, 8.2 and 8.3. The same are reproduced hereunder for ready reference :
Article 8 : Air Transport
1. Profits derived from the operation of aircraft in international traffic by an enterprise of one of the Contracting States shall not be taxed in the other Contracting State.
2. The provisions of para 1 of this article shall likewise apply in respect of participation in pools of any kind by enterprises engaged in air transport.
3. For the purposes of this article the term "operative of aircraft" shall include transportation by air of persons, livestock, goods of mail, carried on by the owners or lessees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprise, the incidental lease of aircraft on a charter basis and any other activity directly connected with such transportation.
4. Gains derived by an enterprise of a Contracting State from the alienation of aircraft owned and operated by the enterprise, the income from which is taxable only in that state, shall be taxed only in that state."
32. Thus, on an examination of the provisions, it is clearly seen that the activity of operation of aircraft in international traffic does not envisage that profits earned from the spare/idle capacity of personnel by making their services available to other airlines at a price can be said to be profits incidental to activity under article 8.1. When the services of these engineers, etc. are aimed towards the maintenance of the fleet of aircraft of the assessed itself, no taxable event takes place but the moment these services even if no extra cost is incurred for providing them is made available to other airlines at a price to be paid by them for availing these services, the profits so earned are not treaty protected. The fact that non-rendering of these services to other airlines will not have any impact on the working of assesseds own airline has also a crucial role to play in arriving at this reasoning. As such, under no circumstances can it be said that the same is inextricably linked with the assessed main activity i.e. flying of passengers and cargo internationally.
33. Similarly, even under article 8.2, the profits so earned are not treaty protected and I am in concurrence with the conclusion of my learned brother. In coming to the conclusion that there is no element of reciprocity in the arrangement entered into by British Airways with the other airlines, I would like to state that the services rendered is simply and purely a commercial exercise where the assessed is utilising its excess, idle capacity which it is willing to sell at a price to the airlines which cannot, afford to incur the necessary expenditure required to maintain engineering staff, etc. and also, have the capacity to make the payment to British Airways in US Dollars as per the agreement entered into by them. The requirement of the capacity to make the payment to the Provider airline by the user explicitly makes it purely commercial venture.
34. To this, I would like to add further. The learned authorised representative while addressing the arguments on IATP has invited our attention to paper book para 34 on the basis of which it has been argued that in 1948, a few European airlines started sharing aircraft materials, equipment and manpower resources and that this cooperation although covered by a contract was a gentlemans agreement and entirely reciprocal without financial settlement and that from 1960 to 1997, the IATP family of airlines has grown from 24 to 121 i.e. 96 members and 25 guests. Our specific attention was invited to the following :
"The International Airlines Technical Pool is an organization of airlines formed for the purpose of providing reciprocal technical support at line stations throughout the world. This technical support includes aircraft spare parts, ground and ramp handling equipment and manpower. The primary goal of IATP is to generate economic savings to participating airlines by minimizing investments otherwise required for purchase of equipment and spare parts for positioning at various stations in support of aircraft operations."
(emphasis by underlining, italicised in print, by J.M.)
35. A perusal of this IATP Manual shows that the purpose of coming together under the umbrella of IATP was to generate savings to participating airlines by minimising investment, etc. is fully in concurrence with the crux of the finding of my learned brother with which I am in full agreement though I would like to state it slightly in a different manner i.e., that if an airline of the stature of British Airways is maintaining its engineering staff, personnel and spare parts etc., then other airlines i.e. user airlines who cannot afford to maintain the same infrastructure and keep their limited capital locked, would be availing of the capital employed of another airline i.e., the Provider Airlines (here British Airways) to meet safety regulations and other requirements in order to fly its aircrafts.
36. Coming back to IATP, I am of the view that apart from the other functions which IATP discharges, it also makes available information pertaining to the spare parts of the aircraft which any airline would require and the airline maintaining the spare part would make available not on a reciprocal basis but at a price the said spare part to the airline requiring it for the efficient functioning of its aircrafts. A perusal of the paper book para 41 shows that article 6.1 & 6.2 of IATP make it necessary for the member airlines to invoice not only the work done and but also the material furnished in the manner laid down under the IATP agreement. Article 7 of IATP further lays down the consequences of delay or failure to provide and article 8 lays down the liability of provider and user and article 9 lays down the manner in which the disputes are to be resolved. The same are being reproduced for ready reference :
"6. Charges
1. Charges under this Agreement shall be invoiced as specified in the annexes hereto. Work orders specifying the work done and/or material furnished shall be considered as full proof of their own contents if signed by a crew member or other representative of the User.
2. Charges invoice in accordance with this Agreement shall be paid within one month after receipt of the invoice and shall (unless otherwise agreed between the parties to the invoice) be settled through and in accordance with the regulations of the IATA Clearing House insofar as such regulations and those of Government permit (not valid for L pool).
7. Delay or failure to provide The Provider shall be excused from and shall not be liable for any delay or failure howsoever caused including the negligence of the Provider, its servants or agents in the rendering of services or the furnishing of goods pursuant to this Agreement, and the User therefore is not entitled to raise a claim for damage in respect of any such delay or failure.
8. Liability of Provider and User
1. The Provider shall not be liable to the User either in contract or a tort for damage sustained by or claims lodged against the User in accordance with or resulting from the rendering of services or the furnishing of goods pursuant to the Agreement, whether or not such damage was sustained or such claims were lodged due to the negligence of the Provider, its servants or agents, unless the same result from or are caused by acts of omissions amounting to willful misconduct of the management of the Provider.
2. The User shall indemnify and save free and harmless the Provider, its employees, servants and agents from any liability towards third parties (other than the Providers employees, servants and agents), including cost and expenses incident thereto, arising in connection with or resulting from the rendering, of services or the furnishing of goods pursuant to this Agreement, unless due to the willful misconduct of the management of the Provider.
3. If the User reimburses the Provider in kind, returns borrowed goods to the Provider or otherwise makes available services or goods under this Agreement, the liability and the obligation to indemnify and to hold harmless, of the respective companies shall be, mutates mutants, as provided above.
4. Nothing in this Agreement shall affect the mutual liability of the contracting parties in case of damage or claims or liabilities which have no connection with the performance of services by a Provider under this Agreement, this liability being subject to the rules as set out in any other agreement existing between the Provider and User or in absence of such rules, to the applicable laws (not valid for L pool).
9. Disputes
1. Any disputes concerning the interpretation or effect of this Agreement or concerning any right, liabilities or obligations arising out of this Agreement shall be referred to and finally settled by arbitration.
2. The arbitral Tribunal shall (unless the parties to the dispute agree to the appointment of single arbitrator) consist of three arbitrators and the arbitrator(s) shall on the application of any party to the dispute be appointed by the Director General of IATA if the parties concerned have not appointed the arbitrator(s) by mutual agreement within thirty days after any of the parties shall have notified the other party or parties that it wishes to settle a dispute by arbitration.
3. The arbitral Tribunal shall settle its own procedure. It shall construe and interpret this Agreement in accordance with the laws prevailing where the Provider has its principal place of business. Its award shall include direction concerning the allocation of costs and expenses incurred in connection with the arbitration, including arbitrator(s) fees. The award shall be final and conclusively binding upon the parties. (not valid for L pool)."
37. Thus, on a perusal of these specific articles along with the IATP Agreement, it is clearly borne out that the IATP Agreement makes available to its member airlines certain facilities by the "Providers" to the Users at a price to be invoiced in the manner laid down in the IATP agreement for which the invoice shall be settled through and in accordance with the IATA clearing house insofar as such regulations and those of Government permits unless otherwise agreed upon between the parties to the invoice. This is clearly borne out from article 6.2 of the IATP agreement. This is again borne out from paper book per para 54 to 62. The relevant portion at para 58 reads as under
"Article 6 Remuneration 6.1 In consideration of the Handling Company providing the services, the Carrier agrees to pay to the Handling Company the charges set out in the respective Annex(es) B. The Carrier further agrees to pay the proper charges of the Handling Company and to discharge all additional expenditure incurred for providing the services referred to in sub-article 1.4, 1.6, 1.7 and 1.8.
6.2 The charges set out in Annex(es) B do not include :
any charges, fees or taxes imposed or levied by the Airport, Customs or other authorities against the Carrier or the Handling Company in connection with the provision of services herein by the Handling Company or in connection with the Carriers flights.
expenses incurred in connection with stopover and transfer passengers and with the handling of passengers for interrupted, delayed or cancelled flights.
Such charges, fees, taxes or other expenses as outlined above shall be borne ultimately by the Carrier.
Article 7 Accounting and Settlement 7.1 The Handling Company shall invoice the Carrier monthly with the charges arising from the provision of the handling services of Annex-A as listed in Annex(es) B at the rates of charges set out in Annex(es) B. 7.2 Settlement shall be effected through the IATA Clearing House unless otherwise agreed in Annex(es) B."
38. The learned authorised representative has also placed on record from paper book per para 63 to 86 Standard Ground Handling Agreement at Annexure W. Paper book per para 87 to 94 is the Standard Ground Handling Agreement (Simplified Procedure) between British Airways and Air India for Mumbai valid from 15-8-1998. Similarly, paper book pages 92 to 94 is the Standard Ground Handling Agreement (Simplified Procedure) between Saudia-Saudi Arabian Airlines and British Airways for Delhi valid from 2-12-1995. A similar Standard Ground Handling Agreement (Simplified Procedure) at paper book para 95 has also been placed on record between F1 A1 Israel Airlines and British Airways for Bombay and Delhi valid from 1-8-1995.
39. Thus, a perusal of this entire material fully supports the conclusion arrived at by my learned brother with which I am in concurrence that the determination of tax in the present facts of the case should be on the basis of relevant facts and evidence.
40. Thus, in the peculiar facts and circumstances where the assessed is fully in a position to give all necessary facts and figures, an assessment made de hors the relevant facts and figures in the present case would be an assessment in vacuum and would be unfair to both the parties concerned. Only in the circumstance where the assessed is being secretive and not making the necessary information available on account of some plea or the other as has been the earlier stand of the assessed during the assessment proceedings before the assessing officer and the Commissioner (Appeals) where it has argued that it is not possible to separate the income earned from ground handling services and engineering services provided. Only in those peculiar circumstances, the assessing officer was fully justified to estimate the income of the assessed in the manner he had done.
41. Similarly, the shelter of article 8.3 where operation of aircraft has been expanded to include amongst others "any other activity directly connected with such transportation" is also not available to the assessed on the simple reading of the fact itself. The attentions of engineers while ensuring the airworthiness of the fleet of aircraft of the assessed is concerned can undisputedly be understood to mean activity directly connected with such transportation but when these services are rendered to other airlines, it cannot be said that the activity is directly connected with such transportation i.e.
(a) transportation of human beings;
(b) livestock, goods or mail carried on by the owners; or
(c) sale of tickets on behalf of other enterprises; or
(d) incidental lease of aircraft on chartered basis;
(e) any other activity directly connected with such transportation.
42. The term "operation of aircraft" cannot be expanded beyond what is actually understood and enumerated in the article to the point where the resultant expansion leads to an absurd and anamolous meaning. Thus, fully agreeing with the finding of my learned brother that the specific services provided by the British Airways pertaining to engineering/ground handling result in a taxable event in India, I would like to state my reasons separately. First and foremost, I would like to state that in the present context, there is no ambiguity in the language of the article. Thus, it is not necessary to resort to any interpretative process to unfold the intent of the contracting parties. Nevertheless, since both the sides have pressed various rules of interpretation in order to interpret the concerned article. I would start from the premises that the issue pertaining to the interpretation of taxing provisions is fairly settled to the extent that generally, the rules of strict interpretation would apply. The argument of the learned authorised representative that the liberal construction should be applied to the present facts of the case have been rejected by my learned brother. To this, I would merely like to state that even applying the rules of liberal construction as is advocated by the learned authorised representative the activity of ground handling and engineering cannot be considered to be treaty protected either under article 8.1, 8.2 or 8.3 of DTAA. Thus, as this activity cannot be considered to be operation or aircraft in international traffic or a pooling activity as this would seem to suggest a bringing together of finances, personnel for profit apportionment amongst members and it also cannot be considered to be any other activity directly connected with such transportation even if a liberal construction is applied. Thus even applying this yardstick, the case of the assessed fails.
43. Thus, I would like to state that even on the aspect of meaning of pooling, different rules of interpretation have been pressed into by both the sides. After appraising the entire conspectus of arguments, I would lie to reiterate more elaborately that on a conjoint reading of IATP Agreement and article 8.2, the profit so earned are not treaty protected. Pooling in its commercial parlance denotes bringing together of finances, personnel, expertise, profits, etc, for the benefit of the members and the proceeds/profits to the apportioned between the members which is not the case as far as the IATP membership is concerned despite the fact that the word pooling has been used in that agreement because, at least, it is pooling of information to be disseminated for the benefit of its members and a forum which exists for settling payments, disputes, etc. amongst members inter se and does not amount to pooling as is envisaged and granted treaty protection under article 8.2 of the DTAA.
44. Coming back to the arguments of rules or interpretation, it is seen that if articles 8.1, 8.2 and 8.3 are looked at even from the purposive point of view and ignoring the literal and strict rule of construction, even then the said income does not come under the protection of the treaty exempt income. No doubt, in interpreting international agreements, statutory context, and statutory purpose does have a sway but, difference of opinion amongst legal luminaries in judgments of International court of Justice shows that differences existed regarding the meaning of protocols of negotiations and other materials. The most widely and general view has been that treaty obligations are to be interpreted restrictively because in case of doubts parties to the treaty in doubtful cases should only be presumed to have waived the sovereignty that is unequivocably apparent from the text of the treaty for which it is necessary to look into the ordinary meaning of the terms and the wording not of the individual sub-article but that of the entire article in the context in which it was incorporated. Appreciating the fact that the ordinary meaning of the term is not necessarily that of everyday usage and that legal usage can have different connotation for both the contracting states the recourse can be taken to the development, if any, to the international tax language but even in that situation in the present case, the ordinary meaning supports the case of the revenue and no case is made out to read a special meaning as advocated by the learned authorised representative.
45. For the purpose of interpretation of double taxation treating, recourse is often taken to the Vienna Convention. The relevant provisions of articles 31 and 33 VCLT are being reproduced hereunder in order to support the conclusion that articles 8.1, 8.2 & 8.3 read together in the context of the ordinary meaning would result in concluding that earning of income from the activities in India by way of providing engineering/ground handling services gives rise to a taxable event in India. The relevant articles of VCCT reads as under
"Article 31.General rule of interpretation.
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to terms of the treaty in their context and in the light of its object and purpose.
2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes;
(a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty.
(b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.
3. There shall be taken into account, together with the context
(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions.
(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation.
(c) any relevant rules of international law applicable in the relations between the parties.
4. A special meaning shall be given to a term if it is established that the parties so intended."
Article 33. Interpretation of treaties authenticated in two or more languages.
1. When a treaty has been authenticated in two or more languages, the text is equally authoritative in each language, unless the treaty provides or the parties agree that, in case of divergence, a particular text shall prevail.
2. A version of the treaty in a language other than one of those in which the text was authenticated shall be considered an authentic text only if the treaty so provides or the parties so agree.
3. The terms of the treaty are presumed to have the same meaning in each authentic text.
4. Except where a particular text prevails in accordance with para 1, when a comparison of the authentic texts discloses a difference of meaning which the application of articles 31 and 32 does not remove, the meaning which best reconciles the texts, having regard to the object and purpose of the treaty, shall be adopted."
46. Reliance has been placed upon CIT v. Podar Cement (P) Ltd. & Ors. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC) and AIR 1999 (SC) 1609 in order to press the arguments that the doctrine of updating of construction should be applied and the examination and propositions laid down therein are not in dispute and are accepted principles of interpretation and jurisprudence development but after considering the said judgment and the principle laid therein, it is seen that the same has no relevance to the issue at hand because what the Honble Supreme Court said in this judgment was that the modern means of communications i.e., fax, e-mail, etc. should be taken into account while interpreting how a notice is served upon a party. The said rule of updating construction by way of laying down the principle that the legal jurisprudence should stay in step with technological development is an accepted principle but lends no support to the issue at hand as no amount of updating and developing rules of construction can it be stretched to encompass a situation in the present facts to conclude that income earned on account of engineering/ground handling services rendered by British Airways to other (user airlines as defined in IATP agreement can be treated to be treaty protected and hence, not taxable in India.
47. Thus, whether the issue of interpretation is looked from the aspect of construing the entire article in a consistent manner with its sub-articles individually or whole to accept the contention of the assessed would lead manifestly to an absurd or anomalous situation not envisaged by the contracting states to the DTAA.
48. If the issue is addressed from the aspect of giving the article along with its sub-articles, its ordinary meaning even then the assessed has no case. In the face of clear grammatical construction, it is clear that the meaning assigned in this order to the text of article of DTAA manifest and without doubt the ordinary meaning as is understood from a reading thereof should prevail and there is no reason why the obvious meaning should be disregarded and the meaning sought to be assigned by the assessed should be read into it.
49. The purposive rule of interpretation also leads to the same conclusion. The dominant purpose on consistency the article clearly expresses the intention of the contracting parties which even if interpreted liberally exclude the situation proposed by the assessed and are quite clear, plain and unambiguous. A bare reading of the article explicitly makes it clear that this activity of rendering engineering/ground handling services has not been included in article 8 as therein specific examples are given of what is considered to be exempt from tax.
50. As has already been stated earlier, the rendering of engineering and ground handling services to other airlines are in noway inextricably linked with the operation of the aircrafts. If for any reason the assessed stops rendering these services to the other airlines, the activity of transport of international traffic in persons and cargo will not be affected in any manner.
51. While praying for restoration in the eventuality that the income if taxable, learned authorised representative submitted that the provisions of section 44BBA should be considered. I would like to state that the applicability of this section has been rejected by both the authorities below with which I am in full concurrence. I would merely clarify further that by virtue of the fact that this section specifically considers the manner in which the profits of non-resident engaged in the "business of operation of aircraft" is to be taxed, thus, the providing of engineering/grounds handling services to other airlines cannot be understood to be included in operation of aircraft. At the cost of reiterating the non-rendering of this activity to other airlines will not affect even remotely the operation of aircraft of the assessed. The utilisation of spare/idle engineering and ground handling staff is definitely a separate and a distinct business activity by itself even if no special cost has been incurred on its account. Thus, in the ultimate analysis, applying the analogy discussed in detail while interpreting article 8 of DTAA, I am fully in agreement with the finding of the authorities below that the present activity cannot be taxed under section 44BBA of the Income Tax Act, 1961.
52. Similarly, provisions of section 44C pertaining to deduction of heads office expenditure was held to be not applicable by the assessing officer as despite repeated requests, the assessed did not put forth any evidence to support the expenditure incurred. In fact, the consistent stand of the assessed has all along been that no extra cost has been incurred as the personnel are anyway required for the airworthiness of the fleet of British Airways and only the spare/idle capacity is utilised by way of rendering engineering/ground handling services to other airlines.
53. The fact that this income gives rise to a taxable event in India can be appreciated from the different angle also namely, that there is no controversy over the issue that under article 265 of the Constitution of India, only those taxes can be levied and collected under the law of the land. There is also no dispute over the constitutionality of the Income Tax Act, 1961, of which section 90 which has already been reproduced in the earlier part of the order of my learned brother which makes provision for the Central Government to enter into agreements with Governments of any other country outside India :
(a) for the grant of relief in respect of income on which tax has been paid under the Income Tax Act of India and Income Tax Act in that country by way of giving credit for abatement, etc.;
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country by way of taxing the income in either of the contracting states under the provisions of double tax avoidance agreement entered into between the two countries;
(c) the agreement may also be entered into for the exchange of information for the prevention, evasion or avoidance or income-tax chargeable under this head or under the corresponding law in force in that country or for investigating of case of such evasion or avoidance;
(d) for recovery of income-tax under this Act and under the corresponding law in force in that country.
54. Thus, as far as any income earned by a company or a person by his activities in India is concerned, then the taxability or the non-taxability of the same as far as the persons and companies of UK are concerned, would be determined by taking recourse to the DTAA entered into between the two countries. If on an examination of provisions of these DTAA it is borne out that a particular income is treaty protective, then the same shall not result into a taxable event as, far as India is concerned but if after examination of the provisions of DTAA it is borne out that a particular income is not treaty protection, then the same is taxable in India.
55. Thus, in ITA 4653 filed by the assessed, due to the aforementioned reasons, ground No. 1(i) to (iv) in assesseds appeal are rejected and ground No. 1(v) is restored. Ground Nos. 2, 3, 4 and 7 are rejected. Ground No. 5 is partly allowed by way of restoration. Ground No. 6 is consequential and ground Nos. 8 and 9 being general in nature required no adjudication.
56. Similarly, in ITA-484 filed by the revenue, agreeing in principle that Commissioner (Appeals) in the facts and circumstances of the case had no basis for reducing the assessed income, the ground is restored back to the assessing officer with the direction to make assessment de novo subject to the directions given hereinabove.
57. In the result, all the three appeals of the assessed and the three counter-appeals of the revenue are partly allowed for statistical purposes.
R.M. Mehta, V.P. 24-9-2001
58. Two separate orders have been passed in these appeals by the Tribunal, the second order by the learned J.M. although both of us are agreed on every aspect of the matter. There are certain observations which inadvertently have crept into the order of my learned colleague on which I have to express my reservations.
59. There were two main issues raised and argued before the Tribunal by the parties, the first being whether receipt on account of ground handling services from other airlines were taxable in India or treaty protected and second if these were taxable then what was going to be the basis of computation and whether the assessed was required to be given any opportunity to prove the quantum of expenditure incurred to earn the income in question.
60. Coming to the first issue one of us (the Vice President) authored the order and by a detailed discussion it was held that receipts from other airlines on account of ground handling charges were taxable in India and not treaty protected. I must categorically mention after reading the order of my learned colleague that the reasoning and conclusions of both of us are quite identical. It is, however, on the second aspect that I would like to observe as follows :
In my opinion once the Members of the Division Bench are agreed that the matter of computation of income for whatever reason has to be decided afresh, then no observations should be made in the order which would (i) prejudice the mind of the tax authority, who is to decide the issue; (ii) nor make any adverse comments against any of the parties before the Tribunal; (iii) nor direct the tax authority concerned to examine the matter in a particular manner which would give an impression that his power is being curtailed in any manner; and (iv) not make any contradictory observations.
61. Before I proceed to refer to specific observations in the separate order passed by my learned colleague, I would like to mention that even at the assessment stage it was not the case of the revenue that no deduction should be allowed on account of expenditure and in fact in all the years under appeal the assessing officer allowed some deduction no doubt on estimate basis. One of the arguments of the assesseds counsel was that the assessing officer has visited the airport and collected the information behind the back of the assessed and which was not confronted to it and I must categorically mention that on behalf of the revenue the learned senior counsel did not rebut this factual submission.
62. Coming now to the specific observations of my learned colleague she at various places in her order has commented on the bona fides of the assessed, observing that "the doors of equity are open to those who approach the Courts with clean hands". On the under hand, my learned colleague has made the following observations in para 28 of her separate order :
"Having thus elaborated on the misconceived stand of the assessed, I would like to state that the endeavor at the Tribunal is also to determine the taxable income of the assessed in a fair, judicious and proper manner. Consequently, keeping this into consideration, the matter is being restored back to the file of the assessing officer in order to enable him to arrive at the correct taxable income which is fair both to the assessed as well as the revenue. Thus, being guided by the principle that justice should not only be done but also seen to be done, there is no cogent reason to block the evidence simply relying on the past conduct of the assessed. Thus being of the view that if the assessed even at this belated stage is able to prove the bona fides and shows its willingness to cooperate with the department and enable it to determine the correct taxable income, then the evidence by way of full facts and figures should not be blocked and deserves to be brought on record."
63. If the aforesaid is the view expressed by my learned colleague in conclusion then I do feel that there is really no need to comment on the bona fides of the assessed or for that matter to guide the assessing officer as to in which manner he should proceed since in para 23 of her order my learned colleague has asked the assessed to bring on record the details pertaining to the exact and particular arrangement with each and every airline entered into by it as also to bring on record the facts pertaining to the payment by IATP to the British Airways in US Dollars. I do not recollect that we at any stage of the hearing of the appeal before the Tribunal tried to ascertain as to what were the records which the assessed was maintaining and what it proposes to place before the assessing officer in case the matter was set aside. All that which was submitted by the learned counsel for the assessed was that adequate opportunity was not allowed by the tax authorities and at present relevant details were available to substantiate the income returned and if another opportunity was allowed, then the assessed would be able to satisfy the tax authorities. Nothing was mentioned about non-co-operation with the tax authorities and day in and day out we in the Tribunal come across in so many cases where the assesseds for whatever reason have not been able to plead their case properly before the tax authorities and the Tribunal allows opportunity for purposes of doing so not only in the interest of justice, but substantial justice and there is also a provision for admitting additional evidence at the Tribunal stage when it is of the view that it is necessary to do so for giving to the parties.
64. Para 17 of the order of my learned colleague is as follows :
"Thus, in the situation, it is necessary to state that in the facts of the case where the assessed has not placed on record any evidence, the assessing officer was fully justified in computing the taxable income of the assessed in the manner computed by him. Taking note of the consistent stand of the assessed that the British Airways incurred no extra cost to maintain engineers/technicians who in their spare idle time provided services to certain other airlines on payment and that even if these services were not provided to the other airlines, the British Airways anyway was required to meet the personnel for servicing their fleet. I am of the view that the assessing officer has been more than reasonable in reducing the expenditure on salaries, etc. of these personnel to half on an estimate basis in the face of the stand of the assessed that all the engineering/ground handling personnel were anyway required for its own fleet."
65. In my opinion the aforesaid observations do not leave any doubt in my mind that the action of the assessing officer in computing the taxable income of the assessed stands approved by my learned colleague. These observations are quite contrary to those made by my learned colleague in other parts of her order and especially when in conclusion she also takes the view that the matter is required to be set aside for recomputing the taxable income for whatever reason whether factual or legal.
66. In para 19 of the order my learned colleague has referred to the requirements of Company Law in Britain and there is also a reference to the British Accounting Standard Board, but I must categorically state that neither in the orders of the tax authorities and nor at the hearing of the appeals before the Tribunal was any reference made by any of the authorities to the aforesaid.
67. A reference may also be made in para 22 of the order of my learned colleague :
"After referring to the above, I would merely like to confine myself to the reasons for restoration which, despite the conduct of the assessed, we have arrived at the same conclusion that it is fair and proper to both the parties concerned to finally have the full facts and figures on record before deciding the amount to be taxed. The restoration is justified in view of this fact that as has been observed by my learned brother, in the draft order, that the learned authorised representative in his alternative argument has contended that if the issue of taxability is decided against him, restoration of the same to the file of the assessing officer may be made as now he is in a position to give full facts and figures.
68. The matter can go on and on, but I would like to curtail the same at this stage as my endeavor is only to point out that when the matter is set aside for recomputing the taxable income, the reasons may be many, but the Tribunal should resist from making any observations which would prejudice the mind of the assessing officer, curtail his independent application of mind, place the parties in a restricted area specially when both the Members of the present Division Bench are agreed that the Tribunal is supposed to render effective and substantial justice and even if something has been lacking at an earlier stage, no harm could be done in case another opportunity was allowed which would enable to computation of the assesseds correct taxable income.
69. In view of the aforesaid I would like to disassociate myself from the various observations made by my learned colleague which would fall within the broad categories highlighted aforesaid.