Income Tax Appellate Tribunal - Mumbai
Delta Air Lines, Inc, Mumbai vs Assessee on 29 April, 2015
आयकर अपील
य अ धकरण "L" यायपीठ मब
ंु ई म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "L" BENCH, MUMBAI
BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER
आयकर अपील सं./I.T.A. No.1256 /Mum/2014
( नधा रण वष / Assessment Year : 2010-2011
Delta Air Lines, Inc., बनाम/ Asstt. Director of
C/o BMR and Associates Income Tax
Vs.
LLP, (International Tax),
36-B, Dr. R.K. Shirodkar Range 1(2), Mumbai,
Marg, Ist floor, Room No. 120,
Parel (East), Scindia House,
Mumbai - 400 012. Ballard Estate,
N.M. Road,
Mumbai - 400 038.
थायी ले खा सं . /PAN : AAACD 4092 N
(अपीलाथ /Appellant) .. ( यथ / Respondent)
Appellant by Shri Ajit Kumar Jain
Respondent by : Dr. Narender Kumar and
Shri Ajay Srivastava - CIT DR
ु वाई क तार ख / Date of Hearing
सन : 16-02-2015
घोषणा क तार ख /Date of Pronouncement : 29-04-2015
[
आदे श / O R D E R
PER R.C. SHARMA, A.M. :
This is an appeal filed by the assessee, passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 for A.Y. 2010-11.
2. In this appeal the assessee is aggrieved by the denial of benefit of Article 8 of India-USA Double Taxation Avoidance Agreement. The assessee is also aggrieved by the enhancement of Global Profitability rate and charging of interest u/s 234B of the Act.
2 ITA 1256/M/14
4. Rival contentions have been heard and record perused. Facts in brief are that the assessee, Delta Airlines Inc., a resident of USA, is engaged in the business of carriage of cargo and passengers on its own aircraft and or on third party aircrafts. The assessee has obtained an approval from the Director General of Civil Aviation (DGCA) to undertake scheduled air services in India. The assesee was also granted approval by Reserve Bank of India (RBI) to establish branches in India for undertaking activities related to booking of air passengers and air freight. A return of income was filed on September 28, 2010 declaring nil income from business operations and interest of Rs. 1,56,469/- earned on fixed deposits was offered to tax. During the course of assessment proceedings, the assessee was asked to furnish details of the revenue attributable to the usage of third party carriers for carriage of cargo and passengers and was asked to show cause as to why such revenue may not be taxed. The assesee submitted the requisite details and its arguments along with the agreements entered with such third party carriers for carriage of cargo and passengers while claiming that such revenues cannot be taxed in India due to exemption under Article 8 of the Indo-US treaty. The A.O. however has not agreed with the claim of the assesee. The AO, as per the draft assessment order, has proposed to assess the business income of the assessee at Rs. 2,15,32,280/- by applying the global profitability rate of 2.5% to the total revenues of Rs. 85,44,55,568/- earned by the assessee in respect of third party carriers.
5. With regard to denial of benefit under Article 8 of Double Taxation Agreement treaty, the contention of the assessee before the A.O. was that when the assessee is not able to provide seats to its passengers or space for its cargo', in its own aircrafts, it utilises services of other airlines for such transport. This is a standard industry practice. The AO required the assessee to show cause as to why the revenue attributable to the usage of third party carriers for carriage of cargo and passengers may not be taxed. The assessee 3 ITA 1256/M/14 contended that the' income attributable to the services provided by third party carriers is eligible for exemption under Article 8(2) and Article 8(4) of the 'India - USA tax treaty. The assessee submitted that based on its arrangements with the third party carriers, it could be regarded as a charterer and/ or engaged in other activity directly connected with such transportation and thus, the income derived on account of utilizing third party aircrafts is covered under Article 8(2) of the India-USA tax treaty. Further, the Assessee submitted that the arrangements with the third party carriers amount to 'pooling' and thus get covered under Article 8(4) of the India-USA tax treaty. The A.O. however held that the arrangement of the assessee with the third party carriers is not akin to that of pooling/chartering as intended to be covered under Article 8(2) and Article 8(4) of the India -USA tax treaty. The A.O. also held that jurisdictional HC ruling in the case of Balaji Shipping UK Limited, 211 Taxman 535 is not applicable to the assessee's case since the assessee is claiming relief under India-USA tax treaty and aforesaid judgment is pronounced under Double Taxation Avoidance Agreement between India and United Kingdom (India - UK tax treaty). The A.O. has also relied upon following decisions:-
(i) ADIT v. Federal Express Corporation (125 ITD 1) (Mumbai
(ii) United Parcel Service Co. v DDIT (52 SOT 170) Mumbai.
6. Further contention of the A.O. was that profits derived by an enterprise from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in the state of its residence (Article 8(1). Such profits taxable in the state of its residence shall be the profits derived from the transportation of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft (Article 8(2). Further, these provisions shall also apply to profits from participation in a pool, a joint business, or an international operating agency (Article 8(4). The revenues under question are the revenues generated from utilization by the assessee of 4 ITA 1256/M/14 services of other airlines for transport of its passengers or cargo. Since the assessee itself is not involved in operation of these aircrafts in international traffic, the requirement of Article 8(1) itself is not fulfilled. The assessee has 'Interline Cargo Special Prorate Agreements' with other airlines for carriage of cargo and 'Code-sharing agreements' with other airlines for carriage of passengers. These agreements provide for space sharing for cargo and seat sharing for passengers at agreed rates. There is no chartering of aircrafts. The agreements of the assessee with other airlines are in respect of booking of space for the assessee's cargo or booking of seats for assessee's passengers.
7. The A.O. also held that though the assessee has, in the alternative claimed that arrangements with the third party carriers tantamount to 'pooling', it is evident from the above description, terms and conditions of agreements with other airlines that there is in reality no pooling arrangement. A pooling arrangement is an arrangement where two or more parties combine to carry out an activity and also agree to pooling of funds and sharing of profits. The agreements of the assessee with other airlines are in respect of booking of space for the assesse's cargo or booking of seats for assessee's passengers and there is neither any pooling of funds nor sharing of profits. The profits are earned by other airlines independently from the charges recovered by them from the assessee for transporting assessee's cargo/passengers.
8. In view of the above discussion, the A.O. held that the revenues generated from the usage of third party carriers for carriage of assessee's cargo and: passengers would not fall either under Article 8(1) or Article 8(2) or Article 8(4) of India US tax treaty. Hence, no benefit can be given to the assessee in this regard. It is 'in view of this fact is that the decisions of Mumbai Tribunal in the cases of Federal Express Corporation (125 ITD 1) and United Parcel Service Co . (ITA Nos. 3611, 28D8; 2809 & IMUM/2005, 2006 5 ITA 1256/M/14 order dated 14/03/2012) directly apply to the case of the assessee. In the case of Federal Express Corporation (supra), Hon'ble Mumbai Tribunal has held as under:
"Having held as above, the next question arising for our consideration is as to what extent the benefit of art. 8 of Indo-US treaty can be allowed to the assessee. The contention of the assessee is that the entire freight revenue received by the assessee should be exempted from tax in view of the decision of this Bench in the case of Balaji Shipping (UK) Ltd. (supra) while the contention of the Revenue is that profits attributable to the transportation of cargo through other airlines as well as inland transportation cannot be exempted in view of the specific definition of the expression "profits from the operation of ships or airways in international traffic" has been defined in para 2 of art. 8, such expression should not be given extended meaning in the light of various commentaries. Thus there is no dispute between the parties as far as the profits from transportation of cargo in the international traffic by the assessee through the aircrafts as an owner/lessee/charterer are concerned. We have also gone through the provisions of art. 8 of Indo-US treaty. Para 1 provides that profits from the operation of ships or aircrafts in the international traffic shall be taxable only in the State of residence. Para 2 provides that profits from operation of ships or aircrafts in the international traffic shall mean profits derived by an enterprise from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners/lessees/charterers of the ships or aircrafts. In view of these clear provisions it is held that profits attributable to the transportation of cargo, mail etc. by the aircrafts owned, chartered or leased by the assessee cannot be taxed in India.
30. Thus, the dispute between the parties is, therefore, restricted to the profits derived by the assessee from the transportation of cargo through aircrafts belonging to other enterprises as well as profits attributable to the inland transportation. It is in this context that the decisions of this Bench are to be analysed. Therefore, the question arises whether there is any conflict between these two decisions. In the case of Balaji Shipping (UK) Ltd. (supra), the Bench was required to interpret the provisions of art. 9 of Indo-UK treaty while in the case of Delta Airlines Inc. (supra), it was required to interpret the provisions of art. 8 in Indo-US treaty. Therefore, it would be appropriate to reproduce the relevant provisions of both the treaties :
........................
........................
31. A comparative study of the above provisions clearly indicates that art. 9 of Indo-UK treaty uses the expression "profits from operation of ships" but such expression has not been defined. On the other hand, in the Indo-US treaty, the expression "profits from operation of ships or aircrafts in the international
6 ITA 1256/M/14 traffic" has been defined in para 2 of art. 8. Since the expression "profits from operation of ships" was not defined in Indo-UK treaty, this Bench in the case of Balaji Shipping (UK) ltd. (supra), following the judgment of the Hon'ble Supreme Court in the case of Union of India & Anr. Vs. Azadi Bachao Andolan & Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) and the decision of the Tribunal in the case of Metchera Canada Inc. vs. Dy. CIT (2006) 99 TT J (fv1umbai) 702 : (2006) 100 ITD 251 (Mumbai), held that such expression. should be construed in the manner in which the contracting parties understood at the time of execution of the treaty, i.e. in the light of the commentaries of international law available at the time of execution of the agreement On the' other hand, the Tribunal while disposing the appeal of Delta Airlines Inc. (supra), following the decision of the Supreme Court in the case of CIT vs. P. V.V.L. Kulandagan Chettiar (supra), held that the expression, "profits from operation of ships or aircrafts in the international traffic" must be understood in the sense in which it has been defined in para 2 of art. 8. Thus, in our opinion, there is no conflict between these two decisions, Therefore, following the decision of the Bench in the case of Delta Airlines Inc. (supra), it is to be held that benefit of art 8 would be available to the assessee to the extent the activity carried on by the assessee falls within the parameter of the definition given in art. 8(2) of the Indo-US treaty.
9. It is evident from the above that the Tribunal, while deciding the above issue, has already considered the facts of the case of its own decision in Balaji Shipping (UK) Ltd. (197 TTJ 865) [which has been affirmed by the Bombay High Court and relied upon by the assessee] and has also distinguished the facts of both the cases. The Tribunal has also distinguished the provisions of Article 8 of Indo-US and Article 9 of indo-UK Tax Treaty. Even otherwise, from the agreements of the assessee with other airlines, it is evident that there is no arrangement in the nature of "slot charter" between the assessee and such other airlines. It may be noted that the decision of Mumbai Tribunal in the case of Federal Corporation has been accepted by the said assessee and issue has been settled under Mutual Agreement Procedure (MAP) between Indian and US Governments (to avoid double taxation).
10. Since the A.O. held that the revenues generated from third party carriers are liable to be taxed in India in the hands of the assessee, he computed the percentage of profitability of the assessee at 2.52% [as against 7 ITA 1256/M/14 the gross global profitability of (-) 3.57% declared by the assessee] by adding back the following items to the assesse's 'profit before tax':
- Other expenses and
- Restructuring and Merger Related Expenses
11. The assessee has objected to modification of its global profitability percentage by above exclusion of 'other expenses' and 'Restructuring and Merger Related Expenses'. The A.O. also levied interest on the entire income u/s 234B of the Act.
12. By the impugned order, the DRP confirmed the action of the A.O. against which the assessee is in further appeal before us.
13. Shri Ajit Kumar Jain, the ld. A.R. appearing on behalf of the assessee contended that the assessee is a US entity engaged in the operation of aircrafts in international traffic and is eligible to claim benefit of Article 8 of the India US tax treaty. There is no doubt that the assessee is foreign airline company engaged in the transportation of goods / passengers. This is accepted by the AO and the DRP. The limited issue under dispute is whether the usage of space on third party aircrafts is in the nature of 'charter' and exempt under Article 8. The assessee before the AO and the DRP had placed reliance on dictionary meanings, Regulation 883 of the US Regulations, Air Transport Agreement between India and US, rulings in the case of Balaji Shipping UK Ltd. (2012) 24 taxmann.com 229] and APL & Co Pte Ltd [(2013) 33 taxmann.com 186] to contend that usage of space tantamount to 'charter'. The learned Counsel of the assessee during the hearing argued that the same bench of the IT AT had pronounced a ruling on facts similar to the assessee in the case of MISC Berhad (ITA No 6499/Mum/2012) post the final order being passed by the AO under section 143(3) rws 144C(13). In the case of MISC Berhad (supra), where it was held that space booking is 'charter' under Article 8 of India Malaysia tax treaty. He stated that Paragraph 1 and 2 of Article 8 of 8 ITA 1256/M/14 the India USA tax treaty (applicable in the case of assesse in the present case) and India Malaysia tax treaty (applicable to MISC Berhad) are similarly worded (reference is drawn to page 102 of the paper book filed by the assessee during the course of the proceedings) and the ruling is based on facts similar to that of the assessee. He submitted that in the case of MISC Berhad, an owner of ships, (supra) the assessee had booked some space on ships operated by third party shipping companies on an as and when required basis under a space booking/slot charter arrangement which is similar to the present case. The learned Counsel for the assessee referred to the following paragraphs of the judgment in the case of MISC Berhad where it has been held that space booking / slot charter is 'charter':
• Page 23 - 6th line "The containers transported through feeder vessels have been sent by way of slot charter or space charter arrangement. "
• Page 24 - first line " ... The Department has held that the chartering of some space or slot charter arrangement cannot be equated with chartering of a complete ship....... .............
The assessee's case on the other hand has been that the word charterer" also includes space charterer or slot charterer and the same cannot be segregated from the meaning of operation of ships. Heavy reliance has been placed on the concept of charterer given by the Hon'ble Bombay High Court in Balaji Shipping U.K Ltd. (supra) .... "
• Page 25 - para 20 "20. For the shipping income, the Para-2 categorically envisages that for the purpose of Article-8, profits from the operation of ships in the international traffic means, profit derived by an enterprise from the transportation by sea of goods carried on by the "owner" or "lessee" or "charterer" of ships. Thus, the profits from the "operation of ships" have been qualified by the words carried on by the "owner" or "lessees" or "charterer ".
• Page 29 - last 7 lines of Para 22 and para 23 "Thus, the whole of the ratio laid down in Balaji Shipping U.K Ltd. (supra) cannot be applied in the present case, as the phrases used in Article-8 in Indo- Malaysia treaty is indeed differently worded. However, certain relevant observations and interpretation word "charterer"/ "charter" by the Hon'ble High 9 ITA 1256/M/14 Court can be taken as guidance for understanding these terms, which shall be discussed in the later part of the order. "
23. We will now independently examine Article-8(l) and Article-8(2) of Indo- Malaysia DTAA. The crucial phrase or words which need to be analysed here are "operation of ships ", transportation by the "owner" or "lessees" or "charterers" of ships. First of all, the word "operation" is different from the word "operate" or "operator ". The word "operate" means to control the functioning of machine, process or system ....
..... The operation of ships cannot be understood merely as an operator of ships or a person who operates the ships. The word "operation of ships" has to be understood in a broader sense of carrying out shipping activity. The carrying of shipping activity could be as an owner of a ship or as a lessee of a ship or as a charterer of a ship. Here, the word "owner" has to be inferred as a person who owns a ship and the word "lessee" as a person who owns the ship for a given lease period. The word "charterer" has to be understood as a person who charters or hires a ship for a voyage. "
• Page 33 - para 24 and para 25 "24. From the above definitions of the term "charter" or "charterer", one thing is amply clear that it means hiring of vessels or a ship or a part of its space under an agreement for a voyage. Thus, even a part of a space in the vessels for a particular journey is also considered as "charter of ship" or "charterer ". In the decision of Balaji Shipping U.K Ltd. (supra), while referring to the judgment of Tychy (supra), the High Court have noted that a "slot charter" and a "voyage charter" of a part of a ship are in a sense charterers of a space in a ship.
25. From the above discussion, the following inferences can be deduced:-
i) Firstly, the operation of a ship can be done as charterer which does not mean to own or control the ship either as an owner or as a lessee;
ii) Secondly, charterer is a hirer of a ship under an agreement or arrangement to acquire the right to use a vessel or a ship for the transportation of a good on a determined voyage, either the whole of the ship or part of the ship or some space of the ship in a charter party agreement;
and
iii) Thirdly, the word "charterer" includes a voyage charter of a part of a ship or a slot, as it is also arrangement or agreement to hire a space in a ship owned and leased by other persons.
Thus, in our opinion, the word "charterer" should not be confused from the word "owner" or "lessee" or having control of the ship or as an operator of the ship. The operation of ship can be done as a charterer, which includes part of a ship or particular space in a ship. "
10 ITA 1256/M/14 • Page 37 - 6th line " ... Thus, the view taken by the Assessing Officer for denying the benefit under the present Article-8 is not tenable as per our discussion in the forgoing paragraphs, that chartering of some space or slot charterer in a ship is actually a part and parcel of charter of a ship ... "
• Page 39 - Para 31 "31. Thus, in our conclusion, we hold that transportation of cargo in the container belonging to the assessee from Indian Port i.e., Port of booking to the Hub Port through feeder vessel by way of space charter / slot charter arrangement, falls within the ambit of the word "charterer" and, therefore, it cannot be segregated form the scope of "operation of ships" as defined in Article- 8(2) of the Indo-Malaysian treaty .. "
14. Based on above, it was contended by the learned Counsel for the assessee that full exemption should be granted to the assesse under Article 8, as space booking has been held to be 'chartering' as contemplated under Article 8(2) of the India US tax treaty.
15. Without prejudice to the arguments that booking of space on third party aircrafts is 'charter' and therefore income of the assesse is exempt under Article 8(2), the Counsel for the assessee submitted that income from usage of third party aircrafts amounts to income earned by participating in a 'pool/joint business' and thus is covered under Article 8(4) of the India US tax treaty. Dictionary meanings of the term "pool", it submitted the following definitions to understand the meaning of the term pool:
(i) Black's Law Dictionary:
'Pool' has been defined as "An association of entities who share their resources and funds to promote their joint undertaking. "
(ii) Concise Law Dictionary:
Combining of several persons of their separate resources in one large operation or to promote their joint business or undertaking.
11 ITA 1256/M/14
16. He further referred to the meaning of the term 'pool' discussed by Mr Klaus Vogel in his commentary on Article 8(4) of the OECD model convention, which is in pari-materia with Article 8(4) of the India US tax treaty:
"The terms '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 December 1944 (U.NT.S. vol. 84, 389). In that Agreement, they typify the various forms of international co-operation by air transport enterprises, co-operation which may take place in the technological as well as in the commercial fields ... The terms cover all forms of co-operation, and their enumeration is consequently no more than exemplary and is not exhaustive. "
17. Based on the above, the learned Counsel for the assessee contended that the term 'pool' includes any 'commercial arrangement' and covers all forms of co-operations that would include commercial co-operation and should not be given a narrow interpretation as given by the AO and the DRP in its order by only referring to pooling of funds and sharing of profits. The assessee shares a reciprocatory arrangement with the third party carriers, and therefore such an arrangement would amount to pool under Article 8(4) of the India US tax treaty. On perusal of the agreements entered with third party carriers, it can be observed that the element of reciprocity is embedded in these arrangements. Further, the observation of the AO and DRP is on the premise that the arrangement is not in the nature of 'pooling' whereas the word used in the treaty is 'pool' and not 'pooling'. The word 'pooling' has a different connotation as compared to the word 'pool'.
18. On the other hand, the Dr. Narender Kumar, the ld. CIT-DR appearing on behalf of the Revenue contended that the profits 'derived' from activity of 'operations' of ship/aircraft in 'international traffic' under Article 8 will not cover the receipts under code sharing agreement. As per the ld. D.R. Article 8(1) is the substantive provisions granting the exemption. What is exempt under Article 8(1) is the "profit derived from operation of ship or aircraft in International traffic". The twin condition of operation of aircraft and in 12 ITA 1256/M/14 international traffic should be simultaneously fulfilled to claim the exemption under Article 8(1). The use of expression "profits derived" connotes that the profit should have a direct and first level nexus to the operation of aircraft in International traffic. Thus only that part of profit would qualify for exemption under Article 8(1) which is derived from operation of aircraft in International traffic and not any other profit which has only a remote connection to the activity of operation of aircraft in International traffic. The ld. D.R. further contended that the meaning of 'profits derived from operation of ships/aircraft' is restrictive which is also evident from the fact that Article 8(2) seeks to further expand the meaning of 'profits derived' from operation of aircraft in international traffic as owner/lessor/charterer. Clause (a), (b),(c) of Article 8(2) seek to further expand the restrictive meaning so as to allow exemption to other ancillary activities also but for such clarification, they would have not been part of such profits under 8(1). Hence the first and crucial test for eligibility under Article 8(1) has to be whether the impugned profit is the profit derived from operation of aircraft in international traffic? There is no dispute in respect of profit derived by assessee by transportation by its own/leased/chartered aircrafts to final destinations. It is only the receipts under the code sharing agreements with the third parties where the assessee has only booked the tickets and the actual transportation has been done by third parties that such receipts cannot be said to be the profits 'derived' from international voyage carried by assessee in case of third party agreements. Hence to the extent of such receipts, the basic condition of 8(1) are not satisfied because there is no operation of aircraft in International traffic by assessee relevant to such receipt which has resulted in profits and hence such profits cannot be said to be "derived" from operation of aircraft in International traffic and therefore the assessee fails to satisfy the crucial test for being eligible under Article 8(1) r/w 8(2) in respect of the voyages which have not been operated by assessee either by owned/leased/chartered aircrafts.
13 ITA 1256/M/14
20. It was further contended by the ld. D.R. that though the profit from sale of tickets is deemed to be included u/s 8(2)(a) as profits derived from operation of aircraft in International traffic but that will come into play only when the assessee first satisfies the substantive Article 8(1) r/w 8(2) also in respect of the very same voyage for which it has earned profit on sale of ticket for an international voyage. As already demonstrated earlier, the receipts for activities under Article 8(2)(a)/(b)/(c) are only for enlarging the scope of profits but the qualifying conditions have to be still independently fulfilled under Article 8(1)& 8(2) to claim the benefit of receipts falling in Article 8. The ld. D.R. further contended that the Ld. AR while arguing that the ITAT decision in earlier years in assessee's own case was not applicable, himself admitted that the impugned receipts in this year were not in the nature of ancillary receipts. Rather it was his argument that such receipt would fall into the main activity of transportation in International traffic as a charterer. This means that the assessee has to satisfy the twin condition of (i) operation in international traffic and (ii) as a owner/lessee/charterer.
21. In earlier year the receipts from other activities connected to such transport falling in 8(2)(b) without having any receipts which qualify under Article 8(1) & 8(2) have been held by ITAT Mumbai in assessee's own case to be not eligible for benefit of Article 8. This view of the ITAT therefore supports the arguments made in earlier para above.
22. As per the ld. D.R., the issue is covered by the decision of the ITAT in assesee's own case reported at 124 ITD 114 (Mumbai). Following are the observations of the Tribunal at para 13 of its order:-
"The next issue for our consideration is whether the activities of screening of luggage belonging to passengers of other airlines and third party charter handling and maintenance services would fall within the ambit of the words any other activity directly connected with such transportation used in para 2(b) of art. 8 since entire claim of assessee is solely based on such provisions. A 14 ITA 1256/M/14 perusal of art.8(2) (b) makes it clear that the activity carried on by the assessee must be directly connected with such transportation. The words 'such transportation' refers to the transportation prescribed in the main body of para 2, i.e., transportation by sea or air of passengers, mail, livestock or goods carried by the owner or lessee or the charter of the ships. In our opinion, the combined reading of paras 1 and 2(b) reveals that only that activity which is directly related to the transportation of passengers by the assessee as owner/lessee/ charterer of the aircraft would fall within the ambit of para 2(b) of art. 8 and consequently, the activity relatable to the transportation of passengers by other airlines would be outside the scope of such provisions. For the similar reason, the activity of third party charter handling and maintenance would also be outside the ambit of para 2(b) of art 8. The view taken by us is also fortified by the decision of Co-ordinate Bench in the case of British Airways Plc. (Supra) wherein expression under article 8 of Indo-UK treaty (which is similarly worded) was denied in respect of the various services provided to other airlines. For the reasons given above, we are unable to uphold the finding of the CIT(A) that the subsidiary activities carried on by the assessee fall within the scope of art. 8(2)(b) of Indo-US treaty. The orders of the CIT(A) are, therefore, reversed on this issue and consequently, denial of exemption by the AO is upheld ".
From perusal of this para it is evident that it is mandatory for an assessee to carry the main activity of transportation in international traffic itself as required under Article 8(1) and 8(2) as owner/lessee/charterer and once it is satisfied then only any ancillary activity as described in para 2(b) of Article 8 can be also brought into the ambit of profits from such transportation. Thus nexus qua each voyage in international traffic is a must to the transportation by assessee as owner/lessee/charterer. If the assessee does not carry transportation itself qua any particular voyage as owner/lessee/charterer, then qua such voyage it would fall out of main articles 8(1)( and 8(2) even though it may qualify under Article 8 for other voyages wherein it has transported as owner/lessee/charterer. The receipts in question are in respect of code sharing voyages where the assessee has not at all carried operation in International traffic even partly. Therefore this decision shall also apply to facts of present assessee, where no transportation is carried out by assessee as charterer also."
23. Further reliance was placed by the ld. D.R. on the decision of Mumbai Bench of ITAT in the case of Marubeni Corporation 44 taxmann.com 22(Mumbai) wherein it is held that if there are contradictory decision than the judgment in assessee's own case will be preferred.
24. Reliance was also placed by the ld. D.R. on the decision of ITAT Mumbai Bench in the case of ADIT vs. Federal Express Corporation 125 ITD 15 ITA 1256/M/14 1(Mum). It is also in respect of air transport under Indo-USA treaty as the case of present assessee. Para 29, 31 and 40 were relied, for ready reference relevant part of para 40 is reproduced as under:-
"As per para 1 of the article 8, the profits from the operation of aircrafts in the international traffic derived by the assessee cannot be taxed in India. However, the expression "Profits from the operation of ships or aircraft in the international traffic" has been defined in para 2. According to this para, the said expression has been defined in two parts. The first part defines the scope of the main or direct activity of transportation in the international traffic while the second part includes certain activities other than the main activity of transportation in international traffic. The perusal of the first part reveals that main or direct activity is restricted to the transportation of passenger / cargo / mail etc, in the international traffic by the owners, charterers or lessees of ships or aircrafts. Therefore, such transportation through aircrafts by the assessee neither as owner nor as charterer or lessee would be outside the scope of such expression. The alternate contention of the assessee that such transportation would fall within para 2(b), in our opinion, is also without force since para 2(b) includes other activity directly connected with such transportation. The words "such transportation", in our opinion, would only mean the transportation referred to in first part of the definition. Therefore, transportation in the international traffic through other airlines would be outside the scope of article 8(2). We hold accordingly."
25. The ld. D.R. also invited our attention to para 15 of the ITAT Mumbai Bench order in the case of DDIT vs. CIE De Navegacao Norsul, 121 ITD 113 (Mum) wherein following was the observation of the Bench:-
"In the present case, admittedly, the assessee is neither the owner nor lessee nor the charterer of the feeder vessel carrying the cargo from Mumbai port to destination in South Africa i.e., Durban. Therefore, profits attributable to such voyage would be outside the scope of article 8 of Indo-Brazil treaty even though the assessee may be engaged in the business of transportation of goods in the international traffic."
The case of DDIT vs. CIE DE NAVEGACAO (supra) was also considered by Hon'ble Bench in case of MISC Berhard. At para 30 page 37 Hon'ble Bench in MISC Berhard observed that the assessee has failed to link and establish the voyage wise transportation, whether the feeder vessels were actually loading the goods into the mother vessels, which the assessee had claimed. Thus by implication the Hon'ble ITAT in case of MISC Berhard opined that it is only because of presence of a undisputed in extricate and direct link qua each voyage between feeder vessels and mother vessels that the assessee(MISC Berhard) was held as a charterer but for which the decision in case of DDIT vs. CIE DE NAVEGACAO would have held the ground. In the instant case also 16 ITA 1256/M/14 not only there is no evidence which has been placed on record or claimed for any linkage between feeder voyage from India to Hub port and there from to final destination, even the entire voyage from India to final destination under code sharing arrangement is performed through third parties only and no part of such voyage was performed by assessee. Hence the question of linkage would not arise at all. Hence by implication even as per the ratio of MISC Berhard(supra), the decision in case of DDIT vs. CIE DE NAVEGACAO would be applicable in case of facts of the present assessee and that the decision of MISC Berhard would not be applicable.
vii. Kind attention of Hon'ble Bench is invited to para 21 and 22 at page 27 and 28 order in case of MISC Berhard where the Hon'ble Bench has relied upon decision in Balaji Shipping U.K. which was also a case of shipping company having same modus operandi of business. At para 26 Hon'ble Bench in case of MISC Berhard has referred section 115 VB for finding definition of operation of ship. In this regard, argument of revenue is that once assessee is opting for Indo - US treaty for taxation then definition given is article 8 (2) of treaty must be considered not as mentioned in IT Act 1961 for some other purpose i.e. for chapter - XII.
26. The ld. CIT- DR also argued that the arrangement under code sharing is not in nature of a slot/space charter to qualify under 8(2) for following reasons:-
i. There is no such written agreement for space or slot charter between assessee and other airlines. The code sharing agreement is not a charter agreement.
ii. The right of assessee to book flights under code sharing agreements with other third parties is not exclusive unlike the charter agreement. Under the code sharing agreement, the other parties are also entitled to book the flights and the assessee has no fixed space/slot for which the booking rights are exclusively with assessee only. The number of seats/space which can be booked by assessee is also not fixed under the code sharing agreement. It varies from time to time and from party to party. In substance the arrangement of assessee with third party is such that it only allows the assessee (without exclusion of others) also to book the tickets for its customers on the flights operated by other third parties. The role of the assessee to the extent of bookings made under code sharing agent is therefore more like a booking agent and not as a charterer.
iii. Though it is the contention of Ld AR that the cargo/passengers carried under code sharing arrangement from India to intermediary destinations have been transported further by assessee airlines from such intermediary destinations to final destinations. However from the facts mentioned in 17 ITA 1256/M/14 A.O's order, DRP directions and arguments taken by learned A.R. it appears that complete transportation under code sharing arrangement took place from origin to final destination in single stretch and nothing is placed on record to show that such destinations were only interim destinations.
iv. Even if there is break of voyages at intermediary destination, but nothing has been produced before the AO/CIT(A)/ITAT to show that destinations to which all passengers/cargo were carried from India under code sharing were further transported to final destination by assessee's airlines.
v. Mere fact that the assessee was operating its airline also from such intermediary destinations to final destinations will not automatically prove that that the all such passengers/cargo which were carried from India under code sharing to intermediary destinations were transported to final destinations by assessee's airline only.
vi. To call a particular voyage as an operation in International traffic, at least one part of the operation (main part and not the incidental part) must be carried by assessee in the international traffic as a charterer if not as an owner/lessee to take the benefit of Article 8. Nothing has been placed to show that in every voyage the destination under code sharing was not the final destination and that there was an in extricate link between voyage from India to interim destination by third parties under code sharing arrangement and from interim destination to final destination by assessee as a charterer.
vii. The existence of an in extricate link of one leg to final leg is necessary to fulfill the condition of space/charter arrangement. This view is supported by observation of ITAT in case of MISC Berhard (supra) also which has been relied by Ld AR, in para 29 page 36 reproduced for ready reference:-
"From the above observations, it can be understood that the facility of slot hire agreement with the feeder vessels to complete the voyage is not merely an auxiliary or incidental activity to the operation of ships, but inextricably linked. If the transportation of cargo by feeder vessels belonging to other enterprise is only a part of main voyage by the mother ship i.e., owned or leased by the assessee enterprise, then it has to be taken as a part and parcel of the operation, which is inextricably linked with the completion of the entire voyage. The linkage between the transportation by feeder vessels, mother vessels of the ship owned by the assessee has to be established. Hence in absence of any link qua each voyage from India to interim destination under code sharing and interim destination to final destination by assessee, and also in absence of any evidence that even the second leg of same voyage which started from India was 18 ITA 1256/M/14 carried by assessee, the code sharing arrangement cannot be said to be in nature of space/slot charter.
27. In para 14 page 17 the ITAT has observed the crucial facts to arrive at conclusion that the shipping activity of assessee from Indian port to Hub port was in nature of charter arrangement and covered in Article 8:
...........For the purpose of its transportation of cargo, the assessee used the services of feeder vessels operated by third parties by using space charter/slot charter from Indian Port to Hub Port. At the Hub Port, the containers which were owned by the assessee were transferred to mother vessels i.e., the ships owned by the assessee and from thereon, the cargos / containers were transported by its own ships to the final destination port. The entire voyage from India Port to Hub Port and from there to final destination port, is inextricably linked and cannot be segregated as held by the Assessing Officer and the learned Commissioner (Appeals). He further submitted that the Assessing Officer has, in fact, admitted that the assessee has furnished proof to substantiate the linkage of the voyage performed on feeder vessels and mother vessels (i.e., ships owned by the assessee). The Revenue's case is that since the feeder vessel is not owned / leased by the assessee, therefore, the benefit of Article - 8, cannot be given on the goods carried through the feeder vessel is not a correct interpretation of Article - 8(2). The carriage of goods from the feeder vessel is nothing but a charter only, in a sense that the assessee has booked space charter / slot charter for its containers which are owned by it."........
28. The ld. CIT - DR further submitted that in case of present assessee, it has not been shown that one leg of the voyage is carried by third parties as a feeder channel and the remaining leg to final destination is carried by assessee unlike the case of MISC Berhard(supra). Further nothing has been shown by assessee to prove that flight destinations booked under code sharing were only the interim destinations and not the final destinations and even if they were interim destinations the passengers transported from India to interim destinations by third party airlines, were ultimately transported by assessee's airline to complete their voyage there from to the final destination. Whereas in case of MISC Berhard(supra) the AO and CIT(A) gave a undisputed finding that the entire voyage from India Port to Hub Port and from there to final 19 ITA 1256/M/14 destination port, was inextricably linked and could not be segregated and that the Assessing Officer has, in fact, admitted that the assessee has furnished proof to substantiate the linkage of the voyage performed on feeder vessels and mother vessels (i.e., ships owned by the assessee. It was on these facts it was held by ITAT in MISC Berhard that assessee was operating ships in international traffic and that the carriage of goods in the first leg of voyage from India to Hub port by feeder vessels was like a charter. Hence in present case the arrangement of assessee with third parties on peculiar facts cannot be said to be in nature of a charter arrangement.
29. It was the contention of the ld. D.R. that on one hand the Ld AR relies on the decision in case of MISC Berhard to support its case for eligibility of Article 8 but on other hand when it comes to requirement of establishing the one to one linkage of voyages from India to interim destinations to the voyages from interim destinations to final destinations, he contends that this principle cannot be applied to airline business unlike the case of MISC Berhard which was for a shipping business. The Ld AR has failed to appreciate that the very basis for holding the arrangement of transportation from India to interim destination by third parties and from there to final destination by assessee, by ITAT in MISC Berhard was the undisputed presence of one to one linkage for both the legs of journeys i.e. from India to interim destination and there from to final destination. The condition of establishing the linkage therefore cannot be dispensed with if one has to call the arrangement as space/slot charter following the ratio of decision of MISC Berhard (supra). Further, just because the shipping and airline business are little different in so far as mode of transport, the condition of establishing the linkage cannot be dispensed with when the Article 8 under which the relief is being claimed does not make any such distinction between the shipping and airline business. If the contention of 20 ITA 1256/M/14 Ld AR is accepted then how can he rely on the case of MISC Berhard to support his claim of benefit under Article 8.
30. The alternate contention of Ld AR that the profits are eligible for exemption under Article 8(4) as the profits derived from 'pool' arrangement, is also not tenable for following reasons;-
"As per the dictionary meaning of 'pool' as illustrated by Ld AR during hearing it would clearly suggest that a 'pool' means combining of several persons of their separate resources in one large operation (concise law dictionary). Thus a 'pool' requires several persons coming together to contribute and combine their resources for a large business and then share the resources amongst them. In the present case the arrangement are only bilateral arrangements and not several persons have come together. Further, it is also not the case that the assessee and third party both are contributing their aircrafts in a pool which are shared by both. Only the third party is contributing its aircraft and the assessee is only using the resources of the third party as per the terms of agreement. Thus the arrangement does not at all meets principles of pool arrangement; rather assessee is conducting itself as a simple hirer of the resources for its own activities.
b. Further even to qualify for exemption for profits under a pool arrangement, one has to still satisfy the condition of Article 8(1) as applicability of Article 8(4) is flowing from substantive Article 8(1). Since there is no mention of Article 8(2) at all under Article 8(4), a conjoint reading of Article 8(1) and 8(4) therefore would make it very clear that benefit of Art 8(4) can be claimed only if the assessee is eligible under 8(1) by deriving profits from operation of aircraft in International traffic under a pool arrangement. As already explained in earlier para that when the assessee has not shown to have carried even a part of the voyage in International traffic qua voyages under code sharing arrangement, the conditions of Article 8(1) is not fulfilled and hence the benefit of Article 8(4) cannot be claimed even if there were any pool arrangement (without admitting the existence of pool arrangement in this case).
21 ITA 1256/M/14 c. Since Article 8(2) is not at all referred under article 8(4), the question of going into expanded definition of international traffic as charterer/lessee would not come into play without prejudice to the fact that in present case even there is no charter arrangement.
31. We have considered the rival contentions, gone through the orders of authorities below and also deliberated upon the judicial pronouncements cited at bar by the ld. A.R. and ld. D.R. in the context of the factual matrix of the case. From the record we found that the assessee is a company incorporated under the laws of the United States of America and tax resident of USA. It is engaged in carriage of cargo and passengers through air in International Traffic. These services were performed by employing Delta's airlines own aircrafts whose income has been claimed exempt under Article 8 and allowed by AO also. However, the assessee has also entered into code sharing agreement with other third party airlines for carriage of cargo and passengers from India. For such code sharing voyages, the aircrafts used by third party carriers are neither owned nor leased or chartered by the assessee i.e. Delta Air lines Inc but under the code sharing agreement the assessee was booking its customers for international traffic on the flights operated by such third parties from India. The receipts in respect of such bookings made by assessee under the code sharing agreement have also been claimed as exempt form taxation in India under Article 8 of DTAA between India and USA on grounds that cargo/passengers booked under code sharing arrangement from India will also be covered by international traffic. The AO and the DRP has held such receipts are not covered under Article 8 as the code sharing agreement could not be said to be in the nature of a charter arrangement as envisaged under the DTAA. The basic question to be decided is whether the code sharing arrangement with third party in which assessee was booking tickets for its customers can be said to be slot/space charter arrangement on specific facts of the instant case so as to make it eligible for benefit under Article 8 of DTAA.
22 ITA 1256/M/14
32. For better understanding of exemption provided under Article 8 of DTAA between India and US, we reproduce hereunder the relevant provisions containing under Article 8:-
"ARTICLE 8 Shipping and air transport
1. Profits derived by an enterprise of a Contracting State from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in that State.
2. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean profits derived by an enterprise described in paragraph 1 from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft including--
a) the sale of tickets for such transportation on behalf of other enterprises;
(b) other activity directly connected with such transportation; and
(c) the rental of ships or aircraft incidental to any activity directly connected with such transportation.
3. Profits of an enterprise of a Contracting State described in paragraph 1 the use, maintenance, or rental of containers (including trailers, barges, and related equipment for the transport of containers) used in connection with the operation of ships or aircraft in international traffic shall be taxable only in that State.
4. The provisions of paragraphs 1 and 3 shall also apply to profits from participation in a pool, a joint business, or an international operating agency."
33. It is clear from the provisions of Article 8 (1) that it is the substantive provisions granting the exemption to an enterprise of a contracting state from the operation by that enterprise of ships or aircraft in international traffic. Article 8(2) clarifies that the operation of ships or aircraft in international traffic shall mean profits derived by an enterprise from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft. Thus the meaning of "profit derived from operation of ship or aircraft in international traffic" as 23 ITA 1256/M/14 owner/lessor/charterer is a condition precedent for claim of exemption under Article 8. Hence the first and crucial test for eligibility under Article 8(1) is that such profit should be derived from operation of aircraft in international traffic by the ship or aircraft owned/leased/chartered by the assessee. There is no dispute in respect of profit derived by assessee by transportation by its owned/leased/chartered aircrafts. It is only the receipts under code sharing agreements with the third parties where the assessee has only booked the tickets and the actual transportation is done by third parties ship or aircraft that such receipts cannot be said to be the profits "derived" from international voyage carried by the assessee by entering into code sharing agreements. The receipts for activities under Article 8(2)(a)(b)(c) are only for enlarging the scope of profits from other related activities but the qualifying condition of such transportation through ship or aircraft owned/leased or chartered by assessee have to be still independently fulfilled under Article 8(1) & (2) to claim the benefit of receipts falling under Article 8. In assessee's own case the Tribunal held that the receipts from other activities connected to such transport falling under Article 8(2)(b) without having any receipts which qualify under Article 8(1) & 8(2) are not eligible for benefit of Article 8. The Tribunal in assessee's own case reported at 124 ITD 114 (Mumbai) observed at para 13 that Article 8(2)(b) makes it clear that the activity carried on by the assessee must be directly connected with such transportation. The words "such transportation" refers to the transportation prescribed in the main body of para 2 i.e. transportation by sea or air of passengers, mail, livestock or goods carried by the owner or lessee or the charter of the aircraft. It was also observed that only that activity which is directly related to the transportation of passengers by the assessee as owner/lessee/charterer of the aircraft would fall within the ambit of para 2(b) of Article 8 and consequently the activity relatable to the transportation of passengers by other airlines would be outside the scope of such provisions. It was further held that the activity of third party charter handling and maintenance would also be outside the 24 ITA 1256/M/14 ambit of para 2(b) of Article 8. Similar view has been taken by the co-ordinate Bench in the case of British Airways Plc. wherein expression under Article 8 of Indo-UK Treaty (which is similarly worded) was denied in respect of the various services provided through other airlines. The contention of the ld. AR was that since the assessee is an airline, admittedly operating in international traffic, therefore income from cargo/passengers through third airlines is also covered under Article 8 of DTAA. Heavy reliance was placed by the ld. AR on the decision of Tribunal in the case of MISC Berhard vs. ADIT (ITA No. 6499/Mum/2012) wherein the assessee used the services of feeder vessels operated by third parties by using space charter/slot charter from Indian Port to Hub Port only and from where the cargo were transferred to the mother vessels i.e. the ships owned by the assessee for being transported to final destination port. The Revenue's case was that since the feeder vessel is not owned/leased/chartered by the assessee, therefore, the benefit of Article 8 cannot be given. After considering the entire facts, the Tribunal had recorded its finding to the effect that since the entire voyage from Indian Port to Hub Port and from there to final destination port was inextricably linked and could not be segregated and hence the carriage of goods from the feeder vessel was nothing but a charter only and therefore the receipts in respect of voyage from Indian Port to Hub port were also held to be exempt under Article 8. However, in the instant case there is no situation like transportation to Hub Port and from there to final destination port nor there is any inextricable link between such transportation, therefore, the principle laid down in the case of MISC Berhad (supra) cannot be applied to the facts of the instant case.
34. There is nothing on record to suggest that assessee had entered into agreement with the third party in the nature of slot charter/space charter so as to qualify under Article 8(2). The right of the assesse to book flights under code sharing agreements with other third parties is not exclusive unlike the charter agreement. The assessee has no fixed space/slot for which the 25 ITA 1256/M/14 booking rights are exclusively with assessee only. The number of seats/space which can be booked by assessee is also not fixed under the code sharing agreement. The role of the assessee in respect of bookings so made under code sharing agreement is essentially in the nature of booking agent and not as a charterer. Nothing was placed on record in support of ld. AR's contention that the cargo/passengers carried under code sharing arrangement was upto intermediary destinations only and thereafter assessee had transported further by its owned airlines from such intermediary destinations to final destinations. In terms of the facts recorded by A.O./DRP, we found that complete transportation under code sharing arrangement took place from origin to final destination in single stretch and nothing is placed on record to show that such destinations were only interim destinations. Thus the proposition laid down in the case of MISC Berhard (supra) is not applicable to the facts of the present case. However, nothing has been produced before the A.O./DRP/ITAT to show that destinations to which all passengers/cargo were carried from India under code sharing were further transported to final destination by assessee's airlines. Merely the fact that assessee in some instances operating its airline from such intermediary destinations will not automatically prove that passengers/cargo which were carried from India under code sharing to intermediary destinations were transported to final destinations by assessee's airline only. Nothing was brought on record to support the contention that there was inextricable link between voyage from India to interim destination by third parties under code sharing agreement and from interim destination to final destination by assessee's owned/chartered/leased aircraft. In this regard, it is important to bring on record the relevant observation by the ITAT in the case of MISC Berhard (supra) vide para No. 29, page 36 of its order:-
"From the above observations, it can be understood that the facility of slot hire agreement with the feeder vessels to complete the voyage is not merely an auxiliary or incidental activity to the operation of ships, but inextricably linked. If the transportation of cargo by feeder vessels
26 ITA 1256/M/14 belonging to other enterprise is only a part of main voyage by the mother ship i.e., owned or leased by the assessee enterprise, then it has to be taken as a part and parcel of the operation, which is inextricably linked with the completion of the entire voyage. The linkage between the transportation by feeder vessels, mother vessels of the ship owned by the assessee has to be established. Hence in absence of any link qua each voyage from India to interim destination under code sharing and interim destination to final destination by assessee, and also in absence of any evidence that even the second leg of same voyage which started from India was carried by assessee, the code sharing arrangement cannot be said to be in nature of space/slot charter."
35. To arrive at conclusion that the shipping activity of assessee from Indian Port to Hub Port was in the nature of charter arrangement and covered under Article 8, precise observation at para 14 in page No. 17 of the Tribunal order reads as under:-
"For the purpose of its transportation of cargo, the assessee used the services of feeder vessels operated by third parties by using space charter/ slot charter from Indian Port to Hub Port. At the Hub Port, the containers which were owned by the assessee were transferred to mother vessels i.e., the ships owned by the assessee and from thereon, the cargos / containers were transported by its own ships to the final destination. port. The entire voyage from India Port to Hub Port and from there to final destination port, is inextricably linked and cannot be segregated as held by the Assessing Officer and the learned Commissioner (Appeals). He further submitted that the Assessing Officer has, in fact, admitted that the assessee has furnished proof to substantiate the linkage of the voyage performed on feeder vessels and mother vessels [i.e., ships owned by the assessee). The Revenue's case is that since the feeder vessel is not owned / leased by the assessee, therefore, the benefit of Article - 8, cannot be given on the goods carried through the feeder vessel is not a correct interpretation of Article - 8(2). The carriage of goods from the feeder vessel is nothing but a charter only, in a sense that the assessee has booked space charter/slot charter for its containers which are owned by it."
36. However, in the present case of the assessee it has not been found that any passenger or cargo was taken to the hub port by feeder vessel owned by third party and there from to final destination by assessee's owned/leased/chartered aircrafts/ship. Nothing has been shown to prove that flight destinations booked under code sharing were only upto interim destinations and not to the final destinations and even if they were interim 27 ITA 1256/M/14 destinations the passengers transported from India to interim destinations by third party airlines, were ultimately transported by assessee's airline to complete their voyage there from to the final destination. However, in the case of MISC Berhard (supra), the Tribunal has given a clear finding that the entire voyage from India Port to Hub Port and from there to final destination port was inextricably linked and could not be segregated. On these facts, it was held by the Tribunal that the assessee was operating ships in international traffic and that the carriage of goods in the first leg of voyage from India to Hub Port by feeder vessels was like a charter. The absence of linkage of carrying passengers from India to interim destination under code sharing and from interim destination to final destination is pointed out only to distinguish the facts of the assessee's case from that of MISC Berhard (supra) which has been heavily relied upon by the ld. A.R. We found that on the one hand the ld. A.R. relied on the decision in the case of MISC Berhard (supra) to support assessee's eligibility under Article 8 but on the other hand when it comes to requirement of establishing one to one linkage of voyages from India to interim destinations and from interim destinations to final destinations, he contends that this principle cannot be applied to airline business unlike the case of MISC Berhard which was for a shipping business. The condition of establishing the linkage therefore cannot be dispensed with if one has to call the arrangement as space/slot charter following the ratio of decision of MISC Berhard (supra).
37. Now coming to the alternative contention of the ld. A.R. that the profits are eligible for exemption under Article 8(4) insofar as profits were derived from "pool" arrangement.
38. We have considered the rival contentions. Arrangement of "pool" requires several persons coming together to contribute and combine their resources for a large business and then share the resources amongst them.
28 ITA 1256/M/14 However in the present case the arrangement was only bilateral arrangements and not several persons have come together. Nothing was brought on record to indicate that the common funds and resources were brought together in a pool which is shared by members of the pool. However, the assessee has only entered into code sharing arrangement, it is also not a case that assessee and third party both are contributing the air craft in a pool which are shared by both. However in the instant case third party is contributing its aircraft and the assessee is only using the resources of third party by booking seats in the aircraft. Thus the arrangement does not meet principle of pool arrangement.
39. In view of the above, we can conclude that income derived by the assessee by booking of seat/space under code sharing agreement cannot be said to be income derived from operation of aircraft/ship in international traffic through owned/leased/chartered aircraft/ship. Furthermore the code sharing agreement cannot be held as space/slot charter in absence of inextricate linkage of both legs of journeys. In the result, the receipts to the extent of code sharing arrangement cannot be said to be profits derived from operation in international traffic under Article 8-(1) read with Article 8-(2). The decision in the case of MISC Berhard (supra) is distinguishable on facts, therefore, cannot be applied to the present case.
40. In the result, the action of the A.O. for denial of benefit under Article 8 of DTAA is confirmed.
41. The next grievance of the assessee is against enhancing the global profitability rate for determining profits from operations carried from India.
42. From the record we find that the assessee has shown profitability rate at loss of 3.57%. However, while applying Rule 10, the A.O. enhanced the global profitability rate by disallowing the other expenditure claimed by the assessee in its global accounts which did not have any implication on the 29 ITA 1256/M/14 profitability from Indian operations. Thus the A.O. estimated the profit on pro rata basis @ 2.52% after excluding the expenditure not related to Indian operation. Article 7(2) of DTAA provides that such profits should be computed which the PE might be expected to make if it were a distinct and separate enterprise, then any expenditure which is required for the AE's global business point of view as a whole cannot be allowed as deduction unless its utility is proved to be relevant to PE's activity in India by assuming the PE were a distinct and separate entity. Thus while computing the profits attributable to India, only such expenses which are specific to India can be considered.
43. We find that the assessee has not given any details of such expenditure before the A.O. or DRP to prove any part of such expenditure was attributable to PE in India. The assessee is directed to furnish such details of expenditure. In the interest of justice, we restore this ground back to the file of A.O. for determining the profit attributable to PE. We direct accordingly.
44. The next grievance of the assessee relates to charging of interest u/s 234B of the Act.
45. The contention of the ld. A.R. was that once the income was subject to TDS, no interest u/s 234B of the Act should be charged in view of the decision in the case of NGC Network Asia LLC, 313 ITR 187 (Bom).
46. We have considered the rival contentions. There is no dispute to the proposition that once the income is subject to TDS, it was responsibility of the deductor, there is no liability of interest u/s 234B of the Act for failure to pay advance tax. In the instant case, we found that the assessee was collecting money from its customers on booking of tickets under code sharing arrangement. Nothing was brought on record by the assessee to substantiate its claim that such receipts were subject to TDS. In the interest of justice, 30 ITA 1256/M/14 this ground is also restored back to the file of A.O. with a direction not to charge interest u/s 234B of the Act if he found that the income of the assessee was subject to TDS. We direct accordingly.
46. In the result, appeal of the assessee is allowed in part in terms indicated hereinabove.
Order pronounced in the open court on 29th April, 2015.
आदे श क घोषणा खल ु े #यायालय म% &दनांकः 29-04-2015 को क गई ।
Sd/- sd/-
(AMIT SHUKLA) (R.C. SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
मुंबई Mumbai; &दनांक Dated 29-04-2015 [
व.6न.स./ RK , Sr. PS
आदे श क! " त$ल%प अ&े%षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु7त(अपील) / The DRP,, Mumbai
4. आयकर आयु7त / CIT, Mumbai
5. :वभागीय 6त6न<ध, आयकर अपील य अ<धकरण, मुंबई / DR, ITAT, Mumbai l Bench
6. गाड@ फाईल / Guard file.
ु ार/ BY ORDER, आदे शानस स या:पत 6त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मंब ु ई / ITAT, Mumbai