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2009 (1) TMI 769 - AT - Income TaxEligible for the benefits of article 8 of the Indo-US DTAA - business of operation of aircraft - Whether the benefit of article 8 of the Indo-US treaty can be denied to the assessee merely on the ground that the nature of activity carried on by the assessee, in the opinion of AO, amounts to courier activity - HELD THAT - Assessee has a fleet of 650 aircrafts engaged in the transportation of cargo in the international traffic globally. It is also recognised by the Director General of Civil Aviation in India since the approval was granted to operate air cargo service to and from India. The assessee also obtained approval from the Reserve Bank of India to establish branches at Mumbai, New Delhi, Kolkata and Chennai for undertaking the airline cargo operations. Further air carrier certificate has been issued to the assessee by the Federal Aviation Administration, the Government of U. S. certifying that the assessee has met all the requirements of the Federal Aviation Act, 1958. It is also noted that the assessee is registered member of International Air Transport Association (IATA). Further it is submitted by the assessee that five flights a week were operated to and from India in the international traffic for transportation of cargo even in the first year of business in India. All these factual aspects could not be controverted by the ld DR. Therefore, considering the same, we are of the considered view that CIT (A) was justified in holding that the assessee was engaged in the business of transportation of cargo by air in the international traffic. In our view, the inland transportation is an integral part of the main activity of transportation of cargo in the international traffic provided there is live link between inland transportation and the main transportation in the international traffic. This aspect was examined by the Bench in the light of various commentaries in the case of Deputy DIT v. Safmarine Container Lines N. V. 2008 (7) TMI 444 - ITAT BOMBAY-L . It was held in that case that inland transportation from customer s place at Ludhiana to Mumbai was an integral part of the main activity of the transportation of the same in the international traffic through ships owned/chartered/leased by the assessee. Accordingly, the benefit of article 8 of the Indo-US treaty was allowed. Therefore, following the said decision, it is held that the benefit of article 8 cannot be denied to the assessee merely on the ground that the assessee was collecting cargo from its customer s place and transporting the same to the airport for the purpose of further transportation in the international traffic and vice-versa. The contention of the assessee is that the entire freight revenue received by the assessee should be exempted from tax - 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 article 8 of the Indo-US treaty. 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. 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 would be pertinent to mention that profits from airline business falling outside the scope of article 8 would have to be treated as business profits under article 7 of the Indo-US treaty and, therefore, the claim of the assessee would have to be examined under article 7 of the treaty. Therefore, it is summarised as under (1) The scope of the expression profits from the operation of ships or aircrafts in the international traffic in article 8(1) would be limited to the scope of the definition given in article 8(2). (2) That the transportation of passengers, mails or cargo, etc., by the assessee in the international traffic by the aircrafts as owner/charterer/ lessee would fall within the scope of article 8 and therefore, profits attributed to the same cannot be taxed in India. Further, the profits from inland transportation directly connected with such transportation would also not be taxable in India. (3) That the transportation of cargo in the international traffic through the aircrafts owned/chartered/leased by other enterprises would be outside the scope of article 8(2) and consequently would not be exempt from taxation under article 8(1) unless such transportation falls under paragraph 4 of this article. Further, the inland transportation connected with such transportation would also not be exempt under article 8. However, such profits would be considered as business profits under article 7. Therefore, taxability or exemption in respect of such profits will have to be examined by the Assessing Officer in the light of article 7 of the treaty. (4) Where a space is booked with other airlines, the question whether transportation through such airlines can be said to be transportation by the aircraft chartered by the assessee needs to be examined by the Assessing Officer with reference to the first part of the definition given in article 8(2) in the light of material which may be placed before him. Since the meaning of the word chartered is not clear from the definition itself, the Assessing Officer would be justified in ascertaining the scope of such word in the light of the commentaries or other materials which may be placed before him. In view of the above discussion, the orders of the Commissioner of Income-tax (Appeals) are, therefore, modified and the matter is restored to the file of the Assessing Officer to reframe the assessments as per the observations and guidelines given above. Interest u/s 234B - This issue is covered by the decision of the Special Bench in the case of Motorola Inc. v. Deputy CIT 2005 (6) TMI 226 - ITAT DELHI-A held that interest u/s 234B is not chargeable where the tax is deductible at source. If any part of the income of the assessee is found to be chargeable to tax by AO then the same would be covered by the provisions of section 195 and, therefore, tax would be deductible at source and consequently interest u/s 234B would not be chargeable. Hence, this ground raised by the Revenue is to be dismissed. In the result, the appeals are partly allowed.
Issues Involved:
1. Whether the assessee is engaged in the business of operation of aircraft and eligible for the benefits of Article 8 of the Indo-US treaty. 2. Whether the inland transportation activities are ancillary or incidental to the international air transport. 3. Whether the assessee's use of other airlines for cargo transportation affects its eligibility for treaty benefits. 4. Whether the Assessing Officer correctly denied the benefit of Article 8 of the Indo-US treaty. 5. Whether Rule 10 of the Income-tax Rules, 1962, could be invoked. 6. Whether interest under section 234B could be charged. Detailed Analysis: 1. Business of Operation of Aircraft: The core issue was whether the assessee was engaged in the business of operating aircraft and thus eligible for the benefits of Article 8 of the Indo-US treaty. The assessee, a non-resident company incorporated in the USA, was involved in integrated air and ground transportation of time-sensitive and time-definite shipments. The Commissioner of Income-tax (Appeals) held that the assessee was indeed in the business of operating aircraft, supported by various approvals and certifications from the Director General of Civil Aviation, Reserve Bank of India, and the Federal Aviation Administration of the US. The Tribunal upheld this view, noting that the assessee had a fleet of 650 aircraft and was recognized as an airline in both the US and India. 2. Inland Transportation Activities: The Tribunal examined whether inland transportation activities were ancillary or incidental to international air transport. It was held that inland transportation was an integral part of the main activity of transportation of cargo in international traffic, provided there was a live link between inland transportation and the main transportation. This was supported by the decision in the case of Deputy DIT v. Safmarine Container Lines N. V., where inland transportation was considered part of the main activity of international transportation. 3. Use of Other Airlines: The Tribunal considered the assessee's use of other airlines for cargo transportation due to regulatory constraints in India. The Assessing Officer had denied the benefit of Article 8, arguing that the assessee was engaged in courier activities rather than operating aircraft. However, the Tribunal clarified that the transportation of cargo by other airlines was part of the assessee's main activity and should not disqualify it from treaty benefits. The Tribunal also noted that interline agreements with other airlines were common in the industry and did not change the nature of the assessee's operations. 4. Denial of Article 8 Benefits: The Assessing Officer's denial of Article 8 benefits was based on the view that the assessee was engaged in courier activities and not in the operation of aircraft in international traffic. The Tribunal disagreed, stating that the assessee's activities were in line with international air transport and that the inland transportation was ancillary to the main activity. The Tribunal emphasized that the benefit of Article 8 should not be denied merely because the assessee was collecting cargo from customers and transporting it to the airport. 5. Invocation of Rule 10: The Assessing Officer invoked Rule 10 of the Income-tax Rules, 1962, due to the absence of audited books of account, computing the profit at 5.5% of the gross receipts. The Commissioner of Income-tax (Appeals) did not address this contention explicitly, as the primary issue was resolved in favor of the assessee. The Tribunal's decision to restore the matter to the Assessing Officer implies that the applicability of Rule 10 may need to be reconsidered in light of the Tribunal's findings. 6. Interest under Section 234B: The issue of charging interest under section 234B was addressed for the assessment year 2001-02. Both parties agreed that this issue was covered by the decision of the Special Bench in the case of Motorola Inc. v. Deputy CIT, which held that interest under section 234B is not chargeable where tax is deductible at source. The Tribunal concluded that if any part of the assessee's income is found to be chargeable to tax, it would be covered by section 195, and therefore, interest under section 234B would not be chargeable. Conclusion: The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision that the assessee was engaged in the business of operating aircraft and eligible for the benefits of Article 8 of the Indo-US treaty. Inland transportation was considered ancillary to international air transport. The use of other airlines for cargo transportation did not disqualify the assessee from treaty benefits. The matter was restored to the Assessing Officer to reframe the assessments as per the Tribunal's guidelines. Interest under section 234B was not chargeable if tax was deductible at source. The appeals were partly allowed.
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