2012 (5) TMI 178 - AT - Income Tax

Benefit of Article 8 of the Indo-USA DTAA to the line-haul activity revenue contested that CIT(A) erred in not adjudicating on nature of Cargo business carried on by assessee in India and has failed to inquire into real nature of business activity Held that - The claim of the assessee does not fall within the scope of article 8(2) of Indo-USA DTAA - from the language of article 8 it clearly emerges that the income derived from the operation of ships in international traffic shall also include income from any other activity directly connected with such transportation - the claim of the assessee can be examined with reference to paragraph 4 of article 8 which includes profits from participation in a pool, a joint business, or an international operating agency - matter is restored to the file of the Assessing Officer to reframe the assessments to examine the question as to where a space is booked with other airlines, whether transportation through such airlines can be said to be transportation by the aircraft chartered by the assessee with reference to the first part of the definition given in article 8(2) in the light of material placed in favour of revenue.

Issues Involved:
1. Applicability of Article 8 of the Indo-USA Double Tax Avoidance Agreement (DTAA) to the line-haul activity.
2. Nature of Cargo business carried on by the assessee in India.
3. Admissibility of additional grounds by the Revenue.

Detailed Analysis:

1. Applicability of Article 8 of the Indo-USA Double Tax Avoidance Agreement (DTAA) to the Line-Haul Activity:
The primary issue was whether the line-haul activity, which involves transportation of goods through other airlines, falls under Article 8 of the Indo-USA DTAA, thereby exempting the profits attributable to such activity from taxation in India. The assessee, a non-resident cargo airline company incorporated in the USA, claimed that its income from line-haul activity should not be taxable in India under Article 8 of the DTAA. The Assessing Officer (AO) disagreed, treating the line-haul activity as a separate activity not covered under Article 8, and attributed 10% of the total line-haul expenses as income taxable in India.

The CIT(A) ruled in favor of the assessee, holding that the line-haul activity is an integral part of the assessee's business of operating aircraft in international traffic. The CIT(A) referred to paragraph 2 of Article 8 of the DTAA, which includes profits from the sale of tickets, other activities directly connected with transportation, and rental of ships or aircraft incidental to such transportation. The CIT(A) cited various international commentaries and precedents, including the OECD Model Tax Convention and the decision of the Hon'ble Delhi Tribunal in British Airways Plc v. Dy. CIT, supporting the view that line-haul activities are directly connected with the operation of aircraft in international traffic.

2. Nature of Cargo Business Carried on by the Assessee in India:
The Revenue raised additional grounds contending that the CIT(A) failed to adjudicate on the nature of the cargo business carried on by the assessee in India and did not inquire into the real nature of the business activities. The Tribunal admitted the additional grounds, noting that they were part and parcel of the original grievance projected by the Revenue.

The Tribunal reviewed the case of Federal Express Corporation, where it was held that line-haul charges are not income from the operation of aircraft entitled to the benefits of Article 8 of the Indo-USA DTAA. The Tribunal in Federal Express emphasized that the expression "profits from the operation of ships or aircraft in international traffic" should not be given an extended meaning and should be restricted to transportation by the owners, lessees, or charterers of ships or aircraft.

3. Admissibility of Additional Grounds by the Revenue:
The Tribunal admitted the additional grounds raised by the Revenue, as they were integral to the original grounds of appeal. The Tribunal considered the arguments and precedents cited by both parties, including conflicting decisions in Balaji Shipping and Delta Airlines Inc., and the interpretation of treaties under international law.

The Tribunal concluded that the view expressed in Federal Express is a possible view and does not warrant a different interpretation or the constitution of a special bench. The Tribunal upheld that the claim of the assessee does not fall within the scope of Article 8(2) of the Indo-USA DTAA. However, it allowed for the possibility that the claim could be examined under paragraph 4 of Article 8, which includes profits from participation in a pool, joint business, or international operating agency.

Conclusion:
The Tribunal restored the matter to the AO to reframe the assessments in light of the observations and guidelines provided. The appeals of the Revenue were allowed for statistical purposes, and similar conclusions were reached for the other two appeals for the assessment years 1999-2000 and 2000-01.

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