2015 (5) TMI 681 - AT - Income Tax

Denial of benefit of Article 8 of India-USA Double Taxation Avoidance Agreement - Held that - 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. 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.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 (2014 (7) TMI 686 - ITAT MUMBAI) is distinguishable on facts, therefore, cannot be applied to the present case.In the result, the action of the A.O. for denial of benefit under Article 8 of DTAA is confirmed. Enhancement of Global Profitability rate - Held that - 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 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. 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. Charging of interest u/s 234B - Held that - 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, 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. - Appeal decided partly in favour of assesse.

Issues Involved:
1. Denial of benefit under Article 8 of the India-USA Double Taxation Avoidance Agreement (DTAA).
2. Enhancement of Global Profitability Rate.
3. Charging of interest under Section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Denial of Benefit under Article 8 of the India-USA DTAA:

The assessee, Delta Airlines Inc., a resident of the USA, engaged in the business of carriage of cargo and passengers, claimed exemption under Article 8 of the India-USA DTAA for revenues earned from the usage of third-party carriers. The Assessing Officer (AO) denied this benefit, arguing that the arrangement with third-party carriers did not qualify as "pooling/chartering" under Article 8(2) and Article 8(4) of the treaty. The AO referenced decisions in ADIT v. Federal Express Corporation and United Parcel Service Co. v. DDIT to support his stance. The AO emphasized that the revenues were generated from the usage of third-party carriers and that the assessee itself was not involved in the operation of these aircraft in international traffic, thus failing to meet the requirements of Article 8(1).

The Tribunal analyzed the assessee's contention that the usage of third-party carriers constituted "chartering" and was thus exempt under Article 8(2). The Tribunal noted that the agreements with third-party carriers did not involve exclusive booking rights or fixed space/slot, which are typical characteristics of a charter arrangement. The Tribunal also considered the alternative claim under Article 8(4), which pertains to "pooling," but found that the bilateral arrangements did not meet the principles of a pool arrangement as they lacked the contribution and sharing of resources among several parties.

The Tribunal concluded that the revenues from third-party carriers did not qualify for exemption under Article 8 of the DTAA, as the arrangements were not in the nature of chartering or pooling.

2. Enhancement of Global Profitability Rate:

The AO enhanced the global profitability rate by disallowing certain expenses claimed by the assessee in its global accounts, which did not have any implication on the profitability from Indian operations. The AO estimated the profit on a pro-rata basis at 2.52%, excluding expenditures not related to Indian operations. The Tribunal directed the assessee to furnish details of such expenditures and restored the matter to the AO for determining the profit attributable to the Permanent Establishment (PE) in India. The Tribunal emphasized that only expenses specific to Indian operations should be considered while computing profits attributable to India.

3. Charging of Interest under Section 234B:

The assessee argued that interest under Section 234B should not be charged as the income was subject to Tax Deducted at Source (TDS). The Tribunal acknowledged the principle that if the income is subject to TDS, the responsibility lies with the deductor, and there is no liability for interest under Section 234B for failure to pay advance tax. However, the Tribunal noted that the assessee did not substantiate its claim that the receipts were subject to TDS. The Tribunal restored this issue to the AO with directions to verify if the income was subject to TDS and, if so, not to charge interest under Section 234B.

Conclusion:

The Tribunal confirmed the AO's action of denying the benefit under Article 8 of the DTAA for revenues from third-party carriers. The issue of enhancing the global profitability rate was restored to the AO for further examination, and the charging of interest under Section 234B was also restored to the AO for verification of TDS applicability. The appeal of the assessee was allowed in part, as indicated in the detailed analysis.

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