2022 (3) TMI 1432 - AT - Income Tax

Income deemed to accrue or arise in India - collection charges paid by AAI to the assessee - income derived from operation of aircraft - DTAA between India and Germany - Whether the charges paid by Airport Authority of India (for short AAI) to the assessee, for assessee collecting the User Development Fee (for short UDF) from the passengers and passing it on to AAI, is not commission and even if it is so, the same is income from operation of aircraft and not liable for tax as per Article 8 of DTAA between India and Germany? - HELD THAT - It is not in dispute that the assessee s income derived from operation of aircraft is not taxable under Article 8 of DTAA between India and Germany. However, the assessee received collection charges from AAI as the assessee collected UDF from the passengers and the same was passed on to AAI. A duty was cast on the assessee to collect UDF from the passengers and pass it on to the AAI. Assessee was paid collection charges wherever the UDF is remitted to AAI within the stipulated time. As the effective management of the assessee company is situated in Germany the profits from operation of aircraft in international traffic is taxable only in Germany. The UDF is levied at the Indian airports as a measure to increase revenues of the airport operator. UDF is levied to brdge any revenue shortfall so that the airport operator is able to get a fair rate of return on investment. The quantum of UDF varies from airport to airport and the rate of UDF at airports is determined by the Airports Economic Regulatory Authority of India (AERA) for major airports and ministry of civil aviation for not major airports. Presently UDF collection charge at a flat rate of Rs.5/- per passenger (all inclusive) is allowed to airlines subject to payment of UDF collection to AAI within 15 days of receipt of bill. Airlines will make full payment of UDF to AAI and raise a separate invoice for the collection charges on UDF to AAI. The collection charges paid by AAI to the assessee in whatever name called i.e., either discount or commission is nothing but service charges paid, for assessee collecting UDF and passing it on to AAI. The collection charges paid by AAI to assessee cannot be said to be the income derived from operation of aircraft. Further in assessee s case on identical facts for the assessment year 2013-14 the Ld. DRP approved the order of the assessing officer in holding that the collection charges received by the assessee from AAI on remitting the UDF within the stipulated time as income from business taxable in India and such income is not derived from operation of aircraft falling under Article 8 of DTAA between India and Germany. Thus we hold that the collection charges received by the assessee from AAI are not income derived from operation of aircraft falling under Article 8 of DTAA between India and Germany. Thus ground Nos. 1 to 4 raised by the assessee are dismissed.

Summary

Issues Involved:
1. Interpretation of collection charges by Airport Authority of India as commission income or income from operation of aircraft under DTAA between India and Germany.
2. Taxability of collection charges received by the assessee.
3. Applicability of Article 8 of DTAA between India and Germany.
4. Disallowance of discount by Airport Authority of India.
5. Levy of interest under sections 234B and 234C of the Income Tax Act.
6. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Analysis:
1. The primary issue in the appeal was whether charges paid by Airport Authority of India to the assessee for collecting User Development Fee (UDF) from passengers and passing it on to AAI constitute commission income or income from the operation of aircraft under the DTAA between India and Germany. The assessing officer considered these charges as commission, not derived from the operation of aircraft, proposing to assess them as business income taxable under Article 7 of the Treaty.

2. The assessee contended that the charges were discounts, not taxable under Article 8 of the DTAA, as they were derived from the operation of aircraft. The DRP approved the assessing officer's view, stating that discounts were not covered by Article 8, and the charges were for services rendered by the assessee, not from the operation of aircraft.

3. The tribunal analyzed Article 8 of the DTAA, which states that profits from the operation of aircraft in international traffic are taxable only in the Contracting State where the effective management of the enterprise is situated. As the assessee's effective management was in Germany, the profits from operating aircraft were taxable only in Germany. The UDF was levied to increase airport revenues, and the collection charges were for services rendered, not derived from aircraft operation.

4. Based on the above analysis, the tribunal concluded that the collection charges received by the assessee from AAI were not income derived from the operation of aircraft under Article 8 of the DTAA between India and Germany. Therefore, the grounds raised by the assessee were dismissed.

5. The tribunal also dismissed the grounds related to the levy of interest under sections 234B and 234C, considering them consequential, and the ground regarding the initiation of penalty proceedings under section 271(1)(c) as premature at that stage.

6. In conclusion, the appeal of the assessee was dismissed, and the tribunal pronounced the order accordingly on March 24, 2022.