2017 (2) TMI 157 - HC - Income Tax

Providing technical services to other airlines - covered by Articles 8(1) and 8(4) of the Double Taxation Avoidance Agreement between India and Germany and by Articles 8(1) and 8(3) of the Double Taxation Avoidance Agreement between India and Netherlands - Held that - This Court is of opinion that the amplification of the term operation of aircraft in Article 8 (1) through Article 8 (3), i.e. 3. For the purposes of this article the term operation of aircraft shall include transportation by air of persons, live-stock, goods or mail, carried on by the owners or lessees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprise, the incidental lease of aircraft on a charter basis and any other activity directly connected with such transportation. had the effect of limiting the nature of activities that could be comprehended in the pool envisioned in Article 8 (2) in other words, the expanded meaning of operation of aircraft included those activities in Article 8(3) through the extended definition and no more. On the other hand, there is no such limitation in the DTAAs in question, in these cases. This constituted the most significant difference between the two sets of cases on the one hand, and British Airways (2001 (9) TMI 242 - ITAT DELHI-A ) on the other. For these reasons, this Court rejects the Revenue s contentions. For the foregoing reasons, this Court answers the questions of law, framed in both sets of appeals, against the Revenue and in favour of the assessees; there is no infirmity in the impugned orders of the ITAT, which are affirmed. The appeals fail and are dismissed.

Summary

Issues Involved:
1. Taxability of profits from technical services provided by international airlines under the Double Taxation Avoidance Agreements (DTAAs) between India and Germany, and India and Netherlands.
2. Interpretation of the term "pool" in the context of DTAAs.
3. Applicability of the ITAT's decision in British Airways Plc. vs. Dy. CIT to the current cases.

Detailed Analysis:

1. Taxability of Profits from Technical Services:
The primary question was whether the profits from technical services provided by the assessees (international airlines) to other airlines were covered under Articles 8(1) and 8(4) of the Indo-German DTAA, and Articles 8(1) and 8(3) of the Indo-Dutch DTAA. The assessees argued that these profits were not taxable in India as they were derived from participation in a pool, a joint business, or an international operating agency. The Revenue contended that these services were separate business activities and not part of air transport operations, thus taxable in India.

2. Interpretation of the Term "Pool":
The court examined whether the services provided under the International Airlines Technical Pool (IATP) constituted participation in a "pool" as per the DTAAs. The Revenue argued that a "pool" required a unified management structure and direct reciprocity between services provided and received. The assessees countered that the IATP arrangement, which involved sharing technical resources among member airlines, met the criteria for a "pool" under the DTAAs.

3. Applicability of the ITAT's Decision in British Airways Plc. vs. Dy. CIT:
The Revenue relied on the ITAT's decision in British Airways, where similar services were deemed taxable in India. However, the court noted significant differences between the cases, including the nature of services, the absence of reciprocity in British Airways' case, and the specific language of the DTAAs involved.

Judgment Summary:

Taxability of Profits:
The court held that the profits from technical services provided by the assessees were not taxable in India. The services were part of the IATP arrangement, which constituted participation in a pool as per the DTAAs. The court noted that the IATP's primary goal was to generate economic savings by sharing technical resources, which aligned with the objectives of the DTAAs.

Interpretation of "Pool":
The court rejected the Revenue's narrow interpretation of "pool," emphasizing that the IATP arrangement met the criteria for a pool under the DTAAs. The court noted that the IATP was the only internationally recognized pool in the aviation industry, and its structure and operations were consistent with the pooling provisions of the DTAAs.

Applicability of British Airways Decision:
The court distinguished the current cases from the British Airways decision, noting key differences in facts and the specific language of the DTAAs. The court emphasized that the British Airways case involved a one-way traffic of services without reciprocity, whereas the assessees in the current cases both provided and received services under the IATP arrangement.

Conclusion:
The court affirmed the ITAT's decisions, holding that the profits from technical services provided by the assessees were not taxable in India under the relevant DTAAs. The appeals by the Revenue were dismissed, and the questions of law were answered in favor of the assessees.