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2022 (5) TMI 412 - AT - Income TaxTaxability of income in India - income derived from baggage screening services and aircraft handling services provided to other airlines, being ancillary and incidental to its main activities of transportation of passengers, goods etc. by air - Article 8(2)(b) of India-USA Tax Treaty - HELD THAT - The profit derived by the assessee from baggage screening services and aircraft handling services provided to other airlines is in no way connected to assessee's activity of transportation of passengers, mail, livestock or goods etc. by air in its own aircrafts. In fact, if the assessee does not provide such services to other airlines, in no manner, assessee's activity of transportation of passenger, mail, goods, livestock etc. would be affected. In fact, the assessee itself has stated that when not required by the assessee for its own transportation activity, for optimum use of the equipments and manpower deployed at IGI airport, the services are provided to other airlines. These facts make it clear that, either provision or non provision of certain services to other airlines will not at all have any impact on assessee's activity of transportation of passenger, mail, goods, livestock etc. That being the case, in our considered opinion, the profit derived by the assessee from baggage screening services and aircraft handling services provided to other airlines will not come within the ambit of 'other activity directly connected to such transport' as provided under Article 8(2)(b) of India-USA Tax Treaty. Hence, would not be covered under Article 8(1) of the Tax Treaty. Thus, assessee's claim under Article 8(1) read with Article 8(2)(b) must fail. On a reading of Article 8(4), we are unable to find any restrictive covenant indicating that the reciprocity in services must be in the same country. Therefore, once the assessee derives profit from participating in a pool on reciprocal basis, in terms of Article 8(4), such profit can only be taxed in the country of residence of the enterprise, in the present case USA. Also in case of Air France Vs. ACIT . 2020 (6) TMI 1 - ITAT DELHI the Bench has gone a step further by holding that services provided and received from non-IATP members will also come within the ambit of Article 8. Thus, the materials on record not only demonstrate the existence of a pool in terms of Article 8(4), i.e., IATP pool but they also demonstrate that the assessee is a member of the pool and being a member has provided and received services from airlines on reciprocal basis. Thus, in our considered opinion, the profit derived from providing baggage screening services and aircraft handling services to other airlines as a participant of IATP pool would be covered under Article 8(1) read with Article 8(4) of India-USA Tax Treaty. The ratio laid down in the decisions relied upon by leaned counsel for the assessee, particularly, the decision of Hon'ble Jurisdictional High Court in case of DIT Vs. KLM Royal Dutch Airlines 2017 (2) TMI 157 - DELHI HIGH COURT clearly support this view. Thus we hold that the profit derived from providing baggage screening services and aircraft handling services to various other airlines in India will not be taxable in India under Article 8(1) read with Article 8(4) of the India-USA Tax Treaty. Therefore, the additions made in different assessment years under dispute are hereby deleted. Assessee's claim of exemption under Article 8(1) read with Article 8(2)(b) is rejected. Whereas, its claim under Article 8(1) read with Article 8(4) is allowed. Levy of interest under section 234B - HELD THAT - As no interest under section 234B can be levied as the liability is on the payer to deduct tax at source and not on the assessee to pay the advance tax. This is so, in view of the ratio laid down by the Hon'ble Supreme Court in case of DIT Mitsubishi Corporation 2021 (9) TMI 875 - SUPREME COURT Penalty u/s 271(1)(c) - Addition of income received from baggage screening and aircraft handling services from other airlines - HELD THAT - While deciding this particular issue in quantum appeals, we have held that the income is not taxable in India, in terms of Article 8(1) read with Article 8(4) of India-USA Tax Treaty. In view of our aforesaid decision in the quantum appeals, penalty imposed under section 271(1)(c) of the Act in all these assessment years cannot survive. Accordingly, for this very reason, we delete the penalty imposed in all the assessment years under dispute. Even, otherwise also, the income from baggage screening services and aircraft handling services received from other airlines, whether, would be covered under Article 8 of India-USA DTAA is a highly debatable issue on which more than one view is possible. Therefore, consequent to additions made on such a debatable issue, no penalty under section 271(1)(c) of the Act can be imposed, alleging furnishing of inaccurate particulars of income. For this reason also, penalty imposed under Section 271(1)(c) of the Act needs to be deleted. Assessee appeal allowed.
Issues Involved:
1. Validity of notices issued under section 142(1)(i). 2. Taxability of income from baggage screening and aircraft handling services under Article 8 of India-USA DTAA. 3. Attribution of expenses to Permanent Establishment (PE). 4. Levy of interest under sections 234A and 234B. 5. Imposition of penalty under section 271(1)(c). Detailed Analysis: 1. Validity of Notices Issued Under Section 142(1)(i): The Tribunal previously ruled that notices issued under section 142(1)(i) after the end of the relevant assessment years were invalid, rendering the assessments invalid as well. The Revenue appealed, and the Hon'ble Jurisdictional High Court remanded the matter back to the Tribunal for a decision on the merits. 2. Taxability of Income from Baggage Screening and Aircraft Handling Services: - Assessee's Claim: The assessee, a US-based airline company, argued that income from providing baggage screening and aircraft handling services to other airlines should be exempt under Article 8 of the India-USA DTAA. The assessee claimed these services were incidental to its primary business of operating aircraft in international traffic, thus falling under Article 8(1) and 8(2). - Assessing Officer's Decision: The Assessing Officer accepted that income from operating aircraft in international traffic was exempt under Article 8(1). However, he considered income from baggage screening and aircraft handling services as separate business activities, taxable in India under Article 7 of the DTAA, since the assessee had a Permanent Establishment (PE) in India. - Tribunal's Decision: The Tribunal held that the income from these services did not fall under Article 8(1) read with Article 8(2)(b) as they were not directly connected to the transportation of passengers and goods by the assessee’s aircraft. However, the Tribunal accepted the assessee's alternative claim under Article 8(4), which covers profits from participation in a pool, joint business, or international operating agency. The Tribunal found that the assessee was a member of the International Airlines Technical Pool (IATP) and provided services on a reciprocal basis, thus qualifying for exemption under Article 8(4). 3. Attribution of Expenses to Permanent Establishment (PE): Given the Tribunal's decision on the taxability of income under Article 8(4), the issue of attributing expenses to the PE became academic and was not adjudicated. 4. Levy of Interest Under Sections 234A and 234B: The Tribunal noted that the liability to deduct tax at source lies with the payer, not the assessee. Therefore, no interest under sections 234A and 234B can be levied on the assessee, following the Supreme Court’s decision in DIT Mitsubishi Corporation. 5. Imposition of Penalty Under Section 271(1)(c): - Assessee's Appeal: The assessee appealed against the penalties imposed based on the addition of income from baggage screening and aircraft handling services. - Tribunal's Decision: The Tribunal deleted the penalties, holding that the income was not taxable in India under Article 8(1) read with Article 8(4) of the India-USA DTAA. Additionally, the Tribunal noted that the issue was highly debatable, and no penalty could be imposed for furnishing inaccurate particulars of income on such a debatable issue. Conclusion: The appeals were partly allowed, with the Tribunal ruling in favor of the assessee on the taxability of income under Article 8(4) and deleting the penalties imposed under section 271(1)(c). The issues concerning the attribution of expenses to the PE and the levy of interest under sections 234A and 234B were rendered academic or infructuous.
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