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2024 (11) TMI 815 - AT - Income TaxTaxability of income in India - Receipts under code sharing arrangements - Denial of benefit of exemption under Article 8 of the India-USA Tax Treaty -receipts with the third parties where the assessee has only booked the tickets and the actual transportation has been done by third parties - Disregarding alternative methodology for computing taxable income submitted by the Appellant Assessee is a foreign airline company and a tax-resident of USA engaged in the business of operation of aircrafts in the international traffic. The assessee obtained an approval from the Director General of Civil Aviation ( DGCA ) to undertake scheduled air services in India on the routes specified under the India-US Air Transport Agreement ( ATA ) and established a branch office in India, to undertake activities related to the booking of air passenger tickets and air freight in India, with the approval of the Reserve Bank of India ( RBI ), which is an admitted Permanent Establishment ( PE ) in India. HELD THAT - It is relevant to note that in assessee's own case for AY 2010-11 2015 (5) TMI 681 - ITAT DELHI , the coordinate bench has considered the same issue and held that the receipts under code sharing arrangements cannot avail the benefit of Article 8 of India-US DTAA and accordingly taxable in India.' Since the terms of Treaty are negotiated between the two countries it is clear that the terms agreed between India and US while entering into the agreement, that India-US DTAA, generally follows the pattern of the US model tax convention but is different in a number of respects to reflect India's status as a developing country. This is supported by the fact that a combined reading of the above Article 8 as per US Model and Article 8 of India US DTAA, and accordingly leads to us to see the merit in the argument that the OECD commentaries have to be read into Article 8 while considering the applicability of the same to code-sharing arrangement. One of the reasons for the coordinate bench to decide the issue against the assessee in AY 2010-11, is that there is no agreement to substantiate the terms under which code-sharing arrangement have been entered into by the assessee. For the year under consideration the assessee during the course of hearing provided a sample copy of the agreement entered into with Air France and submitted that similar agreements are available for all code-sharing arrangements with third party airlines. Therefore, the contention of the revenue that the receipts from code sharing agreement are not substantiated by any underlying agreements is not tenable for the year under consideration. On perusal of records we notice that the assessee had filed an application with the Competent Authority ( CA ) under Art.27 of the India-US DTAA requesting that the authorities invoke Mutual Agreement Procedures( MAP ) for resolving the impugned issue for the year under consideration along with the earlier years. US authorities have responded stating that despite prolonged efforts, a consensus could not be reached with the Indian authorities and that the US authorities are in agreement with the view that all of assessee's profits including revenue associated with interline and code sharing arrangement are to be exempt from Indian Taxation. Thus we hold that the profits derived from the transportation of passengers under code sharing arrangement by the assessee is to be treated as profits from operation of aircrafts for the reason that i. the transportation of passengers either fully or party in third party aircrafts in a specific journey by way of a code sharing arrangement, would fall within the ambit of the word charterer and, accordingly would be within the scope of operation of aircrafts as defined in Article-8(2) of the India US DTAA. ii. The passengers under code sharing arrangements are transported on behalf of the assessee by the third party airlines under the code sharing arrangement on a principal to principal basis where the ticket for the entire journey is issued by the assessee bearing specific code. Hence the same would fall within the scope of operation of aircrafts iii. The transportation of passengers by the assessee under code sharing arrangement either fully or partly in a third party aircrafts is inextricably linked which is established in assessee's case here Accordingly the receipts of the assessee under code sharing arrangement are covered under Article-8, of India US DTAA and cannot be taxed in India. The grounds including the additional ground raised by the assessee in this regard are allowed.
Issues Involved:
1. Denial of benefit of exemption under Article 8 of the India-USA Tax Treaty. 2. Disregarding alternative methodology for computing taxable income. 3. Enhancing the Global Profitability Rate on a pro-rata basis. 4. Levy of interest under Section 234A and Section 234B of the Income Tax Act. 5. Initiation of penalty proceedings. Detailed Analysis: 1. Denial of benefit of exemption under Article 8 of the India-USA Tax Treaty: The primary issue was whether the receipts of the assessee under code-sharing arrangements are covered by Article 8 of the DTAA between India and the USA and thus not taxable in India. The AO allowed the benefit under Article 8 for transportation undertaken entirely through the assessee's own aircraft but denied it for receipts under code-sharing agreements. The AO held that such receipts do not satisfy the condition of Article 8(1) as there is no operation of aircraft in international traffic by the assessee relevant to such receipts. The Tribunal, however, found that code-sharing arrangements have a direct nexus with the main business of operation of aircraft and thus qualify for exemption under Article 8. The Tribunal relied on the decision of the Bombay High Court in similar cases and concluded that the transportation of passengers under code-sharing arrangements falls within the ambit of "operation of aircrafts" as defined in Article-8(2) of the India-US DTAA. Consequently, the receipts under code-sharing arrangements are exempt from taxation in India. 2. Disregarding alternative methodology for computing taxable income: The assessee argued for an alternative methodology for computing taxable income, suggesting that the revenue in relation to transportation through third-party carriers should be considered as an agreed percentage of the total value of tickets booked. However, the Tribunal's decision on the applicability of Article 8 rendered this argument academic, as the receipts under code-sharing arrangements were deemed exempt from taxation. 3. Enhancing the Global Profitability Rate on a pro-rata basis: The AO computed the income chargeable to tax by applying the assessee's Global Profitability Rate (GPR) to the Code-share Revenue. However, since the Tribunal ruled that the receipts under code-sharing arrangements are exempt under Article 8, the issue of enhancing the GPR on a pro-rata basis became irrelevant. 4. Levy of interest under Section 234A and Section 234B of the Income Tax Act: The Tribunal noted that the issue of interest under Section 234A and 234B is consequential to the main issue of taxability under Article 8. Since the main issue was resolved in favor of the assessee, this ground did not require separate adjudication. 5. Initiation of penalty proceedings: The Tribunal found the issue of penalty proceedings to be premature and thus did not warrant separate adjudication. Conclusion: The Tribunal allowed the appeal of the assessee, granting exemption under Article 8 of the India-US DTAA for receipts under code-sharing arrangements, thereby rendering other grounds academic or premature. The decision was pronounced in open court on 07-11-2024.
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