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TMI Blog2008 (3) TMI 351X X X X Extracts X X X X X X X X Extracts X X X X ..... . In respect of cargo business, KLM has obtained licence to use the premises situated at Shed No. 12, FACT Building, Bombay measuring 503.50 sq. mts. and space on third floor Satellite Building at Cargo Complex, Bombay measuring 50 sq. mts. The said premises were licenced to be used as warehouse and office respectively. Originally the licence was for the period September 14, 1992 to September 13, 1995, and further renewed from September 14, 1995 to September 13, 1998. The licence was specifically granted for the purpose of cargo handling and the licencee, i.e., the appellant was not to use the premises for any purpose other than that for which the licence has been granted. The assessee entered into an agreement with CSC for handling the cargo in India on its behalf. The agreement was entered into on April 1, 1997. As per the said agreement, the appellant was to pay for management, supervision, document handling, physical handling, tracking and tracing export and import cargo at Bombay. For this purpose, the appellant was to pay CSC a sum at Rs. 9 per tonne of the cargo handled. During the assessment proceedings, the Assessing Officer made enquiries with CSC. CSC replied to the quer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of annexure 1 declaring the general terms and conditions of licence agreement between the appellant of the said premises to any third party. In this way, the claim of the assessee that the payment received from CSC is reimbursement of rent is incorrect. The receipt is taxable in any case because the assessee is using the premises for its own business purposes and, therefore, it cannot claim that whatever it is receiving from CSC is being paid to the AAI and therefore, there is no income component. Any other receipt from any other company cannot be termed as reimbursement of rent. The income received from CSC is taxable as these services are separate business activity and are not covered under "air transport services". The income accrues and arises in India and therefore, taxable in India. As per the model commentary on the DTAA, if an airline extends its services which is a separate business activity, the same are not covered under article 8. He, accordingly, held that receipt from CSC is taxable as income from other sources. The learned Commissioner of Income-tax (Appeals) held that the appellant KLM has violated the terms of the licence agreement. There is no evidence of wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between India and Netherlands, profits from the operation of aircraft in international traffic shall be taxable only in the State in which the place of effective management of the enterprise is situated. Therefore, the learned Commissioner of Income-tax (Appeals) was in error when he interpreted this clause so as to exempt only those profits which are derived from operation of aircraft in international traffic. This was opined in paragraph 3.3 of the appellate order, which is an incorrect finding. Paragraph 1 of article 8 nowhere mentions the words "derived from". Though there is no written agreement between KLM and CSC in the years under appeal, the basic understanding was that CSC shall handle all the cargo for and on behalf of KLM at Bombay airport for which it will be paid remuneration at Rs. 9 per tonne of cargo handled. It was also an understanding that the rent payable to the AAI will be payable by CSC. This is clear not only from the copy of account of the appellant in the books of CSC but also from various other correspondence where it shows that the amount payable to CSC was reduced to the extent of rent payable to the AAI. The amount deducted from CSC is exactly the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are so conclusively related to such operation that they should not be regarded as separate business and should be considered to be ancillary to the operation of aircraft in international traffic. Thus, even if some ancillary activities connected to the business of operation of aircraft in international traffic is carried on, the same will receive identical treatment and can be subject to tax only in the country where effective management is situated. Shri Aggarwal further submitted that even if the recovery of rent is to be treated as income, and even if the same is held taxable under the head "Income from other sources", deduction permissible therein, i.e., section 57(iii) be allowed. The assessee on one hand received amount by way of recovery of rent and on the other hand, identical sum was paid to the AAI towards the rent of the premises. This will cancel the income and expenses against each other and hence, nothing is taxable in India. Lastly, Shri Aggarwal submitted that except for the years under appeal, at all times, the contentions of the appellants have been upheld. For the assessment years 1998-99 and 1999-2000, though notices under section 147 were issued, proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T v. Sterling Foods [1999] 237 ITR 579 (SC); (ii) Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC); (iii) Pandian Chemicals Ltd. v. CIT [2002] 254 ITR 562 (Mad); (iv) Nirma Industries Ltd. v. Asst. CIT [2005] 95 ITD 199 (Ahd) [SB]. Therefore in terms of the treaty what has been excluded from the income of the airlines is profits derived from operation of aircraft and no other income can be excluded. Whereas all other incomes will have to be included in final income as "income attributable to permanent establishment". Thus, the profits received from the operation of technical services to the other airlines is not covered under article 8. Moreover, in terms of article 7, profits have to be computed subject to the limitation of domestic law of the contracting state in which permanent establishment is situated. Paragraph 2 of article 8 indicates that paragraph 1 will apply in respect of participation in pools of any kind by the enterprise engaged in air transport. This refers to the cases where one airlines carries passengers of other airlines on a code sharing basis in absence of adequate sitting space available when the tickets are booked where the passengers are tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmentary to fill up the blanks in statute in the case of ambiguity or a perceived validity or provide any missing link in the statute. However, the Tribunal does not hold such a jurisdiction. Shri Shankar also submitted that world over doubt has been raised as to whether model tax commentaries can be used in interpretation of country specific treaties. It has been opined by renowned author like Trank Van Brunchot, former judge of the Netherlands Supreme Court and Dr. Klaus Vogel that the OECD model commentaries are necessary but by no means an easy travel companion for the judiciary. They stem from Governments only-no parliament or taxpayers are involved. Before looking at the OECD model and commentaries for help, courts should be aware of the fact that Government is talking to them, unchecked by democratic counterparts. The wording of treaty is not always as clear as it could be. It is opined that if the court then calls on the OECD models and commentaries for help, it goes to the devil for confession. If such opinion is given by none other than the judge of a Supreme Court of Netherlands and likes of Dr. Klaus Vogel, international acclaimed author, the court should do well by not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from handling cargo has not been brought to tax in India. The limited question that arises is whether the recovery of rent from CSC is the income of KLM chargeable to tax in India. The profits from the operation of aircrafts will include transportation of passengers as well as cargo. For handling the cargo to be transported on its aircrafts, KLM was allotted space at Cargo Complex, Bombay by AAI. The licence in this regard has been renewed from time to time and as per pages 116 and 117 of the paper book, the agreement in this regard is in force till April 21, 1999, i.e., even beyond the period of the financial years involved in these appeals. There is no written agreement on record between KLM and CSC for the years under appeal. However, the agreement with effect from April 1, 1997, has been placed on record which is at pages 72 to 76 of the paper book. The copy of account of KLM in the books of CSC is at pages 84 to 86 of the paper book. CSC has credited the account of KLM by the amount of warehouse rent payable by CSC. The KLM in the first instance pays the rent to AAI. As per the arrangement between KLM and CSC, KLM pays to CSC charges for handling cargo at Rs. 9 per tonne. Fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... handling cargo in its behalf, the assessee could not have received the sum for handling cargo on its aircraft in international traffic. Thus, all the activities are linked to each other and there is no scope to dissect the activities by excluding the recovery of rent from CSC as a separate source of income for the appellant in India. KLM did not carry on its business operations in India by availing the premises on lease and by sub-letting the same leave apart unauthorisedly. Thus, there is no merit in the contention of the learned Departmental representative that the said income should be taxed under article 6 of the DTAA in relation to income from immovable property. KLM was having licence to use the space at cargo complex and admittedly, the same was used for handling cargo. Recovery of rent from CSC has merely reduced its overall expenses in relation of handling of cargo by CSC and is not a separate source of income for KLM. We, therefore, hold that the assessee did not derive any income other than the profits from the operation of aircrafts in international traffic and hence, in terms of article 8, the same is not subject to tax as admittedly effective management of KLM is not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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