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TMI Blog2012 (5) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... nce to the first part of the definition given in article 8(2) in the light of material placed – in favour of revenue. - IT APPEAL NOs. 3611 (MUM.) OF 2005 and 2808 & 2809 (MUM.) OF 2006 - - - Dated:- 14-3-2012 - N.V. VASUDEVAN, N.K. BILLAIYA, JJ. Jitendra Yadav for the Appellant. Poras kaka, Manish Kant and Prashant Bhojwani for the Respondent. ORDER N.K. Billaiya, Accountant Member ITA No. 2808/Mum/2006 is an appeal filed by the revenue against the order dated 21/2/2006 of CIT(A)-VI, Mumbai relating to assessment year1999-2000. ITA No.2809/Mum/06 is an appeal filed by the revenue against the order dated 21/2/2006 of CIT(A) VI, Mumbai relating to assessment year 2000-01. ITA No.3611/Mum/2005 is an appeal by the revenue against the order dated 28/2/2005 relating to assessment year 2001-02. Since common issue are involved in all these appeals they were heard together and we deem it appropriate to pass a common order. 2. We shall take up for consideration ITA No.3611/Mum/05 for A.Y 2001-02. The original grounds of appeal raised by the revenue is as follows: On the facts and in the circumstances of the case and in law, the ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re known as line-haul charges. Line-haul charges are incurred while sending or receiving shipments, courier as well as cargo, by airlines other than UPS airline. Line haul services are used for providing service to customers where UPSCO airlines do not cover certain destinations within the required timeframe. It includes all or some of the following: 1. Charges agreed upon by the courier operator and airline i.e. Cost per kg. Between origin A and destination B 2. Cost of ticket for on board courier 3. Handling charges at origin and destination airports including manpower costs. 4. Other miscellaneous charges if any (delivery order charges, terminal fee etc. The AO in his assessment order did not agree with the assessee's contentions and held that line-haul activity i.e. the activity of transportation of goods in the course of international traffic through other airlines is a separate activity and not covered under Article 8 of the DTAA. The AO estimated 10% of the total line-haul expenses incurred during the previous year as the income attributable to this activity in India. 4. Before CIT(A) the assessee submitted that it is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( a ) the sale of tickets for such transportation on behalf of other enterprises; ( b ) other activity directly connected with such transportation ; and ( c ) the rental of ships or aircraft incidental to any activity directly connected with such transportation. The assessee submitted that the above paragraph, which defines the scope of income covered by Article 8 of the DTAA, also covers even the activities of international air transport where the goods are not carried by enterprise through its own aircraft. For example, Clause (a) covers sale of tickets for such transportation on behalf of other enterprises. This activity does not involve any air transportation through the enterprises own fleet of aircraft either owned or leased. Similarly, Clause (b) enhances the scope of paragraph 2 by including activities other than transportation of goods through own or leased aircraft, provided such activities are directly connected with its air transportation business. 6. The Assessee submitted that its customers entrusted the assessee with the responsibility to transport the goods in different parts of the world at any given time. While ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from other activity directly connected with such transportation; and (c) profits derived from the rental of ships or aircraft incidental to any activity directly connected with such transportation. According to him, what needs to be seen is whether the Assessee falls in the purview of the above definition. Having regard to the facts of the case, including the Operating Permit issued to the Assessee, he was of the view that it was established beyond doubt that the Assessee was in the business of operation of aircraft for transportation of cargo which is carried on either through own aircraft or other airlines engaged in international traffic. He was also of the view that it is the requirement that to get the benefits under DTAA that the Assessee has to own or charter the aircraft. The CIT(A) held that the Assessee used the services of the other enterprise for the transportation of cargo in the international traffic for its own customers in the course of its own business of operation of aircraft in international traffic. Such activities constitute integral part of the Assessee's business of operation of aircraft in international traffic and cannot be considered as a separate a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will deal with the admission of additional grounds sought to be raised by the Assessee before the Tribunal. The additional grounds sought to be raised is part and parcel of the grievance projected by the Revenue in the original ground of appeal. The AO has in the assessment order held that line hauling activity is a separate activity and would not amount to activity of operation of aircraft in India or directly related to such operations. Therefore the additional ground is admitted for adjudication. 13. The DR submitted that the ITAT Mumbai in the case of Asstt. DIT v. Federal Express Corpn. [2010] 125 ITD 1 (Mum) on identical facts as it prevails in the case of the Assessee has held that line-haul charges are not income from operation of aircraft entitled to the benefits of ARTICLE 8 Of Indo-USA DTAA. The assessee in that case was Federal Express Corporation (FEC) a non-resident company incorporated under the laws of United States of America. It was engaged in the integrated air and ground transportation of time sensitive and time definite shipments to various destinations around the world. It also provides door-to-door delivery service for international shipment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle, profits from the operation of ships or aircraft in international traffic shall mean profits derived by an enterprise described in paragraph 1 from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft including :- ( a ) the sale of tickets for such transportation on behalf of other enterprises; ( b ) other activity directly connected with such transportation; and ( c ) the rental of ships or aircraft incidental to any activity directly connected with such transportation. (3) Profits of an enterprise of a Contracting State described in paragraph 1 from the use, maintenance, or rental of containers (including trailers, barges, and related equipment for the transport of containers) used in connection with the operation of ships or aircraft in international traffic shall be taxable only in that State. (4) The provisions of paragraphs 1 and 3 shall also apply to profits from participation in a pool, a joint business, or an international operating agency. As per para 1 of the article 8, the profits from the operation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not be taxable in India in view of the specific definition of the expression profits from the operation of ships or aircraft in international traffic given in article 8(2) of Indo-U.S. Treaty has to be referred to a special bench. In the case of Balaji Shipping (supra), the Tribunal had to deal with the question as to whether income from carriage of freight through the feeder vessel belonging to others for ultimate transport to place of destination was integral part of the business of the assessee of transportation of goods in international traffic. Factually it was found that the Assessee collected cargo from Indian port and drew Bill of Lading for the entire transportation i.e., from the port of loading to the port of destination. The Charterer ship of the assessee did not come to the Indian port but the cargo was being collected from Indian port and transported to the hub port at Dubai. For this purpose, connecting carrier agreements had been entered into with several parties from Indian ports to hub port only. It was also factually found that the Assessee had chartered two ships and was found to be transporting goods in international traffic. The answer to the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e passengers/cargo may be transported internationally by ships operated by other enterprises under slot chartering arrangement. In our view, this paragraph would cover the facts of the present case since the assessee not only transports its cargo through the ships chartered by it but also transports the cargo in the international traffic by the ships operated by other enterprises under slot chartering arrangement. Since Article 8 of OECD Model Convention and Article 9 of Indo-UK Treaty are similarly worded. Paragraph 6 of OECD Commentary discussed above would apply in defining the scope of Article 9(1) of Indo-UK Treaty as per the rule of contemporaneous exposition discussed in the earlier part of the order. Accordingly it is held that the freight income earned by the assessee on account of transportation of cargo in the international traffic by ships operated by other enterprises under slot chartering arrangement would be taxable only in State of residence and consequently, such income would be exempt from taxation under the Indian Income-tax Law. 16. According to the learned counsel for the Assessee, the international thinking is that income from all activities connectin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ederal Express (Supra) and Delta Airlines Inc. (Supra) to the effect that where any expression or term is defined in a treaty then it would be unnecessary to refer to the commentaries or decisions of foreign jurisdiction. He reiterated the submission made earlier that treaties have to be interpreted in a holistic way keeping in view the international thinking as expressed in international commentaries. In this regard he referred to the decision of the Hon'ble Supreme Court in the case of Ram Jethmalani v. Union of India [2011] 200 Taxman 171/12 taxmann.com 27 wherein the Hon'ble Supreme Court after referring to the decision in the case of Azadi Bachao Andolan 2004 (10) SCC 1 observed that treaties are drafted by diplomats and not lawyers, leading to sloppiness in drafting also implies that care has to be taken to not render any word, phrase, or sentence redundant, especially where rendering of such word, phrase or sentence redundant would lead to a manifestly absurd situation, particularly from a constitutional perspective. Reference was made by the learned counsel for the Assessee to the decision of the Hon'ble Delhi High Court in the case of Asia Satellite Tel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as directly and inextricably linked to the cargo handling business of the assessee, and that the recovery of licence fee/rent was not in the course of a separate business of renting out the premises. The Tribunal also held that the assessee did not carry on any business operations in India by letting out the premises on lease or by sub-letting them and that the provisions of article 6 of the Double Taxation Avoidance Agreement were not applicable. The additions made by the Assessing Officer and the Commissioner of Income-tax (Appeals) were consequently deleted. On appeal by the Revenue, the Hon'ble Delhi High Court dismissed the appeal by holding that the Tribunal had correctly appreciated the law and no substantial question of law arose for consideration. According to the learned counsel for the Assessee, the decision of the Tribunal in the case of Federal Express (supra) and Delta Airlines Inc. (supra) are contrary to the decision of the Hon'ble Delhi High Court and therefore the same should not be followed. 19. The learned DR submitted that submissions made by the learned counsel for the Assessee on the decision of Federal Express (supra) being contrary to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ships or aircraft. Such transportation includes the sale of tickets for such transportation on behalf of other enterprises, other activity directly connected with such transportation, and rental of ships or aircraft incidental to any activity directly connected with such transportation. Thus, income of an enterprise from the rental of ships or aircraft constitutes profits from the operation of ships or aircraft in international traffic only if it is incidental to the operation by the enterprise of ships or aircraft in international traffic. For Example, under the convention only bareboat leasing that is incidental to the operation by the enterprise of ships in international traffic is within the scope of Article 8. This provision is narrower than the provision in the US Model, which covers not only rental profits that are incidental to transportation activities of the lessor but also any rental profits derived from the operation of ships or aircraft in international traffic by the lessee. 20. It was submitted that similarly a narrower meaning has to be given to profits from the business of operating aircraft as defined in Article 8 (2) of the Indo-USA DTAA. Finally our atte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Treaty i.e ., in the light of the commentaries of International Law available at the time of execution of the agreement. On the other hand, the Tribunal while disposing the appeal of Delta Airlines Inc. (supra), following the decision of the Supreme Court in the case of P.V.A.L. Kulandagan Chettiar (supra), held that the expression profits from operation of ships or aircraft in the international traffic must be understood in the sense in which it has been defined in para 2 of article 8. Thus, in our opinion, there is no conflict between these two decisions. Therefore, following the decision of the Bench in the case of Delta Airlines Inc . (supra), it is to be held that benefit of article 8 would be available to the assessee to the extent the activity carried on by the assessee falls within the parameter of the definition given in article 8(2) of the Indo-U.S. Treaty. ( b ) On the argument of the learned counsel for the Assessee that while interpreting treaties international commentaries are relevant cannot be disregarded, the Tribunal held as follows: 32. The contention of the learned counsel for the assessee that the ratio laid dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law for the State of residence to impose tax on income from property situated in another State and whether there is such a bar under the treaty depends upon the correct interpretation of its provisions. 33. A perusal of the above arguments clearly shows that the interpretation of the provisions of the treaty was the subject- matter before the Hon'ble Supreme Court. It is pertinent to note that the above contention was turned down by the Hon'ble Supreme Court by observing as under : The contention put forth by the learned Attorney General that capital gains is not income and, therefore, is not covered by the treaty cannot be accepted at all because for purposes of the Act capital gains is always treated as income arising out of immovable property though subject to different kind of treatment. Therefore, the contention advanced by the learned Attorney General that it is not a part of the treaty cannot be accepted because in the terms of the treaty wherever any expression is not defined the expression defined in the Income-tax Act would be attracted. The definition of income would, therefore, include capital gains. Thus, capital gains derived from immovable p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be necessary. But, if the language is clear and unambiguous then the scope of such expression or term cannot be enlarged or restricted by referring to the commentaries . ( c ) On the argument of the Assessee that the decision in the case of Delat Airlines Inc. (supra) is contrary to the tribunals decision in the case of Safmarine Containers Lines N.V. (supra) 35. The contention of the assessee's counsel that the decision in the case of Delta Airlines Inc. (supra) is contrary to the earlier decision of the Tribunal in the case of Safmarine Containers Lines N.V. (supra) is also without force. Para 10 of the order in the case of Safamarine Containers Lines N.V. (supra) reads as under : Now, we will examine the amount in dispute in the context of DTAA. Both the sides have taken shelter of commentary on article 8 by OECD and Klause Vogel. At this juncture, it would be relevant to note that the DTAA is the main document and has to be considered for examining the taxability or otherwise of an item of income in the respective States. If the language of DTAA is clear and does not admit of any doubt, there is no need for refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntaries on International Taxation. Sometimes, an ambiguity can be in the words used by the contracting parties while drafting the treaty. Article 8(2) of the Indo-Belgium Treaty defines the expression income derived from operation of ships or aircraft in the international traffic . The main part of sub-clause (b) defines the scope of the direct activity of transportation in the international traffic while the second part includes the activity other than the main activity of transportation in the international traffic. The Bench was concerned with the second part of the definition which included other activity directly connected with such transportation . The meaning of such other activity was not clear and, therefore, the Bench proceeded to ascertain its meaning by looking into the commentaries. It is in this context a part of such expression was considered in the light of the OECD Commentary. In the case of Delta Airlines Inc . (supra) also the Bench was concerned with the second part of the definition in article 8(2) and since the assessee was carrying on activity which had no nexus with the direct activity of transportation in the international traffic, it was held that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard, the AO will also examine the question as to where a space is booked with other airlines, the question whether transportation through such airlines can be said to be transportation by the aircraft chartered by the assessee with reference to the first part of the definition given in article 8(2) in the light of material which may be placed before him. Since the meaning of the word 'chartered' is not clear from the definition itself, the Assessing Officer would be justified in ascertaining the scope of such word in the light of the commentaries or other materials which may be placed before him. In view of the above discussion, the order of the CIT(A) is modified and the matter is restored to the file of the Assessing Officer to reframe the assessments as per the observations and guidelines given above. In view of the above conclusion, the grievance of the revenue projected in the additional ground of appeal does not require adjudication. The appeal of the Revenue is allowed for statistical purposes. 25. The parties agreed that the other two appeal of the Revenue are identical in all aspects. Therefore for the reasons given while deciding the appeal for AY 01-02, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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