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TMI Blog2015 (5) TMI 681X X X X Extracts X X X X X X X X Extracts X X X X ..... under code sharing agreement cannot be said to be income derived from operation of aircraft/ship in international traffic through owned/leased/chartered aircraft/ship. Furthermore the code sharing agreement cannot be held as space/slot charter in absence of inextricate linkage of both legs of journeys. In the result, the receipts to the extent of code sharing arrangement cannot be said to be profits derived from operation in international traffic under Article 8-(1) read with Article 8-(2). The decision in the case of MISC Berhard (2014 (7) TMI 686 - ITAT MUMBAI) is distinguishable on facts, therefore, cannot be applied to the present case.In the result, the action of the A.O. for denial of benefit under Article 8 of DTAA is confirmed. Enhancement of Global Profitability rate - Held that:- From the record we find that the assessee has shown profitability rate at loss of 3.57%. However, while applying Rule 10, the A.O. enhanced the global profitability rate by disallowing the other expenditure claimed by the assessee in its global accounts which did not have any implication on the profitability from Indian operations. Thus the A.O. estimated the profit on pro rata basis @ 2.52% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord perused. Facts in brief are that the assessee, Delta Airlines Inc., a resident of USA, is engaged in the business of carriage of cargo and passengers on its own aircraft and or on third party aircrafts. The assessee has obtained an approval from the Director General of Civil Aviation (DGCA) to undertake scheduled air services in India. The assesee was also granted approval by Reserve Bank of India (RBI) to establish branches in India for undertaking activities related to booking of air passengers and air freight. A return of income was filed on September 28, 2010 declaring nil income from business operations and interest of ₹ 1,56,469/- earned on fixed deposits was offered to tax. During the course of assessment proceedings, the assessee was asked to furnish details of the revenue attributable to the usage of third party carriers for carriage of cargo and passengers and was asked to show cause as to why such revenue may not be taxed. The assesee submitted the requisite details and its arguments along with the agreements entered with such third party carriers for carriage of cargo and passengers while claiming that such revenues cannot be taxed in India due to exemption u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the A.O. was that profits derived by an enterprise from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in the state of its residence (Article 8(1). Such profits taxable in the state of its residence shall be the profits derived from the transportation of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft (Article 8(2). Further, these provisions shall also apply to profits from participation in a pool, a joint business, or an international operating agency (Article 8(4). The revenues under question are the revenues generated from utilization by the assessee of services of other airlines for transport of its passengers or cargo. Since the assessee itself is not involved in operation of these aircrafts in international traffic, the requirement of Article 8(1) itself is not fulfilled. The assessee has Interline Cargo Special Prorate Agreements with other airlines for carriage of cargo and Code-sharing agreements with other airlines for carriage of passengers. These agreements provide for space sharing for cargo and seat sharing for passengers at agreed rates. There is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been defined in para 2 of art. 8, such expression should not be given extended meaning in the light of various commentaries. Thus there is no dispute between the parties as far as the profits from transportation of cargo in the international traffic by the assessee through the aircrafts as an owner/lessee/charterer are concerned. We have also gone through the provisions of art. 8 of Indo-US treaty. Para 1 provides that profits from the operation of ships or aircrafts in the international traffic shall be taxable only in the State of residence. Para 2 provides that profits from operation of ships or aircrafts in the international traffic shall mean profits derived by an enterprise from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners/lessees/charterers of the ships or aircrafts. In view of these clear provisions it is held that profits attributable to the transportation of cargo, mail etc. by the aircrafts owned, chartered or leased by the assessee cannot be taxed in India. 30. Thus, the dispute between the parties is, therefore, restricted to the profits derived by the assessee from the transportation of cargo throug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see falls within the parameter of the definition given in art. 8(2) of the Indo-US treaty. 9. It is evident from the above that the Tribunal, while deciding the above issue, has already considered the facts of the case of its own decision in Balaji Shipping (UK) Ltd. (197 TTJ 865) [which has been affirmed by the Bombay High Court and relied upon by the assessee] and has also distinguished the facts of both the cases. The Tribunal has also distinguished the provisions of Article 8 of Indo-US and Article 9 of indo-UK Tax Treaty. Even otherwise, from the agreements of the assessee with other airlines, it is evident that there is no arrangement in the nature of slot charter between the assessee and such other airlines. It may be noted that the decision of Mumbai Tribunal in the case of Federal Corporation has been accepted by the said assessee and issue has been settled under Mutual Agreement Procedure (MAP) between Indian and US Governments (to avoid double taxation). 10. Since the A.O. held that the revenues generated from third party carriers are liable to be taxed in India in the hands of the assessee, he computed the percentage of profitability of the assessee at 2.52% [as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had booked some space on ships operated by third party shipping companies on an as and when required basis under a space booking/slot charter arrangement which is similar to the present case. The learned Counsel for the assessee referred to the following paragraphs of the judgment in the case of MISC Berhad where it has been held that space booking / slot charter is 'charter': Page 23 - 6th line The containers transported through feeder vessels have been sent by way of slot charter or space charter arrangement. Page 24 - first line ... The Department has held that the chartering of some space or slot charter arrangement cannot be equated with chartering of a complete ship . . The assessee's case on the other hand has been that the word charterer also includes space charterer or slot charterer and the same cannot be segregated from the meaning of operation of ships. Heavy reliance has been placed on the concept of charterer given by the Hon'ble Bombay High Court in Balaji Shipping U.K Ltd. (supra) .... Page 25 - para 20 20. For the shipping income, the Para-2 categorically envisages that for the purpose of Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a ship are in a sense charterers of a space in a ship. 25. From the above discussion, the following inferences can be deduced:- i) Firstly, the operation of a ship can be done as charterer which does not mean to own or control the ship either as an owner or as a lessee; ii) Secondly, charterer is a hirer of a ship under an agreement or arrangement to acquire the right to use a vessel or a ship for the transportation of a good on a determined voyage, either the whole of the ship or part of the ship or some space of the ship in a charter party agreement; and iii) Thirdly, the word charterer includes a voyage charter of a part of a ship or a slot, as it is also arrangement or agreement to hire a space in a ship owned and leased by other persons. Thus, in our opinion, the word charterer should not be confused from the word owner or lessee or having control of the ship or as an operator of the ship. The operation of ship can be done as a charterer, which includes part of a ship or particular space in a ship. Page 37 - 6th line ... Thus, the view taken by the Assessing Officer for denying the benefit under the present Article-8 is not tenable as per our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the commercial fields ... The terms cover all forms of co-operation, and their enumeration is consequently no more than exemplary and is not exhaustive. 17. Based on the above, the learned Counsel for the assessee contended that the term 'pool' includes any 'commercial arrangement' and covers all forms of co-operations that would include commercial co-operation and should not be given a narrow interpretation as given by the AO and the DRP in its order by only referring to pooling of funds and sharing of profits. The assessee shares a reciprocatory arrangement with the third party carriers, and therefore such an arrangement would amount to pool under Article 8(4) of the India US tax treaty. On perusal of the agreements entered with third party carriers, it can be observed that the element of reciprocity is embedded in these arrangements. Further, the observation of the AO and DRP is on the premise that the arrangement is not in the nature of 'pooling' whereas the word used in the treaty is 'pool' and not 'pooling'. The word 'pooling' has a different connotation as compared to the word 'pool'. 18. On the other hand, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee relevant to such receipt which has resulted in profits and hence such profits cannot be said to be derived from operation of aircraft in International traffic and therefore the assessee fails to satisfy the crucial test for being eligible under Article 8(1) r/w 8(2) in respect of the voyages which have not been operated by assessee either by owned/leased/chartered aircrafts. 20. It was further contended by the ld. D.R. that though the profit from sale of tickets is deemed to be included u/s 8(2)(a) as profits derived from operation of aircraft in International traffic but that will come into play only when the assessee first satisfies the substantive Article 8(1) r/w 8(2) also in respect of the very same voyage for which it has earned profit on sale of ticket for an international voyage. As already demonstrated earlier, the receipts for activities under Article 8(2)(a)/(b)/(c) are only for enlarging the scope of profits but the qualifying conditions have to be still independently fulfilled under Article 8(1) 8(2) to claim the benefit of receipts falling in Article 8. The ld. D.R. further contended that the Ld. AR while arguing that the ITAT decision in earlier years in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (Supra) wherein expression under article 8 of Indo-UK treaty (which is similarly worded) was denied in respect of the various services provided to other airlines. For the reasons given above, we are unable to uphold the finding of the CIT(A) that the subsidiary activities carried on by the assessee fall within the scope of art. 8(2)(b) of Indo-US treaty. The orders of the CIT(A) are, therefore, reversed on this issue and consequently, denial of exemption by the AO is upheld . From perusal of this para it is evident that it is mandatory for an assessee to carry the main activity of transportation in international traffic itself as required under Article 8(1) and 8(2) as owner/lessee/charterer and once it is satisfied then only any ancillary activity as described in para 2(b) of Article 8 can be also brought into the ambit of profits from such transportation. Thus nexus qua each voyage in international traffic is a must to the transportation by assessee as owner/lessee/charterer. If the assessee does not carry transportation itself qua any particular voyage as owner/lessee/charterer, then qua such voyage it would fall out of main articles 8(1)( and 8(2) even though it may quali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther airlines would be outside the scope of article 8(2). We hold accordingly. 25. The ld. D.R. also invited our attention to para 15 of the ITAT Mumbai Bench order in the case of DDIT vs. CIE De Navegacao Norsul, 121 ITD 113 (Mum) wherein following was the observation of the Bench:- In the present case, admittedly, the assessee is neither the owner nor lessee nor the charterer of the feeder vessel carrying the cargo from Mumbai port to destination in South Africa i.e., Durban. Therefore, profits attributable to such voyage would be outside the scope of article 8 of Indo-Brazil treaty even though the assessee may be engaged in the business of transportation of goods in the international traffic. The case of DDIT vs. CIE DE NAVEGACAO (supra) was also considered by Hon ble Bench in case of MISC Berhard. At para 30 page 37 Hon ble Bench in MISC Berhard observed that the assessee has failed to link and establish the voyage wise transportation, whether the feeder vessels were actually loading the goods into the mother vessels, which the assessee had claimed. Thus by implication the Hon ble ITAT in case of MISC Berhard opined that it is only because of presence of a undispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement of assessee with third party is such that it only allows the assessee (without exclusion of others) also to book the tickets for its customers on the flights operated by other third parties. The role of the assessee to the extent of bookings made under code sharing agent is therefore more like a booking agent and not as a charterer. iii. Though it is the contention of Ld AR that the cargo/passengers carried under code sharing arrangement from India to intermediary destinations have been transported further by assessee airlines from such intermediary destinations to final destinations. However from the facts mentioned in A.O s order, DRP directions and arguments taken by learned A.R. it appears that complete transportation under code sharing arrangement took place from origin to final destination in single stretch and nothing is placed on record to show that such destinations were only interim destinations. iv. Even if there is break of voyages at intermediary destination, but nothing has been produced before the AO/CIT(A)/ITAT to show that destinations to which all passengers/cargo were carried from India under code sharing were further transported to final destination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to arrive at conclusion that the shipping activity of assessee from Indian port to Hub port was in nature of charter arrangement and covered in Article 8: ..For the purpose of its transportation of cargo, the assessee used the services of feeder vessels operated by third parties by using space charter/slot charter from Indian Port to Hub Port. At the Hub Port, the containers which were owned by the assessee were transferred to mother vessels i.e., the ships owned by the assessee and from thereon, the cargos / containers were transported by its own ships to the final destination port. The entire voyage from India Port to Hub Port and from there to final destination port, is inextricably linked and cannot be segregated as held by the Assessing Officer and the learned Commissioner (Appeals). He further submitted that the Assessing Officer has, in fact, admitted that the assessee has furnished proof to substantiate the linkage of the voyage performed on feeder vessels and mother vessels (i.e., ships owned by the assessee). The Revenue s case is that since the feeder vessel is not owned / leased by the assessee, therefore, the benefit of Article 8, cannot be given on the goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia to interim destination by third parties and from there to final destination by assessee, by ITAT in MISC Berhard was the undisputed presence of one to one linkage for both the legs of journeys i.e. from India to interim destination and there from to final destination. The condition of establishing the linkage therefore cannot be dispensed with if one has to call the arrangement as space/slot charter following the ratio of decision of MISC Berhard (supra). Further, just because the shipping and airline business are little different in so far as mode of transport, the condition of establishing the linkage cannot be dispensed with when the Article 8 under which the relief is being claimed does not make any such distinction between the shipping and airline business. If the contention of Ld AR is accepted then how can he rely on the case of MISC Berhard to support his claim of benefit under Article 8. 30. The alternate contention of Ld AR that the profits are eligible for exemption under Article 8(4) as the profits derived from pool arrangement, is also not tenable for following reasons;- As per the dictionary meaning of pool as illustrated by Ld AR during hearing it wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the laws of the United States of America and tax resident of USA. It is engaged in carriage of cargo and passengers through air in International Traffic. These services were performed by employing Delta s airlines own aircrafts whose income has been claimed exempt under Article 8 and allowed by AO also. However, the assessee has also entered into code sharing agreement with other third party airlines for carriage of cargo and passengers from India. For such code sharing voyages, the aircrafts used by third party carriers are neither owned nor leased or chartered by the assessee i.e. Delta Air lines Inc but under the code sharing agreement the assessee was booking its customers for international traffic on the flights operated by such third parties from India. The receipts in respect of such bookings made by assessee under the code sharing agreement have also been claimed as exempt form taxation in India under Article 8 of DTAA between India and USA on grounds that cargo/passengers booked under code sharing arrangement from India will also be covered by international traffic. The AO and the DRP has held such receipts are not covered under Article 8 as the code sharing agreement c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arterers of ships or aircraft. Thus the meaning of profit derived from operation of ship or aircraft in international traffic as owner/lessor/charterer is a condition precedent for claim of exemption under Article 8. Hence the first and crucial test for eligibility under Article 8(1) is that such profit should be derived from operation of aircraft in international traffic by the ship or aircraft owned/leased/chartered by the assessee. There is no dispute in respect of profit derived by assessee by transportation by its owned/leased/chartered aircrafts. It is only the receipts under code sharing agreements with the third parties where the assessee has only booked the tickets and the actual transportation is done by third parties ship or aircraft that such receipts cannot be said to be the profits derived from international voyage carried by the assessee by entering into code sharing agreements. The receipts for activities under Article 8(2)(a)(b)(c) are only for enlarging the scope of profits from other related activities but the qualifying condition of such transportation through ship or aircraft owned/leased or chartered by assessee have to be still independently fulfilled und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d recorded its finding to the effect that since the entire voyage from Indian Port to Hub Port and from there to final destination port was inextricably linked and could not be segregated and hence the carriage of goods from the feeder vessel was nothing but a charter only and therefore the receipts in respect of voyage from Indian Port to Hub port were also held to be exempt under Article 8. However, in the instant case there is no situation like transportation to Hub Port and from there to final destination port nor there is any inextricable link between such transportation, therefore, the principle laid down in the case of MISC Berhad (supra) cannot be applied to the facts of the instant case. 34. There is nothing on record to suggest that assessee had entered into agreement with the third party in the nature of slot charter/space charter so as to qualify under Article 8(2). The right of the assesse to book flights under code sharing agreements with other third parties is not exclusive unlike the charter agreement. The assessee has no fixed space/slot for which the booking rights are exclusively with assessee only. The number of seats/space which can be booked by assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the entire voyage. The linkage between the transportation by feeder vessels, mother vessels of the ship owned by the assessee has to be established. Hence in absence of any link qua each voyage from India to interim destination under code sharing and interim destination to final destination by assessee, and also in absence of any evidence that even the second leg of same voyage which started from India was carried by assessee, the code sharing arrangement cannot be said to be in nature of space/slot charter. 35. To arrive at conclusion that the shipping activity of assessee from Indian Port to Hub Port was in the nature of charter arrangement and covered under Article 8, precise observation at para 14 in page No. 17 of the Tribunal order reads as under:- For the purpose of its transportation of cargo, the assessee used the services of feeder vessels operated by third parties by using space charter/ slot charter from Indian Port to Hub Port. At the Hub Port, the containers which were owned by the assessee were transferred to mother vessels i.e., the ships owned by the assessee and from thereon, the cargos / containers were transported by its own ships to the final destin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to support assessee s eligibility under Article 8 but on the other hand when it comes to requirement of establishing one to one linkage of voyages from India to interim destinations and from interim destinations to final destinations, he contends that this principle cannot be applied to airline business unlike the case of MISC Berhard which was for a shipping business. The condition of establishing the linkage therefore cannot be dispensed with if one has to call the arrangement as space/slot charter following the ratio of decision of MISC Berhard (supra). 37. Now coming to the alternative contention of the ld. A.R. that the profits are eligible for exemption under Article 8(4) insofar as profits were derived from pool arrangement. 38. We have considered the rival contentions. Arrangement of pool requires several persons coming together to contribute and combine their resources for a large business and then share the resources amongst them. However in the present case the arrangement was only bilateral arrangements and not several persons have come together. Nothing was brought on record to indicate that the common funds and resources were brought together in a pool which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific to India can be considered. 43. We find that the assessee has not given any details of such expenditure before the A.O. or DRP to prove any part of such expenditure was attributable to PE in India. The assessee is directed to furnish such details of expenditure. In the interest of justice, we restore this ground back to the file of A.O. for determining the profit attributable to PE. We direct accordingly. 44. The next grievance of the assessee relates to charging of interest u/s 234B of the Act. 45. The contention of the ld. A.R. was that once the income was subject to TDS, no interest u/s 234B of the Act should be charged in view of the decision in the case of NGC Network Asia LLC, 313 ITR 187 (Bom). 46. We have considered the rival contentions. There is no dispute to the proposition that once the income is subject to TDS, it was responsibility of the deductor, there is no liability of interest u/s 234B of the Act for failure to pay advance tax. In the instant case, we found that the assessee was collecting money from its customers on booking of tickets under code sharing arrangement. Nothing was brought on record by the assessee to substantiate its claim tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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