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TMI Blog2024 (11) TMI 815X X X X Extracts X X X X X X X X Extracts X X X X ..... E ) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this regard are allowed. - Ms Padmavathy S, AM And Shri Sunil Kumar Singh, JM For the Appellant : Shri Sriram Seshdri / Ms. Amulya K. For the Revenue : Shri Anil Sant, Addl. CIT DR ORDER PER PADMAVATHY S, AM: This appeal by the assessee is against the final order of assessment passed by the Assistant Commissioner of Income Tax, Int.Tax Circle 2(1)(2), Mumbai, (the AO in short) under section 143(3) r.w.s.144C(13) of the Income Tax Act 1961 (the Act) dated 16.12.2021 for assessment year (AY) 2018-19. The assessee raised various grounds pertaining to the following issues 1. Denial of benefit of exemption under Article 8 of the India-USA Tax Treaty ( Treaty ) Ground No.1 (1.1, 1.2, 1.3, 1.4 1.5) 2. Disregarding alternative methodology for computing taxable income submitted by the Appellant Ground No.2 (2.1, 2.2, 2.3, 2.4.) 3. Enhancing the Global Profitability Rate on a pro-rata basis Ground No.3 (3.1) 4. Levy of interest under Section 234A and Section 234B of the Act Ground No.4 (4.1) 5. Initiation of penalty proceedings Ground No.5 (5.1) 2. The assessee also raised the following additional grounds Disregarding the evidence establishing linkage for the purpose of Article 8 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey is undertaken by the Assessee under a single ticket issued by it (iii) Where transportation is undertaken entirely through third-party carriers under code-sharing arrangement 5. A code-share arrangement is an arrangement in which one air carrier (i.e., marketing airline ) puts its designator code on the flight of another carrier ( operating airline ), thereby allowing the first carrier, i.e., the marketing carrier, to hold itself out as providing service in markets where it does not otherwise operate or in segments where it operates infrequently. During the year under consideration, the assessee filed a return of income declaring nil income towards profits derived from operation of aircrafts in international traffic claiming benefit under Article 8 of the DTAA between India and USA which reads as under ARTICLE 8 Shipping and air transport 1. Profits derived by an enterprise of a Contracting State from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in that State. 2. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean profits derived by an enterprise described in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view of the AO. The assessee is in appeal against the final order of assessment passed by the AO pursuant to the directions of the DRP. 7. The ld AR presented various arguments on merits with regard to the issue under consideration. With regard to issue being covered against the assessee by the decision of the coordinate bench in assessee's own case the ld AR argued that i. the decision of the coordinate bench has not considered some of the critical ratios laid down in decision of the jurisdictional High Court in the case of Balaji Shipping UK Ltd vs ACIT [2012] 24 taxmann.com 229 (Bombay) ii. the coordinate bench has decided against the assessee mainly by distinguishing the decision of the coordinate in the case of MISC Berhad vs ACIT [2014] 47 taxmann.com 50 (Mumbai - Trib.) relied on by the assessee stating that the said decision is rendered in the context of India- UK DTAA iii. the link between the goods transported in other ships under slot sharing with the operation of ships owned by the assessee in the case of MISC Berhad (supra) was not called for by the AO in assessee's case and therefore deciding against the assessee on that ground is not tenable. iv. the conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the ld DR that the coordinate bench has rejected even the MA filed by the assessee whereby the view expressed has reached finality, the ld AR submitted that the MA filed requesting to rectify the finding given by the Tribunal that the assessee failed to establish the link that it is the assessee's aircrafts used for transporting the final leg of travels in cases where the passengers transported using third party airlines. The assessee had pleaded that the said linkage was never asked for by the revenue and hence such a finding was a mistake apparent on record. The MA was rejected stating that the contention of the assessee is not a mistake apparent on record. Therefore the ld AR submitted that the issue of applicability of Article 8 for the receipts under code-sharing arrangement was not raised in the MA and hence the argument of the ld DR is not correct. 11. We heard the parties and perused the material on record. From the perusal of the facts as enumerated herein above it is clear that the limited issue for our consideration in this appeal is whether the receipts of the assessee under code sharing arrangements are covered by Article 8 of the DTAA between India and USA an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipts which qualify under Article 8(1) 8(2) are not eligible for benefit of Article 8. The Tribunal in assessee's own case in Delta Airlines Inc. (supra) observed at para 13 that Article 8(2)(b) makes it clear that the activity carried on by the assessee must be directly connected with such transportation. The words such transportation refers to the transportation prescribed in the main body of para 2 i.e. transportation by sea or air of passengers, mail, livestock or goods carried by the owner or lessee or the charter of the aircraft. It was also observed that only that activity which is directly related to the transportation of passengers by the assessee as owner/lessee/charterer of the aircraft would fall within the ambit of para 2(b) of Article 8 and consequently the activity relatable to the transportation of passengers by other airlines would be outside the scope of such provisions. It was further held that the activity of third party charter handling and maintenance would also be outside the ambit of para 2(b) of Article 8. Similar view has been taken by the co-ordinate Bench in the case of British Airways Plc. wherein expression under Article 8 of Indo- UK Treaty (whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention that the cargo/passengers carried under code sharing arrangement was up to intermediary destinations only and thereafter assessee had transported further by its owned airlines from such intermediary destinations to final destinations. In terms of the facts recorded by A.O./DRP, we found 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. Thus the proposition laid down in the case of MISC Berhard (supra) is not applicable to the facts of the present case. However, nothing has been produced before the A.O./DRP/ITAT to show that destinations to which all passengers/cargo were carried from India under code sharing were further transported to final destination by assessee's airlines. Merely the fact that assessee in some instances operating its airline from such intermediary destinations will not automatically prove that passengers/cargo which were carried from India under code sharing to intermediary destinations were transported to final destinations by assessee's airline only. Nothing was brought on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircraft and the assessee is only using the resources of third party by booking seats in the aircraft. Thus the arrangement does not meet principle of pool arrangement. 37. In view of the above, we can conclude that income derived by the assessee by booking of seat/space 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 in extricate 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 (supra) is distinguishable on facts, therefore, cannot be applied to the present case. 12. On perusal of the above findings of the Tribunal, it is observed that the key principles on the basis of which the coordinate bench has decided the issue against the assessee are a. The Assessee s income derived by booking of seat/space under a code-sharing agreement is not income derived from opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship. The operation of ship can be done as a charterer, which includes part of a ship or particular space in a ship. 26. to 27.*** 28. Another very important observation made by the High Court which is quite relevant to note is, how the slot charterer agreements or space charterer agreement are inextricably linked with the shipping business in the present day shipping business. The said observations are as under: 26. An enterprise may not ply the ships owned or chartered or otherwise controlled or managed by it in respect of certain routes. It would however, on account of the business exigencies, be required to carry cargo on such routes. Business expediency could arise on account of a number of reasons and different situations such as obliging regular clients, or cultivating new ones. If it were not to do so, it may well loose clientele. Ships owned or chartered or otherwise controlled or managed by an enterprise may not be available on the particular route on a given day or for a particular period. The enterprise may already have entered into contracts or may even be required to enter into contracts for the carriage of goods on that route on that day or during that period. The tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be equated with chartering of complete ship. By this, the Assessing Officer means that the assessee must have complete control of such ships even under the charter agreement. Thus, the view taken by the Assessing Officer for denying the benefit under the present Article-8 is not tenable as per our discussion in the forgoing paragraphs, that chartering of some space or slot charterer in a ship is actually a part and parcel of charter of a ship. Under the charterer agreement, there is no ownership or control of entire ship because the risk under the charter party agreement or arrangement is upon the owner of the ship who generally assumes an operational risk for transporting the cargo of the person who has hired the ship and the hirer agrees to pay for conveyance of goods on a determined voyage. The risk of the assessee is towards its customers from whom he has agreed to transport the cargo/goods from the destination port of booking to the final destination port. Thus, in our opinion, such a strict interpretation of the word charterer as adopted by the Department cannot be sustained. 30.*** 31. Thus, in our conclusion, we hold that transportation of cargo in the container bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g arrangement would fall within the ambit of Article 9 for the reason that by availing the facility of slot hire agreements, the enterprise engaged in shipping business does not arrange the shipment on behalf of the owner of the said vessel, but does so, on its own account on a principal to principal basis with its clients and that they have a nexus to the main business of the enterprise of the operation of ships. While holding so, the Hon'ble High Court has included both the scenarios (i) where the goods are transported by an enterprise by availing of the slot hire facility obtained by it on the ship of another from a port in India upto a hub port abroad and from there transporting the goods further to their final destination upon a ship owned or chartered or otherwise controlled by it and (ii) where the goods are transported by the assessee from a port in India directly to their final destination to a port abroad by availing a slot hire facility obtained by it on the ship of another. 17. It is also relevant to mention here that Article 9 of India-UK DTAA does not define the profits from operation of Ship or Aircrafts in international traffic whereas Article 8 of India-US DTAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with regard to interpreting chartering is that the receipts under slot chartering agreements has a direct nexus/inextricably linked to the main business of the enterprise of the operation of ships and therefore eligible for benefit under Article 9. The assessee under code sharing arrangements, books tickets in other airlines under a designated code specific to the assessee, so that the assessee holds itself out as providing service to destinations where it does not otherwise operate or in segments where it operates infrequently. The typical way in which the tickets are booked under code sharing arrangement is explained as below 20. From the above it is clear that though the passengers are transported through airlines not operated by the assessee, the tickets until the final destination are issued by the assessee (bearing specific codes). The journey can happen entirely in the third party airline or a part of the journey by third party airline and the rest by the assessee. The code sharing arrangements allow airlines to offer service to the segments where they do not operate their own flights thereby without additional equipment, resources, and costs the airlines can increase their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... One more contention of the revenue in this regard is that the there is no specific number of tickets or seats blocked for the assessee in the third party aircrafts under code sharing arrangement and therefore it cannot be considered as chartering. However it is relevant to note that under code sharing arrangement when tickets are booked, the third party airlines takes the responsibility of ensuring that the passengers of the assessee are transported to the destination which would mean that the those number of tickets / passengers are blocked by the assessee in the third party airlines. Accordingly we unable agree with this contention of the revenue. 22. One more contention of the revenue is that under code sharing arrangement, the aircrafts are operated by third parties and therefore it would not fall under Article 8(1) where the assessee is required to be in the operation of aircraft in international traffic. In this regard we notice that the Hon'ble Bombay High Court in the case of Balaji Shipping (supra) has held that slot chartering agreement would amount to operation of ship. When we applying the said ratio to the similar arrangement of code sharing it would amount to ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pore DTAA (which is similarly worded as India-US DTAA). Therefore in our considered view, rejecting the plea of the assessee on the ground that the link is not established between the transportation by third party aircrafts and assessee's own aircraft is not tenable. 24. We notice that the facts pertaining to AY 2008-09 in assessee's own case the coordinate bench held that the benefit under Article 8(2)(b) of India US DTAA cannot be claimed unless the ancillary services have a direct nexus to the operation of aircraft in international traffic. The said decision was rendered in the context of receipts towards services rendered by the assessee such as screening, security, charter handling etc., to other airline operators. Therefore the same is distinguishable from the issue under consideration here i.e. receipts from code sharing arrangement whether can be considered to be part of the operation of aircraft in international traffic. Accordingly with due respect we are unable to agree with the reliance placed by the coordinate bench in assessee's case for AY 2010-11 in this regard. 25. During the course of hearing the ld AR argued that the OECD Model Convention specifically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation in a pool, a joint business, or an international operating agency. 26. In this regard we notice that the OECD commentaries specifically mention slot chartering / code sharing arrangement as an activity directly connected with international traffic wherein it is stated that 6. Profits derived by an enterprise from the transportation of passengers or cargo otherwise than by ships or aircraft that it operates in international traffic are covered by the paragraph to the extent that such transportation is directly connected with the operation, by that enterprise, of ships or aircraft in international traffic or is an ancillary activity. One example would be that of an enterprise engaged in international transport that would have some of its passengers or cargo transported internationally by ships or aircraft operated by other enterprises, e.g. under code-sharing or slot-chartering arrangements or to take advantage of an earlier sailing. Another example would be that of an airline company that operates a bus service connecting a town with its airport primarily to provide access to and from that airport to the passengers of its international flights. 27. We also notice that Model Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above discussion and placing reliance on the ratio laid down by the Hon'ble Bombay High Court and the coordinate bench of the Tribunal, 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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