M/S. UNITED AIRLINES INC.,NEW DELHI vs. DDIT, NEW DELHI

PER SAKTIJIT DEY, JM:

Captioned appeals relate to the same assessee and arise out

of separate appellate orders of learned first appellate authority

pertaining to assessment years 1996-97, 1997-98, 1998-99,

1999-2000, 2000-01, 2001-02 and 2002-03.

arise out of quantum proceedings. Whereas, the rest five appeals

3 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 are against the imposition of penalty under section 271(1)(c) of

the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). At

the outset, we propose to deal with the quantum appeals.

QUANTUM APPEALS

ITA No.216/Del/2000 for AY: 1996-97 ITA No.217/Del/2000 for AY: 1997-98 ITA No.1691/Del/2008 for AY: 1998-99 ITA No.1692/Del/2008 for AY: 1999-00 ITA No.1693/Del/2008 for AY: 2000-01 ITA No.1694/Del/2008 for AY: 2001-02 ITA No.1695/Del/2008 for AY: 2002-03

appeals, it is necessary to observe, assessee’s appeals in

assessment years 1996-97 and 1997-98 were earlier disposed of

by the Tribunal vide order dated 9th September, 2005. The

appeals were allowed in favour of the assessee on the limited legal

and jurisdictional issue that notices issued under section142(1)(i)

after the end of the relevant assessment years being invalid, the

assessments made pursuant thereto are also invalid. Against the

aforesaid decision of the Tribunal, the Revenue went in appeal

before Hon’ble Jurisdictional High Court. Vide order dated

21.11.2006, in ITA No. 1303/2006, the Hon’ble Jurisdiction High

Court remanded the matter back to the Tribunal for deciding the

4 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 appeals on merit. This is how the appeals came up for hearing

before us.

assesee’s claim of exemption in respect of certain income by

taking shelter under Article 8 of India–USA Double Taxation

Avoidance Agreement (DTAA). Since, relevant facts relating to this

issue are more or less common in all these appeals, we propose to

take up ITA No. 216/Del/2000 pertaining to assessment year

1996-97 as the lead appeal and discuss the facts involved therein.

in United States of America (USA) and is a tax resident of the said

country. As stated, the assessee is engaged in the business of

operating airlines in international traffic for carriage of

passengers and goods and in providing services incidental to such

operation. As submitted by the assessee, it started its operation in

India with flights from Indira Gandhi International (IGI) Airport,

New Delhi, in December, 1995. During the same time, Delta

Airlines, another USA based company, engaged in the business of

operation of airlines closed its operation in India. The baggage

screening, including equipment and fixtures at IGI Airport which

was earlier in possession of Delta Airlines was taken over by the

5 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 assessee. Subsequently, the assessee also acquired its own

technologically advanced equipments. In course of assessment

proceeding in assessment year 1996-97, the Assessing Officer

noticed that in course of investigation carried out by the zonal

unit of Directorate of Revenue Intelligence (DRI) in assessment

year 1996-97, it was found that assessee had earned revenue of

more than Rs. 1 crore in India which was not offered to tax. Basis

such information, the Assessing Officer called upon the assessee

to explain the reason for not showing such income. In response to

the query raised by the Assessing Officer, the assessee submitted

that in addition to income earned by it from operation of airlines

in international traffic for carriage of passengers and goods, it has

also earned income from other airlines in India by providing

baggage screening services and engineering and aircraft handling

services. The assessee submitted, in terms of Article 8 of the Tax

Treaty between India and USA, profits derived by assessee from

operation of aircraft in international traffic can be taxed only in

USA. Thus, the assessee submitted that the amount received from

other airlines for providing baggage screening services and

engineering and aircraft handling services, being incidental to

operation of aircraft in international traffic, is not taxable in India.

6 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 After considering the submissions of the assessee, the Assessing

Officer agreed that the income/profit earned by assessee from

operation of aircraft in international traffic is covered under

Article 8(1) of the Tax Treaty, hence, not taxable in India.

However, insofar as income/profit earned by the assessee from

other airlines while providing baggage screening services and

engineering and aircraft services, he held it as separate business

activity, hence, cannot be considered to be either directly

connected to operation of aircraft in international traffic for

transportation of passengers and goods or incidental to the

activity. Thus, he concluded that the amount received by the

assessee from other airlines towards baggage screening services

and engineering and aircraft handling services being not covered

under Article 8 would be taxable in India under Article 7 of the

DTAA as business profit, since, the assessee has Permanent

Establishment (PE) in India. While coming to such conclusion, the

Assessing Officer held that expenses claimed by the assessee will

be allowed to the extent directly related to the PE in India,

whereas, the head office expenses will be allowed subject to the

limitation prescribed under section 44C of the Act. Accordingly,

he completed the assessment.

7 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 5.1 Being aggrieved with the aforesaid decision of the Assessing

Officer, assessee preferred appeals before learned Commissioner

(Appeals.)

5.2 Though, the assessee made detailed submissions before

learned first appellate authority reiterating its claim that the

income earned from other airlines by rendering baggage screening

services and aircraft handling services are covered under Article

8(1) and 8(2), however, learned Commissioner (Appeals) was not

convinced. Accepting the reasoning of the Assessing Officer, he

held that the income received from other airlines is not covered

under Article 8 of the Tax Treaty. Thus, he confirmed the

additions made by the Assessing Officer.

5.3 As regards the allowance of expenses attributable to the PE,

learned Commissioner (Appeals) held that since the expenditure

incurred is in relation to operation of aircraft in international

traffic, there is no need to treat the services rendered to other

airlines as a separate business activity and apportion part of the

expenditure to that account. Thus, he held that assessee is not

entitled for deduction of expenditure on apportionment basis.

assessee drew our attention to Article 8 of India–USA DTAA and

8 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 submitted that as per paragraph 1, profit derived by an enterprise

of Contracting State from operation of aircraft in international

traffic can only be taxed in the country of residence. He

submitted, since, the assessee is a tax resident of USA, the profit

derived from operation of its airline business is taxable only in

USA. Laying emphasis on paragraph 2 of Article 8, he submitted,

apart from profit derived from transportation by carriage of

passengers, mail, livestock or goods, either as owner or lessees or

charterers, the profit derived from various ancillary and incidental

activities, such as profits from sale of tickets on behalf of other

enterprise, rental of ship or aircraft incidental to any activity

directly connected with such transportation, profit from the use,

maintenance, or rental of containers used in connection with the

operation of ships or aircraft in international traffic shall be

taxable only in that State or profit from any other activity directly

connected with transportation of passengers, mail, livestock or

goods would also qualify for exemption from taxation in India

under Article 8 of the Treaty. He submitted, Tax Treaty between

countries are drafted broadly adhering to either OECD Model or

UN Model or US Model. However, some variation is made based

on negotiations between the countries on the taxability of various

9 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 kinds of activities and services. Making a comparative analysis of

OECD Model Convention, UN Model Convention and US Model

Convention, learned counsel for the assessee submitted all of

them have expressed that ancillary and incidental activities

connected to operation of aircraft in international traffic also

qualify for beneficial treatment under Article 8(2). Drawing our

attention to Article 8(2) of India – USA Treaty, he submitted, it

specifically provides that profits derived from operation of aircraft

in international traffic shall include any activity directly

connected with such transportation. Whereas, he submitted no

such provision is contained in India-Japan Treaty. He submitted,

in India–Japan treaty the benefit of treaty provisions have not

expressly been extended to unspecified activities directly linked to

the transportation of passengers and goods etc. by air. He

submitted, Treaty with Germany contains provisions similar to

the Treaty with Japan, inasmuch as, it makes no specific

inclusion of activities directly linked to the transportation of

passengers and goods by air in the treaty itself nor do such

services find a mention in the protocol clarifying various

provisions of the said Treaty. Thus, he submitted, compared to

the provisions in India-Japan and India-Germany Treaty, Article 8

10 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 of India–USA Treaty is wider in scope and encompasses the profit

derived from ancillary activities which are directly connected to

operation of aircraft in international traffic. In this context, he

drew our attention to the technical explanation and the statement

of performance of US Model Convention as issued by Treasury

Department of US Government, which reads as under:

“Finally, certain non-transport activities that are an integral part of the services performed by a transport company are understood to be covered paragraph 1, though they are not specified in paragraph 2. These include, for example, the performance of some maintenance or catering services by one airline for another airline, if these services are incidental to the provision of those services by the airline for itself.”

6.1 Learned counsel submitted, the baggage screening services

and technical & engineering services provided by the assessee to

other airlines are sine qua non for the operation of aircraft or

transportation of passengers and goods by air. As various

countries, including India, have made Rules keeping in view the

safety and security of passengers, airports and aircraft which

make it mandatory that every person boarding an aircraft and

every baggage or cargo carried in an aircraft must undergo

screening to ensure that they do not carry or contain any

firearms, explosives etc. Further, without maintenance of the

11 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 aircraft at the ground level after its arrival from one destination

and before its departure to the next and without refueling and

ensuring the presence of various oils and fluids, it is not possible

for an aircraft to take off. Therefore, such activities are certainly

directly connected to the operation of aircraft for transportation of

passenger and goods. He submitted, without the services being

rendered by the assessee to itself and to other airlines, it will not

be possible for any aircraft to be air-borne with passengers or

goods. He submitted, apart from utilizing these services for its

own operation, it provides such services to other airlines to fully

utilize its technical manpower as well as the equipment. In this

context, he also referred to commentary of Klaus Vogel. He

submitted, since the baggage screening and technical and

engineering services provided to other airlines are preparatory

and auxiliary services related to transportation of passengers and

goods, the profit derived from such activities can only be taxed in

the country of residence under Article 8(1) read with Article 8(2) of

the Treaty. Thus, he submitted, the income earned by the

assessee from baggage screening, technical and engineering

services provided to other airlines would not be taxable in India.

6.2 Without prejudice, he submitted, even otherwise also such

12 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 income is not taxable in India, since, the assessee is a member of

a pool in terms of Article 8(4) of India – USA DTAA. Drawing our

attention to Article 8(4) of the Treaty, he submitted, profit derived

by an enterprise from participation in a pool shall be taxable only

in the country of residence. Proceeding further, he submitted, the

only pool known to the international aviation industry is the

International Airlines Technical Pool (IATP). In this context, he

drew our attention to IATP Manual, a copy of which is placed in

the paper book. He submitted, IATP is a non-profit, independent,

non-political global organization of airlines formed for the purpose

of providing reciprocal and technical support at line stations

throughout the world. He submitted, technical support includes,

aircraft spare parts, ground and ramp handling equipment and

manpower. The primary goal of IATP is to provide general

economic savings to participating airlines by minimizing

investments otherwise required for purchase of equipment and

spare parts for positioning at various stations in support of

aircraft operations. He submitted, the IATP Manual clearly states

that the organization is dedicated to a spirit of cooperation

between members which extends the mutual assistance and

support in a common effort to maintain a high degree of technical

13 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 performance in aircraft operations. He submitted, as a pool

member of IATP for the services provided and received, there is no

actual payment by the airlines rendering or receiving services and

only notional credits and debits are made through pool

accounting mechanism, i.e., IATA Clearing House. Explaining the

functions of pool, he submitted, under the IATP there are various

pools formation for various categories of services which are

denoted by different alphabets. By way of illustration, he

submitted, for example pool ‘D’ relates to ground handling

equipment, pool ‘F’ relates to technical facilities and services, pool

‘L’ relates to line maintenance, etc. He submitted, the services

rendered relating to baggage and cargo cleaning and aircraft

maintenance fall within the ambit of ‘L’ Pool. He submitted, Form

53 of the IATP is a contract that is used for technical facilities and

services and Form 55 of IATP is used for line maintenance. He

submitted, assessee is a member of IATP since November, 1967

and being part of IATP pool provides parts, equipments and

services and also receives various services from pool members. He

submitted, the baggage screening services provided in India are to

airlines which are members of IATP. He submitted, assessee has

also received reciprocal services from other IATP member airlines.

14 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 He submitted, while providing services to other airlines, the

assessee did not employ any additional manpower to render the

services and the manpower employed was to the extent required

for baggage handling and aircraft maintenance of its own aircraft

landing in and taking off from Delhi. This, according to learned

counsel for the assessee, clearly demonstrates that the provision

of services to other airlines was not carried out on commercial

lines, hence, cannot be treated as separate business activity. He

submitted, for providing such services, assessee has entered into

specific agreement in Form No.55/53 of the IATP, which are

standard agreements entered into between the members of IATP

for receiving and rendering services. Referring to OECD Model

Convention, he submitted, where an airlines enterprise agrees

under an IATP agreement to provide spare parts or maintenance

services to other airlines landing at a particular location, activities

carried out pursuant to that agreement will be ancillary to the

operation of aircraft in international traffic. He submitted, the

only requirement is, there must be reciprocity of services. He

submitted, the assessee participated in the IATP pool, wherein,

there was reciprocity of services and earned certain revenues from

such activities and also incurred expenditure. Thus, he

15 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014

submitted, the income received from providing baggage screening,

technical and engineering services clearly fall within the ambit of

Article 8(4) of Tax Treaty, hence, not taxable in India. In support

of his submissions, learned Counsel relied upon the following

decisions:

i. DIT Vs. KLM Royal Dutch Airlines, 392 ITR 218 (Del. HC) ii. Air France Vs. ACIT, 82 ITR (T) 301 (Del. ITAT) iii. KLM Royal Dutch Airlines Vs. DDIT, [2013] 33 taxmann.com 373 (Delhi – Trib.) iv. DDIT Vs. KLM Royal Dutch Airlines [2012] 19 taxmann.com 302 (Delhi) v. Lufthansa German Airlines Vs. DCIT [2004] 90 ITD 310 (Delhi) vi. DCIT Vs. KLM Royal Dutch Airlines (ITA No.403 & 404/Del/2010, Dt.19.11.2010) (Delhi – Trib.) vii. KLM Royal Dutch Airlines Vs. DIT ( ITA No. 4811/Del/2010, dt. 28.01.2011) (Delhi – Trib.) viii. Daimler Chrysler India Pvt. Ltd. Vs. DCIT, 120 TTJ 803 (Pune – Trib.) ix. DDIT Vs. Safmarine Container Lines N.V., 120 ITD 71 (Mumbai – Trib.)

submitted, insofar as the profits directly derived by the assessee

from operation of aircraft in the international traffic, the

Assessing Officer has not disputed that such income is covered

under Article 8(1) of the Tax Treaty. He submitted, the

profit/income derived by the assessee from baggage screening,

16 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 technical and engineering services provided to other airlines at

international airport in Delhi in no way are connected to

operation of aircraft in international traffic. He submitted,

passengers or goods travelling in other airlines are not

transported by the assessee. He submitted, receipts from baggage

screening services and technical and engineering services

provided to other airlines do not form part of the cost of ticket

that the assessee charges for its own passengers or goods.

Therefore, it is altogether a separate commercial activity

undertaken by the assessee without having any connection, either

direct or otherwise, with assessee’s activity of operating airlines in

international traffic for transportation of passengers/goods. He

submitted, the issue now stands well settled by virtue of the

decision of the Tribunal in case of British Airways Vs. DCIT,

(2002) 80 ITD 90 (Delhi). He submitted, even in case of Delta

Airlines, whose business in India was taken over by the assessee

subsequently, the Tribunal has held that the income received

from providing ground handling services and other services to

other airlines are not covered under Article 8 of India–USA DTAA.

Thus, he submitted, the profit derived from these activities, being

neither directly connected to assessee’s business of operating

17 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014

aircraft in international traffic nor being ancillary or incidental to

the said activity, would not come within the ambit of Article 8(1)

and 8(2). He submitted, assessee’s case will not also be covered

under Article 8(4) as there is no pooling arrangement in real sense

of the term, as, there is neither pooling of funds nor resources

between the members. Therefore, he submitted, the income

derived by the assessee from provision of baggage screening

services and technical and aircraft handling services to other

airlines are not covered under Article 8 of the Tax Treaty. He

submitted, since, the assessee has a permanent establishment in

India, the receipts will be taxable under Article 7 of the Tax

Treaty. In support of his contention, learned Departmental

Representative relied upon the following decisions:

18 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 7. B.A. Balasubramaniam & Bros. Co Vs CIT [116 Taxman 842, 236 ITR 977, 157 CTR 556] 8. CIT Vs R.M.P. Plasto (P.) Ltd [184 Taxman 372 (SC)/[2009] 313 ITR 397 (SC)/[2009] 227 CTR 635] 9. K.P. Madhusudhanan Vs CIT [[2001] 118 Taxman 324 (SC)/[2001] 251 ITR 99 (SC)/[2001] 169 CTR 489 (SC) 10. Delta Airlines, Inc. Vs. ADIT, [2015] 57 taxmann.com 1 (Mumbai – Trib.) 11. ADIT Vs. Delta Airlines Inc. (ITA No. 2801/Mum/2002 & Ors., dt. 29.09.2008)

ratio laid down by the Tribunal in case of British Airways (supra)

is not applicable to assessee’s case. Rather, assessee’s case is

similar to the case of KLM Royal Dutch Airlines (supra). In this

context, he drew our attention to a chart showing distinguishing

features of both the decisions. Further, he submitted, the decision

rendered by the Tribunal in case of ADIT Vs. Delta Airlines Inc.,

26 SOT 514 (Mum.) would not be applicable to assessee’s case,

as, in case of Delta Airlines the Tribunal held that neither the

OECD Commentary, nor the US technical explanation could be

looked into while considering the scope of paragraph 2 of Article 8

of India–USA Tax Treaty. He submitted, OECD Commentary

definitely holds a persuasive value insofar as the interpretation of

terms contained in the Tax Treaty. In this context, he drew out

19 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 attention to the decision of the Hon’ble Supreme Court in case of

Engineering Analysis Centre of Excellence (P.) Ltd. Vs. CIT, 432

ITR 471 (SC). He submitted, as per Article 31 of the Vienna

Convention of the Law of Treaties, 1969, Treaties are to be

interpreted in good faith in accordance with the ordinary meaning

to be given to the terms of the Treaty in their context and in the

light of its object and purpose. Referring to the decision of KLM

Royal Dutch Airlines (supra), he submitted, technical explanation

given by one of the Treaty partners, i.e., US Treasure Department

could be used as an aid to interpretation. In this context, he also

referred to a decision of the Tribunal in case of DDIT Vs. Preroy

A.G., 39 SOT 187 (Mum.). Thus, he submitted, while interpreting

Article 8 of the India–USA Tax Treaty, reliance can be placed on

the OECD Commentary and Technical Explanation to the US

Model Convention issued by the Treasure Department of US. To

buttress his submission that all ancillary and incidental activities

relating to operation of airlines in international traffic come within

the ambit of Article 8, learned counsel for the assessee relied

upon a decision of the Hon’ble Bombay High Court in case of DIT

Vs. Balaji Shipping UK Ltd. [2012] 253 CTR 460 (Bombay).

20 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 9. We have patiently and carefully heard the parties and have

given a thoughtful consideration to the detailed submissions

made, both, orally as well as in writing, in the light of ratio laid

down in the judicial precedents cited before us. We have also

perused the materials placed on record. Undisputedly, the

assessee is engaged in the business of operating aircraft in

international traffic for transportation of passengers, goods etc.

Also, there is no dispute that the assessee, being a tax resident of

USA, is governed under India–USA DTAA. Before the

departmental authorities, it is the claim of the assessee that as

per Article 8(1) of the India-USA Tax Treaty, profits derived by the

assessee from operation of aircraft in international traffic is

taxable in USA. Meaning thereby, such profit is not exigible to tax

in India. The Assessing Officer, admittedly, has accepted the

aforesaid claim of the assessee, insofar as, profit earned from

transportation of passengers, goods etc. in aircraft operated by

the assessee. The only point of dispute between the assessee and

Revenue is with regard to the income earned by the assessee from

providing baggage screening services and aircraft handling

services to other airlines at IGI airport, Delhi. The departmental

authorities have observed that the income derived by the assessee

21 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 from providing these services to other airlines do not come within

the ambit of Article 8(1) read with Article 8(2) of the Tax Treaty,

as, these are not activities which are directly connected to

transportation of passengers, goods etc. by air by engaging

assessee’s aircraft.

9.1 Before we proceed to deal with the disputed issue, it is

necessary to bear in mind that interpretation of Bilateral Treaties

entered into by two sovereign nations cannot be made in the

mode or manner adopted for interpreting statutory legislation.

This observation has been made by the Hon’ble Supreme Court in

case of Union of India Vs. Azadi Bachao Andolan, [2003] 132

taxmann.com 373 (SC). While dealing with the issue of

interpretation of a Tax Treaty, the Hon’ble Supreme Court has

further observed that while interpreting the provisions of any

international Treaty, including Treaty for avoidance of double

taxation, it has to be borne in mind that Treaties are negotiated

and entered into at a political level for several considerations as

their basis. The main function of a double taxation avoidance

treaty should be seen in the context of aiding commercial

relations between treaty partners as being essentially a bargain

22 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 between two treaty countries as to the division of tax/revenues

between them falling to be taxed in both jurisdictions.

9.2 Therefore, the provisions of a Treaty relating to taxation of a

particular item of income may differ from country to country as

treaties are negotiated at political level between two countries

based on various considerations, including commercial

consideration. Keeping in perspective these salutary principles,

we will proceed to deal with the issue.

9.3 As discussed earlier, the main thrust of assessee’s

contention is, the income derived from baggage screening services

and aircraft handling services provided to other airlines, being

ancillary and incidental to its main activities of transportation of

passengers, goods etc. by air will also fall within the four corners

of Article 8(1) read with Article 8(2) of the Tax Treaty. For this

purpose, it is necessary to look into Article 8 of India–USA DTAA

which read 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 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—

23 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014

(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. 5. For the purposes of this Article, interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 (Interest) shall not apply in relation to such interest. 6. Gains derived by an enterprise of a Contracting State described in paragraph 1 from the alienation of ships, aircraft or containers owned and operated by the enterprise, the income from which is taxable only in that State, shall be taxed only in that State.”

9.4 On a careful reading of Article 8 of the Tax Treaty, as

reproduced above, it is to be seen that as per paragraph 1 of

Article 8, profits derived from the operation of ships or aircraft in

international traffic shall be taxable only in the country of

residence of the entity/enterprise engaged in the business of

operation of ships or aircraft. Paragraph 2 of Article 8 explains the

meaning of the expression “profits from operation of ships or

aircraft in international traffic”. This expression means, profit

derived from transportation by sea or air of passengers, mail,

livestock or goods carried on by the owners or lessees or charterer

of ships or aircrafts. However, in addition to transportation of

24 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 passengers, mail, livestock or goods, the following three activities

are also considered to be coming within the expression “profits

derived by an enterprise from operation of ships or aircraft in

international traffic”:

(a) the sale of tickets for such transportation on behalf of

other enterprises;

(b) other activities directly connected with such

transportation; and

(c) the rental of ships or aircraft incidental to any activity

directly connected with such transportation.

9.5 If the provisions contained under Article 8 of India–US Tax

Treaty are juxtaposed to similar provisions contained under UN

Model Convention, OECD Model Convention and US Model

Convention, it can be seen that the expression ‘other activity

directly connected with such transportation’ as incorporated

in clause (b) of Article 8(2) of India-USA Tax Treaty is absent in

OECD Model Convention, UN Model Convention and US Model

Convention. Thus, essentially, Article 8(2) of India-USA Tax Treaty

narrows down the scope and ambit of expression ‘profits from

the operation of ships or aircraft in international traffic’ by

restricting it to specific activities. For this reason, if we may say

25 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 so, the meaning of expression ‘profits from operation of ships

or aircraft in international traffic’ as finds place in Article 8(2)

makes it different from the other Model Conventions, referred to

above. Hence, the commentaries/technical explanation

explaining the provisions of OECD Model Convention or US Model

convention may not be of much help in interpreting Article 8(1)

read with Article 8(2) of the India-US Tax Treaty.

9.6 Admittedly, the income derived by the assessee from

providing baggage screening services and aircraft handling

services to other airlines do not fall either under clause (a) or (c) of

paragraph 2 of Article 8 of the Tax Treaty. The only clause under

which these activities can fit in is clause (b). Therefore, as per

paragraph 2(b) of Article 8, the expression ‘other activity’ has to

be read in conjunction with ‘directly connected with such

transportation’. The words ‘such transportation’ certainly, in

turn, refers to transportation by sea or air respectively of

passenger, mail, livestock or goods carried on by the owners or

lessees or charterers of ships or aircrafts. In other words, profits

derived from other activity directly connected to transportation by

sea or air of passengers, mail, livestock or goods by the assessee

itself would come within the ambit of profit from operation of

26 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 ships or aircrafts in international traffic, as per Article 8(1) read

with Article 8(2).

9.7 Interestingly, the expression ‘other activity directly

connected with such transportation’ as incorporated in Article

8(2)(b) is not found in similar provision contained in India-

Germany, India-Japan and India-Netherlands DTAA, which were

referred to before us by learned counsel for the assessee at the

time of hearing. Thus, if we read Article 8(2) of India–USA Tax

Treaty contextually in conjunction with paragraph 1 of Article 8 of

the treaty, it is to be seen that in addition to transportation of

passengers, mail, livestock or goods by sea or air, any other

activity has to be considered with reference to such

transportation as aiding it, supporting it and incidental thereto.

Two activities, viz., sale of tickets for such transportation on

behalf of other enterprise and the rental of ships or aircrafts

incidental to any activity directly connected with such

transportation have been specifically included within the meaning

of ‘profits from the operation of ships or aircrafts in the

international traffic’. Therefore, any activity which can aid and

assist the transportation of passengers, mail, livestock or goods

etc. by the assessee by air or sea can come within the ambit of

27 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 ‘other activity directly connected to such transportation’. As

given by way of illustration by the Assessing Officer, such activity

can be the operation of bus service connecting a town with its

airport for transporting the passengers, transportation of goods

by truck connecting a depot with a port or airport etc. These

activities, undoubtedly, aid and assist the transportation of

passenger, mail, goods, livestock etc. by the assessee itself, hence,

would come within the ambit of Article 8(1) read with Article 8(2)

0f India-USA Tax Treaty.

9.8 Thus, according to our understanding, the use of

expression ‘other activity directly connected with such

transportation’ in Article 8(2)(b) of the India-USA Tax Treaty

restricts the applicability of Article 8(1) only to a specific category

of profit/income which is directly connected to the transportation

of passengers, mail, livestock or goods etc. by the enterprise by

air or sea. Article 31(1) of the Vienna Convention on the law of

treaties, 1969 says that treaties shall be interpreted in good faith

in accordance with the ordinary meaning to be given to the terms

of the treaty in their context and in the light of its object and

purpose. Thus, when the phraseology used in India–USA Tax

Treaty is clear and unambiguous in its terms and can be

28 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 understood according to the ordinary meaning of the words used

therein, there is no need for interpreting the provisions with

external aid of OECD Commentary or Technical Explanation to

US Model Convention.

9.9 As regards various judicial precedents cited before us by

learned counsel for the assessee, on careful examination, we find,

mostly these decisions were rendered in the context of benefit of

exemption under Article 8(1) read with Article 8(4) by

participating in a pool. Hence, in our humble opinion, they are

not applicable for deciding whether the profit derived from

providing baggage screening services and aircraft handling

services to other airlines would come within the ambit of Article

8(2). Insofar as, the decision of the Hon’ble Bombay High Court in

case of DCIT Vs. Balaji Shipping UK Ltd. (supra). The facts of the

case reveal that the assessee was operating vessels for carriage of

cargo from India to international ports. However, since the vessels

chartered by the assessee did not ply the Indian territorial waters,

the assessee entered into slot hire agreement with another entity

under which the other entity provided container slot spaces on

the feeder vessels operated by it to transport the cargo of the

assessee from Indian ports to the international ports or hubs

29 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 from where the cargo was transported by charter vessels of the

assessee for onward journey to the final destination. Thus, as

could be seen from the aforesaid facts, ultimately, by entering

into the slot hire agreement the assessee transported its own

cargo from India to the final destination. Therefore, the Hon’ble

Court held that the income derived from transportation of cargo

would not be taxable in India in terms of India–UK DTAA.

9.10 However, in the facts of the present appeals, the profit

derived by the assessee from baggage screening services and

aircraft handling services provided to other airlines is in no way

connected to assessee’s activity of transportation of passengers,

mail, livestock or goods etc. by air in its own aircrafts. In fact, if

the assessee does not provide such services to other airlines, in

no manner, assessee’s activity of transportation of passenger,

mail, goods, livestock etc. would be affected. In fact, the assesse

itself has stated that when not required by the assessee for its

own transportation activity, for optimum use of the equipments

and manpower deployed at IGI airport, the services are provided

to other airlines. These facts make it clear that, either provision

or non provision of certain services to other airlines will not at all

have any impact on assessee’s activity of transportation of

30 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 passenger, mail, goods, livestock etc. That being the case, in our

considered opinion, the profit derived by the assessee from

baggage screening services and aircraft handling services

provided to other airlines will not come within the ambit of ‘other

activity directly connected to such transport’ as provided

under Article 8(2)(b) of India-USA Tax Treaty. Hence, would not be

covered under Article 8(1) of the Tax Treaty. Thus, assessee’s

claim under Article 8(1) read with Article 8(2)(b) must fail.

9.11 Having held so, it is necessary to examine assessee’s claim

that it will, otherwise, also be covered under Article 8(4) read with

Article 8(1) of the Tax Treaty. Article 8(4) of India–USA DTAA

extends benefit provided under Article 8(1) to profits from

participation in pool, joint business or international operating

agency. It is the contention of the assessee that in view of Article

8(4), the profits derived by an enterprise from participation in

pool shall be taxable only in the country of which the enterprise is

a resident. This argument was not taken by the assessee before

the departmental authorities in the initial two assessment years,

i.e., assessment years 1996-97 and 1997-98. However, from

assessment year 1998-99 onwards, the assessee has also staked

its claim of exemption under Article 8(4) read with Article 8(1) of

31 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 the Tax Treaty. It is the say of the assessee that the only pool

known to the international aviation industry is IATP and the

assessee, being a member of the pool, having provided services to

other airlines on reciprocal basis, the profit from baggage

screening services and aircraft handling services can only be

taxed in USA, the country of residence, in terms of Article 8(1) of

the Treaty. The learned Commissioner (Appeals) has negated

assessee’s claim under Article 8(4) primarily for the following

reasons:

(a) The assessee failed to furnish any evidence of existence

of IATP and had not filed names of airlines who are

members of the pool.

(b) Assessee could not prove that it had become a member

of IATP by contributing assets for baggage screening

and aircrafts handling services acquired by it from

M/s. Delta Airlines in 1995.

(c) Assessee could not file any evidence to show that the

equipment for baggage screening and aircraft handling

services was under common control and management

of IATP.

32 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 (d) Assessee failed to furnish any evidence to show that

identical services/facilities were received by the

assessee from other airlines in IATP on reciprocal

basis.

9.12 At this stage, we must observe, in addition to documentary

evidences furnished before the departmental authorities, the

assessee had furnished certain additional evidences before the

Tribunal vide letter dated 2nd April, 2018. Vide order dated

17.05.2018, the Tribunal had admitted the additional evidences

as part of record. The additional evidences filed by the assessee

are as under:

(i) Documents showing services provided by the assessee

to other airlines.

(ii) Services provided by other airlines to the assessee.

(iii) The relevant extract of International Airlines Technical

Pool (IATP) manual.

(iv) Specimen of ground handling agreements entered into

buy the assessee with other airlines.

9.13 On perusal of the IATP agreement, a copy of which is at

page 29 of the paper-book, it is noticed that the assessee became

a participant of the IATP pool in November, 1967. There are

33 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 various other airlines that are part of the pool, though, from

different time periods, to name a few, Air Portuguese, Romanian

Air Transport, Thai Airways International Public Company Ltd.,

Royal Jordanian Airlines, Turkish Airlines Inc., US Airways Inc.,

Virgin Atlantic Airways Ltd. There is no dispute that the IATP was

created based on IATP manual. The IATP manual further provides

that provider and user of services should jointly establish a detail

specification of users required services. The manual also specifies

various categories of agreement in specific form, such as,

standard ground handling agreement has to be as per Form 55 or

Form 53.

9.14 It is also universally recognized that the largest pool of

airlines know to aviation industry is the IATP and it is in

existence since early sixties. Membership of the IATP has

increased from 24 in 1962 to 121 in 1997. Basically, IATP is an

organization of airlines formed for the purposes of providing

reciprocal technical support at line stations throughout the world.

Technical support includes aircraft spare parts, ground and ramp

handling equipments and manpower. The primary goal of IATP is

to generate economic savings to participating airlines by

minimizing investments otherwise required for purchase of

34 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 equipments and spare parts for positioning at various stations in

support of aircraft operation. The advantage of being a member of

pool is, suppose a particular service is required by a particular

airline in a particular station, which on its own it cannot avail,

such service is provided by another airline who may be having the

facilities at that airport. Similarly, the other airline can avail the

service on reciprocal basis at another airport where it may not be

having the facilities on its own. As per the mechanism under

IATP, actual payment is not made by the airlines for rendering or

receiving the services, but only notional credits or debits are

made through pool accounting mechanism, i.e., IATA Clearing

House. It is observed, being a member of the pool, assessee has

entered into ground handling agreements with various other

airlines and provided and received services on reciprocal basis at

different airports. To demonstrate the aforesaid fact, the assessee

has furnished the documentary evidences indicating services

provided to other airlines and availed from other airlines. Thus,

aforesaid documentary evidences and materials on record

contradict the finding of learned Commissioner (Appeals) that the

assessee failed to furnish any evidence to demonstrate the

existence of IATP or the fact that it has become a pool member or

35 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 it has provided and availed services on reciprocal basis. The

material on record clearly demonstrate that as a member of IATP,

the assessee has not only provided services to various other

airlines but has also availed services from other airlines, though,

may not be in India but at various other airports.

9.15 On a reading of Article 8(4), we are unable to find any

restrictive covenant indicating that the reciprocity in services

must be in the same country. Therefore, once the assessee

derives profit from participating in a pool on reciprocal basis, in

terms of Article 8(4), such profit can only be taxed in the country

of residence of the enterprise, in the present case USA. While

dealing with identical issue relating to taxability of profit derived

from participation in a pool, the Hon’ble Jurisdictional High Court

in DIT Vs. KLM Royal Dutch Airlines (supra) interpreting pari

materia provision contained under Article 8(3) of the India-

Netherland Tax Treaty has held as under:

“30. The Assessees participated in the IATP pool and earned certain revenues from such activities and also incurred expenditure. There is, in the opinion of the Court, clear reciprocity as to the extension of services; IATP membership is premised upon each participating member being able to provide facilities for which it was formed (line services, OMR services, etc.) of a required mandated standard. As there was reciprocity in the rendering and availing of services, there was clearly participation in the pool; in terms of the two DTAAs (Indo-German and India- Netherlands) the profits from such participation were not taxable in India.

36 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014

37 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 persons, live-stock, goods or mail, carried on by the owners or lessees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprise, the incidental lease of aircraft on a charter basis and any other activity directly connected with such transportation..." had the effect of limiting the nature of activities that could be comprehended in the pool envisioned in Article 8 (2): in other words, the expanded meaning of operation of aircraft included those activities in Article 8(3) through the extended definition and no more. On the other hand, there is no such limitation in the DTAAs in question, in these cases. This constituted the most significant difference between the two sets of cases on the one hand, and British Airways (supra) on the other. For these reasons, this Court rejects the Revenue's contentions. 33. For the foregoing reasons, this Court answers the questions of law, framed in both sets of appeals, against the Revenue and in favour of the assessees; there is no infirmity in the impugned orders of the ITAT, which are affirmed. The appeals fail and are dismissed.

9.16 Identical view has been expressed by the Tribunal in case of

DIT Vs. Lufthansa German Airlines (supra). The decision of the

Coordinate Bench in case of Air France Vs. ACIT (supra) also

expressed similar view. In fact, in case of Air France Vs. ACIT

(supra), the Bench has gone a step further by holding that

services provided and received from non-IATP members will also

come within the ambit of Article 8. Thus, the materials on record

not only demonstrate the existence of a pool in terms of Article

8(4), i.e., IATP pool but they also demonstrate that the assessee is

a member of the pool and being a member has provided and

received services from airlines on reciprocal basis. Thus, in our

considered opinion, the profit derived from providing baggage

38 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 screening services and aircraft handling services to other airlines

as a participant of IATP pool would be covered under Article 8(1)

read with Article 8(4) of India–USA Tax Treaty. The ratio laid

down in the decisions relied upon by leaned counsel for the

assessee, particularly, the decision of Hon’ble Jurisdictional High

Court in case of DIT Vs. KLM Royal Dutch Airlines (supra) clearly

support this view. Pertinently, while deciding the issue in case of

DIT Vs. KLM Royal Dutch Airlines (supra) the Hon’ble

Jurisdictional High Court took note of the fact that in India-UK

DTAA the words used are ‘pools of any kind’, which are different

from the expression used in Article 8(3) of India-Netherland

DTAA. At the cost of repetition, we must observe, Article 8(4) of

India-USA DTAA and Article 8(3) of the India-Netherland DTAA

are, more or less, identically worded. For this very reason also, we

are unable to subscribe to the view expressed in case of British

Airways (supra) and Delta Airlines (supra), insofar as, they relate

to claim of exemption of profit from participation in pool.

9.17 Thus, to conclude, we hold that the profit derived from

providing baggage screening services and aircraft handling

services to various other airlines in India will not be taxable in

India under Article 8(1) read with Article 8(4) of the India–USA

39 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 Tax Treaty. Therefore, the additions made in different assessment

years under dispute are hereby deleted.

Article 8(1) read with Article 8(2)(b) is rejected. Whereas, its claim

under Article 8(1) read with Article 8(4) is allowed.

the assessee concerning attribution of expenditure to the PE have

become academic, hence, not required to be adjudicated. For this

reason also, the grounds raised on the levy of interest under

section 234A and 234B of the Act have also become infructuous.

However, in principle, we accept assessee’s contention that no

interest under section 234B can be levied as the liability is on the

payer to deduct tax at source and not on the assessee to pay the

advance tax. This is so, in view of the ratio laid down by the

Hon’ble Supreme Court in case of DIT Mitsubishi Corporation

[2021] 130 taxmann.com 276 (SC).

PENALTY APPEALS ITA No.954/Del/2014 for AY: 1998-99 ITA No.955/Del/2014 for AY: 1999-00 ITA No.956/Del/2014 for AY: 2000-01 ITA No.957/Del/2014 for AY: 2001-02 ITA No.958/Del/2014 for AY: 2002-03

40 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 13. These appeals are against penalty imposed under section

271(1)(c) of the Act based on addition of income received from

baggage screening and aircraft handling services from other

airlines. While deciding this particular issue in quantum appeals,

we have held that the income is not taxable in India, in terms of

Article 8(1) read with Article 8(4) of India–USA Tax Treaty. In view

of our aforesaid decision in the quantum appeals, penalty

imposed under section 271(1)(c) of the Act in all these assessment

years cannot survive. Accordingly, for this very reason, we delete

the penalty imposed in all the assessment years under dispute.

Even, otherwise also, the income from baggage screening services

and aircraft handling services received from other airlines,

whether, would be covered under Article 8 of India–USA DTAA is

a highly debatable issue on which more than one view is possible.

Therefore, consequent to additions made on such a debatable

issue, no penalty under section 271(1)(c) of the Act can be

imposed, alleging furnishing of inaccurate particulars of income.

For this reason also, penalty imposed under Section 271(1)(c) of

the Act needs to be deleted. Accordingly, we do so.

41 ITA Nos.216 & 217/Del/2000; 1691 to 1695/Del/2008; 954 to 958/Del/2014 Sl. No. QUANTUM APPEALS Assessment Result Year 1. ITA No.216/Del/2000 1996-97 Partly Allowed 2. ITA No.217/Del/2000 1997-98 Partly Allowed 3. ITA No.1691/Del/2008 1998-99 Partly Allowed 4. ITA No.1692/Del/2008 1999-00 Partly Allowed 5. ITA No.1693/Del/2008 2000-01 Partly Allowed 6. ITA No.1694/Del/2008 2001-02 Partly Allowed 7. ITA No.1695/Del/2008 2002-03 Partly Allowed PENALTY APPEALS

Order pronounced in the open court on 12th April, 2022

Sd/- Sd/ (PRADIP KUMAR KEDIA) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 12th April, 2022. RK/-