LUFTHANSA GERMAN AIRLINES,NEW DELHI vs. DCIT, INTERNATIONAL TAXATION, CIRCLE, GURGAON

As could be seen from the above ground Nos. 1 to 4, the primary issue to be adjudicated in assessee’s appeal is as to whether the charges paid by Airport Authority of India (for short AAI) to the assessee, for assessee collecting the User Development Fee (for short UDF) from the passengers and passing it on to AAI, is not commission and even if it is so, the same is income from operation of aircraft and not liable for tax as per Article 8 of DTAA between India and Germany.

Briefly, the facts are the assessee is an international air transport operator having its head office at Germany. For its Indian operations assessee has an office at Gurgaon. Assessee primarily deriving income from operation of aircrafts for the international traffic, transportation of passengers and cargo The assessee in its return of income filed on 16.09.2014 claimed its entire income as exempt from tax under Article 8 of DTAA with Germany. In the course of assessment proceedings the assessing officer after examining the revenues reported by the assessee with reference to taxability as per Article 8 of DTAA with Germany he found that income is covered under Article 8 and not taxable. However, in respect of collection charges received by the assessee from AAI for assessee collecting UDF charges from passengers and passing it on to AAI within the stipulated time, the assessing officer was of the view that these collection charges paid by AAI to the assessee are noting but commission since UDF is collected as part of sale of tickets and remitted to the AAI for airport operations and for this effort AAI paid commission to the assessee. Further the assessing officer was of the view that the collection charges received by the assessee from AAI for the assessee collecting the UDF and passing it on to AAI, are not from the business of operation of aircrafts and these are commercial activities which are independent from the business operations of aircrafts in India. The assessing officer was of the view that the opportunity to earn this income may have arisen due to some connection but these activities are not incidental to the operation of aircraft. Thus the Assessing officer in the draft assessment order passed u/s 143(3) r.w.s 144C(1) of the Act on 22.11.2016, proposed to assess the collection charges received by the assessee from AAI as business income chargeable to tax under Article 7 of the Treaty.

The assessee filed its objection before the Ld.DRP and the Ld. DRP approved the draft order passed by the assessing officer. Further the Ld.DRP also observed that for the assessment year 2013-14 the draft order of the assessing officer was also approved on similar facts.

Before us the Ld. Counsel for the assessee submits that the assessee has not preferred appeal in the assessment year 2013-14 in view of the smallness of revenue effect. The Ld. Counsel for the assessee reiterating the submissions made before the authorities below, submits that AAI has allowed discount to the assessee for collecting the UDF and passing it on to AAI within the stipulated time. He submits that if the UDF collected is not remitted to AAI within the stipulated time no discount is allowed to the assessee. Further the Ld. Counsel for the assessee submits that it has been wrongly worded as “collection charges” though it is nothing but discount allowed to the assessee. The Ld. Counsel submits that the discount allowed to the assessee by AAI is not taxable under Article 8 of DTAA as this income is derived from operation of aircraft. 4

On the other hand the Ld. DR submits that discounts are not covered under Article 8 of DTAA. The Ld. DR submits that only the income derived from operation of aircraft is covered under Article 8 of DTAA and the collection charges received by the assessee from AAI is not derived from operation of aircraft. The Ld. DR submits that the collection charges are paid to the assessee for the services rendered by the assessee to AAI in collecting and passing on the UDF to AAI within stipulated time. The Ld. DR submits that the Assessing officer has rightly considered these receipts as business income of the assessee.

We have heard rival submissions, perused the order of the Ld. DRP and the Assessment order. It is not in dispute that the assessee’s income derived from operation of aircraft is not taxable under Article 8 of DTAA between India and Germany. However, the assessee received collection charges from AAI as the assessee collected UDF from the passengers and the same was passed on to AAI. A duty was cast on the assessee to collect UDF from the passengers and pass it on to the AAI. Assessee was paid collection charges wherever the UDF is remitted to AAI within the stipulated time. The taxability of income in the hands of the is governed by Article 8 of the treaty and it reads as under:

The question is whether the collection charges paid by AAI to the assessee is income derived from operation of aircraft not liable to tax in India as per Article 8 of DTAA between India and Germany. As the effective management of the assessee company is situated in Germany the profits from operation of aircraft in international traffic is taxable only in Germany. The UDF is levied at the Indian airports as a measure to increase revenues of the airport operator. The UDF is levied to brdge any revenue shortfall so that the airport operator is able to get a fair rate of return on investment. The quantum of UDF varies from airport to airport and the rate of UDF at airports is determined by the Airports Economic Regulatory Authority of India (AERA) for major airports and ministry of civil aviation for not major airports. Presently UDF collection charge at a flat rate of Rs.5/- per passenger (all inclusive) is allowed to airlines subject to payment of UDF collection to AAI within 15 days of receipt of bill. Airlines will make full payment of UDF to AAI and raise a separate invoice for the collection charges on UDF to AAI. The collection charges paid by AAI to the assessee in whatever name called i.e., either discount or commission is nothing but service charges paid, for assessee collecting UDF and passing it on to AAI. The collection charges paid by AAI to assessee cannot be said to be the income derived from operation of aircraft. Further in assessee’s case on identical facts for the assessment year 2013-14 the Ld. DRP approved the order of the assessing officer in holding that the collection charges received by the assessee from AAI on remitting the UDF within the stipulated time as income from business 6 taxable in India and such income is not derived from operation of aircraft falling under Article 8 of DTAA between India and Germany.

In these circumstances and for the above reasons, we hold that the collection charges received by the assessee from AAI are not income derived from operation of aircraft falling under Article 8 of DTAA between India and Germany. Thus ground Nos. 1 to 4 raised by the assessee are dismissed.

Ground No. 5 is in respect of levy of interest u/s 234B and 234C which is consequential and hence the same is dismissed.

Ground No.6 is in respect of levy of interest u/s 271(1)(c) of the Act which is premature at this stage and hence the same is dismissed.

In the result appeal of the assessee is dismissed. Order pronounced in the open court on : 24/03/2022.