DCIT(IT)-2.1.2, BKC, KURLA vs. DELTA AIR LINES, DEORA MARG

Ld. CIT DR on the contrary, referred to the decision in the assessee's own case for Assessment Year 2010-11, [2015] 57 taxman.com 1 (Mum) which held otherwise. In the said decision for Assessment Year 2010-11, the distinguishing fact noted by the Coordinate Bench while holding in favour of the assessee in appeal for Assessment Year 2018-19 was that linkage between transporting passengers in third-party aircraft to an intermediary location and from there to ultimate location in assessee's own aircraft was not established. For Assessment Year 2018-19, assessee had submitted details about the entire journey whether by own or third-party aircrafts linked through using specific codes for the entire journey. Coordinate Bench took note of the factual position from the details so submitted that the codes used by the assessee were unique to the assessee which were used even in the tickets issued for the airlines operated by third-party which established the link. It also noted that unique code is used for the entire journey whether fully or partly carried out using third-party airlines. Coordinate Bench also took cognizance of sample copy of agreement entered into with Air France to distinguish the decision of the Coordinate Bench in appeal for Assessment Year 2010-11, since the basis of the decision for Assessment Year 2010-11 was on the ground that there is no agreement to substantiate the terms under which code-sharing arrangement were entered into by the assessee. Thus, the Coordinate Bench negated the contention of the Revenue that the receipts from code-sharing agreement are not substantiated by any underlying agreements.

We have perused the order of Coordinate Bench for Assessment Year 2018-19 in detail as well as the order of ld. CIT(A) who has elaborately dealt with the same, on every aspect of the merits of the case. Decision of the Coordinate Bench in assessee’s own case for Assessment Year 2018-19 is squarely applicable to the year under consideration, there being no material change in factual matrix and the applicable law, as nothing cogent was brought on record by the revenue to demonstrate any variation to this effect. The observations and findings of the Coordinate Bench for appeal for Assessment Year 2018-19 are reproduced below for ready reference: “16. We notice that though there are no other judgements on the issue of codesharing arrangement in the case of Airlines at the Tribunal or High Court level, there are many decisions by the Tribunal / High Court on the applicability of Article 8 under various DTAAs to the slot sharing arrangement by shipping companies including the decision of Hon'ble Bombay High Court in the case of Balaji Shipping. Before proceeding further it is relevant to mention that slot chartering by Shipping Companies is an arrangement where agreements are entered into with third party operators of the ship to rent one or more container slots on the said ship. The Hon'ble Bombay High Court in the case of Balaji Shipping (supra) while considering the applicability of Article 9 of India-UK DTAA to the receipts from slot chartering arrangement has held that the slot chartering 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.

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 defines the same as "profits derived 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". Therefore the revenue in assessee's case contended that the decision of the Bombay High Court in Balaji Shipping's case is not applicable to assessee. However the Hon'ble Bombay High Court in the case DIT(IT) vs APL Co. Pte. Ltd [2016] 75 taxmann.com 32 (Bombay) while considering similar issue under India-Singapore DTAA has followed its own decision in the case of Balaji Shipping (supra) and held no substantial question of law arose. The Article 8 of India-Singapore DTAA is similarly worded as India-US DTAA with respect to the definition of profits from operation of Ship or Aircrafts in international traffic and that the decision is rendered post the decision of the coordinate bench in assessee's own case. Therefore in our view, the decision of the jurisdictional High Court in the case of APL Co. Pte. Ltd (supra) will have a binding precedence while considering assessee's case. Further it is noticed that the coordinate bench in various other cases including those rendered in the context of DTAAs which are similarly worded as India-US DTAA have followed the ratio laid down by the Hon'ble Bombay High Court in the decision of Balaji Shipping (supra).

In view of the legal position with regard to slot-chartering arrangement in shipping business it becomes necessary for us to analyse the applicability of the ratio laid down in the above decisions to the code-sharing arrangement in airline business which is similar to slot chartering. Though, the decision of the coordinate bench in assessee's own case has a binding precedence, given evolution in the juridical status post the decision in assessee's case for AY 2010-11 and given that in the decision for AY 2010-11, the coordinate bench has considered only the decision of MISC Bernard (supra), we are inclined to analyse assessee's case afresh for the year under consideration. While doing so we are conscious that there is no change to the assessee's facts pertaining to the impugned issue between AY 2010- 11 and the year under consideration.

We notice that the ratio laid down by the jurisdictional High Courts in the case of APL Co. Pte. Ltd (supra) and Balaji Shipping (supra) 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

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 revenue. Under code sharing arrangements, the passengers are provided with wide range of choices though the tickets are booked through single airline therefore the customer base of the airline increases. Therefore in our considered view, the revenue earned through transporting passengers using third party airlines either entirely or part of the journey under the code sharing arrangement, has a direct nexus / inextricably linked to the main business of the assessee of operation of aircrafts. When we consider these facts and apply the ratio laid down by the jurisdictional High Court there is merit in the submission that the receipts of the assessee through code sharing arrangements are eligible for the benefit under Article 8 of India US DTAA.

The ld DR during the course hearing vehemently argued that receipts under code sharing arrangement does not fall within the definition of "profits from operation of Ship or Aircrafts in international traffic" since under the said agreement the assessee neither owns / leases / charters the aircrafts. In this regard we notice from the relevant observations of the coordinate bench in the case of MISC Bernard (supra) as extracted in the earlier part of this order that the coordinate bench has given a categorical finding that the operation of ship can be done as a charterer, which includes part of a ship or particular space in a ship and that even a part of a space in the vessels for a particular journey is also considered as "charter of ship" or "charterer". The coordinate bench further observed that in the decision of Balaji Shipping U.K. Ltd. (supra), while referring to the judgment of Tychy (supra), the High Court have noted that a "slot charter" and a "voyage charter" of a part of a ship are in a sense charterers of a space in a ship. This findings of the coordinate bench and the Hon'ble High Court, leads to the interpretation that when an assessee blocks a space in a third party airline in a particular journey, by booking tickets under a code sharing arrangement then the same would amount to the assessee chartering the third party aircraft i.e. assessee is the charterer of the space in the aircraft. In other words, for the assessee to be a charterer of an aircraft there is no requirement that the entire aircraft should be chartered and that the assessee would become a charterer even if a space is booked in the aircraft. 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.

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 operations of aircraft in international traffic by the assessee and accordingly would be covered under Article 8(1) of India-US DTAA. Further the Hon'ble Bombay High Court in the case of Balaji Shipping (supra) also held that under slot chartering the arrangement is on a principle to principle basis i.e. the transportation of goods by third party vessels is done on behalf of operator of the ship. In assessee's case under the code sharing arrangements, the tickets are issued by the assessee for the entire journey including journey through third party airlines and accordingly the passengers are carried in third party aircrafts on behalf of the assessee. Therefore on this count also it is to be held that the operation of aircrafts in international traffic by the assessee would include code sharing arrangements.

We notice that the coordinate bench for AY 2010-11 has rejected the reliance placed by the assessee in the case of MISC Bernard mainly for the reason that the link is not established between the transportation by third party aircrafts and assessee's own aircraft (though the assessee through MA contended that the AO did not call for the same). However for the year under consideration the assessee submitted paper books containing the details (page 198 to 443) submitted before the lower authorities where in the entire journey whether by own or third party aircrafts is linked through using specific codes for the entire journey. From the perusal of the details submitted we notice that the codes used by the assessee are unique to the assessee which is used even in the tickets issued for the airlines operated by third party which is establishes the link. We further notice that this unique code is used for the entire journey whether fully or partly carried out using third party airlines. We also notice that the coordinate bench in the case of APL Co. & Pte Ltd [2017] 185 TTJ 305 (Mumbai) has given that finding that once it is held that chartering includes slot charter/ space charter and it falls within the ambit of 'operation of ships', then the benefit of Article 8 cannot be denied simply on the ground that the transportation has been done either partly or fully through slot charter arrangement or joint charter arrangement. In other words it is held that that ‘linkage is not a pre-requisite’ for availing benefit of Article 8 of the IndiaSingapore 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.

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.

During the course of hearing the ld AR argued that the OECD Model Convention specifically mentions that the receipts from slot chartering and code sharing would be covered under Article 8 and drew our attention to the relevant clauses of the said model. It is relevant to mention here that the DTAA between US and other countries follow the US Model of DTA conventions. Therefore in our considered view it is essential to examine if what is stated in the OECD Model Convention commentaries can be applied to assessee's case. In this regard we notice that the India-US Treaty is not entirely following the US Model of DTA conventions but also has incorporated certain specific items (refer Para 6, & 8 of the OECD model commentary) in to Article 8(2) of India US DTAA. In other words definition of profits from the operation of ships or aircraft in international traffic is an inclusive definition as per US Model whereas it is not so in Article 8(2) of India US DTAA. For reference Article 8 under US Model is extracted below Article 8 SHIPPING AND AIR TRANSPORT 1. Profits of an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that Contracting State.

The provisions of paragraphs 1 and 3 of this Article shall also apply to profits from participation in a pool, a joint business, or an international operating agency.

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.

We also notice that Model Technical Explanation Accompanying the US Model mentions that when negotiations happen between other countries and US while entering into Treaty, the Model Tax Convention on Income and on Capital, published by the Organisation for Economic Cooperation and Development (the “OECD Model”), and recent tax treaties concluded by both countries would be taken into account. 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 into by the assessee. For the year under consideration the assessee during the course of hearing provided a sample copy of the agreement entered into with Air France and submitted that similar agreements are available for all code-sharing arrangements with third party airlines. Therefore, the contention of the revenue that the receipts from code sharing agreement are not substantiated by any underlying agreements is not tenable for the year under consideration.

On perusal of records we notice that the assessee had filed an application with the Competent Authority (“CA”) under Art.27 of the India-US DTAA requesting that the authorities invoke Mutual Agreement Procedures(“MAP”) for resolving the impugned issue for the year under consideration along with the earlier years. We further notice that the US authorities have responded stating that despite prolonged efforts, a consensus could not be reached with the Indian authorities and that the US authorities are in agreement with the view that all of assessee's profits including revenue associated with interline and code sharing arrangement are to be exempt from Indian Taxation.

In view of 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 here Accordingly the receipts of the assessee under code sharing arrangement are covered under Article-8, of India US DTAA and cannot be taxed in India. The grounds including the additional ground raised

In the result, appeal of the Revenue is dismissed.

Appeal for the other two assessment years, i.e., Assessment Year 2015-16 and 2016-17 are also dismissed, as our observations and findings in the above paragraphs apply mutatis mutandis.

In the result, all the three appeals of the Revenue are dismissed.