CASE LAWS DETAILS
DECIDED BY: ITAT, MUMBAI BENCH `L’, MUMBAI
IN THE CASE OF: ADIT (International Taxation) Vs. Federal Express Corporation, USA, Appeal No: ITA Nos. 4452, 4453 & 9482/2004, DECIDED ON: January 29, 2009
RELEVANT PARAGRAPH
27. Rival submissions of the parties have been considered carefully in the light of the material placed before us and the case laws referred to. The first question for our consideration is whether the benefit of Article 8 of the Indo U.S. Treaty can be denied to the assessee merely on the ground that the nature of activity carried on by the assessee, in the opinion of the A.O., amounts to courier activity. It may be mentioned that the learned Departmental Representative could not seriously challenge the factual finding given by the GT(A) to the effect that the assessee is engaged in the business of transporting cargo in the international traffic by its own aircraft. We have also gone through the finding of the fact recorded by the CIT(A). It is not in dispute that the assessee has a fleet of 650 aircraft engaged in the transportation of cargo in the international traffic globally. It is also recognised by the Director General of Civil Aviation in India since the approval was granted to operate air cargo service to and from India. The assessee also obtained approval from the Reserve Bank of India to establish branches at Mumbai, New Delhi, Kolkata and Chennai for undertaking the airline cargo operations. Further air carrier certificate has been issued to the assessee by the Federal Aviation Administration, government of U.S. certifying that the assessee has met all the requirements of the Federal Aviation Act, 1958. It is also noted that the assessee is registered member of International Air Transport Association (IATA). Further it is submitted by the assessee that five flights a week were operated to and from India in the international traffic for transportation of cargo even in the first year of business in India. All these factual aspects could not be controverted by the learned Departmental Representative. Therefore, considering the same, we are of the considered view that the CIT(A) was justified in holding that the assessee was engaged in the business of transportation of cargo by air in the international traffic.
28. Having held as above, the other aspect of the question is whether the benefit of Article 8 can be denied on the ground that inland transportation undertaken by the assessee, in order to provide door-to-door facility, has been termed by the Assessing Officer as courier activity. In our view, the inland transportation is an integral part of the main activity of transportation of cargo in the international traffic provided there is live link between inland transportation and the main transportation in the international traffic. This aspect was examined by the Bench in the light of various commentaries in the case of Safmarine Containers Lines N.V. (supra). It was held in that case that inland transportation from customer’s place at Ludhiana to Mumbai was an integral part of the main activity of the transportation of the same in the international traffic through ships owned/chartered/leased by the assessee. Accordingly, the benefit of Article 8 of Indo U.S. Treaty was allowed. Therefore, following the said decision, it is held that the benefit of Article 8 cannot be denied to the assessee merely on the ground that the assessee was collecting cargo from its customer’s place and transporting the same to the airport for the purpose of further transportation in the international traffic and vice-versa.
29. Having held as above, the next question arising for our consideration is as to what extent the benefit of Article 8 of Indo U.S. Treaty can be allowed to the assessee. The contention of the assessee is that the entire freight revenue received by the assessee should be exempted from tax in view of the decision of this Bench in the case of Balaji Shipping (UK) Ltd. (supra) while the contention of the revenue is that profits attributable to the transportation of cargo through other airlines as well as inland transportation cannot be exempted in view of the specific definition of the expression ” profits from the operation of ships or aircraft in international traffic” given in Article 8(2) of Indo U.S. Treaty. Reliance has been placed on the later decision of this Bench in the case of Delta Airlines Inc.(supra) wherein it has been held that since the expression “profits from the operation of aircraft in the international traffic” has been defined in para 2 of Article 8, such expression should not be given extended meaning in the light of various commentaries. Thus, there is no dispute between the parties as far as the profits from transportation of cargo in the international traffic by the assessee through the aircrafts as an owner/lessee/charterer are concerned. We have also gone through the provisions of Article 8 of Indo-US Treaty. Paragraph 1 provides that profits from the operation of ships or aircraft in the international traffic shall be taxable only in the state of residence. Paragraph 2 provides that profits from operation of ships or aircraft in the international traffic shall mean profits derived by an enterprise from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners/ lessees/ charterers of the ships or aircraft. In view of these clear provisions it is held that profits attributable to the transportation of cargo, mail, etc. by the aircraft owned, chartered or leased by the assessee cannot be taxed in India.
31. A comparative study of the above provisions dearly indicate that Article 9 of Indo U.K. Treaty uses the expression “profits from operation of ships” but such expression has not been defined. On the other hand, in the Indo US Treaty, the expression “profits from operation of ships or aircraft in the international traffic” has been defined in para 2 of Article 8. Since the expression “profits from operation of ships” was not defined in Indo U.K. Treaty, this bench in the case of Balaji Shipping (UK) Ltd. (supra), following the judgement of the Honourable Supreme Court in the case of Azadi Bechao Andolan (supra) and the decision^ the Tribunal in the case of Meta chem Canada Inc. 100 ITD 251(Mum), held that such expression should be construed in the manner in which the contracting parties understood at the time of execution of the Treaty i.e. in the light of the commentaries of International Law available at the time of execution of the agreement. On the other hand, the Tribunal while disposing the appeal of Delta Airlines Inc. (supra), following the decision of the Supreme Court in the case of CIT Vs. P.V.A.L. Kulandagan Chettiar (supra), held that the expression “profits from operation of ships or aircraft in the International traffic must be understood in the sense in which it has been defined in para 2 of Article 8. Thus, in our opinion, there is no conflict between these two decisions. Therefore, following the decision of the Bench in the case of Delta Airlines Inc. (supra), it is to be held that benefit of Article 8 would be available to the assessee to the extent the activity carried on by the assessee falls within the parameter of the definition given in Article 8(2) of the Indo U.S. Treaty.
32. The contention of the learned counsel for the assessee that the ratio laid down by the Bench in the case of Delta Airlines Inc. is not in accordance with the decision of the Hon’ble Supreme Court in the case of P.V.A.L. Kulandagan Chettiar (supra), in our opinion, is without force. In that case two questions were raised by the Honourable Supreme Court which, inter alia, included a question “whether the capital gains should be taxable only in the country in which the assets are situated.”.
As per the facts narrated in the judgement, the assessee had sold certain immovable properties situated at Malaysia which resulted in short term capital gains of Rs. 18,130/-. This income was taxed in India by the Assessing Officer. However, the CIT(A), the Appellate Tribunal as well as Honourable High Court held that in view of the Treaty between India and Malaysia, such capital gains could not be taxed in India. Thus, the matter reached before the Supreme Court. It is in this context, the Attorney General of India appearing for the revenue raised the following contention appearing at page 660 of 267 ITR:
“He further urged that tax on capital gains is a different kind of tax though brought within the fold of income tax law in this country; that under the principles of international law the fiscal jurisdiction pf a State to tax any form of income generally arises from either the location of the source of income within its territory or by virtue of the residence of the assessee within its territory. However, in contrast to the State where income is source, the country of which the assessee is a resident is entitled to tax the assessee on its global Income and In other words, the assessee Is subject to unlimited fiscal liability In the State of residence. Similar view has been taken by Karnataka High Court. In CIT Vs. R.M. Muthlah [1993] 202 TTR 508. Thus, the State of which the assessee Is a resident has Inherent jurisdiction to tax the assessee’s income from property situated in another State. However since it is generally recognised that the State of source in respect of immovable property has a closer economic connection with the income from that property, the treaties generally provide that tax may be imposed by the State of source in respect of such property and shall be allowed as a credit In the State of residence; that it needs to be emphasised that there is no bar under the international law for the State of residence to impose tax on income from property situated In another State and whether there is such a bar under the treaty depends upon the correct interpretation of its provisions.”
33. A perusal of the above arguments clearly shows that the interpretation of the provisions of the treaty was the subject matter before the Honourable Supreme Court. It is pertinent to note that the above contention was turned down by the Honourable Supreme Court by observing as under:
“777 a contention put forth by the learned Attorney General that capital gains is not income and, therefore, is not covered by the treaty cannot be accepted at all because for purposes of the Act capital gains is always treated as income arising out of immovable property though subject to different kind of treatment. Therefore, the contention advanced by the learned Attorney General that it is not a part of the treaty cannot be accepted because In the terms of the treaty wherever any expression is not defined the expression defined in the Income-tax Act would be attracted. The definition of “income” would, therefore, include capital gains. Thus, capital gains derived from immovable property is income and therefore article 6 would be attracted”. Again at page 672 it was observed as under:
“Taxation policy is within the power of the Government and section 90 of the Income-tax Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the Income-tax Act, it would be unnecessary to refer to the terms addressed in the OECD or in any of the decisions of foreign jurisdiction or in any other agreements.”
