Air France Vs Addl. CIT International Taxation (ITAT Delhi)
The issue under consideration is whether Indian branch is deriving income from technical handling to IATP Pool Members and non IATP Members is taxable in India?
ITAT states that, in the present case, it can be seen that the Indian Branch office is merely a branch office of the foreign/assessee company, which is engaged in the operation of aircraft in international traffic. There are no specific services referred between the head office and the branch office as per the submissions of the assessee which appears to be correct and no distinguishing facts were brought on record by the Revenue before us. The entire receipts collected by the branch office are remitted to the head office, after meeting the local expenditure and the said receipt of the branch office are from the public at large and not from rendering of services to the head office. Thus, the assessee company is not having any permanent establishment in India. Therefore, the observation of the Assessing Officer that the assessee company is having permanent establishment in India and hence income arrived in India is taxable, is not correct finding according to the facts on record.
Further, after going through the “International Airlines Technical Pool” (IATP) Agreement along with the Standard Handling Agreement in consonance with the DTAA between India and France, it can be seen that the assessee company is a member of IATP and the services provided by the assessee company to the relevant air companies were also the member of the IATP. There is no dispute on this aspect by the Assessing Officer in the assessment order though the Ld. DR is contending contrary that some of the airlines whom the services provided were not members of IATP. But that is not the case in the present Assessment Year. In fact as per Annexure “A” of IATP manual, it is evidently clear that there is no bar on member airline to provide service to non IATP Pool member and in fact, even non IATP Pool members if takes such service from a pool would be considered as a pool service to them. Thus the submission of the Ld. DR is factually incorrect.
Now coming to the DTAA between India and France, it can be seen that Article 8(2) specifically mentions that the DTAA will apply to the profits derived by an enterprise of a Contracting State from the operation of aircraft in international traffic from the participation in a pool, a joint business or an international operating agency and shall be taxable only in that Contracting States. In the present case, the contracting state is France and though under domestic law the assessee has to pay tax in India while deriving income from Indian territory, yet because of Article 8(2) of the DTAA agreement, Air France is exempted to pay any tax in India as its services/activities and profit thereof derives from pool participation. Thus, appeal of the assessee is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
There are two appeals which are filed by the Assessee against the assessment order dated 04/10/2011 passed by the Assessing Officer u/s 143 (3) read with Section 144C of the Income Tax Act, 1961 as confirmed by the DRP vide its order dated 02.08.2011 for Assessment Year 2004-05 & 2005-06 respectively and two appeals are filed by the Assessee and Revenue against the orders dated 06.02.2012 passed by CIT(A)-XI, New Delhi for Assessment Year 2006-07.
2. Firstly we are taking up appeals for A.Y. 2006-07 being ITA No. 1786/Del/2012 and ITA No. 2212/Del/2012 as the same was argued firstly by the both the parties. The Grounds of appeal are as under:-
ITA No. 1786/Del/2012 (assessee’s appeal)
1. “That the Learned CIT (A) has grossly erred in not appreciating the true and correct facts of the case before passing the impugned order.
2. That the Learned CIT (A) has grossly erred in not appreciating that the appellant does not render any ground handling services and only render technical handling services even though it has been held that both are covered under Article 8 of the DTAA if rendered to IATP Pool Members.
3. That the Learned CIT (A) has grossly erred in concluding that the services rendered to one non IATP pool member would be taxable in the hands of the appellant to the extent of the revenue earned from the said customer under Article 7 of the DTAA.
4. That the appellant seeks to alter, modify and add any of the around as the case may be.”
ITA No. 2212/Del/2012 (revenue’s appeal)
1. “On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 1,78,09,378/- made by the AO, by holding the assessee’s income from ground handling and technical handling services to third party airlines are within the ambit of ‘operation of aircraft’ in International traffic and hence covered by Article 8 of Indo-French DTAA.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO on account of receipts from rendering engineering and ground handling services to third party airlines, even though such receipts are not covered under Article 8 of the Double Taxation Avoidance Agreement between India and France.
3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO on account of receipts from rendering engineering and ground handling services to third party airlines are not directly connected to operation of aircrafts in international traffic as envisaged in Article 8 of the Indo- France DTAA and accordingly, the receipts from such activities are taxable in India.
4. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the AO on account of receipts from rendering engineering and ground handling services to third party airlines, by relying upon the decisions of ITAT, New Delhi in the cases of Lufthansa German Airlines and KLM Royal Dutch Airlines, while ignoring the decision of the Hon’ble ITAT in the case of British Airways Plc (ITA 3098/del/2009, dated 30.10.2009), which is squarely applicable in the present case.
5. The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal.”
3. During the hearing, the Ld. DR pointed out that tax limit in appeal being ITA No.2212/Del/2012 filed by the Revenue is below Rs. 50 lakhs which squarely falls within the ambit of Circular No. 17/2019 dated 08.2019 issued by the Central Board of Direct Taxes prescribing the tax effect for preferring appeals before Tribunal by the revenue and subsequent clarification issued by CBDT on 20th August, 2019. Therefore, ITA No.2212/Del/2012 filed by the Revenue is dismissed.
4. Now we are taking up ITA No. 1786/Del/2012. The assessee is a foreign company, engaged in the operation of aircraft in international traffic. The assessee is a tax resident of France and is liable for taxation in France. The assessee filed its return of income for A.Y. 200 6-07 on 31st March 2008, declaring Nil taxable income as the assessee claimed that the entire income earned by the assessee in India is exempt from taxation under Section 90 of the Income Tax Act, 1961. Thereafter, the case of the assessee was fixed for scrutiny u/s 143(2). The assessee in India derives income from the following sources;
i. Carriage of passage.
ii. Carriage of cargo.
iii. Interest income from funds directly connected with the operation of aircraft in International Traffic.
iv. Income from technical handling to other IATP Pool Members.
During the course of assessment, the assessee was directed to furnish details in respect of the Technical Handling undertaken by it for other carriers along with the details of income from cargo passage and interest etc. The assessee furnished the details. The assessee submitted that the case of the assessee was squarely covered by the judgment of the Tribunal in case of Lufthansa German Airlines (90 ITD 310) and since the assessee was rendering Technical Handling services only to IATP Pool Members, it is a pooling activity and not liable to be taxed in India. The Assessing Officer passed an assessment order thereby treating the Technical Income as “fee for technical services” at Rs. 1,81,79,476/- covered u/s 1 15A read with Section 44D and taxed the same at 20% of the gross receipts.
5. Being aggrieved by the assessment order the assessee filed an appeal before the CIT(A). The CIT(A) partly allowed the appeal of the
6. The Ld. AR submitted that as per the general rules specified under the IATP manual, wherein, for activities covered, under “ground maintenance equipment and aircraft recovery” is identified under standard agreements is “E” whereas the identification to be affixed on such standard agreements at the time of entering into such agreements by the member airlines for line maintenance services, the code is to be used “L” and which has been consistently done and followed by the assessee airlines. Everywhere on the agreement and the description of the services being made is that of Technical Services. Thus it is clear that no ‘Ground Handling Activity’ is undertaken or carried out by the assessee Airlines. The Ld. AR further submitted that only ‘Technical Handling Services’ has been undertaken. Local company with AF (HO) as a shareholder and a Local Indian company as the other shareholder had floated a Pvt. Ltd. Co. in the name and style of Air France Ground Handling India Pvt. Ltd. which was for the object and main purpose of being undertaking ‘Ground Handling Activities’ and not ‘Technical Handling Activities’. This was a separate entity incorporated under Companies Act, 1956 and was for ‘Ground Handling Services’ which never took off and was wound up subsequently. The assessee airlines is providing services on a per-flight basis. The services offered by the assessee airlines varies in quality and coverage and it is offering facilities like “storage” to some of the airlines, “Loan of Equipment” to some airlines providing “qualified man power” etc. to different airlines. The Ld. AR further submitted that the rates charged by the servicing airlines to the service receiver airlines is dependent on number of flights handled, discount offered due to handling number of flights and determination of cost sharing rules, which is determined according to the general rules of the IATP manual. Wherein, based on number of flights handled, global flights handled and agreement between airlines under the pooling arrangement charge applicable rates, as may be determined by the member airlines and it is not the case wherein, by charging varied rates, the member airlines do not fall part of the IATP pool. The IATP does not prescribe the rates to be charged from other member Airlines. During the Assessment Year 2006-07, the assessee airlines had serviced only one airline i.e. Iberworld, who was not a member airline but was of the status of a guest airlines covered under the IATP pool. The Ld. AR further submitted that ad-hoc agreements with Etihad Airlines, Air Canada, Jet Airways, Air India, TNT Airways and Cambata Aviation etc. have been entered into, has mentioned by the Revenue. Thus airlines with which commencement of contract with third parties provided technical assistance during F.Y. 2006-07. The Ld. AR submitted that even ad-hoc basis agreements are agreements which are not continuous in nature and are for a limited time period and entered of and on by the member airlines depending on the requirements and was not without any agreements. The Ld. AR submitted that the IATP Manual provides raising direct invoices between member airlines as per manual and hence such invoices are in accordance with the IATP manual. The Ld. AR further submitted that deduction of TDS is merely a recovery procedure and not a levy of tax. There are only notional credits and debits between the member airlines and there is no transaction of money and provision of TDS does not make any receipt as taxable. The Ld. AR further submitted that service tax is a levy which is different from Income Tax Act and is levied on services being provided by one part to another and such services are chargeable to service tax in India. In the instant case, it is not a dispute and other services being rendered by assessee airlines but on the other hand, the dispute is whether the services rendered by the assessee airlines is part and parcel as pool arrangement and subjected to tax at home base rather than source. It is not a dispute as to whether service has been rendered by assessee airlines to other airlines or not. The Ld. AR further submitted that no monies were paid or received in India on account of services rendered by the assessee airlines to other airlines which are part and parcel of pool. But only notional credits and debits are given through pool accounting mechanism i.e. IATA Clearing House. The facilities extended by the assessee airlines are in the nature of line maintenance facilities and these are predominantly with the view to assist the airlines as a means of collaborating the air transport enterprises. The Ld. AR relied upon the decision of the Tribunal in case of Luftansa German Airlines 90 ITD 310 and since the assessee was rendering Technical Handling Services to IATP Pool Members, it is a pooling activity and not liable to be taxed in India. The Ld. AR also relied upon the decision of KLM Royal Dutch Airlines decided in ITA No. 403 & 404/DEL/2010 and ITA No. 481 1/Del/2010 of the Tribunal and the Hon’ble High Court decision in case of DIT vs. KLM Royal Dutch Airlines & Lufthansa German Airlines (2017) 392 ITR 218 (Del.). The Ld. AR also furnished the comparison of the DTAA between UK, Netherlands, Germany and France. The Ld. AR submitted that the provisions of Article 8(4) of the Indo – German Treaty and Article 8(2) of the Indo – France Treaty and Article 8(3) of the Indo – Netherland Treaty are identically worded as under:-
“The provisions of paragraph 1 shall also apply from the participation in a joint business or an international operating agency.”
Whereas the Article 8(2) of the Indo – UK Treaty is differently worded as under:-
“The provision of paragraph 1 of this Article shall likewise apply in respect of participation in pools of any kind enterprises engaged in air transport.”
Thus, the Ld. AR submitted that the CIT(A) was not right in sustaining taxability to the extent of Rs. 3,70,098/- under Article 7 of the DTAA and rejecting the claim of Article 8 of the DTAA.
7. The Ld. DR submitted that one of the activities from which assessee derived income during the years under appeal is Technical Handling. Although the assessee has been claiming that it has provided ‘Technical Handling’ services as per the agreements produced, the nature of services has been described as “Ground Handling”. The assessee provides its services on a ‘per-flight’ basis for fixed duration. The services on offer also vary on quality and coverage. The Ld. DR further submitted that the assessee also provides a multitude of other facilities. The assessee does not follow a uniform pricing policy for the services provided by it and the rates charged for the same type of Aircraft i.e. A-330 vary from airlines to airlines. Similarly, there are different rates on the basis of duration of services as well as for additional services as reflected in the table produced during the hearing. The Ld. DR further submitted that the assessee provides its services both to airlines who are members of IATA/IATP as well as members who are not members of IATP. The assessee also provides its services under bilateral service agreements as well as on an ad-hoc basis without any agreements. The assessee raised direct invoices specifying the amount payable on the basis of actual usage of services as well as the period i.e. 30 days within which such amount is payable. The assessee also receives service charges directly from the service recipients. The agreements for the provision of services with certain Airlines have inbuilt provision for TDS and Austrian Airlines have deducted TDS too. Similarly, amount received from Austrian Airlines and others are subjected to Service Tax. The agreement with Singapore Airlines has inbuilt “Termination Clause” as well as provision for “Annual Pricing Review”. The agreement with Singapore Airlines & Austrian Airlines also provides for the sub-contract of the services to KLM. However, while the assessee charges US Dollar 625 & Euro 340 from Singapore & Austrian Airlines respectively for its services. The assessee also promoted a JV named Air France Ground Handling Pvt. Ltd. with Interglobe to assist it in the provision of ground handling services and pays to the said concern for the same. The activities involving provision of services and facilities are not only restricted to Delhi but has also taken commercial space at other airports like Chennai, Banalore & Mumbai as per its website. Thus services are offered at these stations as well. As evident from the above the bilateral agreements between the assessee and other airlines are varied both in terms of the nature and quality of services provided, service charges as well as other services conditions and no two agreements are identical. The result of the above well organized, independent and parallel commercial/business structure is the sure and constant increase in the Revenue earned from the provision of services and facilities over the years. The assessee is also a member of various other pools like IATA Fuel Quality Pool (IFQP), IATA’s Safety Audit of Ground Operations (ISAGO) which is an internationally recognized system for assessing the operational management and control systems of an organization that provides ground handling services for airlines and European Line Maintenance Organization (ELMO). The Ld. DR relied upon the decision of British Airways PLC vs. DCIT (ITA No. 4653 to 4655/DEL/1999, 484 to 486/DEL/2000 order dated 24.09.2001) 2003-TII-23-ITAT-DEL-INTL.
8. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee company is claimed benefit under the DTAA under Article 8 of the Treaty, since the entire revenue receipts are from operation of aircraft in international traffic as per the assessee before the Assessing Officer. The assessee also submitted during the assessment proceedings that the Indian Branch office is merely a branch office of the foreign company, which is engaged in the operation of aircraft in international traffic. There are no specific services referred between the head office and the branch office as per the submissions of the assessee. The entire receipts collected by the branch office are remitted to the head office, after meeting the local expenditure and the said receipt of the branch office are from the public at large and not from rendering of services to the head office as per the assessee. The Assessing Officer asked the assessee to submit sources of income including from ground handling, flight maintenance etc. and asked to explain the taxability of the same vis-à-vis judgments of the authorities in the cases of British Airways and Luftansa Airlines of the Tribunal. The assessee submitted that during the year under consideration Air France has provided technical handling services to other IATP pool members aggregating to Rs. 1,81,79,476/-. The same is covered under Article 8 of the provisions of Double Taxation Avoidance Agreement between India and France (DTAA). The assessee further submitted that it is part and parcel of the Income covered under operation of aircraft of international traffic. The technical handling services are provided by Air France to only ITAP pool members. The Assessing Officer further asked the following queries:
(i) The nature of technical handling services and the steps involved in the same?
(ii) Basis of figure of Rs. 1,81,79,476/-
(iii) Taxability of the same vis-à-vis decisions of the ITAT in the case of
British Airways and Lufthansa Airlines and also to show cause, why the receipts should not be taxed in India?
(iv) The extent of technical services provided to its own aircrafts and the aircrafts of the other airlines.
The assessee provided the copies of invoices, contracts for technical handling to the Assessing Officer. The Assessing Officer after going through the contracts and invoices observed that the services are not mentioned in Annexure – B of the agreement. The Assessee explained technical handling services as nothing, but verifying the technical parameters of the aircraft, after it has taken a journey to verify that the same is in an airworthy and safe conditions to fly again. Such examination airworthiness certificate is provided to the airlines by AF basis which flying is allowed. The assessee is member of “International Airlines Technical Pool” (IATP). As an IATP member the assessee extends technical facilities (line maintenance facilities) to other IATP Members only during the year under consideration. No such facility or service has been provided by assessee to any non IATP Member during the year under consideration. The services as per the Standard Ground Handling Agreement 1998 Main Agreement along with Annexure A and Annexure B is as under:
“ IATP FORM-55 LINE MAINTENANCE POOLING
ANNEXURE B.12/OS-DEL
LOCATION, AGREED SERVICES AND CHARGES
To the Standard Ground Handling Agreement of April 1998 Between
AIR FRANCE AUSTRIAN AIRLINES
having its principal office at And having its principal office at
45 Rue de PARIS Fortanastrasse : P.O. Boax 50
95747 ROISSY CDG CEDEX A-11 07, Vienna
FRANCE Austria
And hereinafter referred to as and hereinafter referred to as
“the Handling Company” “the Carrier”
Holding EASA PART 145 approval
Certificate Nbr : FR. 145 010
Effective from: October 25, 1998
This Annex B for the location: Delhi (DEL)
Is valid from: April 1 * 2006
And replaces: Annex B 1 1 valid from April 01,2005
PREAMBLE
This Annex B is prepared in accordance with the simplified procedure whereby the Parties agree that the terms of the Main Agreement and Annex A of the SGHA of April 1998 as published by the International Air Transport Association shall apply as if such terms were repeated here in full.
By signing this Annex B, the parties confirm that they are familiar with the aforementioned Main Agreement, Annex A and International Airline Technical Pool Rules.
PARAGRAPH 1 – SERVICES CONTRACTED
1.1 For a single ground handling consisting of the arrival and the subsequent departure at agreed timings of the same aircraft, the Handling Company shall provide the following services of Annex A at the following rates.
1.1.1 Section 2 2.2.1, 2.2.2.
Section 6 6.3.1, 6.3.2.(a), (b), 6.6.1(c)
Section 7 7.1.3
Section 8 8.1.1., 8.1.2(b), 8.1.4, 8.1.5, 8.1.6, 8.1.9, 8.1.10, 8.1.11, 8.1.12, 8.2.1, 8.2.2, 8.2.3
Section 9 9.1.1, 9.1.2, 9.1.3, 9.1.4 (a), 9b), 9.2.1 (see 1.2), 9.2.2, 9.2.3, 9.2.4, 9.2.5, 9.3.1(b), 9.3.2, 9.3.3 (to a limited extent).
Section 14 14.4.2(b5) (if required)
