Case Law Details
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.”
- The crux of the above observations is that wherever any expression is not defined in the Treaty then the expression defined in the domestic law could be applied. That means that meaning of such expression can be ascertained with reference to the other materials which may be by way of domestic law or the commentaries available at the time of execution of the agreement by the contracting parties as held by the apex court in the case of Azadi Bachao Andoian, Impliedly, it means that where any expression or term is defined then it would be unnecessary to refer to the commentaries or decisions of foreign jurisdiction as held by the apex court in the case of P.V. A.L. Kulandagan Chettiar (supra). Therefore, the decision of the Bench in the case of Delta Airlines Inc. (supra) to the effect that commentaries on international law need not be looked into where the expression has been defined in the Treaty itself is in accordance with the ratio laid down in the above decision.
- The contention of the assessee’s counsel that the decision in the case of Delta Airlines is contrary to the earlier decision of the Tribunal In the case of Safmarine Container Lines N.V. (supra) is also without force. Para 10 of the order in the case of Safmarine Container Lines reads as under; “Now, we will examine the amount in dispute in the context of DTAA. Both the sides have taken shelter of commentary on Article 8 by OECD and Kiause Vogei. At this juncture, it would be relevant to note that the DTAA is the main document and has to be considered for examining the tax ability or otherwise of an item of income in the respective States. If the language of DTAA is clear and does not admit of any doubt, there is no need for referring to the OECD Model and commentaries etc. The Honourable Supreme Court in CTT Vs. P. V.A.L. Kulandagan Chettiar [2004] 267 ITR 654 has held in penultimate para that “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”. The review petition filed against this judgement also stands dismissed in CIT Vs. P. V.A.L Kulandagan Chettiar [2008] 300 ITR 5 (SC). Under these circumstances, we are of the considered opinion that the commentary on the Model Convention can be taken assistance of only if the language of the treaty is drafted loosely or in an inclusive way or it does not unearth the intention of the Contracting States in a lucid manner.
However, in para 15, the Tribunal observed as under:
“15. We have considered the rival submissions and perused the relevant material on record. From the language of Article 8 it clearly emerges that the income derived from the operation of ships in international traffic shall also include income from “any other activity directly connected with such transportation”. This expression has not been further elaborated in the DTAA in as much as such other activities have not been exhaustively spelt out. Under these circumstances, it is imperative to go by the Commentaries for ascertaining the true purport of this expression.”
Perusal of the above shows that the principle laid down in para 10 of the order has been reiterated by us in the case of Deita Airlines Inc.(supra). As far as para 15 is concerned, it has been stated clearly that the expression “other activity directly connected with such transportation” in Article 8(2)(b) of Indo U.S. Treaty has not been further elaborated in the DTAA and, therefore, the true intent could be ascertained by looking into the commentaries. This principle is not contrary to the earlier principles stated in para 10. It only means that to the extent any term or expression is ambiguous then to ascertain its meaning the Court can look into the commentaries on International Taxation. Sometimes, an ambiguity can be in the words used by the contracting parties while drafting the treaty. Article 8(2) of the Indo Belgium Treaty defines the expression “income derived from operation of ships or aircraft in the International traffic”. The main part of sub-clause (b) defines the scope of the direct activity of transportation in the international traffic while the second part includes the activity other than the main activity of transportation in the international traffic. The Bench was concerned with the second part of the definition which included “other activity directly connected with such transportation”. The meaning of such other activity was not clear and, therefore, the Bench proceeded to ascertain its meaning by looking into the commentaries. It is in this context a part of such expression was considered in the light of the OECD Commentary. In the case of Delta Airlines Inc. (supra) also the Bench was concerned with the second part of the definition in Article 8(2) and since the assessee was carrying on activity which had no nexus with the direct activity of transportation in the International traffic, it was held that the assessee was not entitled to the benefit under Article 8(2)(b) of Indo U.S. Treaty with reference to the profits derived from the activity of screening the baggage belonging to the customers of other airlines. Thus, in our considered opinion, there is no inconsistency between the above two decisions of the Tribunal.
36. Further, the contention of the learned counsel for the assessee that the decision of this Bench in the case of Delta Airlines is contrary to various decisions of the Supreme Court mentioned in para 18 of this order is also without force. Those judgements are authorities for the proposition that the principles of international taxation can be considered while adjudicating the issue with reference to the domestic law. But nowhere it is said by the apex court that such course of action can be adopted even where any term or expression has been specifically defined in the domestic law. Reference can be made to the judgement of the Honourable Supreme Court in the case of People’s Union for Civil Liberties v. Union of India (supra) wherein it has been held that international treaties and instructions have been relied upon by the Supreme Court for statutory interpretation where the terms of any legislation are not clear or are reasonably capable of more than one meaning. It was also observed that in the absence of any law to the contrary, there is prima facie presumption that parliament did not intend to act in breach of international law including the State Treaty obligations. Similarly, in the case of T.N. Godavarman Thirumalpad (supra) it was observed that in the absence of any inconsistency regard must be had to, even in construing the domestic law. Therefore, these decisions do not support the contention of the learned counsel for the assessee that commentaries should be looked into even where the expression or term has been specifically defined in the treaty.
- The decision of the Tribunal in the case of Lufthansa German Airlines 90 ITD 310 (Del.) aiso does not help the contention of the assessee inasmuch as the Tribunal was considering the provisions of Article 8(4) of Indo-German Treaty which deals with the profits from the participation in a pool, a joint business or an international operating agency. Thus, the said decision cannot be considered for considering the scope of Article 8(1) & (2) of Indo-U.S. Treaty.
- Mr. Porus Kaka, the learned counsel for the assessee has, during the course of argument, picked up few words and sentences in the order of the Tribunal in the case of Delta Airlines and started interpreting and commenting on the same, as if a statute was being interpreted. Such selective interpretation, de hors the context in which the “word” or “sentence” is used, misinterprets the decision and puts it out of context. It is trite law, that judgements are. expression of thoughts and views of the Bench, and that they cannot be read as statutes. The language in a judgement may not be perfect but the essence, the context in which it is made, the thoughts it seeks to convey, the ratio it seeks to lay down, have to be understood in the light of the issue before the Court or Tribunal and the factual matrix of that case and also in the context of the particular arguments that the court was considering or was addressing. Judgements have to be read as a whole. It is the essence and the ratio only which is to be considered and grammatical variation, if any, will not alter the ratio. In the order in Delta Airlines, the Bench never had the intention of saying that, international commentaries by various authors, decisions, OECD Commentaries, etc. should never be looked into. We do not understand from where Mr. Kaka got such an impression, especially when the same bench in many other cases, some of which were argued by Mr. Porus Kaka himself, had referred to commentaries by international authors and other such material, while coming to its conclusion. AH that the Bench stated in the case of Delta Airlines (supra) is that, when the term is specifically defined in the treaty itself, we need not travel further and look for external aid, to ascertain the meaning of the term.
39. In view of the above discussion, it is held that where any expression or term has been defined in the treaty itself, than the scope of such expression or term should be understood in the sense in which it is defined in the treaty. Under those circumstances, external aid for interpretation need not be resorted to by reference to the commentaries on international law or decisions of foreign jurisdiction. However, it is clarified that if there is any ambiguity in the word or words used in the definition then, reference can definitely be made to such commentaries and decisions of international courts, in order to ascertain the intent of such word or words as in such cases external aid for interpretation may be necessary. But, if the language is clear and unambiguous then the scope of such expression or term cannot be enlarged or restricted by referring to the commentaries.
40. Let us now examine the provisions of Article 8 of Indo US Treaty and adjudicate the issue before us. The provisions of Article 8 are being reproduced even at the cost of repetition:
1. Shipping and air transport
” Profits derived by an enterprise of a Contracting State from the operation by the enterprise of ships or aircraft m 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 –
(a) the sale of tickets for such transportation on behalf of other enterprises;
(b) other activity directly connected with such transportation; and
© 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 uset 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.”
As per para 1 of the Article 8, the profits from the operation of aircraft in the international traffic derived by the assessee cannot be taxed in India. However, the expression “profits from the operation of ships or aircraft in the international traffic” has been defined in paragraph 2. According to this para, the said expression has been defined in two parts. The first part defines the scope of the main or direct activity of transportation in the international traffic while the second part includes certain activities other than the main activity of transportation in international traffic. The perusal of the first part reveals that main or direct activity is restricted to the transportation of passenger/ cargo/ mail etc. in the international traffic by the owners, charterers or lessees of ships or aircraft. Therefore, such transportation through aircraft by the assessee neither as owner nor as charterer or lessee would be outside the scope of such expression. The alternate contention of the assessee that such transportation would fall within para 2(b), in our opinion, Is also without force since para 2(b) includes other activity directly connected with such transportation. The words “such transportation”, in our opinion, would only mean the transportation referred to in first part of the definition. Therefore, transportation in the international traffic though other airlines would be outside the scope of Article 8(2), We hold accordingly.
41. However, another contention has been raised by the learned counsel for the assessee to the effect that the assessee has made reciprocal arrangement with other airlines. In support of the same, he has placed copies of agreements with Emirates and Lufthansa Airlines. It is also submitted that the assessee has booked a specific space with Air India and the assessee has to pay the compensation irrespective of the actual transportation. According to him, such transportation through reciprocal arrangement would amount to pool arrangement described under paragraph 4 of Article 8. Further, arrangement with Air India would amount to charter of aircraft partly and therefore, such arrangement would also qualify for exemption within the first part of definition itself. This aspect of the issue was neither raised before the Assessing Officer nor before the CIT(A). Even otherwise, there was no occasion for these authorities to consider such aspect of the issue since the Assessing Officer had rejected the entire claim on the ground that activity of assessee amounted to courier activity and the CU(A) allowed the entire claim of the assessee on the ground that the assessee was engaged in the business of transportation in the international traffic by air. The learned Departmental Representative also pointed out that one of the agreement produced now was not in existence in the year under consideration. Accordingly, we are of the view that interest of justice would be met if this aspect of the issue is restored to the file of the Assessing Officer for fresh adjudication after giving reasonable opportunity of being heard.
42. The next and last aspect of the issue is whether inland transportation would qualify for exemption from taxation in India. This aspect of the issue is covered by the decision of this Bench in the case of Safmarine Container Lines N.V. (supra) wherein it has been held that inland transportation would amount to other activity if such transportation is directly connected with the main activity of transportation and, therefore, would fall under Article 8(2)(b) of Indo Belgium Treaty which is in pari materia with Article 8(2)(b) of Indo U.S. Treaty. Therefore, following the said decision, it is held that profits from such inland transportation would not be taxable in India. Consequently, it is also held that profits from inland transportation not connected with main activity of transportation would be outside the scope of Article 8. Thus, the profits from inland transportation connected with the transportation of cargo through other airlines not eligible for exemption under Article 8 would also be outside the scope of Article 8.
43. Before parting with this order, it would be pertinent to mention that profits from airline business falling outside the scope of Article 8 would have to be treated as business profits under Article 7 of Indo U.S. Treaty and, therefore, the claim of the assessee would have to be examined under Article 7 of the Treaty.
44. In view of the above discussion, it is summarised as under:
(1) The scope of the expression “profits from the operation of ships or aircraft in the international traffic” in Article 8(1) would be limited to the scope of the definition given in Article 8(2).
(2) That the transportation of passengers, mails or cargo etc. by the assessee in the international traffic by the aircraft as owner/charterer/ lessee would fall within the scope of Article 8/and ‘ therefore, profits attributed to the same cannot be taxed in India. Further, the profits from inland transportation directly connected with such transportation would also not be taxable in India,
(3) That the transportation of cargo in the international traffic through the aircraft owned/ chartered/ leased by other enterprises would be outside the scope of Article 8(2) and consequently would not be exempt from taxation under Article 8(1) unless such transportation falls under para 4 of this Article. Further, the Inland transportation connected with such transportation would also not be exempt under Article 8. However, such profits would be considered as business profits under Article 7. Therefore, tax ability or exemption in respect of such profits will have to be examined by the Assessing Officer in the light of Article 7 of the Treaty.*
(4) Where the claim of the assessee does not fall within the scope of Article 8(2), the claim of the assessee can be examined with reference to paragraph 4 of Article 8 since it specifically provides that paragraph 1 would apply if the case of the assessee falls under paragraph 4 which includes profits from participation in a pool, a joint business, or an international operating agency.
(5) Where a space is booked with other airlines, the question whether transportation through such airlines can be said to be transportation by the. aircraft chartered by the assessee need to be examined by the A.O. with reference to the first part of the definition given in Article 8(2) in the light of material which may be placed before him. Since the meaning of the word ‘chartered’ is not clear from the definition itself, the Assessing Officer would be justified in ascertaining the scope of such word in the light of the commentaries or other materials which may be placed before him.
45. In view of the above discussion, the orders of the CIT(A) are, therefore, modified and the matter is restored to the file of the Assessing Officer to reframe the assessments as per the observations and guidelines given above.
