The technical handling services rendered by the assessee to the other airlines in India held to be part of the business of the assessee from the operation of aircraft in international traffic.
In DCIT vs. KLM Royal Dutch Airlines [ITA No: 3819 /Del/2015, (A.Y. 2009-10) & ITA No: 3820/Del/2015 (A.Y. 2010-11), decided on 28.05.2018], Revenue raised ground that the CIT(A) has erred in holding that the ground handling and the technical handling services rendered by the assessee to the other airlines in India are part of the business of the assessee from the operation of aircraft in international traffic as per article 8 of the DTAA between India and Netherlands.
The assessee company was into the airlines business and operates in all major countries including India. The assessee company was also into the business of operations of aircraft in international traffic and derived income from providing air services for the carriage of the passengers, freight and mail in international traffic. Apart from business of air transport operation, the assessee was also rendering technical handling services to other airlines in India, the payments of which were settled through IATA clearance. The Assessee claimed the receipt for rendering services like technical handling as exempt under Article 8 of Double Taxation Avoidance Agreement (in short DTAA) between India and Netherlands. Disagreeing with the assessee, AO proceeded to hold that the technical handling charges were required to be taxed in accordance with the provisions of Income Tax Act, 1961 (for short ‘the act’) and not under Article 8 of the DTAA between India and Netherlands and consequently made addition thereof to the total income of the assessee and assessed the same at Rs. 22,32,71,454/- & 240756483/- for AYs 2009-10 & 2010-11, respectively.
The assessee company filed the appeals before the CIT(A), who deleted the additions by allowing the appeals.
Before the Hon’ble High Court in assessee’s own case and in case of Lufthansa German Airlines in ITA 259/2007, a question of law to be determined by the Hon’ble Court was framed as under:-
“Whether profits of the assessees from providing technical services to other airlines is covered by Articles 8(1) and 8(4) of the Double Taxation Avoidance Agreement between India and Germany, and by Articles 8(1) and 8(3) of the Double Taxation Avoidance Agreement between India and Netherlands?”
The learned Members of the ITAT, Delhi observed that it is not in dispute that the question to be decided by the Bench in the present appeals is identical as has been determined by the Hon’ble High Court, in the Judgment (supra). The Hon’ble High Court answered the question of law framed in case of assessee company against the Revenue and in favour of the assessee by returning following findings:-
29. Thus, while interpreting tax treaties and conventions, the emphasis is upon the context- in the instrument itself, and “any subsequent agreement between the parties” as to the interpretation of the treaty or the application of its provisions. The expression “profit from the operation of ship or air-craft in international traffic” has not been defined in the Indo-Dutch DTAA, or in the Indo-German DTAA. In Article 8(3) of the DTAA between India arid UK, it is explained. This is a significant distinction between these three sets of DTAA. The position in the Indo-German DTAA and Indo-Dutch DTAA on the one hand is similar, whereas, in the case of the Indo UK DTAA, there is a difference. The ITAT while explaining the meaning of profit from the operation of ships or aircraft in international traffic- in both Lufthansa and the KLM cases took into consideration the bye laws of IATP, because this organization authorized its members to share aircrafts, aircrafts pooling, ground handling equipment and manpower all over the world. The ITAT also considered the relevant clauses of the IATP manual and held that any receipt by the assessee due to participation in the IATP pool as provided in its manual and dealt with in Article 8(4) of Indo-German DTAA will not be taxable in India under Article 8(1); a similar findings was rendered in the case of KLM too.
30. The Assessees participated in the IATP pool and earned certain revenues from such activities and also incurred expenditure. There is, in the opinion of the Court, clear reciprocity as to the extension of services; IATP membership is premised upon each participating member being able to provide facilities for which it was formed (line services, OMT services, etc.) of a required mandated standard. As there was reciprocity in the rendering and availing of services, there was clearly participation in the pool; in terms of the two DTAAs (Indo-German and India Netherlands) the profits from such participation were not taxable in India.
31. The terms of the India-UK DTAA as contrasted with the DTAA between India and Germany are dissimilar in some significant ways. The British Airways (supra) decision was based on the following facts- as held by the ITAT:
(i) British Airways provided engineering and ground handling services at IGI Airport, New Delhi to 11 other airlines, at Chennai to 5 other airlines and certain other airlines at Mumbai. It has not availed any services/facilities from any airlines in India. Thus, there was no reciprocity in the agreement entered into between British Airways and other airlines;
(ii) British Airways had a separate establishment and separate office set up to monitor ground handling services and different establishment at International Airports New Delhi did not form part and parcel of the operation of British Airways pertaining to the operation of aircrafts in international traffic. There is no such finding in the present appeals.
(iii) British Airways’ services and facilities in India to the other airlines was a commercial activity. The excess/idle capacity was provided to various airlines at a price. The services provided in terms of the IATP manual are not based on any consideration paid or received; a system of credits has been created for IATP members.
(iv) British Airways has a branch office in India, which constituted a Permanent Establishment (“PE”) in India, and, therefore, the income derived from PE in India was taxable as the same was not covered under DTAA.
(v) Article 8(2) of DTAA between India and UK provided that paragraph 1 of Article 8 shall likewise apply in respect of participation in pools of any kind. The words “pools of any kind” was interpreted by the ITAT by taking the dictionary meaning of the word “ ool’”. These are missing in the two DTAAs in question.
(vi) Article 8(3) of DTAA between India and UK provided that the terms “operation of aircraft” shall include “..3. For the purposes of this article the term “operation of aircraft” shall include transportation by air of persons, live-stock, goods or mail, carried on by the owners or lessees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprise, the incidental lease of aircraft on a charter basis and any other activity directly connected with such transportation… ” These terms are not present in the two DTAAs in the present set of appeals.
(vii) After meeting the requirement of its own flights, the services of employees were required for handling other airlines’ operation for generating income.
32. Having regard to these facts this Court is of opinion that the amplification of the term “operation of aircraft” in Article 8 (1) through Article 8 (3), i.e. “…3. For the purposes of this article the term “operation of aircraft” shall include transportation by air of persons, live-stock, goods or mail, carried on by the owners or lessees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprise, the incidental lease of aircraft on a charter basis and any other activity directly connected with such transportation… ” had the effect of limiting the nature of activities that could be comprehended in the pool envisioned in Article 8 (2): in other words, the expanded meaning of operation of aircraft included those activities in Article 8(3) through the extended definition and no more. On the other hand, there is no such limitation in the DTAAs in question, in these cases. This constituted the most significant difference between the two sets of cases on the one hand, and British Airways (supra) on the other. For these reasons, this Court rejects the Revenue’s contentions.
33. For the foregoing reasons, this Court answers the questions of law, framed in both sets of appeals, against the Revenue and in favour of the assessees there is no infirmity in the impugned orders of the ITAT, which are affirmed. The appeals fail and are dismissed.”
The learned Members of the ITAT held that in view of the discussion and following the decisions rendered by Hon’ble High Court in assessee’s own case, we are of the considered view that Article 8 of DTAA between India and Netherlands is categoric enough in its meaning of expression “ profit from the operation of ship or aircraft in international traffic” which includes the activities carried out by the assessee company by rendering technical handling services to the other airlines in India and has certainly connected with its activity of transportation by way of operating the aircraft. There was no illegality or perversity in the orders passed by CIT(A). Both the appeals filed by the Revenue were dismissed.