* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 22.12.2016
Pronounced on: 25.01.2017
+ ITA 627/2016
DIRECTOR OF INCOME TAX ..... Appellant
versus
KLM ROYAL DUTCH AIRLINES ..... Respondent
+ ITA 610/2004
DIRECTOR OF INCOME TAX INTERNATIONAL..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 337/2005
DIRECTOR OF INCOME TAX DELHI ..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 1017/2006
DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION
..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 1024/2006
DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION
..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 1026/2006
DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION
..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 1031/2006
DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION
ITA 627/16 and connected cases Page 1
..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 1241/2006
DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION
..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 856/2007
DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION
..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 195/2008
DIRECTOR OF INCOME TAX ..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 765/2008
DIRECTOR OF INCOME TAX ..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 862/2011
DIRECTOR OF INCOME TAX ..... Appellant
versus
KLM ROYAL DUTCH AIRLINES ..... Respondent
+ ITA 877/2011
DIRECTOR OF INCOME TAX ..... Appellant
versus
KLM ROYAL DUTCH AIRLINES ..... Respondent
+ ITA 1162/2011
DIRECTOR OF INCOME TAX ..... Appellant
ITA 627/16 and connected cases Page 2
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 540/2016
DIRECTOR OF INCOME TAX ..... Appellant
versus
KLM ROYAL DUTCH AIRLINES ..... Respondent
+ ITA 259/2007
DIRECTOR OF INCOME TAX INTERNATIONAL..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 198/2008
DIRECTOR OF INCOME TAX ..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 1861/2010
CIT ..... Appellant
versus
LUFTHANSA GERMAN AIRLINES ..... Respondent
+ ITA 1047/2011
DIRECTOR OF INCOME TAX ..... Appellant
versus
KLM ROYAL DUTCH AIRLINES ..... Respondent
Through: Sh. Dileep Shivpuri, Sr. Standing
Counsel, Sh. Sanjay Kumar, Jr. Standing Counsel
and Sh. Vikrant. A. Maheshwari, Advocate, for
Revenue in Item Nos. 2, 11 and 14.
Sh. Parag. P. Tripathi, Sr. Advocate with Ms.
Neelam Rathore, Advocate, for Lufthansa German
Airlines, in Item Nos. 2 to11, 14, 16, 17 & 18.
Sh. Salil Aggarwal, Sh. Anil Makhija and Sh.
Madhur Aggarwal, Advocates, for KLM Airlines.
Sh. Asheesh Jain, Sr. Standing Counsel in Item
Nos. 4 to 9, 12, 13, 16, 17, 18 & 19.
ITA 627/16 and connected cases Page 3
Sh. Ashok. K. Manchanda, Sr. Standing Counsel,
for Revenue, in Item Nos. 3 & 10.
Sh. Puneet Rai, Jr. Standing Counsel, in Item Nos.
1 & 15.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
MR. JUSTICE S. RAVINDRA BHAT
%
1. The question of law, that arises from both the appeals, to be
determined by the Court is:
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?
2. The facts in brief, in both the appeals are as follows: Both the
assessees (hereafter referred to as "Lufthansa" and "KLM", and collectively,
the "Assessees") are international airlines with headquarters and controlling
offices in Cologne, Germany and Amsterdam, Netherlands respectively and
branch offices in India. They operate aircraft in the international traffic
business; these activities are also carried out in India inasmuch as they
operate aircraft in international traffic from, and to, various Indian airports.
Both the Assessees are members of the International Airlines Technical Pool
("IATP" or the "Pool"). As IATP members they extend minimal technical
facilities (line maintenance facilities) to other International Air Transport
Association ("IATA") member airlines at the New Delhi airport. The
Assessees extend these facilities to various international airlines at Indian
airports. Monies are not paid on account of these services but notional credits
and debits are routed through the Pool's accounting mechanism i.e. IATA
ITA 627/16 and connected cases Page 4
clearing house. The facilities extended by the Assessees are in the nature of
line maintenance facilities and these are predominantly with a view to assist
other IATP member airlines as a means for collaboration among the air
transport enterprises.
3. The nature of the services/facilities provided by Lufthansa and KLM
are:
(i) communications, including compiling, dispatch and receiving all
messages in connection with the services performed by the handling
company, using the carrier's originator code or double signature procedure,
as applicable; (ii) maintenance of a message file containing all above-
mentioned messages for each flight, for ninety days; (iii) provision of
headsets; (iv) providing ramp to light deck communications during tow in
and/or under push back and providing ramp during engine starting; (v) fuel
and oil (vi) liaising with fuel suppliers; (vii) supervise fuelling/defuelling
operations (viii) drain water from aircraft fuel tanks and fuel/defuel the
aircraft with quantities of products requested by carrier's designated
representatives; (ix) check and verify the delivered fuel quality; (x) deliver
the completed fuel order(s) to the carrier's designated representative; (xi)
aircraft line maintenance (xii) perform line inspection in accordance with the
carrier's current instructions. (xiii) enter the aircraft log and sign for the
performance of the line inspection; (xiv) enter remarks in the aircraft log
regarding defects observed during the inspection; (xv) Perform pre-departure
inspection immediately before aircraft departure, according to carrier's
instructions; (xvi) Perform ice-check immediately before aircraft departure
according to carrier's instructions; (xvii) rectify defects entered in the aircraft
ITA 627/16 and connected cases Page 5
log as reported by the crew or revealed during the inspection, to the extent
requested by the carrier. However, major repairs are excluded; (xviii) enter
the aircraft log and sign for the action taken; (xix) report technical
irregularities and action taken to the carrier's maintenance base in accordance
with the carrier's instructions and (xx) provide engineering facilities, tools
and special equipment to the extent available.
4. The Assessees filed their returns of income and claimed that the
amounts received from various IATP member airlines for the above services
rendered in India were not taxable in India. However, the Assessing Officer
("AO") in their cases held that such amounts rec eived by them in India were
taxable, holding that these activities were not covered under the term "Air
Transport Services"; the services were given to other airlines by the
Assessees, the receipt from which was not recovered from their passengers
and was not part of the face value of the ticket. The AO held that these
services were incidental to the Assessees for their own flights, but when
rendered to other airlines they were not air transport operation; the assessees'
business would not be affected if they did not render them to other airlines.
The AO also relied on the Organization for Economic Co-operation and
Development's ("OECD") commentary to hold that separate business
activities are not covered under air transport operation. In view of these
findings, the AO concluded that the Assessees rendered such services to
other airlines by exploiting their manpower when idle at the time when there
were no flights, and could not, therefore, be termed as "air transport
operation".
5. The Assessing Officer also held that the Assessees' income had to be
ITA 627/16 and connected cases Page 6
computed as business income in terms of provisions of the DTAA. He held
that the Assessees' branch offices in India constituted permanent
establishments and, therefore, the income relating to the engineering and
traffic handling was taxable in India, as the same was not covered under
Article 7 of DTAA. The AO also held observed that for these operations, the
airlines entered into separate agreements and the charges were based on per
flight basis. Most of the work was visual inspection based, by the engineers;
any replacement of defective components was replaced at IATP and,
therefore, there was no extra cost of consumables by the Assessees. For
earning income, the Assessees did not incur any additional expenditure. The
earning of the Assessees were by exploiting their existing resources. The AO
allowed deduction on account of amounts paid to engineers and mechanics
out of the total engineering receipts and brought to tax the remaining
amounts. The AO's orders were challenged before the CIT (A) who ruled
that the profit derived from exploitation of excess capacity by rendering
services to other airlines was taxable in India and that deduction of
expenditure which the AO allowed was quite reasonable and did not interfere
with it. The order of the CIT(A) was challenged before the ITAT, which
reversed those findings.
6. The Revenue argued that the ITAT's previous decision in the case of
British Airways Plc. vs. Dy. CIT (2001) 73 TTJ (Del) 519 Ed in a similar
factual background, was a relevant precedent, and that, since the language of
the Indo-UK, the Indo-German and Indo-Dutch DTAAs was similar, that
precedent had to be followed. The ITAT disagreed and held as follows:
"36. It is this sub-clause (4) of Article 8 which is the matter of
ITA 627/16 and connected cases Page 7
dispute. There is no dispute that if any profit has arisen due to
participation in a pool, a joint business, then it will not be
liable to tax in India. The ITAT in the case of British Airways
has held that income in that case had arisen due to permanent
establishment in India. As mentioned earlier in the DTAA
between India and Germany, the word "PE" finds place only in
relation to business. The word "PE" has not been used in
relation to profits from operation of ships or aircrafts in
international traffic. The word "International Traffic" has also
been defined in Article 3(1)(i) of the DTAA which reads as
under:
"The term 'international traffic'; means any transport by a ship
or aircraft operated by an enterprise which has its place of
effective management in a contracting state except when the
ship or aircraft is operated solely between places in the other
contracting state."
37. We have therefore examine as to whether the profits of the
appellant was due to participation in a pool. Admittedly, if it
was so then the profits will not be liable to tax in India. The
aims and objectives of participation in IATP have been
mentioned earlier. We find that the appellant has rendered
services/facilities to three airlines and has availed the services
of one airline. On extending services to the other airlines, the
appellant has received a sum of Rs. 49.64 lakhs and on availing
the services, it has paid the sum of Rs. 45.50 lakhs. Thus, there
was reciprocity between the members of the pool. But in the
case of British Airways, we find that it has rendered services to
more than 16 airlines and has not availed services from any
other airlines in India. It was only one way traffic. Thus, there
was no reciprocity between the British Airlines and the other
airlines and, therefore, the ITAT has held that in the case of
British Airways, there was no reciprocity and, therefore, it
could not be said to be participation in a pool.
38. We also find that in the case of British Airways, the ITAT
has held that the services rendered by that airline was in the
nature of commercial activities and, therefore, was in the
ITA 627/16 and connected cases Page 8
nature of business activities. For coming to this conclusion, the
ITAT had noted that the British Airlines had employed excess
staff for such purposes. Volume of receipts which is in crores
for providing services also suggested that the providing of
services by British Airways was a commercial activity. But in
the case of the appellant, it has not been proved by the revenue
that the extra staff was employed for providing services to other
airlines. We have also noted that the services rendered and
availed were as per IATP manual and, therefore, the profit was
not taxable in India in view of Article 8(4) of DTAA.
39. We also find that Article 8(3) of DTAA between India and
UK, provided that the term "operation of aircrafts shall
include......Charter of Aircrafts including the sale of tickets for
such transportation.....". Such activity is not provided in the
IATP manual. The IATP manual has provided the precise
services, which could be rendered/availed by its members,
which has been enumerated earlier. Therefore, it was clear that
in the case of British Airways, the facilities provided to other
airlines were beyond the scope of IATP objects and, therefore,
the profit from rendering such services cannot be termed as
profits from participation in a pool. But in the case of the
appellant, the services to be rendered to the members airlines
were as per IATP manual and the handling charges were also
as per IATP manual.
39A. We have also noted that as per Article 8(4) of DTAA
between India and Germany, the profit from the participation
"in a pool" will not be taxable in India. But Article 8(2) of
DTAA between India and UK talks of "participation in pool of
any kind by enterprises engaged in air transport". The use of
the word "pools" envisages that there could be several pools or
understanding i.e. more than one. Here the word "pool" does
not indicate a pool which is internationally recognized. The use
of the word "pools any kind" clearly indicates that it was in the
nature of commercially understood meaning. But in the
international aviation industry, there is only one pool i.e. IATP.
Certainly, in the case of British Airways, it was not a case of
participation in a pool. In the appellant's case, it is
ITA 627/16 and connected cases Page 9
participation in IATP only. This was the reason that the ITAT
has to find out the meaning of the word "pool" in the case of
British Airways. Moreover, in the case of British Airways, it
was "pools of any kind" but in the case of the appellant, it was
not a pool of any kind but only IATP. Thus, the facts in the case
of British Airways were altogether different then the facts of the
appellant's case and the view taken by the ITAT in the case of
British Airways is not applicable in the case of appellant as the
facts are entirely different. We have also noted that British
Airways has rendered services to Atlas Air Corporation, which
is not a member of IATP. The services rendered to that airline
could not be bound by IATP manual.
40. Looking to the above distinguishing features, we hold that
the appellant's profit due to participation in a pool was covered
under Article 8(4) of the DTAA between India and Germany
and such profit cannot be brought to tax in India. We,
therefore, allow the ground of appeal and delete the addition
sustained by the CIT(A)."
7. M/s Dileep Shivpuri, Ashok Manchanda and Asheesh Jain, learned
counsel for the Revenue relied on the case of British Airways (supra) and
urged that under the similar circumstances, the ITAT had negated the claim
of British Airways. Counsel for the Revenue stated that it was Article 5(1) of
DTAA, which was applicable in the assessees'case. Counsel emphasized that
the term "pool" is undefined in the DTAA and, therefore, the IATP cannot be
said to be the concerned pool referred to in the two DTAAs. The Revenue 's
counsel stressed that, exemption under the DTAA is based on reciprocity
between two members of the pool for extending/obtaining the facilities. Such
reciprocity should be direct. The facilities, therefore, should be extended to a
particular airlines and the facility should be acquired from that particular
airline. The services were extended to different parties, quite apart from
those given by an entirely different set of parties. Furthermore, the concept
ITA 627/16 and connected cases Page 10
of a pool meant that there had to be a unified management structure, shared
by all, which administered the pool and in the running of which members
had to show some participation. In the absence of a common structure or
common administration, the mere extending of services by more than one
party, based on certain minimum rates did not imply that they were
participants of a pool.
8. Learned counsel stressed that the term "pool" involved an idea of
bringing together the assets or the personnel of various airlines with the
intention to carry on joint business and to share profits from the pool. It was
submitted that the services rendered under IATP agreements did not
constitute services on reciprocal basis as it could happen that the assesses
could receive services from another airline, but may not render any services
to that airline. In other words, there was no reciprocity in the nature of
services rendered as between one airline and another. Nothing on record
established that availing one kind of service by an airline entailed providing
similar services to such airline. It was highlighted that the ground handling
services provided on commercial terms were only with a view to generate
revenues from spare capacity and there was no existence of any pool
regarding ground handling services since neither the assets and nor the
personnel of the various airlines were brought together at any international
airport.
9. Counsel for the Revenue argued that the position would have been
different if IATP had come to India, pooled the resources of various airlines
at the airports, rendered services to willing airlines and thereafter distributed
profits to the participants. The crux of the matter, according to the Revenue,
ITA 627/16 and connected cases Page 11
therefore was, not that separate agreements could be entered into amongst
the various airlines in respect of facilities at one airport belonging to one
airline and fixing the price of the service, but the bringing together of the
infrastructure of various airlines together at one place with a view to render
services and share profits from the pooled assets.
10. The Revenue also argues that since Article 8 (4) of the Indo-German
DTAA and Article 8 (3) of the Indo Dutch DTAA (hereafter referred to as
the "pool provisions") are amplifications of Article 8(1), they should be
construed in such a manner as to be consonant with the main object of the
provision, i.e. that the joint pool or international enterprise should be
relatable or proximate to the air transport operations. Since there is no such
nexus, inasmuch as the international pool operations do not relate to its work
the exception in the pool provisions do not apply. Learned counsel elaborates
this argument, by saying that Article 8 (1) spells out the rule which is that the
carrier would be subject to tax, in its state of residence in respect of air
transport operations, but for the pool provisions, the activities covered in
that provision would not be deemed part of air transport operations. The pool
provisions, therefore, should relate to the assessees' business, jointly with
pool operations relating to participation in an international pool and joint
operations.
11. Learned senior counsel for the Assessees, Shri Parag Tripathi, and
Shri Salil Agarwal, learned counsel argued that the Assessees are concededly
international air carriers, who operate aircrafts in international traffic. They
are members of the IATP, and participate in the pool sharing aircraft
components, spare parts, aircraft tools, ground handling equipment and
ITA 627/16 and connected cases Page 12
manpower across the world. The DTAAs in both cases, by Article 8(1)
provide that profits from the operation of ships or aircrafts in international
traffic shall be taxable only in the contracting state in which the place of
effective management of the enterprises is situated. Indisputably, effective
management of the Assessees are situated in Netherlands and Germany. The
pool provisions in both the DTAAs provide that the provisions of Article
8(1) shall also apply to the profits from the participation in pool joint
business of an international operating agency. Therefore, profits derived
from participation in a pool are taxable in the country of effective
management. It was claimed that under the international traffic, there is no
pool other than the IATP. Counsel argued that the participation in IATP
meant that various services/facilities are provided by the participants and
availed by the participating members. Learned counsel submitted that the
Revenue's contention that there is no reciprocating arrangement by members
is factually unfounded.
12. The participation in the pool, results in the Assessees entering into
separate agreements with IATP members for extending and availing the
services to the airlines members participating in the pool. Such agreements
were entered on the IATP Form-53 and the handling charges were as per the
IATP manual. The Assessees entered into agreements and extended services
to various other airlines, such as Malaysian Airlines, Austrian Airlines,
Aeroflot, Virgin Atlantic, Air Canada, Alitalia, in airports in India. The
Assessee airlines also received similar services in other Indian airports from
other participating members. No consideration was paid on account of these
services; only notional credits and debits were given through the pool
ITA 627/16 and connected cases Page 13
accounting mechanism i.e. IATA clearing house. The services and
facilities,which the assessees provide, are in the nature of line maintenance
facilities with a predominant objective of assisting other IATP member
airlines for collaboration among the air transport enterprises. Such technical
facilities are mandatory and non-derogable from the point of view of flight
safety requirements, which cannot wait till aircrafts returns to their base,
such as the place where the airline concerned has its own in-house facility. In
other words, the technical facilities extended by the Assessees to other
airlines are not routine technical services but are the minimal technical
facilities required to be extended at the transit airport.
13. Countering the Revenue's contentions, learned counsels submit that
the facts of these cases are different from those in British Airways (supra).
The difference in terminology in Article 8 (2) of the Indo-UK DTAA as
compared to the pool provisions of the Indo-German and Indo-Dutch DTAA
between India and Germany, and Netherlands, respectively, was highlighted.
Counsel submitted that in British Airways (supra) the facts disclosed a one-
way traffic, because the Assessees rendered services to many airlines in
India but did not avail services in India from any other airline. It was also
stressed that the Assessees did not have any additional manpower to handle
these facilities in India, but rather, provided facilities most of the times each
week in India to other airlines and likewise availed services. But British
Airways rendered services for which it was remunerated but has not availed
services from any of the airlines. The counsel also stated that the expression
"pool" emphasized in the British Airways (supra) cannot be read in isolation
and should be construed together with "international". The said phrase meant
ITA 627/16 and connected cases Page 14
an arrangement such as IATP; in the absence of the Revenue showing any
other international pool, the Revenue cannot dictate what according to it,
alone constitutes a pool. In the context in which the expression is used, it
means simply sharing resources through a common pool; the management of
the pool is incidental; it can be merely through co-ordination, to achieve
efficient sharing of essential resources. Learned counsel also submitted that
the IATP manual is voluminous and it was the only pool recognized all over
the world. Counsel further argued that the Assessee (Lufthansa) had received
` 49.64 lakhs for rendering services and facilities and in turn had paid a sum
of ` 45.50 lakhs for availing the services/facilities. These payments were
fixed and regulated by IATP clearance. In British Airways (supra), the
assessee only received amounts and did not incur expenses; therefore, profit
motive was proved. In British Airways (supra), the facts justified a
conclusion that the work was a planned commercial activity as the
establishment was only meant for rendering the services to other airlines.
The entire extra or idle staff was deployed for rendering the services. Thus,
in the case of British Airways, it was an organized activity of rendering
services. In the case of the assessee, there was no question of any additional
deployment or permanent establishment.
14. Counsel urged that IATP provides Form No. 53 as the format
agreement between two participating airlines; the British Airways did not
conform to the pool rules and, therefore, it did not enter into agreement using
those formats. Therefore, the agreements entered into by British Airways and
other airlines were not covered under IATP rules, whereas the Assessees
were covered by the IATP. Article 8(4), besides covered income not only by
ITA 627/16 and connected cases Page 15
way of profit in participation of the pool, but also the joint business. But in
the Indo-UK DTAA, exemption was not available to joint business.
Importantly, British Airways did not work under any umbrella arrangement,
whereas the Assessees were working under the international umbrella of
IATP. For these reasons, British Airways (supra) was not an apt authority, as
correctly deduced by the ITAT.
15. The counsel for the Assessees refuted the Revenue's stand that the
Assessees did not furnish the figures of expenses incurred by it. It was
stressed that that no additional cost was incurred for rendering the concerned
services. However, the amount received by the Assessees for rendering the
services and the amount spent by them was already on record of the
Assessing Officer.
16. The Articles 8(1) and 8(4) of the DTAA between India and Germany
read as under:
"(1) Profits from the operation of ships or aircraft in
international traffic shall be taxable only in the Contracting
State in which the place of effective management of the
enterprise is situated;
(2) ...
(3) ...
(4) The provisions of paragraph-I shall also apply to the profits
from the participation in a pool, a joint business or an
international operating agency."
17. Articles 8 (1) and 8 (3) of the Indo-Dutch DTAA read as follows:
ARTICLE 8 Air transport-
1. Profits from the operation of aircraft in international traffic
ITA 627/16 and connected cases Page 16
shall be taxable only in the State in which the place of effective
management of the enterprise is situated.
2. For the purpose of this Article:
(a) profits from the operation in international traffic of aircraft
include profits derived from the rental on a bareboat basis of
aircraft if operated in international traffic if such rental profits
are incidental to the profits described in paragraph 1;
(b) interest on funds connected with the operation of aircraft in
international traffic shall be regarded as profits derived from
the operation of such aircraft and the provisions of Article 11
shall not apply in relation to such interest.
3. The provisions of paragraph 1 shall also apply to profits
from the participation in a pool, a joint business or an
international operating agency.
18. A plain reading of the above provisions reveals that income is exempt
in respect of two activities, namely:
(a) profits from operation of aircrafts in international traffic and,
(b) profits from participation in a pool, joint business or an international
operating agency.
19. In British Airways (supra), the findings that the ITAT upheld were:
The IATP agreement does not envisage bringing together of
the assets or personnel under joint command, nor it envisages
apportioning of receipts or profits. Therefore, it cannot be said
that the impugned agreements constitute pools of any kind
notwithstanding the nomenclature used in the agreements.
Thus, the true position which emerges from this discussion is
that there should first of all be a pool, in fact, in the sense that
the assets or personnel are brought together for some kind of
joint venture, whose profits are shared in some manner by the
participants. That is not the case here. From experience, it was
found that certain airlines had accumulated excess capacity in
respect of ground handling services at some stations, while
some other airlines did not have such facilities on some of the
airports. It would have been quite difficulty for each airline to
ITA 627/16 and connected cases Page 17
have ground facilities at each line station. Maintenance of such
facilities would have involved considerable lay out making
some of the airlines unprofitable. Therefore, a mechanism was
formed through IATP under which airlines, which did not have
ground facilities at some line stations, could use the existing
facilities of another airline. But that did not bring either the
personnel or the equipment of the airlines under a joint
command. That also did not mean that the profits from such
activities were shared by the participants. In fact, separate
agreements were entered into by each providing airline with the
availing airline for rendering and receiving services. It would
have been a totally different matter if IATP would have brought
these facilities under a common umbrella. That would have
amounted to a pool, in fact. But that is not the case. Each
airline, including the appellant, continues to own and manage
its manpower and equipment at each station. As these facilities
were found to be idle for considerable period of time, it was
found profitable to use them to render services to other airlines
with a view to generate revenues. It is no doubt true that the
price for a service is fixed by the IATP. But, fixation of price is
not the sine qua non of the existence of a pool. Besides this, it is
quite contradictory first to say that the establishments were part
and parcel of the appellant's business, which could not be
served as separate establishments, and then to say that an
unserved part was pooled with other establishments. In view of
this, it is held that it cannot be said that the income of the
appellant from the said activities is not taxable in India. It is
further held that the revenues so generated represent the
income of the appellant from the PE in India and, therefore, the
same are taxable in India."
20. At the outset, it is necessary to notice that the Indo-UK DTAA is
significantly different. Whilst Article 8 (1) is similar in its language with the
Indo-German and Indo-Dutch DTAAs, the phraseology used in the other
provisions is a departure in the Indo-UK DTAA. Article 8(2) of DTAA
between India and UK provides that Article 8 (1) shall likewise apply in
ITA 627/16 and connected cases Page 18
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
"pools". Article 8(3) of DTAA between India and UK provided ...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... The Revenue urges that this difference is not material
for deciding the present appeals and that the expression "pools" is to be
interpreted in line with the British Airways (supra).
21. The decision in British Airways (supra) was by a two-member bench;
both agreed on the concept of pooling- however, there were separate
opinions. The presiding member, after considering the dictionary meaning of
the expression "pool" stated that:
63. Article 8(2) in our opinion speaks of the same type of
activity giving rise to profits earned by the enterprise
participating in a pool for earning the profits derived from
international traffic. In other words, what is done by an
enterprise singly in Article 1 is done by the same enterprise
jointly with others by participating in a pool. We have in the
earlier part of this order discussed at length the concept of
"Pools" and nothing more is tobe said so we move on to Article
8(3).
64. Article 8(3) expands the meaning of the term "operation
of aircraft" to include transportation by air of (1) persons (2)
livestock goods or mail carried on by the owners or lessees or
charterers of aircraft (3) sale of tickets for such transportation
ITA 627/16 and connected cases Page 19
on behalf of other enterprises (4) incidental lease of aircraft on
a charter basis (5) any other activity directly connected with
such transportation.
65. Both the parties are agreed that this clause is both
activity based as also enterprise based, but "transportation" by
aircraft of human beings and specified goods and even the term
"any other activity" has to be considered with reference to such
"transportation" as aiding it supporting it and incidental
thereto. The tax authorities have referred to three such
activities, namely :--
"(i) the operation of a bus service connecting a town
with its airport
(ii) transportation of goods by truck connecting a depot
with the airport and
(iii) maintenance and running of a hotel by the airlines
strictly for the use of its passengers for night
accommodation and if the cost thereof is included in the
price of the ticket and the hotel does not cater to any
other category of persons."
66. The above examples in our opinion do aptly qualify for
inclusion in the category of "any other activity directly
connected with such transportation" and by no stretch of
imagination would it include the engineering/ground handling
services provided by the assessee to other airlines.
67. It is clear from the discussion of the various clauses that the
activities, which are tax exempt in India are specified and
determined and there is no scope for an interpretation which
could bring something more into the fold.
22. Internationally, the only pool known to the aviation industry is IATP.
The Revenue does not talk of or refer to any other internationally recognized
pool in this regard. Its contention, rather is that a pool means not mere
sharing of resources, but a structure or managing entity that administers the
pool, which the participants are members of and that such centralized entity
ITA 627/16 and connected cases Page 20
should facilitate the services. This Court is of the opinion that a "pool"
cannot be stereotyped as the Revenue advocates. The international airlines
business is a mammoth one; its size is assessed through operations of
international airlines in several ways: fleet; cargo handled; passengers
handled; countries served; scheduled freight tonne- kilometers (millions)
served; profits; market capitalization and employees serving. 1 The IATP
describes itself in the following terms2:
"IATP Mission
The IATP is a convention of Airlines sharing Technical Resources
to generate economic savings and support on time dispatch reliability
and operational safety.
IATP Organization Definition
The IATP is a non-profit, independent, non-political global
organization based on a democratic culture with equal opportunities
for all member Airlines and their delegates.
Technical Resources Definition
Technical Resources includes, but not limited to, aircraft spare
parts, line maintenance, ground handling equipment, aircraft recovery
kits and technical training.
23. During the course of hearing, counsel for the assessees had relied upon
extracts of the IATP manual issued in 1996. The manual states that from 24
members in 1962, IATP membership had grown from 24 to 121 (96
1
Available at:
http://www.forbes.com/global2000/list/#header:revenue_sortreverse:true_industry:Airline;last visited on:
16.01.2017and
World Air Transport Statistics 58th Edition .IATA; available at:
https://web.archive.org/web/20150102034843/http://www.iata.org/publications/pages/wats-passenger-
carried.aspx, last visited on: 16.01.2017
2
IATP Mission Statement, available at:
https://www.iatp.com//P_Home/About_IatpMission_Statement.aspx, last visited on: 16.01.2017
ITA 627/16 and connected cases Page 21
members and 25 guests). The IATP manual states that it is an organization of
airlines formed for the purpose of providing reciprocal technical support and
line stations throughout the world. This technical support includes aircraft
spare parts, ground and ramp handling equipment and manpower. The
primary goal of IATP is to generate economic setting savings to participant
airlines by minimizing investments otherwise required for purchase of
equipment and spare parts, for positioning at various stations in support of
aircraft operations. The IATP Articles of Association was also relied upon.
Article 11 (1) states that the IATP membership would be to those airlines,
which execute a counterpart of the agreement. The subscribing or applying
airlines (which wish to be a member of IATP) should be "fit, willing and
able to act as provider at not less than one station in respect of each group
in which it wishes to participate. It is thus, apparent from the eligibility
conditions and the general description of the IATP that the arrangement is
primarily meant to optimize resources.
24. If one looks at the airlines industry which is cost intensive in terms of
capital assets such as aircraft spares equipment etc., and one visualizes the
compulsions of each airline to ensure compliance with air safety standards
vis-à-vis both passenger and cargo traffic, the economic advantages for
sharing resources become obvious. But for a pooling arrangement of the kind
which IATP provides, every airline irrespective of its size of operation or
capital deployed, would be compelled to maintain ground handling services
including the repairs, maintenance etc. in different continents, in several
countries. This in turn would sap its capital and telephone its profitability.
This adverse impact would mean that smaller airlines would be economically
unfeasible. Even larger airlines would be driven to increase their costs which
ITA 627/16 and connected cases Page 22
would impact adversely the end products and services, which would
inevitably result in increase of passenger airline ticket fare and cargo or
freight fare. The optimization of resources and to an extent services, not only
makes economic sense but, in fact is a compulsion if the airlines industry is
to continue and grow the way it is today. The shape of the airlines industry
would have been entirely different in the absence of resource pooling and
sharing perhaps one would not have seen as much air traffic as one sees
today. Probably the size of the airlines transport sector in the global economy
would have been smaller, if the costs were driven up in the absence of a pool
like the IATP. It is for this reason that pool provisions like the one the Court
is concerned with today, find place in almost every DTAA entered into by a
multitude of nations. In fact an examination of the OECD Model Convention
bears out this surmise because, right from 1976 the model has been that of
providing tax treatment uniformly in the place of residence of the airline i.e.
where it is principally incorporated and headquartered; equally the concept
of ensuring pooling provisions along with joint businesses has been
consistently followed in all later OECD model DTAA conventions.
25. Though not in any manner binding, the OECD commentary on Article
8 (1) reflects this intention:
4. The profits covered consist in the first place of the profits
directly obtained by the enterprise from the transportation of
passengers or cargo by ships or aircraft (whether owned,
leased or otherwise at the disposal of the enterprise) that it
operates in international traffic. However as international
transport has evolved, shipping and air transport enterprises
invariably carry on a large variety of activities to permit,
facilitate or support their international traffic operations. The
paragraph also covers profits from activities directly connected
with such operations as well as profits from the activities,
ITA 627/16 and connected cases Page 23
which are not directly connected with the operation of the
Enterprises ships or aircraft in international traffic as long as
they are ancillary to such operation.
4.1 If the activity carried on is primarily in connection with
the transportation amount by the enterprise of passengers or
cargo by ships or aircraft that it operates in international
traffic should be considered to be directly connected with such
transportation.
4.2 Activities that the enterprise does not need to carry on
for the purposes of its own operations of ships or aircraft in
international traffic but which make a minor contribution
relative to such operation and are so closely related to such
operation that debtor should not be regarded as a separate
business or source of income of the Enterprises should be
considered to be ancillary to the operation of ships and aircraft
in international traffic.
******************* ***************
23. Various forms of international cooperation exist in
shipping or air transport. In this field international cooperation
is secured through pooling agreements or other conventions of
a similar kind, which lay down certain rules for up
apportioning of the receipts, or profits from the joint business.
24 In order to clarify the taxation position of the participant
in a pool, joint business or an international operating agency
and to cope with any difficulties which may arise the
contracting states may bilaterally add the following if the find
necessary but only so much of the profits so derived as is
attributable to the participant in proportion to its share in the
joint operation.
26. The OECD 2008 version states that:
ITA 627/16 and connected cases Page 24
10. An enterprise that has assets or personnel in a foreign
country for purposes of operating its ships or aircraft in
international traffic may derive income from providing goods
or services in that country to other transport enterprises. This
would include (for example) the provision of goods and services
by engineers, ground and equipment- maintenance staff, cargo
handlers, catering staff and customer services personnel.
Where the enterprise provides such goods to, or performs
services for, other enterprises and such activities are directly
connected or ancillary to the enterprise's operation of ships or
aircraft in international traffic, the profits from the provision of
such goods or services to other enterprises will fall under the
paragraph.
10.1 For example, enterprises engaged in international
transport may enter into pooling arrangements for the purposes
of reducing the costs of maintaining facilities needed for the
operation of their ships or aircraft in other countries. For
instance, where an airline enterprise agrees, under an
International Airlines Technical Pool agreement, to provide
spare parts or maintenance services to other airlines landing at
a particular location (which allows it to benefit from these
services at other locations), activities carried on pursuant to
that agreement will be ancillary to the operation of aircraft in
international traffic.
27. From the above discussion it is quite clear that the airline business
requires not only huge capital deployment in acquisition of assets but also a
continued maintenance and operations regime that is cost intensive. Like in
any other industry, these costs are absorbed in the operation and are
effectively factored in. That an airline carries on these activities as a part of
its airline operation is not disputed and is rather considered a given by the
Revenue. However, its argument essentially is that participation in a pool
means that the activities that an airline performs on behalf of other airlines
constitutes a business which is not an airline operation and is not ancillary or
ITA 627/16 and connected cases Page 25
incidental to its business and consequently, has to be taxed where the income
arises.
28. In furthering this argument it states that the international pool or joint
enterprise model conceived of in the pooling provision and in the relevant
articles of the DTAA between India and Germany on the one hand, and
between India and Netherlands on the other, envision a pool whereby there is
a joint control in terms of deployment of capital resources as well as
minimum management control by both airlines and a separate profit centre.
This Court is of the opinion that the Revenue cannot ordain the manner by
which industries set up or organize their business. The Court, too cannot
resort to the dictionary meaning or seek recourse to other external aids such
as DTAAs between one State and another in the interpretation of such
convention with third-party states. In this endeavour the Court's primary
focus is the meaning that the contracting states intended to give to the
expression in the provisions,which they agree to. That one of the contracting
parties or states might have contracted with another state party, which may
contain a similar provision but with slight modification would be entirely
extraneous. In this respect the Court must be conscious of the fact that it is
interpreting an international convention between sovereign nations. The
Vienna Convention on the Law of Treaties under Article 31 guides the
interpretation, which international agencies primarily have to follow. Article
31 reads as follows:
Article 31, GENERAL RULE OF INTERPRETATION
1. A treaty shall be interpreted in good faith in accordance
with the ordinary meaning to be given to the terms of the treaty
in their context and in the light of its object and purpose.
ITA 627/16 and connected cases Page 26
2. The context for the purpose of the interpretation of a
treaty shall comprise, in addition to the text, including its
preamble and annexes:
1. (a) Any agreement relating to the treaty which was made
between all the parties in connection with the conclusion
of the treaty;
2. (b) Any instrument which was made by one or more
parties in connection with the conclusion of the treaty
and accepted by the other parties as an instrument
related to the treaty.
3. There shall be taken into account, together with the context:
1. (a) Any subsequent agreement between the parties
regarding the interpretation of
the treaty or the application of its provisions;
2. (b) Any subsequent practice in the application of the
treaty which establishes the agreement of the parties
regarding its interpretation;
3. (c) Any relevant rules of international law applicable in
the relations between the parties.
4. A special meaning shall be given to a term if it is established
that the parties so intended.
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 and
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
ITA 627/16 and connected cases Page 27
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 finding 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, OMR 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:
ITA 627/16 and connected cases Page 28
(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 pool.These are missing in the two
DTAAs in question.
ITA 627/16 and connected cases Page 29
(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
ITA 627/16 and connected cases Page 30
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.
S. RAVINDRA BHAT
(JUDGE)
NAJMI WAZIRI
(JUDGE)
JANUARY 25, 2017
ITA 627/16 and connected cases Page 31
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