KLM Airlines got a reprieve from the income tax department on the rent paid for cargo space hired by it from Airport Authority of India, thanks to a Delhi High Court order last week.

KLM, which offers air cargo as well as passenger services, has a licence from AAI for using the cargo space in Mumbai. The airline has outsourced the cargo booking and handling services to an Indian company, CSI, on a commission basis.

Being a Dutch company, KLM is liable to pay tax in the Netherlands for the income it generated in India from its airline operations, including air cargo transportation.

However, the income tax authorities disputed a certain part of its revenue generated from India as income from other sources, a category of income taxable in India. The department argued that the rent payable to AAI by KLM was adjusted while making payment to CSI. The department held that this part of payment is income from other sources. The adjusted amount was treated by the department as income liable to be taxed in India under Article 6 of the DTAA between India and the Netherlands.

The departments contention was upheld by the commissioner (appeal), the first appellate authority on tax matters. However, the Income Tax Appellate Tribunal (ITAT) held that such rent adjustments were invariably linked to its cargo handling business for which licence was issued, and therefore, such rent adjustments could not be treated as income from other sources.

The ITAT also accepted the contention of KLM that even if the recovery of rent was to be treated as income from other sources, since an identical amount was paid to the AAI, the same would be offset against each other because there was a direct nexus between the receipt and the payment.

The Delhi High Court upheld the decision of the tribunal and dismissed the appeal filed by the income tax department against the tribunal order.