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Article 8, India-USA DTAA – code-sharing arrangement is neither chartering arrangement nor pooling arrangement; therefore, income derived therefrom does not qualify for exemption under Article 8 of India-USA DTAA.
Facts:
The taxpayer was a tax resident of USA. It was engaged in the business of carriage of cargo and passengers in its own aircraft and in third party aircrafts. The taxpayer had entered into ‘Interline Cargo Special Prorate Agreement’ with other airlines for carriage of cargo and ‘Code-Sharing Agreement’ with other airlines for carriage of passengers. The agreements respectively provided for space sharing for cargo and seat sharing for passengers at agreed rates. The agreements did not provide chartering of aircrafts.
The taxpayer filed its return of income for the relevant tax year claiming ‘nil’ income contending that its income qualified for exemption under Article 8 of India-USA DTAA. The AO, however, held that as the taxpayer itself was not involved in operation of aircrafts in international traffic, the requirement of Article 8(1) was not fulfilled and further, the arrangement of the taxpayer with other airlines was not akin to that of pooling/chartering contemplated under Article 8(2) and Article 8(4) of India-USA DTAA . Therefore, the AO rejected the claim of the taxpayer for exemption of income. The DRP confirmed the action of the AO.
Held:
There was nothing on record to suggest that the taxpayer had slot charter/space charter arrangement to qualify under Article 8(2). Unlike charter arrangement, the taxpayer did not have exclusive right to book flights under code-sharing arrangement. The role of the taxpayer in respect of bookings so made under codesharing arrangement was essentially that of booking agent and not charterer.
The taxpayer did not bring anything on record to support its contention that there was inextricable link between voyage from India to interim destinations (“hubs”) by third parties under code sharing arrangement and from hubs to final destination by taxpayer’s owned/ chartered/leased. Therefore, the decision in MISC Berhard vs. ADIT [2014] 47 taxmann.com 50 (Mumbai – Trib.) could not be applied.
A “pool” requires several persons coming together to contribute, share and combine their resources for a larger business. However, in the present case, the arrangement was only a bilateral arrangement. Nothing was brought on record to indicate that the common funds and resources were brought together in a pool which was shared by members of the pool. The taxpayer and third party both were not contributing aircraft in a pool shared by both. Rather, third party was contributing its aircraft and the taxpayer was merely booking seats. Thus, the arrangement did not meet principle of pool arrangement.
Accordingly, income derived by the taxpayer by booking of seat/space under code-sharing arrangement cannot be said to be income derived from operation of aircraft/ship in international traffic through owned/ leased/chartered aircraft/ship. Further, in absence of inextricable linkage of both legs of journeys, codesharing arrangement also cannot be said to be space/ slot charter. Therefore, receipts of code-sharing arrangement were not profits derived from operation in international traffic under Article 8 of India-USA DTAA.
