By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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Part C — International Tax Decisions
17 ADIT v.
Delta Airlines Inc.
(2008) TIOL 646 ITAT (Mum.)
Article 8 of India-USA DTAA
A.Ys. : 1992-93 to 1999-2000. Dated : 29-9-2008
Issues :
(i) Service charges received by company engaged in
operation of aircraft from third-party airline companies are not entitled to
benefit of Article 8 of India-USA treaty.
(ii) Interest on deposit placed to meet possible tax
liabilities is not income from operations and is not entitled to benefit of
Article 8 of India-USA treaty.
Facts :
The assessee, an airline company of the USA, is engaged in
the business of international air transport. In addition to main activity of
operation of aircraft, the assessee earned certain service charges in respect of
the following services :
(1) Security screening services provided to the third-party
airline companies with the help of X-Ray machines. The machines were basically
installed for screening of baggage of the cargo of Delta’s own passengers —
but, were also used for rendering services to other foreign airlines for a
charge.
(2) Third-party charter handling services provided to other
charter companies at the airports in India.
The assessee claimed that the entire income from the above
services was exempt from tax in India on the ground that the same represented
income incidental to operation of aircraft in international traffic and the
right of such taxation exclusively vested in the USA in terms of Article 8 of
India-USA treaty.
The assessee had also earned interest income on certain bank
deposits. As per the advice of the Tax Department, the assessee had held back
certain amount to meet probable tax liability. Interest earned on such deposit
was claimed exempt on the ground that the interest was incidental to the
activity of airline operation.
The Tax Department denied benefit of Article 8 in respect of
the above-mentioned incomes on the ground that the service fees for baggage
screening or third-party charter handling service were not covered by Article 8.
Likewise, the Department held that interest income was covered by Article 11 of
the treaty. The Department supported its view on the basis that Article 8 of
India-USA treaty specifically restricted treaty benefit only to income from
activities which relate to the actual transportation.
Held :
(a) The ITAT noted that : (i) Article 8(2) of the treaty
defines scope of expression ‘profits from operation of aircraft’; (ii) the
scope of India-US treaty is restrictive as compared to the scope of similar
Article of OECD model or that of US model; (iii) Since India-US treaty has
deviated from the model text and has specifically defined the scope of
expression ‘profits from operation of aircraft’, the same needs to be
understood as defined in the treaty; and hence, Commentary on OECD model or
technical explanation on US model cannot be relied upon to understand the
scope of the term defined differently in the treaty.
(b) In terms of Article 8(2) of India-US treaty, the
benefit is available only if income is earned from activity directly connected
with the transportation of passengers, cargo, etc. by the assessee as an
owner/lessee/charterer of the aircraft. The services of baggage screening or
third-party charter handling provided to the third-party airline company or
charterers is not connected with transportation of passengers, goods, etc. by
the assessee. Income is therefore not eligible for treaty benefit.
(c) Interest income earned on deposit made to meet possible
tax demand was not income which was connected with business of operation of
the aircraft and hence was not covered by Article 8 of the treaty.
