Per Keshaw Prasad, Accountant Member. - The appeal has been directed by the assessee against the order of the CIT(A) dated 6-12-1999 pertaining to assessment year 1996-97.

2. At the outset, we may mention that an application was moved by the assessee for consideration of the constitution of the Special Bench as substantive question of law arises in the instant case. The comments of the department were also asked for. Department has objected to the proposal of the appellant. However, during the course of hearing of appeal, the ld. Counsel for the appellant has withdrawn the proposal of constitution of special bench. We, therefore, reject the request of the assessee in this regard being withdrawn.

3. Though various grounds have been raised, all the grounds arise against sustaining the addition of Rs. 38.61 lakhs by the CIT(A) by holding that extending technical facilities under the International Airlines Technical Pool (IATP) arrangement to another IATP member airline was neither part of business operation of aircraft in international traffic nor constituents participation in a pool and by further holding that profit from such activity was taxable in India.

4. Briefly, the facts of the case are that Lufthansa German Airlines is an international airline with its head and controlling office at "Von-Gablenze-Strabe 2-6, D-50679 Cologne, Germany" and a branch office in India at 56 Janpath, New Delhi. The assessee is in the business of operation of aircraft in the international traffic and these activities also carried out in India inasmuch as the assessee operates aircraft in international traffic from, and to, Indian airports at New Delhi, Mumbai and Chennai.

5. The assessee is also a member of "International Airlines Technical Pool" (IATP). As an IATP member the appellant extends minimal technical facilities (line maintenance facilities) to other IATA member airlines at New Delhi airport. The appellant has extended these facilities to Aeroflot, Malaysian Airlines and Austrian Airlines at IGI Airport New Delhi. No monies are paid on account of these services but only notional credits and debits are given through the pool’s accounting mechanism i.e. IATA clearing house. The appellant has also received line maintenance services from Swiss Air Transport Co. Ltd. (Swissair) at Mumbai airport. The facilities extended by the appellant 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 collaborations among the air transport enterprises.

6. The exact nature of facilities extended/received under these arrangements were the following :

"Communication

Compile, dispatch and receive all messages in connection with the services performed by the handling company, using the carrier’s originator code or double signature procedure, as applicable.

Maintain a message file containing all above-mentioned messages for each flight, for ninety days.

Ramp

Provide headsets

Perform ramp to light deck communication ( a) during tow-in and/or under push back, (b) during engine starting.

Fuel and Oil

Liaise with fuel suppliers

Supervise fuelling/defuelling operations

Drain water from aircraft fuel tanks Fuel/defuel the aircraft with quantities of products requested by carrier’s designated representatives.

Check and verify the delivered fuel quality

Deliver the completed fuel order(s) to the carrier’s designated representative.

Aircraft line maintenance

Perform line inspection in accordance with the carrier’s current instructions.

Enter the aircraft log and sign for the performance of the line inspection.

Enter remarks in the aircraft log regarding defects observed during the inspection.

(a )Perform pre departure inspection immediately before aircraft departure, according to carrier’s instructions.

(b)Perform ice-check immediately before aircraft departure according to carrier’s instructions.

Rectify defects entered in the aircraft log as reported by the crew or revealed during the inspection, to the extent requested by the carrier. However, major repair are excluded.

Enter the aircraft log and sign for the action taken.

Report technical irregularities and action taken to the carrier’s maintenance base in accordance with the carrier’s instructions.

Provide engineering facilities, tools and special equipment to the extent available."

7. When the assessee filed the return of income, it was claimed that the amount received from various IATP Member Airlines for above services rendered in India was not taxable in India. However, the Assessing Officer held that such amount received by the assessee in India was taxable due to following reasons :

1. These services are separate business activities and are not covered under ‘Air Transport Services’.

2. These services are rendered by Lufthansa German Airlines to other airlines.

3. The receipt from this service is not recovered by Lufthansa German Airlines from the passenger and is not part of the face value of the ticket.

4. These services are incidental to Lufthansa German Airlines for its own flights but when the same is rendered to other airlines it is not an air transport operation.

5. The business of Lufthansa German Airlines will not be affected if they do not render these services to other airlines. Its aircrafts will fly and normal traffic will continue.

6. The OECD commentary has also clarified that separate business activities are not covered under air transport operation.

7. These services are rendered by Lufthansa German Airlines to other airlines by exploiting their manpower which is idle at the time when there is no flight, and can, in no way, be termed as ‘air transport operation’.

8. The Assessing Officer further observed that the income of the assessee is to be computed as business income which the assessee himself has agreed as per the provisions of Article 7 of DTAA. The Assessing Officer held that the assessee’s branch office in India constitutes a permanent establishment 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 Assessing Officer further observed that for doing this operation, the airlines entered into a separate agreement and the charges are based on per flight basis. He observed that most of the work done was visual inspection by the engineers and any replacement of defective components is replaced at IATP and, therefore, there is no extra cost of consumable by the assessee. He observed that the assessee is having regular flight in India and, therefore, for earning the income, it does not incur any additional expenditure. The earning of the assessee is by exploiting the existing resources. However, the Assessing Officer allowed deduction of Rs. 9,00,000 (Rs. 6,00,000 on engineers and Rs. 3,00,000 on mechanics) out of total engineering receipts of Rs. 49,64,639. He, therefore, brought to tax the sum of Rs. 40,64,639 which was challenged before the CIT(A). The CIT(A) held that the profit derived from exploitation of excess capacity by rendering services to other airlines was taxable in India. He further held that deduction of expenditure allowed by the Assessing Officer was quite reasonable and no interference in the same is called for. The order of the CIT(A) is challenged before us.

9. Ld. Counsel for the assessee Shri Dinesh Vyas, Advocate stated that the appellant is an International Airlines Company and operates aircrafts in international traffic. The appellant is a member of an international airline organization called International Technical Pool ("IATP"), members who participate in the pool share aircraft parts, aircrafts tooling, ground handling equipment and manpower all over the world.

10. There is an Agreement between the Republic of India and Federal Republic of Germany for Avoidance of Double Taxation (DTAA). Article 8(1) of the DTAA provided 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.

11. It was argued that there is no dispute that effective management of the assessee is situated in Germany. It was stated that sub-clause (4) of Article 8 of DTAA provided that the provisions of sub-clause (1) shall also apply to the profits from the participation in pool, a joint business of an international operating agency. In other words, the profits derived from participation in a pool will be taxable in the country of effective management. It was claimed that under the international traffic, there is no pool other than IATP. The ld. counsel stated that due to participation in the IATP, the various services/facilities have to be provided/availed to and from the participating members. The precise nature of these facilities/services have already been mentioned earlier in the body of the order.

12. In view of the participation in the pool, the assessee enters into separate agreements with the members of IATP for availing/giving these services/facilities to the participating members. Accordingly, it entered into an agreement and extended above-mentioned services/facilities to Aeroflot, Malasian Airlines and Austrian Airlines at IGI Airport, New Delhi. It has also received similar services/facilities from Swiss Air Transport Co. Ltd. at Mumbai Airport. No moneys are paid on account of these services but only notional credits and debits are given through the pools accounting mechanism i.e. IATA clearing house. The facilities extended by the assessee are in the nature of line maintenance facilities and these are pre-dominantly with a view to assist other IATP member Airlines as a means for collaboration among the air transport enterprises. It was also stated that such technical facilities are mandatory from the point of view of flight safety requirements which cannot wait till the aircraft returns to its base. In other words, the technical facilities extended by the assessee to other airlines are no routine technical services but are the minimal technical facilities required to be extended at the transit airport.

13. The ld. Counsel stated that the lower authorities have not correctly appreciated the DTAA and various clauses of IATP Manual. The ld. Counsel, therefore stated that the addition made by the Assessing Officer and sustained by the CIT(A) was not warranted and deserves to be deleted.

14. Ld. Counsel alternatively argued that the assessee has rendered the services and availed the services and, therefore, the net profit only could be brought to tax.

15. On the other hand, ld. Counsel for the revenue Shri G.C. Sharma, Senior Advocate heavily relied on the decision of the ITAT in the case of British Airways by stating that under the similar circumstances, the ITAT had negated the claim of British Airways. He stated that it was Article 5(1) of DTAA which was applicable in the assessee’s case. He stated that the provisions will apply to the participation of the pool also. The word "pool" has not been defined in DTAA and, therefore, the IATP cannot be said to be the concerned pool. He also stated that for claiming exemption under DTAA, there should be reciprocity between two members of the pool for extending/obtaining the facilities. Such reciprocity should be direct. In other words, the facilities should be extended to a particular airlines and the facility should be obtained from that particular airlines. But in the case of the assessee, it was not so. The services were given to different parties whereas the services have been obtained from different parties. Thus, there was no joint umbrella and no joint command. However, ld. Counsel fairly conceded that expenditure relatable to the permanent establishment could be allowed as deduction. But he hastened to add that as no details of expenses incurred by the assessee were furnished by it before the Assessing Officer inspite of specific query, the Assessing Officer/CIT(A) were justified in allowing expenses to the extent of Rs 9,00,000.

16. In his counter reply, the ld. Counsel for the assessee Shri Dinesh Vyas, Advocate stated that the appellant’s case was entirely different from the facts of British Airways. He stated that sub-clause (2) of Article 8 of DTAA between India & UK was different than sub-clause (4) of Article 8 of DTAA between India and Germany. He stated that in the case of British Airways, it was one way traffic, inasmuch as, it has rendered services to many airlines in India but did not avail services in India from any other airline. These facts have also been stated by the ITAT in paras 19 and 52 of its order in the case of British Airways. He stated that in the case of appellant, the facts were different as it has rendered services in New Delhi and availed the services in Mumbai.

17. It was also stated that the appellant did not have any additional manpower to handle these facilities in India. It has rendered facilities five times a week in India to other airlines and has availed services five times a week in India. But in the case of British Airways, it has only rendered services for which it was remunerated but has not availed services from any of the airlines.

18. The ld. Counsel stated that in the case of British Airways, the ITAT has interpreted the word "pool". By relying on dictionary meaning, the ITAT has given a particular meaning to the word "pool". But in the case of appellant, the question of interpreting the word "pool" did not arise because in the international aviation industries, there is no pool other than IATP. He stated that the department was free to bring on record any other pool which is recognized universally in the international aviation Indus-tries. He stated that the IATP manual is voluminous and this was the only pool which is recognized all over the world. Ld. Counsel further stated that the appellant had received a sum of Rs. 49.64 lakhs for rendering services and facilities and in turn it has paid a sum of Rs. 45.50 lakhs for availing the services/facilities. The payments are fixed and regulated by IATP clearance. But in the case of British Airways, there were only receipt and not expenses and, therefore, their profit motive was clearly established. In the case of British Airways, it was a planned commercial activity as the establishment was only meant for rendering the services to other airlines. The entire extra/idle staff was, therefore, meant 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.

19. The ld. Counsel further stated that IATP has provided Form No. 53 for entering into agreement between two participating airlines but the British Airways does not conform the pool rules and, therefore, it does not enter into agreement on these forms. Thus, the agreement entered in between British Airways and other airlines were not covered under IATP whereas the appellant was covered under the IATP.

20. Ld. Counsel further stated that scope of DTAA, between India and Germany was quite wide. Article 8(4) covered the income of not only by way of profit in participation of the pool but also the joint business. But in DTAA between India and UK, the exemption was not available to joint business. He also stated that British Airways was not working under any umbrella whereas the appellant was working under the international umbrella of IATP. The facts being opposite to each other, the ratio laid down by the ITAT in the case of British Airways cannot be applied to the appellant’s case. Regarding the revenue’s observations to the effect that the appellant did not furnish the figures of expenses incurred by it, the ld. Counsel stated that the Assessing Officer has asked for the information of additional cost which was incurred for rendering the services. In reply, the appellant has submitted that no additional cost was incurred by it in rendering such services. However, the amount received by the assessee for rendering the services and the amount spent by the assessee for availing the services was already on record of the Assessing Officer. The ld. Counsel, therefore, stated that the reliance on the Tribunal’s order in the case of British Airways was misplaced and the addition sustained by the CIT(A) was not justified and deserves to be deleted.

21. We have considered the rival submissions. The appellant is an international airlines company and operates aircrafts in international traffic. The appellant is a member of an international airlines organization called "International Airlines Technical Pool" (IATP). Under the auspicious of the IATP members who participate in the pool share aircrafts parts, aircraft tooling, ground handling equipments and manpower all over the world. The precise nature of services/facilities provided by the appellant and availed by it have been mentioned earlier.

22. The main issue which arises in this appeal is whether on a proper interpretation of Indo German Treaty of Avoidance of Double Taxation and on examination of the IATP manual and on the facts and circum- stances of the present case, the appellant is taxable on any amount under the Indian Income-tax Act.

23. The Article 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 enterprises 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."

24. From the simple reading of the aforesaid provisions, it is clear that the exemption is available to two items separately being :

(i)profits from operation of aircrafts and

(ii)profits from participation in a pool, joint business or an international operating agency.

25. The only pool which is known to the international aviation industry is IATP. The Department has not suggested that there was any other internationally recognized pool in this regard. The appellant has participated in the pool of IATP. It has earned certain revenues therefrom and similarly it has incurred certain expenditure thereunder. The Assessing Officer has taxed the receipts and ignored the expenditure as the appellant has not filed the details of expenses incurred by it on maintaining a permanent establishment. The appellant has claimed that it had rendered services to other airlines and has received services from other airlines. As there was reciprocity in rendering the services and availing the services, it amounted to participation in the pool and as per DTAA between India and Germany, the profits from such participation was not taxable in India. However, the revenue relying on the decision of the ITAT in the case of British Airways has held that income on account of participation in the pool for rendering services/facilities at IGI Airport, New Delhi was not exempt in terms of DTAA.

26. We have, therefore, examined the terms of DTAA between India and UK and between India and Germany. After going through the contents of both the agreements and the order of the ITAT in the case of British Airways, we find that the decision of the ITAT was based on the following facts :

(i)British Airways has 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)The British Airways has 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 partial of operation of British Airways pertaining to the operation of aircrafts in international traffic;

(iii)The services and facilities provided by British Airways in India to the airlines was a commercial activity. The excess/idle capacity has been provided to various airlines at a price.

(iv)The British Airways has a branch office in India which constituted 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".

(vi)Article 8(3) of DTAA between India and UK provided that the terms "operation of aircraft" shall include...... charter of aircraft including the sale of tickets for such transportation on behalf of other enterprises............. These activities could not be carried on without excess capacity.

(vii)After meeting the requirement of its own flights, the parts of the employees were acquired for handling the operation of other aircrafts for generating income.

27. We have, therefore, compared the above facts with the facts of the appellant’s case. Admittedly, the IATP is an international airline organization. Under the auspicious of IATP, members share aircraft parts, aircraft tooling, ground handling equipment and manpower. The objects of the IATP, inter alia, include the following :

(i)to generate economical savings to participating members through the pooling or sharing of resources;

(ii)To establish cost sharing formalities which are acceptable to all participating members. Various airlines joined and participated in the IATP because IATP provided a global airline network to facilitate the exchange of ideas and co-operation. It reduces airlines operational delays and cancellation by sharing resources. The IATP reduces aircraft’s parts inventories expenses while simultaneously lowering operational risks at non-stopped stations.

28. It is admitted fact that there is "IATP manual". It appears that in the case of British Airways, only certain extracts to IATP manual were filed which did not prove the existence of an IATP manual which was interna-tionally recognized. When there is IATP manual, there was no need of interpreting the word "pool". It is so because the manual also says "no part of the manual may be amended without prior agreement of the member countries of the IATP". The facilities and services to be rendered to member airlines have been clearly demarcated in the manual. In case any other services are rendered that will fall outside the IATP manual.

29. As mentioned earlier, the IATP is an organization of airlines formed for the purposes of providing reciprocity, technical support at line station throughout the world. The primary goal of IATP is generating economic savings to participating airlines by minimizing investment otherwise required. The word ‘participating airlines" clearly indicates the reciprocity amongst the members of IATP. It is not necessary that the services should be rendered to the same airline who has given the service. In other words, the Airlines A could render facilities/services to Airline B and could avail facilities/services from Airline C provided all the three airlines are the members of IATP. Keeping in view the aims and objectives of IATP appellant company entered into an agreement with Alitalia Airlines. This agreement was entered on IATP Form 53. The agreed handling charges were as per IATP manual. Similar agreement was entered by the appellant with Air-France on IATP Form 53. The handling charges were fixed as per IATP manual. Similar agreement was entered with Swiss Airlines which was also on IATP Form 53 and the handling charges were as per IATP manual. All the agreements related to only handling facilities. We have also asked the ld. Counsel for the revenue to file the copies of agreement entered into between British Airways and other airlines to whom the services/facilities have been rendered. The ld. Counsel has furnished the copies of the agreement entered into between British Airways on one part, Royal Brunei Airlines, Atlas Air Corporation, Alitalia Linee ACRCC and Singapore Airlines Cargo (P.) Ltd. on the second part. None of the agreements were on IATP Form 53 which is prescribed in IATP manual. We also find hat the handling charges received by the British Airways were not as per IATP manual but as per IATA Rules. As the agreement between the British Airways and other airlines to whom the facilities/services have been rendered were not as per IATP manual, the ITAT was constrained to interpret the word "participation in the pool of any kind" in case of British Airways. But in the appellant’s case, it was not a case of participation "in pools of any kind" but participation in a pool which was internationally recognized in the aviation industry. Such pool was only IATP and, therefore, the income due to participation in the IATP pool was exempt from taxation in India as has been provided in DTAA between India and Germany.

30. We have also examined the DTAA entered into between India and Germany. Article 5(1) of the DTAA reads as under :

"For the purposes of this agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on."

31. It is significant to note that the word "permanent establishment" has been used only in relation to a "business of an enterprise". Article 6 relates to "income from immovable property". Article 7 relates to "business profits". Article 7(1) reads as under :

"The profits of enterprises of a contracting state shall be taxable only for the state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprises may be taxed in the other state but only so much of them as is attributable to that permanent establishment."

32. But a very significant provision has been made in sub-clause (7). This clause reads as under :

"Where profits include items of income which are dealt with separately in other articles of this agreement, then the provisions of those articles shall not be effected by the provisions of this article."

33. The above-said article/clause makes it abundantly clear that the word "permanent establishment" is not attached to the profits which are included in other articles. As the profits from "operation of ships or aircrafts in international traffic" is covered by Article 8, the permanent establishment cannot be a ground for bringing to tax the profits from participation in the pool. By way of separate Article 8, the profits in relation to shipping and air transports have been enumerated. Article 8(1) relating to shipping and air transport reads as under :

"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."

34. Sub-clauses (2) and (3) are not relevant in the appellant’s case.

35. Sub-clause (4) further provides that "provisions of paragraph 1 shall also apply to the profits from the participation in a pool, a joint business or an international operating agency. Because the word "joint business" has been used under the head "shipping and air transport", the joint business will only mean activity of shipping and air transport carried on jointly.

36. It is this sub-clause (4) of Article 8 which is the matter of 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 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 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).

41. In the result, the appeal filed by the assessee is allowed.

113/43