KLM ROYAL DUTCH AIRLINES Vs. DCIT
INCOME TAX APPELLATE TRIBUNAL
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Deepak R. Shah, Accountant Member -
(1.) BOTH these appeals by assessee are directed against the order of CIT(A)-XXX, New Delhi dated 29.11.2001.
(2.) Though several grounds are raised, the contention of appellant (herein referred to as 'KLM') is that it is not subject to tax in India in terms of Article 8 of the DTAA between India and Netherland. It is also contended that the receipt by way of recovery of rent from CSC India P. Ltd. (in short 'CSC') in respect of rent payable to Airport Authority of India (in short 'AAI') is not chargeable to tax and even if so, the rent paid to AAI is to be reduced from the rent recovered from CSC which brings the taxable income to nil.
The appellant is a company incorporated in Netherland. The main activity of the assessee is operation of aircrafts in international traffic i.e. transport of passenger and cargo in and out of India. In respect of cargo business, KLM has obtained licence to use the premises situated at Shed No. 12, FACT Building, Bombay measuring 503.50 sq. mts. and space on third floor Satellite Building at Cargo Complex, Bombay measuring 50 sq. mts. The said premises were licensed to be used as warehouse and office respectively. Originally the license was for the period 14.9.92 to 13.9.95 and further renewed from 14.9.95 to 13.9.98. The license was specifically granted for the purpose of cargo handling and the licensee i.e. the appellant was not to use the premises for any purpose other than that for which the license has been granted. The assessee entered into an agreement with CSC for handling the cargo in India on its behalf. The agreement was entered into on 1st April, 1997. As per the said agreement, the appellant was to pay for management, supervision, document handling, physical handling and tracking and tracing export and import cargo at Bombay. For this purpose, the appellant was to pay CSC a sum @ Rs. 9 per ton of the cargo handled. During the assessment proceedings, the AO made enquiries with CSC. CSC replied to the queries and also filed copy of account of appellant in its books. The AO noted that as per the accounts of appellant in the books of CSC, the appellant had received some amounts from CSC for which the narration mentioned is "expenses payable being warehouse rent adjusted against revenue received". The appellant was asked to produce the copy of agreement with CSC. The agreement was not produced. The assessee was, therefore, issued a show cause notice as to why the payments by CSC to the appellant be not treated as income from other sources. In reply thereto, the assessee submitted as follows:
KLM and Airport Authority of India entered into a License Agreement for a space at the IGI airport. For the space available, we had made an arrangement with CSC India P. Ltd. to use the space on same amount of rent which is paid by the KLM to the airport authorities. KLM makes the payment as per agreement and CSC reimburses their share on a monthly basis without any adjustment. You have already noticed from the books of accounts presented before your goodself that the amount is just a reimbursement to KLM without any profit or income accruing to KLM by the said arrangement. It is merely a mode of payment to the licensor by CSC and contra entry in the books of account of KLM. Any proposal to treat this amount as an income in the hands of KLM or as income of an associate enterprise will be against the principle of natural justice. It will be worth mentioning that the license fee agreed between a company and the airport authorities are an open rate which is the market rate at the airport building of India offered to companies and agents who are engaged in airline and passage/cargo handling activities. Other companies who are engaged in the cargo and passenger handling activities are also offered at the same market rate by the airport authorities. In other words, the rent charged by the airport authorities are not different between the handling agent and airline. Also kindly note that the handling rate charged by CSC to KLM included the cost element of this rental space paid by them at then market rate.
The AO did not find the contention acceptable for the reason that the assessee has not submitted any rent agreement between it and CSC. Thus, the payment received by appellant from CSC cannot be termed as rent as per Para 4A of Annexure 1 declaring the general terms and conditions of license agreement between appellant of the said premises to any third party. In this way, the claim of assessee that the payment received from CSC is reimbursement of rent is incorrect. The receipt is taxable in any case because the assessee is using the premises for its own business purposes and, therefore, it cannot claim that whatever it is receiving from CSC is being paid to AAI and therefore, there is no income component. Any other receipt from any other company cannot be termed as reimbursement of rent. The income received from CSC is taxable as these services are separate business activity and are not covered under 'air transport services'. The income accrues and arises in India and therefore, taxable in India. As per the Model Commentary on DTAA, if an airline extends its services which is a separate business activity, the same are not covered under Article 8. He accordingly held that receipt from CSC is taxable as income from other sources.
(3.) LEARNED CIT(A) held that the appellant KLM has violated the terms of license agreement. There is no evidence of written consent of the authority on record to allow CSC to use the premises. When the appellant had been allowed under the aforesaid license to have the space for cargo handling and instead of using it for the assigned purpose, the said area was in possession and occupation of CSC. Thus, the appellant did not carry out any activity in the allotted space and it had exploited the space unauthorizedly to earn income from CSC. The activity of allowing unauthorized use of space licensed under agreement to CSC cannot be said to be an activity falling within the purview of Article 8 of DTAA. LEARNED CIT(A) held that as per Article 8 of the DTAA between India and Netherland, only those profit derived from operation of aircraft in international traffic by transporting its passengers and goods is covered and is to be taxed in the country where effective management of the enterprise is situated. Article 8 have to be construed in the light of the language used therein and the provision contained in Model Commentaries or the example given therein will not extend the scope of the words used in DTAA. The correct position will be that only so much of the profits will not be liable to tax in the source country which are covered under Article 8 notwithstanding the fact that there is unity of control and management, finance and the operations. On plain reading of Article 8, there is no paragraph or Clause which exempts the income derived from unauthorized exploitation of license. Hence, the same is taxable as income from other sources. The amount received cannot be considered as reimbursement. An amount became reimbursed only when it is incurred on behalf of the party reimbursing. The amount being not in the nature of reimbursement nor having been incurred in the course of earning or making income from unauthorized exploitation of space, the contention for deduction of such expenditure is not tenable. The payment by the appellant to AAI is in respect of activities for handling cargo whereas the appellant allowed unauthroisedly space to be used by CSC and claimed same amount from the said company. Thus, this does not qualify for deduction Under Section 37(1) of the Act. The assessee is now in further appeal before us.;
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