Tax Law

India Taxes Delta Airline's Baggage Screening, 3rd Party Charter Handling Income

A recent ruling of the Mumbai Income Tax Tribunal in India in the case of Delta Airlines Inc., an American airline company has held that the company is not entitled to treaty benefits of exemption on certain incomes derived from related activities. Delta, a company incorporated in, and a tax resident of, the USA was engaged in the business of international air transport in India, and in addition, also carried out security screening services and third party charter handling services. The main income was earned by Delta from international air transport and certain other related activities, namely;

  1. Security screening services rendered to other airline companies with the help of X-ray machines installed for screening of baggage of the cargo of Delta's own passengers as also of other foreign airlines for certain service charges; and
  2. Third party charter handling services provided to other charter companies at the airports in India.

The company, for the relevant financial years, filed its income tax returns in India disclosing ‘Nil’ income. It claimed that the entire income from the above services as exempt from tax in India on the ground that such income being incidental to operation of aircraft in international traffic, the right to tax the same exclusively vested in the USA in accordance with Article 8 of India-USA treaty. Delta had also earned interest income on certain bank deposits held back to meet probable tax liability, which was also claimed as exempt on the ground that the interest was incidental to the activity of airline operation.

However, the Income tax Assessing Officer disallowed the company’s claim and denied the exemption on the grounds that the exemption was available only on profits derived from the operation of aircrafts in international traffic stating that Article 8 of India-USA treaty specifically restricted treaty benefit only to income from those activities that relate to the actual transportation. The Assessing Officer also held that interest income was covered by Article 11 of the treaty. Delta preferred an appeal before the Commissioner (Appeals), who reversed the Assessing Officer’s order and allowed the claim of exemption to the company in respect of all services. An appeal filed by the income tax department against the order was allowed by the Income Tax Appellate Tribunal (ITAT) by upholding the Assessing Officer’s view. In its ruling the ITAT made the following crucial observations:

  1. Article 8 of the India-USA tax treaty has defined the scope of the expression, "profits from operation of aircraft;"
  2. The scope of the treaty is restrictive as compared to the scope of similar Article of OECD model or that of the US model;
  3. Since the treaty has deviated from the model and has specifically defined the scope of the expression "profits from operation of aircraft," the same needs to be understood in terms of the definition and therefore, it follows from the Commentary on OECD model or the technical explanation in the US model cannot be relied upon to understand the scope of the term, as it is defined differently in the treaty.

Further, it held that in terms of Article 8(2) of the India-US treaty, the benefit of exemption is available only on income earned from activities directly connected with the transportation of passengers, cargo, etc. by the airline as an owner, lessee or charterer of the aircraft. Since, the activities of baggage screening or third-party charter handling to other airline companies or charterers was not directly connected to the transportation of passengers or goods, the income from such activities was held to be not eligible for treaty benefit. Similarly, the interest income earned by Delta on deposits made to meet possible tax demand was held to be income not connected with the main business of operations of the aircraft and hence not covered by Article 8 of the treaty to be tax exempt.