The Income Tax Appellate Tribunal (ITAT) has ruled that British Airways is liable to pay tax in India on income earned from providing ground handling and engineering services to other airlines, rejecting the carrier's claim that such receipts are exempt under the India-UK Double Taxation Avoidance Agreement (DTAA).
A Delhi bench comprising Judicial Member Vikas Awasthy and Accountant Member Brajesh Kumar Singh dismissed the airline's appeals for assessment years 2009-10 and 2010-11, holding that the income from ground handling and engineering services does not qualify for exemption under India-UK tax treaty. The Tribunal in its order noted, “The provisions of Article 8 of UK DTAA are narrower and does not extend to pooling services as envisaged in Article 8(4) of India- Germany/Netherlands DTAA”.
British Airways argued that the services it provided to other airlines were not a separate business but closely connected to its main business of operating aircraft in international traffic. The airline said these services were rendered under the International Airlines Technical Pool (IATP), a global arrangement under which airlines share technical support, ground handling facilities and engineering services.
Since Article 8 of the India-UK DTAA exempts profits from international air transport and participation in pools of any kind, the airline contended that the receipts should not be taxed in India. It also argued that ground handling activities are ancillary to aircraft operations and should enjoy treaty protection like KLM and Lufthansa.
The Income Tax Department, however, opposed the plea, arguing that the India-UK DTAA is materially different from the India-Germany and India-Netherlands treaties relied upon by the airline. It submitted that those treaties contain wider provisions covering pooling arrangements, whereas the India-UK treaty does not.
The department also argued that providing ground handling and engineering services to other airlines is a commercial activity carried out for consideration and cannot be treated as income directly connected with aircraft operations.
The tribunal agreed with the tax department, observing that the dispute was a legacy issue which had first arisen in assessment year 1996-97. It noted that British Airways had consistently been denied treaty benefits on such income in earlier years and had failed to show any material to justify taking a different view. The bench also observed that the airline had not demonstrated that the earlier tribunal rulings had been overturned by any higher judicial forum.
Rejecting the airline's reliance on the KLM and Lufthansa decisions, the tribunal pointed out that the Delhi High Court had itself distinguished those cases from British Airways because the India-UK DTAA contains narrower provisions than the India-Germany and India-Netherlands treaties. The High Court had held that the expanded definition of operation of aircraft under the India-UK treaty limits the scope of exempt activities and does not extend to the pooling services claimed by British Airways.
The tribunal also held that British Airways' argument on OECD commentary does not have binding legal force and noted that India has specifically reserved its position on applying the commentary to income from ancillary activities. It therefore upheld the taxability of income earned by British Airways from providing ground handling and engineering services to other airlines in India and dismissed the appeals.
Tax experts said the ruling reinforces that treaty benefits depend on the exact wording of bilateral tax treaties and cannot automatically be extended based on similar rulings involving other countries. Sandeep Sehgal, Partner-Tax at Tax and consulting firm, AKM Global, said, "The Delhi ITAT's ruling in British Airways Plc. correctly underscores that treaty benefits under Article 8 of the India-UK DTAA are strictly confined to profits from the operation of aircraft in international traffic".
Experts believe that the ruling is likely to remain relevant for airlines operating under tax treaties with language similar to the India-UK DTAA, while carriers covered by broader treaty provisions may continue to enjoy different tax treatment.
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