The interpretation of air transport articles in double tax avoidance agreements (DTAA) was clarified by the High Court of Delhi in the Indian case of Director of Income Tax v. KLM Royal Dutch Airlines LNIND 2017 DEL 292. The taxpayers in this case are international airlines, Lufthansa and KLM. Both taxpayers are members of the International Airlines Technical Pool (IATP) and had extended technical facilities to other member airlines at the New Delhi airport and other Indian airports.

The Revenue sought to tax the profits derived by the taxpayers from the provision of such technical facilities but the taxpayers claimed that the amounts were not taxable in India pursuant to the DTAA between India and Germany (in the case of Lufthansa)/ the Netherlands (in the case of KLM).

The relevant Articles of the respective India-Germany DTAA and the India-Netherlands DTAA exempt income in India in respect of two activities from taxability – (a) the operation of aircrafts in international traffic and (b) the participation in a pool, joint business or an international operating agency.

The Revenue contended that the IATP could not be a “pool” within the meaning of the DTAAs because a pool should be based on direct reciprocity. It was argued that the taxpayers did not meet this requirement because the services extended to the different parties were not met by a similar provision of services by these parties.

However, the High Court held that there was clear reciprocity in the services that Lufthansa and KLM extended. IATP membership is premised upon each participating member being able to provide facilities. Participation in the pool meant that there was reciprocity in the rendering and availing of services.

The Revenue also argued that a pool must have involved a unified management structure to administer the pool, and the bringing together of the assets or personnel of the various participating airlines with the intention to carry on joint business and to share profits from the pool.

The High Court held that the Revenue cannot ordain the manner by which industries set up or organise their business. The Court, referring to the IATP manual, found that the IATP was an arrangement that was primarily meant to optimise resources by the sharing of ground handling, repair and maintenance services. This optimisation of resources is an essential feature of the airline industry, without which the costs of running each airline would be prohibitive. The Court further referred to the relevant commentary in the OECD Model Convention which stated that an airline’s provision of services to another airline under an IATP agreement is to be considered ancillary to its business of operating aircraft in international traffic.

Therefore, the High Court dismissed the Revenue’s claim.

Editorial Note

Article 8 of the respective India-Germany DTAA and the India-Netherlands DTAA is similar to the air transport articles of the DTAAs that Singapore has signed with various countries. As such, this judgement is useful in providing guidance on the scope of the articles, in particular, on the interpretation of the word “pool”.

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