Judgment:
1. This batch of seven appeals by the Department can be disposed of by a common order.
2. The assessee is one of the International Airways. By the 1971 Finance Act, a new tax, called Foreign Travel Tax, was levied on the possengers who go abroad. Section 45 of the Finance Act states that there shall be levied and paid to the Central Govt. in respect of each international journey by apassenger, a tax referred to as foreign travel tax, at the rate of 15% of the fare paid As far as the collection of this tax was concerned, Section 45(2) provided that the tax can be collected by the carrier undertaking the carriage of the passengers. It would appear that the assessee, as a carrier, became obliged to collect the tax on behalf of the Govt. of India. For this, the Govt. had agreed to pay to the international airways, a certain percentage as collection by way of commission. The. question in these appeals is, whether the assessee would be liable to be taxed in respect of such commission receivable from the Govt.
3. The ITO found that the assessee had not shown the income from commission in any of the returns filed from the assessment years 1977-78 to 1983-84. He therefore, reopened these assessments with a view to bring to tax such commission. The assessee had submitted that they were not liable to be taxed because of the provisions of Double Taxation Avoidance Agreement between India and the USA. This agreement had come into force from 26th November 1976. The ITO found that what the agreement covered was the income earned by the international airways in the business of transport of goods and passengers and it did not cover the commission earned by them on collection of foreign tax.
In some of the later assessments, the assessee had taken up another factual ground. They had submitted that they had engaged one Combata Aviation P. Ltd. for the purpose of collection of foreign tax and the payments made to that party should be allowed as a deduction. The ITO found that the payment made to this party covered a large number of services and the amount relateable to the collection of foreign taxes, cannot be ascertained therefrom. He, therefore, did not allow the deduction.
4. The assessee appealed, before the CIT (Appeals), the assessee, while reiterating the submissions made before the ITO, had taken up one other line. It was submitted that the assessee was following cash system of accounts and, therefore, the amount can be brought to tax only when they had received this amount. The CIT (Appeals) accepted this submission and held that it would be taxable only in the year of receipt. He, however, added that the ITO should also consider the assessee's contention based on the Double Taxation Avoidance Agreement.
5. Shri Ananthanarayanan, appearing for the assessee, submitted that the entire income would be exempt since it arises from the activity of the assessee and directly springs from their business. Under the Double Taxation Avoidance Agreement, such income would not be taxable in India. Assuming this agreement is not acceptable, he submitted that the assessee was accounting for receipts and expenditure on cash basis only and they have not received this amount so far from the Govt. of India.
6. We have considered the submissions. The first issue to be considered is, whether the income would be exempt under the Double Taxation Avoidance Agreement. What is exempted, is given in Article 1 of the Notification dated 26/12/1976. It is reproduced below: (1) The Govt. of the United States of America shall, on the basis of reciprocal exemption granted by the Govt. of India to citizens of the United States of America and to corporations organized in the United States of America, exclude from gross income and exempt from income-tax all earnings derived- (ii) a non-resident alien as to the United States of America from the operation of aircraft in international traffic. For this purpose the term 'operation of aircraft' shall mean the business of transportation by air or persons, livestock goods or mail, carried on by the owners or leasees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprises, the incidental lease of aircraft and any other activity directly connected with such transportation.
The exemption herein provided shall also apply in respect of participation in pools of any kind regarding air transport.
7. It will be seen that the entire income arising to the carrier from the operation of an aircraft, would be exempt. The term 'operation or aircraft' would include the sale of tickets for transportation. Now, the assessee's case is that, under Section 45(2) of the Finance Act 1971, the assessee, as the carrier, has to include the foreign travel tax in the sale price of the ticket and, therefore, it becomes part of the sale of ticket. Therefore, it is also a trading receipt from the operation of the aircraft. Now it is undeniable that the assessee has been obliged to include foreign travel tax in the sale of the ticket.
But the question is, whether by inclusion of the amount to be collected as foreign travel tax, it becomes part of the assessee's trading receipts. Shri Ananthanarayanan had referred to the analogy of the sales-tax. The sales-tax on sale of goods is collected by the dealers from the customers and it is well settled that such sales-tax collected also becomes part of the trading receipt. It is on this logic that he claims that the foreign travel tax is part of the trading receipt. We are afraid, the two are not analogous. As far as the sales-tax is concerned, it is a tax on the sale of goods and, therefore, it is a tax on the dealer, who effects the sale. He may include the sales-tax payable in the price of the goods and thus reimburse the same. But that is not compulsory. Even if it is not reimbursed himself, he will have to pay the sales-tax since the levy is on the dealer. Now, if we see the provisions of the foreign travel tax, it will be at once clear that the levy is not on the carrier, but on the passenger himself. Section 45 of the Finance Act 1971 is reproduced below :"45. Foreign travel tax - (1) With effect from the date of commencement of this chapter, there shall be levied and paid to the Central Govt. in respect of every international journey by a passenger, where the fare for such journey is paid or is payable in Indian currency, a tax (hereafter in this Chapter referred to as the foreign travel tax) at the rate of fifteen per cent of the fare paid or payable by such passenger for such journey.
Explanation -When a passenger performs an international journey at a concessional rate or without being charged any fare, the fare ordinary payable for the journey shall, for the purpose of this Section, be deemed to be the fare payable by such passenger.
(2) In accordance with rules made under this Chapter, the foreign travel tax shall be collected by the carrier undertaking the carriage of the passengers, or, where the tickets or other relevant documents for such carriage are not issued by such carrier, by the carrier to whom such tickets or other documents relate, as an addition to the fares payable by such passengers and shall be paid to the Central Govt.
8. It would be clear from the above that the levy is on the passenger.
That is the distinction. In sales-tax, the levy is not on the customer.
It is on the dealer. Here, the levy is on the customer and not on the carrier. Therefore, when the carrier collects this amount under Section 45(2) and the regulations issued therein, he is merely collecting it as the agent of the Govt. In fact, that is why they become entitled to a commission. So, it is not possible to accept the submission that foreign travel tax is part of the sale proceeds of the tickets. It is something separate although collected along with the sale of the tickets.
9. Once it is realized that the sale proceeds do not include the foreign travel tax, it becomes clear that it is not a receipt arising to the assessee from the business of operation of aircraft. So any receipt therefrom will not be exempt under the Notification dated 26th November, 1976. It is clearly taxable.
10. The next issue is, whether, under the system of accounts maintained by the assessee, the income would be exempt. It is not quite clear as to how the assessee was accounting for this amount in the books of account. In the course of hearing, we wanted to be informed as to how the assessee was remitting the amount collected by way of tax to the Govt. We wanted to know, whether the gross tax was remitted or, whether the assessee had withheld for himself the commission receivable therefrom. If they had done so, then they have already received the commission. Assuming they have not, even then, in our opinion, the assessee cannot succeed. That is because the assessee being a non-resident, can be assessed only on accrual basis in respectof the income accruing from India. The Madras High Court in the case of CIT v.Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573, had held that, in the case of a non-resident, the cash system of accounting would not be available to them and income accruing will have to be taxed on the point of accrual. This is the only decision on this point and no contrary decision has been given by any High Court. Under these circumstances, we will hold that the assessee's submission regarding cash system is not acceptable.
11. The third point, i.e., the quantum of deduction admissible, was not argued seriously before us. In any case, the findings of the ITO that the amount payable to Combata Aviation (P.) Ltd. is not relateable to the collection of foreign travel tax, is a reasonable finding.