Attribution of cross-border business income in India turns on functions, assets and risks, leaving no taxable income after Indian service

Where a composite cross-border reservation business operated with the host computer outside India and limited marketing/support functions in India, taxability was confined to income fairly attributable to Indian operations on a functions, assets and risks basis. The Tribunal applied the principle that only the Indian slice of a larger business can be taxed where a business connection or permanent establishment is assumed. It attributed 15% of gross receipts to India, but held that no further income was taxable because the commission paid for Indian services had already absorbed that attributable amount.

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Issues: Whether the assessee's income from computerized reservation services could be taxed in India on the basis of business connection and permanent establishment, and if so, what portion of the receipts was attributable to operations in India.

Analysis: The assessee operated a computerized reservation system with the host computer outside India and marketing/support activities in India through its wholly owned subsidiary. The authorities had held that a business connection and permanent establishment existed in India. The dispute before the Tribunal was confined to attribution of income. Following the coordinate bench decision in an identical business model, the Tribunal applied the principle that attribution must reflect the functions performed, assets used, and risks undertaken. It found that the Indian activities were only a limited part of the overall operation and that only 15% of the gross receipts could be regarded as accruing or arising in India. As the assessee had already incurred expenditure in India at 25% of the gross receipts by way of commission to the Indian subsidiary, no further income remained taxable in India.

Conclusion: The income was held not taxable in India on the facts of the case, and the assessee succeeded on merits.

Final Conclusion: The Tribunal concluded that, even assuming a business connection and permanent establishment in India, the attributable income was fully absorbed by the expenditure already incurred in India, leaving no taxable income in India.

Ratio Decidendi: Where only a limited part of a composite cross-border business is carried on in India, taxability is confined to the income fairly attributable to Indian operations on a functions, assets, and risks basis, and no further tax can be levied if the attributable income is fully offset by the amount already paid for Indian services.

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