Permanent establishment and profit attribution for CRS operations narrowed to Indian functions, with section 234B interest deleted.

A non-resident CRS operator was found to have a permanent establishment in India through travel-agent connectivity, distribution arrangements and Indian support functions, including the Indian distributor structure. On attribution, only the profit reasonably connected with Indian operations was taxable because the core processing, database and mainframe functions were performed outside India; the Tribunal therefore restricted attribution to 15% of revenue from bookings made in India. Interest under section 234B was deleted because, where tax was deductible at source on payments to a non-resident, advance-tax default interest could not be levied on the payee.

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Issues: (i) Whether the assessee had a permanent establishment in India, including a fixed place permanent establishment and a dependent agent permanent establishment, in relation to the CRS business. (ii) If a permanent establishment existed, what portion of the receipts from bookings made in India was reasonably attributable to the Indian operations. (iii) Whether interest under section 234B was leviable on the non-resident assessee.

Issue (i): Whether the assessee had a permanent establishment in India, including a fixed place permanent establishment and a dependent agent permanent establishment, in relation to the CRS business.

Analysis: The assessee carried on CRS operations through travel-agent connectivity, distribution arrangements and Indian support functions. The Tribunal followed the earlier year's factual finding that the India-facing activities were sufficient to constitute a business presence in India and that the Indian distributor was part of the operational structure supporting bookings from India. The existence of a permanent establishment was therefore examined on the basis of the functions performed, assets used and risks assumed in India.

Conclusion: The assessee was held to have a permanent establishment in India, including the Indian distributor arrangement.

Issue (ii): If a permanent establishment existed, what portion of the receipts from bookings made in India was reasonably attributable to the Indian operations.

Analysis: The Tribunal held that attribution had to be made on a reasonable basis having regard to the activity carried out in India and abroad. It followed the earlier coordinate bench finding that only a limited part of the revenue from Indian bookings could be attributed to the Indian operations because the core processing, database functions, mainframe operations and substantial business functions were carried out outside India. The earlier percentage-based attribution was treated as the appropriate benchmark on the facts of the year under appeal, and the higher attribution adopted by the lower authority was rejected.

Conclusion: Only 15% of the revenue from bookings made in India was held to be attributable to the Indian operations.

Issue (iii): Whether interest under section 234B was leviable on the non-resident assessee.

Analysis: The Tribunal applied the jurisdictional precedent holding that where tax is deductible at source on the payment to a non-resident, the payee is not liable to advance tax in the relevant context and interest for default in advance tax cannot be levied on the payee. The liability, if any, rested on the payer's deduction obligation.

Conclusion: Interest under section 234B was not leviable.

Final Conclusion: The appeal succeeded only to the extent of restricting attribution to 15% and deleting section 234B interest, while the finding of permanent establishment in India was sustained.

Ratio Decidendi: Where a non-resident's Indian operations create a permanent establishment, only the profit reasonably attributable to the operations carried out in India can be taxed, and interest for advance-tax default cannot be levied on the non-resident where tax was deductible at source on the relevant payments.

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