2019 (7) TMI 1083 - AT - Income Tax

Airline booking income taxable in India due to business connection & PE. Deductions allowed, TDS credit granted, interest exemption.

The Tribunal affirmed that income received from airline bookings made in India is taxable in India as it establishes a business connection. It held that ... Income accrued in India - attribution of profit - PE in India - liability to tax in India in respect of fees received from Airlines relating to segments booked from India through the appellant computer reservation system - Indo-Spain DTAA - AO in alternatively holding that the fees received was taxable in India as royalty under the Indian Income Tax Act and Article 12 of the treaty - HELD THAT:- The issues are squarely covered by the decision in assessee‟s own case up to AY 2005-06. There is a continuous seamless process involved, at least part of which is in India and hence, there is a business connection in India. The computers at the subscriber's desk are not dumb or are in the nature of kiosk incapable of performing any function. The computers along with the configuration have been supplied either by the appellant or through its agent AIPL and the connectivity being provided by the appellant enables the subscribers to access the CRS and perform the ticketing and booking functions. Thus there is a direct business connection established in India and hence in terms of s. 9(1)(i) the income in respect of the booking which takes place from the equipment in India can be deemed to accrue or arise in India and hence taxable in India. In view of this respectfully following the decision of the coordinate bench [2010 (10) TMI 1178 - ITAT DELHI] we also hold that assessee has a permanent establishment in India. Attribution of profit where in the current year the CIT(A) has upheld the attribution of the profit @75% whereas, in earlier years the tribunal has upheld the attribution @15% of the revenue as income arising in India. In view of this respectfully following the decision of the coordinate bench in assessee‟s own case for earlier years, we also reverse the order of the ld CIT(A) in upholding the attribution of profit @75% and direct the ld AO to attribute the income @15%. Accordingly, the appeals of the assessee as per Ground Nos. 2 to 5, 6, 11, 12, 13, 14 and 15 of the appeal are partly allowed. Non-granting of credit of TDS - AR submitted that the assessee should be granted the credit of the tax deduction at source - HELD THAT:- DR also agreed to the issue that if the certificates issued to the assessee are proper and in order then same may be granted. Accordingly we direct the learned assessing officer to grant the credit of the tax deduction at source to the assessee if the proper certificates are placed before the assessing officer. The learned AO may verify the same and grant credit for the same if in order. Accordingly ground number 16 of the appeal of the assessee is allowed with above direction. Interest u/s 234B - entire payment received by the assessee from India was subject to TDS - scope of amendment in section 234B - HELD THAT:- As carefully considered the rival contention and perused the orders of the lower authorities the issue squarely covered in favour of the assessee by the decision of the honourable Delhi High Court in case of the DIT vs GE packaged power incorporation [2015 (1) TMI 1168 - DELHI HIGH COURT] - The amendment brought into the act by the finance act 2012 is applicable with effect from the fund for 2012 and is applicable from assessment year 2013 – 14. In view of this we direct the learned assessing officer to not to charge interest u/s 234B for the above reasons. Accordingly ground number 17 of the appeal of the assessee is allowed. Appeal of the assessee is partly allowed. Issues Involved:1. Taxability of income received from airlines for segments booked in India.2. Existence of a Permanent Establishment (PE) in India.3. Attribution of profits to the PE.4. Alternative taxation of income as royalty.5. Disallowance of expenses.6. Grant of Tax Deducted at Source (TDS) credit.7. Levy of interest under section 234B of the Income Tax Act.Detailed Analysis:1. Taxability of Income Received from Airlines for Segments Booked in India:The assessee contended that no income accrued or arose in India from the fees received from airlines for segments booked through its Computer Reservation System (CRS). However, the Tribunal affirmed the findings of the lower authorities, holding that the income from bookings made in India is taxable in India. The Tribunal relied on the fact that the CRS operations in India, including the connectivity and configuration provided to travel agents, contribute to the income generation, thus establishing a business connection in India.2. Existence of a Permanent Establishment (PE) in India:The Tribunal upheld the findings of the lower authorities that the assessee has a PE in India under Article 5(1) of the Indo-Spain DTAA. The Tribunal noted that the computers and connectivity provided to travel agents in India, along with the activities of Amadeus India Pvt. Ltd. (AIPL), constitute a fixed place PE. Additionally, AIPL was considered a dependent agent PE under Article 5(4)(a) of the Treaty, as it carried out negotiations and entered into agreements with travel agents on behalf of the assessee.3. Attribution of Profits to the PE:The Tribunal followed its earlier decision in the assessee's case for AY 2003-04 to 2005-06, attributing 15% of the revenues from bookings made in India to the PE. The Tribunal rejected the assessing officer's attribution of 75% of the profits, noting that the majority of the functions and assets, including the host computer, were located outside India. The Tribunal emphasized that only a reasonable portion of the income, attributable to the operations carried out in India, should be taxed in India.4. Alternative Taxation of Income as Royalty:The assessing officer had alternatively held that the fees received by the assessee were taxable as royalty under section 9(1)(vi) of the Income Tax Act and Article 12 of the Treaty. However, the Tribunal did not address this issue separately, as it had already held that the income was attributable to the PE and taxable as business income. The Tribunal noted that if the income were to be considered royalty, it would still be taxed as business income under Article 13(5) of the Treaty and section 44DA of the Act, which mandates taxation on a net basis.5. Disallowance of Expenses:The Tribunal addressed various disallowances made by the assessing officer, including distribution fees and development costs. The Tribunal noted that the distribution fees paid to AIPL were for services rendered under the Distribution Agreement, including marketing and connectivity support. The Tribunal emphasized that the nomenclature used in the invoices was not determinative of the nature of the expenses, and the expenses were allowable as they were incurred wholly and exclusively for the business. The Tribunal also allowed the deduction of development costs, noting that these expenses were incurred for the overall CRS system, which benefited the Indian operations.6. Grant of Tax Deducted at Source (TDS) Credit:The Tribunal directed the assessing officer to grant credit for TDS of Rs. 5,66,93,368, subject to verification of the TDS certificates. The Tribunal noted that the assessee should be granted the credit if the certificates were proper and in order.7. Levy of Interest under Section 234B of the Income Tax Act:The Tribunal held that no interest under section 234B was chargeable, as the entire payment received by the assessee from India was subject to TDS. The Tribunal relied on the decision of the Delhi High Court in DIT vs. GE Packaged Power Inc., which held that interest under section 234B is not leviable when the income is subject to TDS. The Tribunal noted that the amendment to section 209(1)(d) by the Finance Act, 2012, was applicable from AY 2013-14 and did not affect the assessment year under consideration.Conclusion:The Tribunal's decision comprehensively addressed all the issues raised by the assessee and the Revenue, affirming the taxability of income from bookings made in India, the existence of a PE, and the attribution of 15% of revenues to the PE. The Tribunal also allowed the deduction of expenses and granted TDS credit, while holding that no interest under section 234B was chargeable. The decision followed the principles laid down in earlier years and relevant judicial precedents, providing a detailed and reasoned analysis of each issue.