2020 (11) TMI 206 - AT - Income Tax

Tribunal grants assessee appeal relief on income computation, profit attribution, expense disallowance, income classification, interest charge.

The Tribunal allowed all appeals of the assessee, providing relief on various grounds, including the computation of income, attribution of profits, ... Income accrued in India - PE in India - Income attribution - AO computed income of assessee as PE in relation to the booking fee relatable to the segments booked from India through the CRS developed by the assessee - AO attributed 75 % of the income as income of the assessee as PE in India - HELD THAT:- Hon’ ble High Court of Delhi in the assessee’s own case for the assessment years 1996-97 to 2006 -07 [2007 (11) TMI 330 - ITAT DELHI-B] and [2019 (7) TMI 1083 - ITAT DELHI] has held that computers installed at the premises of the subscribers constitute a PE of the assessee in India in terms of Article 5(1) of Indo-Spain treaty. It was also held that since the Amadeus India is functionally dependent upon the assessee it do constitute an agency PE in India in terms of Article 5(iv) of the Indo- Spain treaty. Since, the facts are undisputed and since the Hon’ ble Jurisdictional High Court in assessee's own case (based on the judgment in the case of DIT Vs. Galileo International Inc.. [2009 (2) TMI 497 - DELHI HIGH COURT]has held that the assessee constitutes an agency PE and as the matter pending before the Hon’ ble Supreme Court, the issue do not call for any interference from our side. The order of the ld. DRP is being upheld on this ground. Attribution of profits - As relying on own case since payment to the agent is already @33 %, no further addition is warranted in the case of the assessee. Disallowance of the distribution expenses - HELD THAT:- We have gone through the history of such expenditure and find that the addition is being made owing to confusion in the description of the services as “export of processed data/software” or “distribution fee” This expenditure has been allowed by the Co-ordinate Bench of the Tribunal from the assessment years 1996-97 to 2006-07. Since, the facts have not been disputed, in the absence of any material change, we hereby allow the claim of distribution expenses. CRS Income - Royalty OR Business income - AO has held that the income received by the assessee with respect to bookings arising from India is also taxable as royalty income - As the assessee supplies/licenses its proprietary products free of charge to Amadeus India for distribution to the Subscribers and assessee has granted to Amadeus India the right to further grant the right to access and right to use its platforms/software/product offerings to Subscribers. Amadeus India has the exclusive rights to distribute the CRS in India - HELD THAT:- In the assessment framed for assessment year 2006-07 [2007 (11) TMI 330 - ITAT DELHI-B] the Assessing Officer had substantively brought to tax, the booking fee as business income and protectively held the same to royalty since in that year the tax worked out in treating the income as royalty was less than the tax worked out after attributing income to the alleged PE of the assessee. Tribunal in assessee’s own case for the assessment year 2006-07 has held that booking fee received by the assessee is taxable as business income and not under the head royalty. Thus we hereby hold that the booking fee received is in the nature of business income. Income from royalty - bookings arising from India, the payment for Altea Reservation System (ARS) is made by the British Airways for the use of system for the purpose of business in India and for the purpose of earning income from India - AO held that the ARS has been specifically and exclusively used by British Airways, hence, taxed this amount under the head “income from royalty” and tax @ 20% - HELD THAT:- India's change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. Mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State's discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to the DTAAs. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word ' royalty' in Asia Satellite, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so supra note that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement. Thus held that the interpretation advanced by the Revenue cannot be accepted. The question of law framed is accordingly answered against the Revenue. Charge of Interest u/s 234B - HELD THAT:- This issue squarely covered in favour of the assessee by the decision of the Hon’ ble Delhi High Court in the case of 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 of 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 234 B of the Income Tax Act for the above reasons - Decided in favour of assessee. Issues Involved:1. Computation of income by the Assessing Officer (AO).2. Permanent Establishment (PE) and its implications.3. Attribution of income to the PE.4. Disallowance of expenses.5. Classification of CRS income as royalty.6. Taxation of payments related to the Altea system.7. Charge of interest under section 234B.8. Credit for tax deducted at source (TDS).Detailed Analysis:1. Computation of Income by the AO:The AO computed the income of the appellant at Rs. 381,32,77,751/- against the 'Nil' income returned by the appellant. The appellant contended that the AO erred in computing the income and did not afford a reasonable opportunity to be heard.2. Permanent Establishment (PE):The AO held that the appellant had a PE in India under Article 5 of the Indo-Spain DTAA due to the presence of computers, electronic hardware, and connectivity provided to travel agents. The AO also considered Amadeus India (P) Ltd. (AIPL) as a dependent agent PE. The Tribunal upheld the AO's decision based on the Delhi High Court's ruling in the appellant's case for previous years, confirming that the appellant constituted an agency PE in India.3. Attribution of Income to the PE:The AO attributed 75% of the income from bookings made in India to the appellant's PE in India, resulting in Rs. 1,08,94,12,818/- being taxable. The Tribunal referred to previous decisions, where 15% of revenues from Indian bookings were attributed to the PE. Given the unchanged facts and the 33% payment to the agent, the Tribunal held that no further addition was warranted.4. Disallowance of Expenses:The AO disallowed distribution expenses, claiming insufficient documentation. The Tribunal noted that similar expenses had been allowed in previous years and found no material change in facts. Thus, the claim for distribution expenses was allowed.5. Classification of CRS Income as Royalty:The AO classified the booking fee received by the appellant as royalty income under section 9(1)(vi) and Article 13(3) of the Treaty. The Tribunal, referencing its earlier decisions, held that the booking fee was taxable as business income, not royalty, as the appellant did not divulge any process to the users of the CRS.6. Taxation of Payments Related to the Altea System:The AO taxed payments from British Airways for the Altea system as royalty income at 20%. The Tribunal found that the Altea system was used exclusively by British Airways at Indian airports, making the payments taxable as royalty. However, following the Delhi High Court's judgment in the New Skies Satellite case, the Tribunal directed the revenue not to tax the royalty income, emphasizing the need for corresponding changes in the DTAA.7. Charge of Interest under Section 234B:The Tribunal applied the ratio from the 2006-07 assessment year, where interest under section 234B was not chargeable due to the entire payment being subject to TDS. The Tribunal directed the AO not to charge interest under section 234B.8. Credit for Tax Deducted at Source (TDS):The AO was directed to allow TDS credit as per the provisions of the Income Tax Act after due verification.Conclusion:The Tribunal allowed all the appeals of the assessee, providing relief on various grounds, including the computation of income, attribution of profits, disallowance of expenses, classification of income, and charge of interest. The order was pronounced in the open court on 26/10/2020.