2007 (11) TMI 329 - AT - Income Tax

Tribunal Rules No Additional Tax Due for US Company with PE in India via Computerised Reservation System.

The Tribunal determined that the US resident assessee had a PE in India through a Computerised Reservation System. It attributed 15% of booking revenue to ... Business connection - source of income - deemed accrual under section 9(1)(i) read with section 5(2) - permanent establishment - fixed place permanent establishment - dependent agent permanent establishment (agency PE) - attribution of profits to permanent establishment (Article 7) - apportionment of income between operations in and outside India - arm's length remuneration to associated/related distributor - exhaustion of taxable income by payments to local agentBusiness connection - source of income - deemed accrual under section 9(1)(i) read with section 5(2) - Whether the appellant had a business connection in India and income accruing or arising in India under domestic law - HELD THAT: - The Tribunal found that the appellant's CRS extended into India through configuration, connectivity (SITA nodes and leased regional network) and computers at subscribers' desks which enabled bookings initiated and completed in India. These Indian components were integral to the CRS activity that generated the appellant's booking-related revenue; but for the subscribers' bookings in India the appellant would not earn that revenue. On this factual basis the Tribunal held there was a real, intimate and continuous commercial connection amounting to a business connection in India and that income in respect of bookings made from equipment in India could be deemed to accrue or arise in India under section 9(1)(i) read with section 5(2). The Tribunal rejected the submission that mere provision of remote data processing outside India or use of independent service providers (SITA/VSNL) negated a business connection, distinguishing Wipro and relying on factual integration of host, network and customer premises components in India. [Paras 8]There is a business connection in India and part of the appellant's booking income is deemed to accrue or arise in India.Apportionment of income between operations in and outside India - attribution of profits to permanent establishment (Article 7) - What proportion of the appellant's revenue from bookings made in India is reasonably attributable to operations carried out in India - HELD THAT: - Applying the statutory test of attribution (functions performed, assets used and risks undertaken) and recognising that majority of processing, host functions and key assets were located outside India, the Tribunal found the activities in India constituted a minor but essential portion of the CRS. On the factual matrix the Tribunal reasonably apportioned 15% of the revenue from bookings made in India as attributable to operations in India for tax purposes under section 9(1)(i) read with section 5(2); the remainder was attributable to activities outside India. [Paras 9]Fifteen per cent of the revenue from bookings made in India is reasonably attributable to operations carried out in India.Arm's length remuneration to associated/related distributor - exhaustion of taxable income by payments to local agent - Circular No. 23 (treatment of distributor remuneration) - Whether the income attributable to India is consumed by payments to the Indian distributor (Interglobe) so as to leave no taxable income in India - HELD THAT: - The Tribunal found that the appellant paid remuneration (data processing/ distributor fees) to Interglobe for services rendered in India and that those payments had been allowed as deductions in computing the appellant's income. On the facts the remuneration paid to Interglobe absorbed (exceeded) the portion of income attributable to India (the 15% apportioned share). Applying the principle in Circular No. 23 and the approach in Morgan Stanley, the Tribunal held that where the associated enterprise (or agent/PE) is remunerated on arm's length terms and such remuneration consumes the income attributable to the PE, no further income remains taxable in India. [Paras 10]The income attributable to India is exhausted by arm's length payments to Interglobe; consequently no taxable income remains in India.Permanent establishment - fixed place permanent establishment - dependent agent permanent establishment (agency PE) - Whether the appellant had a Permanent Establishment (PE) in India under the Indo US DTAA and, if so, of what character - HELD THAT: - The Tribunal concluded that (i) parts of the CRS (network nodes, leased lines and subscriber site equipment/configuration) operated in India and were at the disposal of the appellant (directly or through Interglobe), thereby constituting a fixed place of business through which the enterprise carried on part of its business; (ii) Interglobe functioned as a dependent agent in India - promoting the CRS, entering subscriber agreements under the distribution arrangement, installing/configuring equipment and maintaining connectivity - and habitually exercised authority to secure subscriber arrangements on behalf of the appellant. The Tribunal rejected characterisation of the in-India activities as merely preparatory or auxiliary and held that both a fixed place PE and an agency (dependent agent) PE existed in India under Articles 5(1) and 5(4)(a) respectively. [Paras 17]The appellant has a PE in India: (a) a fixed place PE constituted by network/nodes and subscriber site equipment/configuration, and (b) an agency PE through dependent agent Interglobe.Attribution of profits to permanent establishment (Article 7) - apportionment of income between operations in and outside India - Whether any profits are taxable in India under the DTAA once a PE is recognised and the extent of such taxation - HELD THAT: - Article 7 requires taxation only of profits attributable to the PE. The Tribunal applied the same apportionment (15% of booking revenue) as the quantum reasonably attributable to Indian operations and then assessed whether any residual profit remained after allowing deductions, notably the arm's length remuneration to the Indian distributor. Finding that the payments to Interglobe exceeded the profit attributable to the PE, the Tribunal held that no net profit remained to be taxed in India under the DTAA. The Tribunal observed that where a PE's attributable profit is fully absorbed by arm's length payments to an associated enterprise, nothing remains attributable to the PE for additional taxation. [Paras 18]Although a PE exists, the profits attributable to it are exhausted by arm's length payments to the Indian distributor; therefore no taxable profit remains under Article 7.Assessment validity - cross objections by revenue - Validity of assessments and cross objections raised by the Revenue regarding notice and rate of tax - HELD THAT: - The Tribunal recorded that the assessee did not press the ground alleging non-issue of notice under section 143(2) and found the assessment to be valid. The Revenue's challenge to rates applied (that foreign company rates were used) was not contested by the assessee; the Tribunal therefore treated the Revenue's cross objections as allowed to the extent argued. [Paras 19, 21]Assessments upheld as valid; cross objections by the revenue are allowed.Final Conclusion: On the facts the Tribunal held that Galileo International possessed a business connection and a PE in India (fixed place and dependent agent) and that 15% of booking revenue was reasonably attributable to Indian operations; however, because arm's length payments to the Indian distributor consumed the income attributable to India/the PE, no net taxable income remained and the appellant's appeals were partly allowed while the revenue's cross objections were allowed. Issues Involved:1. Whether the assessee has any income chargeable to tax in India u/s 5(2) and u/s 9(1)(i) of the Act.2. Whether the assessee has a Permanent Establishment (PE) in India under Article 5 of the Indo-US DTAA.3. Determination of the extent of income attributable to the PE in India.4. Whether the income attributed to the PE is exhausted by payments made to the Indian agent.5. Applicability of interest u/s 234A and 234B.Summary:1. Income Chargeable to Tax in India:The assessee, a US resident, operates a Computerised Reservation System (CRS) for airlines, hotels, etc., and has appointed Interglobe Enterprises Pvt. Ltd. as a distributor in India. The assessee contended that no income accrued or arose in India, and it had no operations in India u/s 5(2) or u/s 9(1)(i) of the Act. The Assessing Officer (AO) held that the booking activities in India through the CRS constituted business connection, making the income taxable in India. The CIT(A) upheld this view, stating that the assessee had a business connection in India from which income accrued or arose.2. Permanent Establishment (PE) in India:The Tribunal examined whether the assessee had a PE in India under Article 5 of the Indo-US DTAA. It concluded that the assessee had a fixed place PE in India through the computers installed at the subscribers' premises, which were connected to the CRS and controlled by the assessee. The Tribunal also found that Interglobe acted as a dependent agent PE, habitually exercising authority to conclude contracts on behalf of the assessee.3. Attribution of Income to PE:The Tribunal held that only 15% of the revenue generated from bookings made in India was attributable to the PE. This was based on the functions performed, assets used, and risks undertaken in India. The majority of the CRS operations, including data processing, were conducted outside India, and only a small portion of the activities occurred in India.4. Payments to Indian Agent:The Tribunal noted that the payments made by the assessee to Interglobe for its services were at arm's length and consumed the entire income attributable to the PE in India. Thus, no further income was taxable in India. The Tribunal relied on Circular No. 23 of 1969 and the Supreme Court's decision in DIT v. Morgan Stanley & Co. Inc. to support this conclusion.5. Interest u/s 234A and 234B:Since the income attributable to the PE was exhausted by the payments made to Interglobe, resulting in no taxable income in India, the question of charging interest u/s 234A and 234B did not arise.Conclusion:The Tribunal partly allowed the assessee's appeals, holding that the income attributable to the PE in India was fully offset by the arm's length payments made to Interglobe, resulting in no taxable income in India. The cross objections raised by the revenue were allowed, upholding the validity of the assessment and the tax rate applicable to the assessee.