2007 (11) TMI 329 - AT - Income Tax

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

Galileo International Incorporation. Versus Deputy Commissioner Of Income-tax, Non-resident Circle, New Delhi.

Galileo International Incorporation. Versus Deputy Commissioner Of Income-tax, Non-resident Circle, New Delhi. - ITD 116, 001, TTJ 114, 289, [2008] 19 SOT ... 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.