2026 (2) TMI 422 - HC - Income Tax

Withholding tax on global distribution services payments reduced to 0.5% after India PE revenue attribution and expense deduction

Revenue attributable to an India permanent establishment was fixed at 15% under the cited Supreme Court precedent; the court concluded that this 15% ... Application u/s 197 - lower tax withholding certificate prayer - revenue attributable to its India PE - as conditioned accepting application that payer(s) making payment to the petitioner are required to deduct tax at the rate of 1.6% - petitioner is a company incorporated in the United Kingdom - petitioner is engaged in providing electronic global distribution services (GDS) to the travel industry globally, through an automated Computer Reservation System (CRS) and services are provided to various airlines, and for each completed booking, the petitioner receives booking fees from the airlines Exigibility of the income tax on the transactions from non-India POS - Respondents has talked about revenue from India Point of Sales (POS) only, whereas the income in the hands of the petitioner from non-India POS is also taxable as the persons have travelled to India on the basis of sale of the tickets booked from the petitioner’s portals or by availing abroad the online services provided by it - HELD THAT:- There is no gain saying the fact that the second issue, the non-India POS on which the AO has created demand, is yet to be decided by the Appellate Authority and/or the Tribunal in accordance with law. Resultantly, for the last four years, the Assessing Officer’s view is against the petitioner. We therefore, refrain from recording any finding or making observation so far as the exigibility of the income tax on the transactions from non-India POS are concerned. Income attributable to India PE - it is a trite position that the revenue attributable to its India PE is to be taken as 15% in light of the judgement of Hon’ble the Supreme Court in petitioner’s own case - DIT v. Travelport Inc. 2023 (5) TMI 227 - SUPREME COURT] The expression “was the income accruing or arising in India” in the 13th and 14th line of the above quoted paragraph, raised a doubt in our mind as to whether 15% of its receipts should be reckoned as revenue or income? But on perusal of the judgement particularly paragraph no. 9 and the order of the Tribunal, we are of the firm opinion that 15% of the commission is the revenue attributable to India PE. That is precisely what has been understood and taken by the competent authority in the order under challenge. Hon’ble the Supreme Court has categorically observed and affirmed the position that 15% represents the quantum of revenue attributable to the Permanent Establishment in India, determined on the basis of the FAR analysis, and not a limit on the allowability of expenditure. As explained by way paragraph 9 of the said judgment, once 15% of the total revenue was attributed to India, the entire commission paid to the distribution agents was liable to be deducted therefrom; and since such commission exceeded the attributed revenue, the Tribunal held that no further income was taxable in India. The competent authority was therefore, required to deduct expenditure being the commission of 68% from the total revenue being 15% of the commission. If the commission being expenditure is subsumed from the revenue of the PE, then, the income shall obviously be negative, at least in the present scenario. Such being the position, we set aside the impugned order dated 24.04.2025 passed by the competent authority and corresponding certificate dated 17.04.2025. The competent authority is directed to issue a fresh certificate providing deduction of tax at the rate of .5% (1/5 of 1.6% = .32 or rounded off .5%). We therefore direct that a fresh tax withholding certificate at 0.5% be issued within fifteen days from today. Issues: Whether, for the purposes of issuing a certificate under Section 197 of the Income-tax Act, 1961 for Assessment Year 2025-26, the competent authority was required to allow deduction of the entire commission (68%) against the revenue attributed to the India Permanent Establishment (15% of total receipts) and accordingly fix the rate of tax withholding.Analysis: The Court examined the Supreme Court decision in DIT v. Travelport Inc. which determined that 15% of the petitioner's receipts constitutes the revenue attributable to the Permanent Establishment in India, ascertained by FAR analysis. That 15% figure represents revenue attributable to the India PE and is not a ceiling on the allowability of related expenditures. The Tribunal in the cited decision treated the entire commission paid to distribution agents as deductible from the revenue attributed to the PE, and where such commission exceeded the attributed revenue, concluded no further income was taxable in India. Applying that legal framework to the facts accepted by the competent authority (15% revenue attributable to PE and 68% commission payable), the competent authority ought to have deducted the full commission from the attributed revenue. The Court declined to adjudicate the separate unresolved issue relating to income from non-India POS, but, to meet ends of justice, directed a proportionate certificate reflecting the petitioner's non-India POS share of total receipts.Conclusion: The impugned order dated 24.04.2025 and the certificate dated 17.04.2025 are set aside. A fresh tax-withholding certificate shall be issued within fifteen days fixing deduction of tax at the rate of 0.5% (reflecting the petitioner's non-India POS proportion of total receipts) in favour of the petitioner.