TaxTMI 
TaxTMI 
2007 (11) TMI 329
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....5-12-2004 in an appeal against assessment framed under section 143(3) read with section 250 of the Act. 1.2 Cross Objection Nos. 47, 48, 49 and 50/Delhi/2006 by the revenue are in respect of ITA Nos. 1733, 2473 to 2475/Delhi/2000. C.O. Nos. 51 to 54 of 2006 by the revenue are in respect of ITA Nos. 820 to 823 of 2005. Since common issues are involved in all these appeals and cross objections were heard together and are being disposed of by this common order. 2. Galileo International Inc. ('the appellant'), a resident of USA, is in the business of maintaining and operating the system for providing electronic global distribution services to airlines, hotels, tour and cab operators by connecting to travel agents ('the TAs') utilising a Computerised Reservation System ('CRS'), which may, inter alia, include a system which receives, processes, stores and disseminates data about flight schedules, seat/room availability, fare information and provision for booking capabilities etc. As a CRS service provider to Airlines, the appellant performs the following: • It receives all relevant information from the various Participant airlines, processes thi....
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....ight Segment is added in a new or an existing Booking File; or whereby the status code is changed in an existing Booking File counted on a per passenger, per Direct Flight basis, except that it shall not include a Cancel. 'Net Passenger Segment' means all Active Confirmed Segments, Passive Segments and other Segments less any cancels. 'Numeric AVS Message' means an AVSW message that indicates the actual number of seats available for sale. 'Participating Carrier' means any airline that has entered into a Global Airline Distribution Agreement with Galileo International. 'System' means any CRS operated by Galileo International, not including the Apollo by Gemini CRS. 2. Duties of Galileo International Galileo International shall maintain and operate the system and shall provide to Participant various standard services at the charges set out in Schedule 2, as it may be amended by Galileo International from time to time. Depending on the options selected by Participant under Schedule 1, these services may include, among other things, display of schedules and fares, building of connections, display of f....
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....essage origination, even though overbooking may result therefrom and denied boarding compensation may be required. Participant shall not reject a booking for a passenger that has been made in the System where that booking has been made via an optional service described in Schedule 6, 7, 11 or 12. Participant shall accept for transportation any passenger presenting a ticket that bears an 'OK' status and that has been issued as a result of a booking made through the System consistent with data in the System and otherwise in accordance with this Agreement, even though no record of that booking may exist in Participant's System, overbooking may result therefrom, and denied boarding compensation may be required. Participant shall accept a ticket for transportation at the fare shown on that ticket provided that the ticket was automatically issued by a Galileo International and Galileo International Subscriber shall have no liability to Participant (and Participant hereby waives any rights and remedies against Galileo International and Galileo International Subscribers) for any inaccuracies in the fares data shown on such a ticket. Participant hereby grants ticketing authority....
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.... extended to Territory 1 at a later date. 2. Responsibilities of Galileo International: (iii) The System will automatically display to Galileo International Subscribers in the primary availability display a numeric value equal to the Quotasale authorised by Participant as stated in Clause 3 of Schedule I, or such lower value as may be stored in the System availability status tables as a result of Numeric AVS Messages received from Participant's System. B. Flight Specific Availability Procedure: (v) Where a Direct Flight Segment is made in Territory 2 without reference to an availability display and Participant has not selected one of the optional booking services described in Schedule 11 or 12, the System will interrogate Participant's System and, subject to seats being available, will send an 'LK' or other applicable message, to Participant's System as if the sell had been made with reference to an overlaid availability display. Schedule 10: Inside Availability: This Schedule describes the Inside Availability service offered in Schedule 4 and forms part of the Galileo International Global Airline Di....
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....n a real-time basis. All input processing and output is managed, processed and stored by the appellant through the MCS in the USA. The appellant in turn appoints Distributors to market and distribute the CRS services to the TAs. In India, the appellant has entered into a Distribution Agreement (DA) dated24th February, 1995with Interglobe Enterprises Pvt. Ltd. ('Interglobe'), an unrelated company to market and distribute CRS services to the TAs in India. Relevant clauses of the DA are extracted herein: "This Agreement is made the 24th day of February, 1995 Between Galileo International Partnership (trading as 'Galileo International'), A Delaware general partnership whose principal place of business is located at 9700 West Higgins Road, Rosemont, Illinois 60018, USA, And Interglobe Enterprises (P.) Ltd. (a company constituted under the laws of India) its successor, nominees and assigns whose registered office is at 66, Janpath, New Delhi- 110001, India. Recitals A. Whereas Galileo International has developed and/or owns and is entitled to commercially exploit and distribute globally, and particularly in India, the software, hardware, I....
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....hat of Vendor and more particularly: 'Individual Subscriber' means a Subscriber who is not a travel agent, and 'Multinational Subscriber' means a Subscriber which is a travel agent which has places of business, branches or offices in more than one country and to which Galileo International provides its CRS Services directly; and 'Vendor' means a Person who sells or may wish to sell its products and/or services through a CRS, and more particularly; 'Air Vendor' means a Vendor which is an airline, whether scheduled, charter, domestic or international; 'International Vendor' means a Vendor who sells or may wish to sell its products and/or services in more than one country and shall include any Air Vendor. 2. Appointment of Interglobe and Establishment of NDC: 2.1 Except as provided herein, Galileo International hereby appoints Interglobe as the sole and exclusive distributor of Galileo International's CRS Services in the Market Region and Interglobe hereby agrees to act in that capacity, subject to the terms and conditions of this agreement. 2.2 Interglobe shall establis....
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....d Routers: 3.1 Galileo International shall at its own cost procure the provision, operation and maintenance of a communication network and associated equipment for the distribution of its CRS Services from the Galileo International's CRS Services from the Note or Router to subscribers in the Market Region. Interglobe may request Galileo International to arrange for such provision and operation of communication network services through Galileo International's contractual relationships with SITA or other such network provider. Such services shall be provided in accordance with the then current Galileo International contract terms and conditions including cost with such network provider save that Interglobe shall pay for such services in Indian currency, insofar as it is possible to do so and subject always to Interglobe being at liberty to renegotiate the cost of such service with the network provider. 4. Provision of Galileo International's CRS Services: 4.1 Galileo International shall at its own cost and responsibility provide such of its own cost and responsibility provide such of its CRS Services shall at its own cost and responsibility prov....
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....national's CRS Services to Subscribers in the Market Region. 6.2 Interglobe shall at all times use all reasonable endeavours to promote the use of Galileo International's CRS Services in the Market Region. In carrying out its marketing activities, Interglobe shall give reasonable consideration to all recommendations of Galileo International. 6.3 Interglobe shall be responsible for entering into contracts with Subscribers who wish to use Galileo International's CRS Services in the Market Region. Such contracts shall be consistent with the terms of this agreement and consistent with the local laws of the relevant jurisdiction and shall provide that Interglobe is acting as a principal and not as agent for Galileo. Interglobe shall give reasonable consideration to Galileo International proposal with regard to the terms of such contracts. Schedule 5 contains Galileo International's Model Subscriber Agreement which Interglobe may use as a guideline in drafting its Subscriber agreements. 6.4 Interglobe will engage staff with appropriate experience and expertise and at all times during this agreement will retain such staff in sufficient numbers to....
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....ileo International on a regular basis, but no less frequently than quarterly, such information as Galileo International reasonably requires relating to the activities of Interglobe under this agreement. The categories of information which may be required include, but are not limited to: (a) sales projections for the forthcoming year; (b) a list of Subscriber contracts entered into or renewed; (c) a list of Subscriber contracts terminated or due to expire in the forthcoming year; (d) staff training activities; (e) customer support activities; (f) competitor activities; (g) operational service levels; and (h) the standard terms of any Subscriber contracts, including the amount and terms of any payment. 14.4 After consultation with Galileo, Interglobe shall produce an annual marketing plan covering its objectives for the forthcoming year and setting reasonable performance targets. Prior to Interglobe producing its marketing plan, Galileo International shall provide to Interglobe details of its current marketing plans insofar as they relate to the Market Region. Interglobe shall use all reasonable endeavou....
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....the Apparatus. 4.4 Relocation of any installed Equipment or any part of the Communications Link (including any relocation at the same premises) may only be undertaken by Galileo or its agent for this purpose, at Subscriber's expense, unless Galileo's prior written consent (which will not be unreasonably withheld or delayed) is obtained. 6.5 Subscriber will not remove or obscure any identifying marks from the Rented Equipment, the Communications Links, the Software Products or the Media or subject any of them to any lien or encumbrance. 9. Supply and use of the Reservation Service: 9.1 Galileo hereby grants to Subscriber, in accordance with the terms and conditions hereof, a non-exclusive licence to use that part of the Reservation service which relates to the Equipment and/or Software Products provided under this agreement, solely for the performance of the specific business functions designed in the Manuals. 9.4 Subscriber agrees that it will only seek access to the Galileo System and use the Reservation Service: (a) In strict accordance with any operating instruction given from time to time by Galileo. (b) Sol....
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....nt installations exist it will become even more critical than the Partner or Associate, and other Network Provider that forms part of the Delivery Chain, contribute with measurement of the service within their control. 5. Service Controls 5.1 Availability: The Goal is for continuous system availability throughout with the requirement that emphasis be placed on Prime Times. 5.1-1 Global Regional and Market: - Host and Network functions are classified as being Global, Regional or Market based indicating their impact to the user community should these systems or functions incur an outage. - Global functions will be available on a 24 hour basis. These are typically Host based systems or functions that affect or potentially affect the entire user community. - Regional functions, those systems or functions serving a broad regional user community will receive maximum service possible during the scope of the Region's Prime Times. These are typically Host based systems or functions that affect or potentially affect a Regional based user community, however may also be network based such as the Galileo International Backbone N....
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....work arounds or alternatives. (This value should be assigned with due regard to the nature of the problem). - High: High impact on business. Complex work around required. Serious user dissatisfaction. - Medium: Medium impact on business. User dissatisfaction but a tolerable work around available. - Low: Limited impact. No anticipated effect on revenue. Inconvenience caused to user. One off problems. 6.1.2 Escalation and Resolution Service providers in the Product Delivery Chain shall allocate resources in order to resolve problems based on business impact to the Global or Regional community. A central problem log will be maintained by Galileo International with problem status assigned responsibility for resolution, estimated completion date and impact/dependency assessment. End user subscribers will initially report all faults to their NDC Help Desk. It will be the responsibility of that local NDC to escalate local problems that cannot be solved to Galileo International, the Partner or 3rd party supplier on the subscriber's behalf. Service impacting problems will be discussed via Service Management meetings held qua....
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.... it contended that it did not have any Permanent Establishment ('PE') in India within the meaning of Article 5 of the Double Taxation Avoidance Agreement between India and USA ('Treaty') and, therefore, the booking fees received by the appellant from the airline companies outside India, being business profits were not liable to tax in India under Article 7(1) of the Treaty. 3. The Assessing Officer held that all the activities in respect of bookings made by the Tas in India were completed in India through the hardware installed in and from TAs in India. On this basis, he held that income accrued or arose in India under section 5 of the Act. The Assessing Officer held that even under the Treaty, the appellant had a PE in India under Article 5 and so the income was held taxable as business income under Article 7 of the Treaty. The Assessing Officer held that the computers are a PE in India. The Assessing Officer observed that the computers installed in India and the mainframe situated outside India are connected through leased lines provided by the appellant and thus became an extension of the mainframe computer of the appellant when the booking is done through the....
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....and situated in India. He observed that the appellant: • has invested substantial money in computers which were given to the TAs without receiving any charges; • provides continuous display of information through leased lines. He further held that activities of PE constitute display of information on the screen of the TAs. On page 15 of his order, the CIT(A) observed as follows: "I am in agreement with the ld. counsel that the profit which can be brought to tax is only that amount which can be said to have been derived from the assets located in the PEs in India and the activities carried on by the appellant in India. Of course, these activities constitute display of information on the screen of the TAs located in India." The CIT(A) held that the appellant had a PE in India under Article 5(1) of the Treaty as the computers are fixed places of business through which the business is wholly or partly carried on by the appellant. The CIT(A) observed that computers occupies a place and is connected with mainframe computer. According to the CIT(A), the computers of the TA and the CRS are integrated and, therefore, the appellant's CRS is brough....
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....ed in the CRS relating to travel itinerary involving multiple Airlines; • Making available Airline's information pages in the CRS system for use of the TAs; • Provision of data for transactions i-elating to Direct Flight Segments on a monthly basis; • Supplying Billing Information Data Transfer ('BIDT') or Marketing Information Data Transfer ('MIDT') by magnetic tapes or other method as may be agreed upon by the parties on a monthly basis. 5.1 Shri Vyas contended that the database relating to seat availability, etc., is on the appellant's MCS, which is located outside the taxable territories and, therefore, the AR argued, the appellant's services were rendered outside India and its income accrued outside India, relying upon the following observations from the decision of the Hon'ble Tribunal in the case of Wipro Ltd. v. ITO [2005] 278 ITR (AT) 57 (Bang.) at Page 69. "The data server is indisputably located outside India. Consequently, the provision of services of offering the data base to its customers is an event outside the taxable territories of India." He pointed out that under the Participati....
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....he said computers have been provided by the appellant to Interglobe only in assessment year 1996-97 and not in the earlier or subsequent appeal years; (iii) the computers were rendered obsolete within 2 years; (iv) these computers were provided to Interglobe whose responsibility was to provide computers to the TAs, to assist in market penetration; (v) the computers have no role in the earning of the appellant's income as is shown by the fact that after assessment year 1996-97 (after which no computers were provided), the appellant's income from CRS not only continued but actually increased, as is shown below: Gross revenue in the assessment years from 1996-97 Assessment Year Total revenues (In U5D) 1996-97 2,662,519 1997-98 7,339,024 1998-99 9,041,702 1999-2000 12,112,000 2000-01 16,784,000 2001-02 23,973,000 2002-03 23,663,000 (vi) the computers so provided to the TAs do not process any data, and their role is merely that of a "dumb terminal"; (vii) the TA is free to use the computer in any manner he chooses and is not restricted to using it only to access the CRS." The learn....
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....luded and the appellant's fee accrues, not when the TA clicks on his computer screen in India, but when the TA's request is accepted on the Airline Server through the appellant's CRS. He referred to clause 2B (i) and (ii) on Pages 46 and 49 of APB-I "Upon request from a Galileo International Subscriber, the System will interrogate Participants System in order that the Galileo International Subscriber may view certain information stored in Participant's System." "Upon request by a Galileo International Subscriber through a secondary 'follow-up' input, the System will interrogate Participant's System with a flight specific availability inquiry." He submitted that the acceptance is not made in India and, therefore, the contract is not made in India. The TA in India, in response to the invitation to offer displayed on his screen, makes an offer which is accepted by the Airline Server abroad through the appellant's CRS. The delivery of the ticket is the mere physical evidence of the contract between the Airline and the passenger which has already been concluded abroad. Thus, the TA's click does not generate the charge. The accepta....
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.... India as SITA's activities are not the appellant's activities or operations at all but are merely services purchased by the appellant. He further submitted that an argument similar to the Department's argument viz. that but for SITA, the appellant would not have been able to earn its revenue, was rejected by the Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd v. DIT [2007] 288 ITR 408, where the revenue had urged that but for the offshore services, the onshore services (which were admittedly taxable) could not have been performed and, therefore, even the offshore component was taxable. The Hon'ble Supreme Court, in this case, inter alia on pages 420 and 421 of the case, held that even if a contract was a lump sum, firm, fixed price, time certain, and indivisible turnkey contract, yet no Indian tax could be imposed in respect of activities outside India, rejecting the Department's stand that the entire contract should be viewed as one composite whole. On page 429, Supreme Court observed that even for the purpose of taxability different components of a contract have to be considered independently. Reliance was also placed, in this regard, upo....
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....ivity provided by SITA/local vendors in India and the computers provided by Interglobe in India cannot be "merged" with the appellant's CRS as: (i) the telecommunication nodes and lines in India are provided to the appellant as a service by an independent contractor/service provider (SITA) who is remunerated on an arm's length basis by the appellant. These are not assets or activities or operations of the appellant, as contended in the written synopsis submitted by the learned DR. (ii) the computers provided to the TAs are not in any way an essential part of the appellant's earning apparatus as is shown by the fact that even after the computers supplied by the appellant were no longer used, the appellant's CRS earnings actually increased. The learned AR contended that the appellant's booking fee accrues when the booking request is accepted through the appellant's MCS in USA. He emphasised that the appellant has no operations of its own in India and, therefore, no income can be regarded as accruing or arising to it in India. He referred to the principles laid down by the Supreme Court in CIT v. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472 a....
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....on 9 of the Act). The operations of unrelated parties, viz. Interglobe and SITA cannot be considered as operations of the appellant. The appellant's income by way of booking fees also cannot be deemed to accrue or arise in India under section 9 of the Act because its income as pointed out above, does not accrue or arise through or from: (i) any asset in India; (ii) any source of income in India. The learned AR clarified that the computers at the TAs desk do not process the information, it only displays the information viz. seat availability, booking confirmation, generates the request. He further submitted that no business connection can exist, in law, if the agent/person has no authority to bind the principal by concluding contracts and relied on the tests laid down by the Supreme Court in the case of CIT v. R.D. Aggarwal & Co. [1965] 56 ITR 20 inter alia, because: (1) the appellant's commercial connection, if any, with India, is far weaker than that of the assessee in the case of RD Aggarwal, where the Hon'ble Supreme Court nevertheless held that no business connection existed, in spite of acknowledging that there was undoubtedly comme....
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....AR that without prejudice to the appellant's submission that no income accrues or arises or is deemed to accrue or arise in India and that the appellant has no operations in India, in any event, even if it is assumed, while denying, that any income can at all be regarded as accruing, really or fictionally to the appellant in India, such income is completely offset and exhausted, inter alia, by the arm's length payments made by the appellant as supported by the test/principle laid down by Supreme Court in the case of DIT (International Taxation) v. Morgan Stanley & Co. Inc. [2007] 292 ITR 416 as under: "As regards attribution of further profits to the PE of MSCs where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the PE." Arguments on behalf of revenue 6. Learned Special Counsel for revenue Shri Kapila submitted that the business model of appe....
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....avel ticket - either E-ticket or printed ticket, which is produced by the computer/printer, being part of the equipment supplied to a Subscriber by the assessee. Purchase order is made by the Subscriber in India- booking is made in India- sale of ticket by Airlines is made in India. The contract (booking) between the Subscriber and the Airlines is concluded in India. Subscriber makes the payment in rupees to the Branch office of the International Airlines in India or to a domestic airlines. Income accrues to the assessee in India from the bookings because of assets provided to the subscribers in India and the telecommunications infrastructure set up by the assessee in India at its own cost as also from the operations of GalileoIndia. 6.1 Shri Kapila submitted that the true nature of the assessee's business in such a scenario can be compared with that of a stock exchange like National Stock Exchange (NSE), which provides a platform for trading. The system installed by NSE is accessed by brokers etc. from the specially secured computers. The moment access is allowed by the Exchange's system, the computer of the broker is integrated with the main computer and the broker can....
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....necessary commands punched by him on the computer. The moment a subscriber accesses the host computer, its computer gets integrated with the host computer. Neither the Airlines nor the Subscribers are concerned with the location of the host computer or how it processes the data. From practical and commercial point of view of the Airlines and the subscribers, what is material is that the online information supplied by the Airlines is displayed on the computer screen of the subscribers for their decision making so that they can make bookings on their computers. The assessee is clearly in the business of running a technologically complex and state-of-the art electronic platform, which acts as a flight reservation exchange or 'market place' in India. The communication network in India, display on subscriber's screen and accessibility to the CRS for user by the subscribers are integral components of the commercial operations of the CRS. The business of the assessee can also be compared with that of a commission agent. Its business, as stated above, is to enable a travel agent to make a contract of reservation of a passenger flight with an Airlines. In other words, the Galile....
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....ntinuous basis by the assessee on its own or hired by it at its own cost is providing for: (i) Provision of the telecommunication 'Nodes' situated at Mumbai/Delhi owned by SITA. (ii) Provision of telecommunication lines between the Node and the premises of the Subscribers. (iii) The entire regional telecommunications network is maintained by the assessee at its own cost. The regional networks together with gateways to international network are essential parts of the inter-active worldwide CRS. (iv) Without provision for telecommunication network, the host computer would not have any business value. The fact that the assessee may have entered into a worldwide contract with SITA (a French company) outside India is immaterial. As observed by the Hon'ble Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd., it is not the situs of making of the contract which is relevant but it is the situs where the services are rendered which is relevant. The assessee has rendered services to the vendors within India by way of maintaining communication network right up to the subscriber's premises. SITA provides domestic connectiv....
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....ld not have made the booking but for the Node and the domestic network hired/leased by the assessee and the hardware and software provided to the Subscribers. The activity which creates the charge of fees from the Airlines is the booking made by the Subscriber in India. Therefore, the source of income of the assessee is the bookings made by the Subscriber. (iii) The Subscribers are resident of India. The assessee provides them with computers and connectivity for making bookings. They place the purchase order on the Airlines in India and the sale also takes place in India. Payment to Airlines is made by the Subscribers in India in Indian rupees. Without the bookings by Travel Agents, there is no business and no revenue. It is for this reason that the assessee provides at its own cost communication network in India as also equipment to the Travel Agents so that they can make bookings on its system and generate income for the assessee by way of commission from the Airlines. There is no merit in the assessee's plea that such equipment is used by the subscribers for their own business and not for the business of the assessee. The very fact that the assessee has distributed ....
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....ition." In the present case the assessee's source of income is the booking made by a travel agent in India on the computer provided by the assessee. The booking is made by the subscriber on the basis of display of information on the computer and necessary sifting of informations and commands made through the computer installed at his premises. Looked at from another angle, it is the business of maintaining the CRS, part of which (telecommunications network, computers and modem etc. and other activities through the agent in India) has produced income in India. Enquiry must stop at this stage. (v) The assessee has explained its business in its letter dated 26th January, 1999 addressed to the Assessing Officer (DPB) in the following words:- "The CRS consists of software owned by the assessee. The software is accessed by the travel agent (the subscriber) by means of a modem for purpose of undertaking flight bookings for the Participant. The software enables the subscriber to access information such as display of schedules and fares, building of connections, display of flight availability status and provision of booking capability. Therefore, the booking f....
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.... (i) Two computers (ii) Printer [Subscriber Agreement P. 46/DPB] (iii) PAD MICRO card [Modem] It is an admitted fact that hardware costing USD 0.5 Million was provided by the assessee free of cost in first two years. The economic life of hardware has been fairly estimated by the assessee to be six years. The assessee has claimed and it has been allowed depreciation on this hardware for all the assessment years under appeal (including assessment year 1998-99). Therefore, its statement before the CIT(A) that all the computers supplied to Interglobe during financial year 1995-96 were 'junked' within two years is patently wrong as no material has been produced to establish that the equipment was scrapped. On the other hand, the assessee itself has been claiming depreciation thereon in all of subsequent years. (iii) Providing free of cost its proprietary software products. These have been provided to the subscribers through the agency of Galileo India for installation on their computers. In the above-mentioned activities in India form part of its business of running the CRS. Indeed, the assessee itself has claimed in the reman....
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....n assessment year 1995-96. The computers were imported between June and October 1995 relevant to assessment year 1996-97. Two years from June 1995 expired in June 1997 relevant to assessment year 1998-99. Therefore, depreciation was claimed in the three assessment years 1996-97 to 1998-99 as the two years period got over in assessment year 1998-99. Further, no depreciation was claimed on these computers from assessment year 1999-2000, consistent with scrapping of these computers after two years and is supported by the fact that scrapping of the computers was specifically averred to before the CIT(A) by letter dated 27-1-2000 and this was recorded by the CIT(A) in Para 6.2 of his order but was not in any way controverted by him. An economic life of 6 years was adopted only for a limited purpose of calculating the depreciated value at which the appellant was entitled to purchase the computers from Interglobe, but it was recognised that the market value could be lower (as it did, in fact, turn out to be nil, due to obsolescence, which is evidenced by the letter dated 27-1-2000 at Page 285A of APB-I). Even otherwise, the fact that these computers (which were 486 models as evidenced fro....
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....arty service providers like VSNL, are the appellant's operations. 7.3 He clarified that reliance placed by DR on the case of Performing Rights Society Ltd. v. CIT [1977] 106 ITR 11 is misplaced. The decision of the Hon'ble Supreme Court is completely distinguishable because in that case royalty income received by the Performing Rights Society for broadcasting, from stations of All India Radio within India, was held to be taxable inIndiaon the ground that the same arose in India. Also, since the case involved a non-profit-making organisation, it is not a relevant precedent for a profit-making business enterprise. 7.4 The learned AR further submitted that it is also contrary to the following uncontroverted factual clarification given by the appellant pursuant to the specific queries of the CIT(A) on which the learned DR has himself relied upon: "The CRS does not contain airline inventory, but rather contains the status of an airline flight as provided by the airline. Typically, the travel agent begins the booking process by looking at flight availability between an origin and a destination. The status of a flight is maintained by the airline. If the flight stat....
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.... Ltd. and CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482. 7.7 It was argued that the analogy with the NSE is completely inapt and erroneous because, in the appellant's case, the Airline, SITA, Interglobe and the TAs are independent parties dealing with each other at arm's length. In any case, no contracts are concluded on the appellant's server. Hence, the appellant's server is neither a trading platform nor an integrated market place. He contended that the allegation of the Department that the moment a subscriber accesses the host computer, its computer gets integrated with the host computer is erroneous as it is not uncommon for a computer to access two servers at the same time. For instance, with today's technology, a person might access his bank account in one window, while he is trying to book a train ticket in another, while at the same time, his access to Google and Yahoo is on in two other windows. This, in fact, does often happen. In such a case, by the logic of the Department, the computer will be integrated with each of the host computers, which seems impossibility. Alternatively, on the basis of this argument, all the various se....
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.... • • the TA's business continued even after the 2 years when the computers were provided to Interglobe. • only 265 out of 800 TAs were provided computers by Interglobe. It is, therefore, submitted that: (i) there is no business connection under section 9(1)(i) of the Act. The case law cited by the appellant in the case of Cutler and Hammer has not been dealt with by the Department. (ii) in any event, there are no activities of the appellant in India, and, therefore, there is no tax liability in India. Finding as to existence of Business Connection 8. We have heard the parties at length. In our opinion, following questions arise for consideration: (1) Whether the assessee has any income chargeable to tax in India under section 5(2) of the Act and whether the assessee has any business connection in India as per section 9(1)(i) of the Act? If yes, to what extent it is taxable in India. (2) If the answer to Question No. 1 is in affirmative, whether, in terms of DTAA between India and USA, the appellant has any PE in India? (3) If answer to Question No. 1 is in affirmative, what is the extent o....
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.... will not determine as to what constitute business connection as the same is pot an exhaustive definition but is a definition which also include some of the activities to be termed as business connection. We shall, therefore, revert to some of the judicial pronouncements in this regard. Hon'ble Supreme Court in the case of CIT v. R.D. Agarwal & Co. [1965] 56 ITR 20 held thus: "The expression 'business connection' undoubtedly means something more than business. A business connection in section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicated an element of continuity between the business of the non-resident and the activity in the taxable territories, a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms. It may include carrying on a part of the main business or activity incidental to the main business of the nonresident though an agent or it may merely be a relation between the business of the n....
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....the judicial pronouncements, we may appreciate the facts and deal with the issue. The appellant has developed a fully automatic reservation and distribution system known as Galileo system with ability to perform comprehensive information, communication, reservation, ticketing, distribution and related functions on a worldwide basis. Through this Galileo system, the appellant provides service to various participants, i.e., Airlines and hotels etc. whereby the subscribers who are enrolled through the efforts of NMC can perform the functions of reservations and ticketing etc. Thus the Galileo system or the CRS is capable not only processing the information of various Airlines for display at one place but also enables the subscribers to book tickets in a way which is a seamless system originating from the desk of the subscriber's computer which mayor may not be provided by the appellant but which in all cases are configured and connected to such an extent that such computers can initiate or generate a request for reservation and also receive the information in this regard so as to enable the subscriber to book the airlines seat or hotel room. The request which originated from the s....
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.... (3) By Clause 15.3 of the Distribution Agreement, the assessee specifically authorises Interglobe (Galileo India) to conclude agreements with the Travel agents in India in accordance with the model Subscriber Agreement which forms an annexure to the said Agreement. (4) Assessee lays down targets and closely supervise and reviews the performance of Galileo India on day-to-day basis in accordance with the Annual Plan and the service manual prescribed by it as per clause 14 of Distribution Agreement. (5) Assessee allots access code to the travel agents for using the CRS. (6) The assessee's business comprises of: (a) Maintenance and running of CRS; (b) Providing computer modem and software to the travel agents inIndiaso that they can use the CRS for making the bookings which generate charge on the airlines; (c) Assessee hires from SITA and maintains and operates telecommunication network in India so that travel agents could make the bookings. All these activities are integral part of the core business carried on by the assessee and these are not auxiliary or preparatory in nature. The contention of Shri Vyas r....
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....he database of various airlines and hotels, which have entered into PCA with the appellant takes place outside India. The computer at Denver in USA processes various data like schedule of flights, timings, pricing, the availability, connection, meal preference, special facility, etc. and that too on the basis of neutral display real time on line takes place outside India. The computers at the desk of travel agent in India are merely connected or configured to the extent that it can perform a booking function but are not capable of processing the data of all the airlines together at one place. Such function requires huge investment and huge capacity, which is not available to the computers installed at the desk of subscriber inIndia. The major part of the work or to say a lion's share of such activity, are processed at the host computer in Denver in USA. The activities in India are only minuscule portion. The appellant's computer in Germany is also responsible for all other functions like keeping data of the booking made worldwide and also keeping track of all the airlines/hotels worldwide that have entered into PCA. Though no guidelines are available as to how much should b....
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....nt. Broadly the assessee receives three 'Euros' as fees per 'net booking', i.e., gross booking minus cancellation. The assessee passed one dollar to Interglobe for each net booking processed through Galileo system by subscriber. Thus in respect of the activities carried out in India and considering the income accruing in India, remuneration paid to the Indian agents consumes the entire income accruing or arising in India. It is also to be noted that the entire payment made by appellant to Interglobe has been allowed as expenses while computing total income of the appellant. In such a situation in view of Circular No. 23 of 23rd July, 1969 no income can be further charged to tax in India. As rightly contended by Shri Vyas the Circular equally applies to the sale of goods as well as rendering of services. The Hon'ble Supreme Court has taken judicial note of said Circular in the case of Morgan Stanley & Co. Inc. and have held that once associated enterprise which is considered as PE of the non-resident assessee is remunerated at arm's length, nothing further would be left to be attributed to the PE of the non-resident. We, therefore, hold that in view of the ab....
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....ecial Bench in the case Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Delhi) in para 124 at Page 399. He further submitted that under the Treaty,India and USA have agreed, reciprocally, to define the extent to which taxes may be levied in each country on residents of the other. This is achieved by specifying conditions which have to be satisfied before different classes of income may be taxed, and where such conditions are satisfied with reference to any class of income, by specifying the limitations subject to which, and the manner in which such income may be quantified, or the rate at which it may be taxed. In the context of business income, the conditions to be satisfied are set out in Article 7(1) of the Treaty, and include the requirement that a non-resident should have a permanent establishment, as defined in Article 5 of the Treaty. Where these conditions are satisfied, the further condition is that the income which may be taxed must be attributable to the permanent establishment and must be derived from the assets and activities of the permanent establishment. It should be noted that the conditions specified in Article 7(1), read with Article 5, and in Article 7(5) are int....
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.... not be destroyed. It is further submitted that the expression 'Permanent Establishment' has been judicially recognised in CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 (AP) at page 147 as requiring the following: "The expression 'Permanent Establishment' used in the Double Taxation Avoidance Agreements postulates the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country." It was submitted that the appellant has nothing in India which satisfies the above tests of a "Permanent Establishment", as generally understood as above, at all, and hence is saved from Indian taxation. Without prejudice to the above, in order for a non-resident to have a Fixed Place PE in India: • • He should have a fixed place of business in India; and • His business should be carried on through that fixed place. The learned AR submitted that the Supreme Court ....
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....ticle 5(3)(a) which specifically includes 'substantial equipment' within the definition of a PE. The deeming provision has been inserted to artificially create a PE out of assets in India. Even then, the artificial extension applies only to 'substantial equipment'. As there is no such provision in the Indo-US Treaty, there would be no basis for deeming an equipment to be a PE. In any case, and without prejudice, the computers of the appellant of the value of US$ 4,95,712 cannot be called 'substantial equipment', and the value of these was insignificant as compared to the revenues earned. One point to be noted is that, even in the Indo-Australian Treaty, the need was felt to specifically incorporate a double deeming, firstly that 'substantial equipment' would be deemed to constitute a PE, and, secondly, that the enterprise concerned would be deemed to carryon business through that deemed PE. Had it been intended that the term 'fixed place of business' should include assets or equipment, a provision to that effect would have been expressly included in the Treaty. This proposition is observed by the Supreme Court in the case of Azadi Bachao Ando....
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....." It was further submitted that the Court of Session, while interpreting the expression "place of business" in section 274 of the Companies (Consolidation) Act, 1908, of the UK, in the case of Lord Advocate v. Huron and Erie Loan & Savings Co. [1911] Session Cases 612 laid down that the test of a 'place of business' is Company must have a local habitation of its own. (iii) Business activity test: Fixed place through which business is carried out. In this connection following reference was drawn to commentary by Skaar at page 155: "The definition of the basic rule PE of the modern tax treaties explicitly requires the enterprise's 'objective' presence in the other country through the existence of a 'fixed place of business'. It also requires a 'business' activity as a condition for PE. Furthermore it is a clear condition that there must be a connection between the place of business and the activity, i.e., that the activity has to be conducted 'through' the place of business." "It is common ground, for instance, that a warehouse owned by a foreign enterprise and at the entire disposal of a domest....
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....arded as having 50 places of business in the single office of a TA who has been supplied 50 computers. - A place of business connotes a specific geographical location. A movable machine can never be a place or a location. - the appellant has no right to enter the TA's premises as a matter of right and to make use of the same for the purpose of the appellant's business. In any event, and without prejudice to the above, even if the Node is regarded as a fixed place of business: - it is not the appellant's fixed place of business, as it is SITA's place of business, and because the appellant has no right to use the said place for the purpose of its own business. - the telecommunication Lines/Nodes can by no stretch be regarded as the appellant's local habitation in India or as a projection of the appellant in India. - a place through which the appellant's business is carried on. If a view is taken that the appellant is also carrying on its business operations through the Nodes/Telecommunication Lines, it would lead to an absurd situation that both SITA and the appellant are carrying on their business operations ....
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....that the travel agent be provided connectivity. Galileo International then, due to their contract with SITA, request them to provide node and lease lines to the travel agents. Once that is provided, the Indian company is provided the connectivity code by the international company, which it passes on to the travel agent. With the help of that code command on the computer the travel agent gets connected to the mainframe of Galileo International." (ii) Continuing ownership of the equipment and software provided to Galileo India for distribution to the Travel Agents. These equipments are situated and used in India in the assessee's business. So long as these equipments owned by the assessee and used in India under assessee's authority (express or implied) in assessee's business, it is quite immaterial as to who actually operates it. The assessee has explained the nature of telecommunication expenses, which is reproduced in para 9.1 of the order of the CIT(A) dated15-12-2004, which reads as under:- "(i) Nature of telecommunication expenses. Galileo avails itself of the services of SITA to provide communication links to all parties that nee....
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....o International's CRS Services in the Market Region comply with such specifications and including, but not limited to, any operating, performance or other parameter imposed by Galileo International." [Though such clause exists in the DA, this clause was never implemented. The assessee and not Interglobe maintained the Indian network at its own cost.] The above quoted clauses of the Distribution Agreement establish:- (i) Nodes and routers hired by the assessee are located in a 'fixed place' in the premises of Telecommunication Centre at Mumbai and Delhi in India. Leased lines 1 network maintained at its own cost by the assessee in India is a fixed place within India. As observed in para 10 of OECD Commentary "a permanent establishment may nevertheless exist if the business of the enterprise is carried on mainly through automatic equipment..." (ii) It is pertinent to mention that the leased communication network is permanently at the disposal of the assessee who has further made it available to the airlines and travel agents for use round the clock for the entire year. (iii) Provision of Node and communication network within In....
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....y attending to it, held that the part of the gas pipeline constituted PE of the Dutch company in Germany. (viii) The following observations of the CIT(A) in paragraph 6.4 of his order are apt:- "The customers and the Subscribers know with certain amount of certainty that the airlines information is displayed on the computers placed in Subscriber's premises and it can be used for getting the information and booking the tickets with minimal effort. Therefore, the computer, which occupies the place and which is connected with mainframe computer, does answer to the description of fixed place of business from which the appellant business is wholly and partly carried on." The CIT(A) has rightly repelled the assessee's contention that communication, display and sifting of information on the computers at the Subscribers premises is not very important to processing of information in the Host computer. (ix) As observed by Klaus Vogel (3rd Edition page 286), "In the same vein, para 4 OECD MC Comm. Article 5 states that it was immaterial whether the premises, facilities of installations were owned or rented by, or were otherwise at the disposal of, t....
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....leo International for use by the travel agents in conjunction with Galileo International's CRS Services. Therefore, the equipment for facilitating access to the CRS Services is provided by Interglobe and software to be used by the subscriber is owned by Galileo International and licensed to Interglobe. Para 6.5 and Para 6.6 of the Distribution Agreement enables Interglobe to request Galileo International to provide computer hardware for use by the travel agent at no cost to Interglobe for the first two years." Hence as late as January, 1999 the appellant made a categorical but misleading statement of fact that cost of maintaining the network in India right from the inception and provision of equipment to the subscribers after first two years was borne by the Galileo India and not by the assessee. (iii) This is clearly a deliberate misstatement of facts. When it was found out that the above-quoted paras 4.2 and 4.3 of the Distribution Agreement were actually given a go-bye and these costs were in fact borne by the assessee right from the inception, the assessee tried to explain it in its written submissions filed with the CIT(A), wherein the a....
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....t has, under Article 77 assigned the powers to CBDT Chairman for all matters and references relating to avoidance of double taxation under various. He submitted that Tax Treaties are to be considered as mini legislations and interpreted as such. The objective of framing the Tax Treaties should be kept in mind, while interpreting the same. He argued that an equipment or plant is not regarded as a PE under the Indo-US Treaty. It is submitted that the absence of "plant" or "equipment" in the definition of PE in the Indo-US Treaty is conclusive that "plant" and "equipment" cannot be a PE thereunder, particularly in view of the specific inclusion of "plant" or "equipment". This follows from the principle laid down by Supreme Court in Azadi Bachao Andolan's case, referred to at Page 28 of the appellant's written submissions Article 5.3(a) of the Australian Treaty is examined in detail below to remove the confusion caused in this regard by the Department: "5.3 An enterprise shall be deemed to have a permanent establishment in one of the Contracting States and to carryon business through that permanent establishment if: (a) substantial equipment is being used i....
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....he appellant or Interglobe, therefore, do not have the premises of the TA at their disposal. This does not at all satisfy the right to use test set out in detail at pages 27 to 30 of the appellant's Paper Book and particularly by the jurisdictional ITAT in the case of Motorola Inc. in the following words at page 401 of the Report: "However, the revenue has failed to establish that ECI had made certain space available to the assessee at its disposal. In other words, there is nothing to indicate that whenever any employee of the assessee visited India, he could straightaway walk into the office of ECI and occupy a space or a table." "Article 5.1 states that the term 'Permanent Establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on." "The OECD commentary on Double Taxation refers to a 'fixed place' as a link between the places of business and a specific geographical point. It has to have a certain degree of permanency. It is emphasized that to constitute a 'fixed place of business', the foreign enterprise must have at its disposal certain premises or a part thereof....
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....act Act'), defines an 'agent' to mean 'a person employed to do any act for another or to represent another in dealings with third persons'. The first limb of the definition of 'agent' (doing any act for another) covers any technical, executive or administrative act performed by one person for another without representing that other person in dealings with third parties. The second limb of the definition of 'agent' (to represent another in dealings with third persons) covers the kind of agency where the agent deals with third parties representing another. This is a case where there are two or more principals, with an agent of one principal representing him in his dealings with others. This could include passive dealings like acting as a conduit without authority to act, or active dealings, like negotiating and concluding contracts. The agents falling within the second limb of the definition of 'agent', has authority to represent the principal in dealings with others and to sell the goods of, or to otherwise carryon the business of, the principal. The learned AR submitted that as per Article 5(4) there should be a person inIndiaacting on be....
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....with the resident principal on behalf of the non-resident principal; and (e) Resultant contracts between the non-resident principal and the resident principal. The learned AR reiterated that clause 16 of the Agreement between the Appellant and Interglobe, expressly provides, inter alia, that neither party to the agreement has any authority to bind the other party; nor can either party hold itself out as the agent of the other party. This negates the existence of any authority on the part of Interglobe "to conclude contracts on behalf of the enterprise" viz., the appellant, so as to attract Article 5(4)(a). Also, this clause would also be a complete defence should Interglobe (or a TA) ever allege that the appellant is bound to a TA by any contract entered into by Interglobe with him. Hence, it cannot be said that Interglobe has any authority to conclude contracts on behalf of the appellant. The learned AR highlighted that no material has been brought on the record to show that Interglobe habitually exercises, or even purports to exercise, or has even once exercised, any such authority, by concluding any contract with an Indian TA on behalf of the appellant. Also no ma....
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.... (b) that this clause does not apply to any and every kind of goods or merchandise, but only to goods or merchandise which are sold. 14.4 Learned AR further argued that clause (c) of Article 5(4) has no application to the facts of this case, inter alia, because it can apply only if an agent habitually secures orders in India wholly or almost wholly for a US resident. Since the only function of Interglobe is to provide an access code to the TA which access code the TA has no obligation to use and which access code the TA may never in fact use as he may prefer to use the CRS of one of the competitors of the appellant, it is clear that Interglobe, by merely providing the access code, does not in any way secure orders or sell goods or merchandise for the appellant in India. He emphasised that unless an agent's activities were income earning activities, there would be no income derived from the assets and activities of the alleged permanent establishment, as required by para 5 of Article 7, for any income to be chargeable to tax in India. 14.5 The learned AR contended that without prejudice to his contentions as regards the non-applicability of Article 5(4) of the Treaty, I....
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.... principle. It is well-established that it is only if the treatment of Interglobe by the appellant were detrimental to Interglobe that the arm's length principle could be regarded as violated in the context of Article 5(5) of the DTAA. In this connection, reference was made to the following observations of the Jurisdictional Bench in the case of Western Union Financial Services Inc. at page 82: "There is no material to show that the rates of compensation are higher in other cases so as to indicate that the agents were discriminated against. Thus there seems to be no basis for the charge that the compensation paid is not adequate for the services rendered by the agents." The learned AR clarified that GIPL, a separate undertaking of Interglobe, was formed on17-3-1997. As Interglobe on its own volition and at its own option, decided to perform the distribution function through this separate company. Thus, the allegation made by the Department based on this fact cannot, in any event, be applied to the assessment years 1995-96 and 1996-97 and also, for all practical purposes, to assessment year 1997-98. GIPL is funded and owned wholly by Interglobe and, even ass....
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....terglobe shall use all reasonable endeavours to achieve the objectives set out in such service level agreement, which shall be reviewed at intervals of not less than one year." Clause 4.6 (P.108 of APB) "Galileo International undertakes to share with and provide to Interglobe any such innovations, technological advancements, improvements and additions to its CRS Services and related services and facilities as it deems commercially desirable or necessary for the Market Region. Galileo International will give due weight to any recommendation which Interglobe may make with respect to such innovation and its introduction in the Market Region. From time to time Galileo International may provide to Interglobe new releases of the software products, in order to provide enhancements or modifications of existing software products. Galileo International will provide to Interglobe as much advance notice as possible of the content of any new release. Galileo International will discuss with Interglobe the implementation date for the new release and will deliver any new release to Interglobe, on an agreed implementation date." Clause 7.1 (P. 111 of APB) "Galileo Internatio....
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....nception it has been treated as a unique and separate undertaking and relief under sections 10A and 80HHE have been claimed on the profits derived from this undertaking. Clauses 2.1 and 2.2 of the Agreement envisage a separate company for carrying on the Galileo business. It was carried on by an independent and distinct undertaking of Interglobe. Until this business was taken over by a new company [Galileo India (P.) Ltd.] with effect from1-4-1997. Therefore, on facts of the case, the proviso to first sentence of Article 5(5) applies and the section 10A undertaking Interglobe or Galileo India cannot be considered to be an independent agent, as this business was economically wholly dependent on the assessee. (iv) Activities of Galileo India (P.) Ltd. are wholly and exclusively devoted to provide service to Galileo International. (Reference Clause 2.9 of the Agreement). The company was incorporated to take over the 'Galileo' business of Interglobe. Therefore, a company which has been set up exclusively to carryon the Galileo business, ab initio cannot be said to carryon such business in the ordinary course of its business. The expression "course of business" axiomati....
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.... "Article 9.12 of Distribution Agreement In the event of termination of these agreements under clause 9.4 or 9.5, parts (b) through (f), upon the expiry of the notice period as specified hereunder:- (a) all subscriber Agreements concluded by Galileo India shall be automatically assigned to Galileo International at no cost to Galileo International and Galileo India shall physically deliver to Galileo International its signed originals of all such Subscriber Agreements within thirty (30) days of such termination takings effect, and (b) Galileo International, at its sole discretion, may purchase all or part of the subscriber hardware, title to which at the time of termination is vested in Interglobe at the lower of Net Book Value or market value in the India market where Net Book Value is defined to be original purchase price inclusive of freight and duty only and no other costs, depreciated on a straight line basis from the date of delivery to Interglobe, using a 6 (six) year useful life or existing market value in Indian market thereof at that point in time, whichever is the lower." (f) The three agreements-Vendors Agreement, Distribution Agreemen....
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....ing fees are paid to the Indian distributor, pursuant to the Distribution Agreement." These payments are made in consideration for the provision of the following services: • • Provision of facilities to the subscribers to access Galileo International's CRS services. • Undertaking marketing activities directed at the national vendors. • Providing the following support services to the subscribers in the market region: • Hardware and software installation; • Hardware maintenance; • Training • Help-desk services (d) As per Clause 9.8(b) of the Distribution Agreement, in case of valid termination of the Distribution Agreement all hardware belonging to Galileo India would vest in the assessee. Further, under clause 9.12, (a) all subscriber agreements would vest in the assessee; These terms clearly show that the agreement is not between two principals. (e) A perusal of the Service Agreement between assessee and the Galileo India clearly shows that a detailed and continuous procedure has been put in place for the reporting, reviewing and monitoring of the p....
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.... of H, N and P forms the total System Availability as the End Subscriber would experience. Similarly the sum of the response time within each component forms the total Response Time as perceived by the End Subscriber. The goal is that Service Level Measurement and Reporting will be the combined function of all Service Providers in the Galileo International Delivery Chain. End to End measurement of standard Focal point sites will be catered for by Galileo International. Where non-Focal point installations exist it will become even mote critical that the Partner or Associate, and other Network Provider that forms part of the Delivery Chain, contribute with measurement of the service within their control. Service Management Problem Management. Refer to Galileo International's Problem Management Procedures for complete documentation on the Problem Management System (PMS). Host, Network and Premises. For problems to be recognized and addressed they must be logged into the Galileo International PMS. Typically problems are recognized as originating at either Host, Network or the Customer Premises components. Currently all problems ....
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....9;s length negotiations for revision of fees. Further, hiring of SITA's nodes inIndiais a part of worldwide contract between the assessee and SITA. Therefore, there could be no question of Galileo India entering into a separate contract with SITA. (ii) Evidence on record clearly suggests that the parties to the Distribution Agreement never intended to implement Clause 3 of the Agreement read with Schedule 3. The subsequent version of the assessee submitted before the CIT(A) that the assessee reduced the fees payable to Galileo India from US$ 1.52 to US$ 1 per segment because Galileo India ref used to incur these costs is without substance. Firstly, no evidence to this effect has ever been produced. Secondly, this contention is also belied by the assessee's letter dated12-12-1995addressed to Interglobe extracted herein: "To: Interglobe Re: Reduction in segment fees Effective November 1995, Interglobe has crossed the 100,000 segment barrier. Congratulations to you and your team. Our projections reveal that Interglobe should be cash positive. Taking into account the advances available with you and increased efforts on our part in fa....
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....f Treaty. (1) Clause 6.3 of the Distribution Agreement clearly authorises the Galileo India to conclude contracts with the Subscribers broadly in accordance with terms of that Agreement. A Model subscriber Agreement is also annexed to that Agreement. Some of the relevant clauses of the Distribution Agreement etc. below:- (i) Clause 2.4 "Notwithstanding clauses 2.1 and 2.3 and subject to clause 10, nothing in this agreement shall prevent Galileo International from distributing Galileo Internationals CRS Services to either: (a) a place of business, branch or office in the Market Region of a Multinational Subscriber, or (b) an Individual Subscriber in the Market Region who gains access to Galileo International's CRS Services directly or indirectly via a third party online service network or any other means which allow any Individual Subscriber access to Galileo International's CRS Services provided that, prior to the introduction of the supply of CRS Services to Individual Subscribers in the Market Region, the parties hereto shall agree upon the commercial arrangements applicable to Bookings to be made in the Market Region ....
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....B) Participant, at its own cost, shall provide Galileo International with data that are at least as complete, timely, accurate, and advantageous, and that are delivered in as favourable a manner, as those it provides to any other CRS, including Participant's CRS. Participant shall provide any such data in a format and through a supplier (if a supplier is used) that are acceptable to Galileo International. (D) Participant shall ensure that Participant's CRS offers services to all air carriers with an ownership interest in Galileo International to the same extent and on terms conditions that are at least as favourable as those on which Participant's CRS offers those services to other air carriers, including Participant. (F) Participant shall accept for transportation any passenger presenting a ticket that bears an "OK" status and that has been issued as a result of a booking made through the System, consistent with data in the System and otherwise in accordance with this Agreement, even though no record of that booking may exist in Participant's System, overbooking may result there from, and denied boarding compensation may be required. (2) ....
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....on the Model Services Level Agreement which forms Schedule 4 hereto. Galileo International and Interglobe shall use all reasonable endeavours to achieve the objectives set out in such service level agreement, which shall be reviewed at intervals of not less than one year." Clause 4.6 "Galileo International undertakes to ,share with and provide to Interglobe any such innovations, technological advancements, improvements and additions to its CRS. Services and related services and facilities as it deems commercially desirable or necessary for the Market Region. Galileo International will give due weight to any recommendation which Interglobe may make with respect to such innovation and its introduction in the Market Region. From time to time Galileo International may provide to Interglobe new releases of the software products, in order to provide enhancements or modifications of existing software products. Galileo International will provide to Interglobe as much advance notice as possible of the content of any new release. Galileo International will discuss with Interglobe the implementation date for the new release and will deliver any new release to Interglobe, on ....
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....dia on account of: (i) having 'fixed place of business' through which its business is carried on in India as per article 5(1) of the Indo-US DTAA. (ii) It also has an agency PE in terms of the proviso to the first sentence of article 5(5). (iii) Without prejudice, it also has an agency PE in terms of second sentence of article 5(5). (iv) The activities of the assessee do not fall under any of the negative items mentioned in article 5(3). (v) The fees payable to the dependent Indian agent is not an arm's length price. (vi) Conditions laid down in articles 4(a), 4(b) & 4(c) are also satisfied. (vii) The assessee is taxable both under the provisions of the Act as well as those of Indo-US DTAA. 16. As regards the exclusivity clause in the contract between Interglobe and the appellant, the learned AR replied that this does not mean that there is no principal-to-principal relationship nor does it mean that Interglobe is an agent of the appellant. There can be exclusive distributors acting on a principal-to-principal basis just as there can be agents acting on a non-exclusive basis. The learned AR submitted t....
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....cence to TAs to use Software Products and the Manuals • TAs would prepare the appropriate Location and ensure that the installation and operation is safe and satisfactory • Interglobe is the owner or licensee of the Rented Equipment and the Software Products and does not warranty the accuracy or reliability of any schedule, fare quotation or any other information • Interglobe would charge specified fees for the equipment/services to TAs 16.1 The learned AR emphasised that the training cost incurred by the appellant shows that Interglobe is being given beneficial and preferential treatment rather than being discriminated against or dominated by the appellant and, hence, as per the Jurisdictional Tribunal decision in the case of Western Union, Financial Services Inc.'s case, this established that Interglobe was being remunerated at more than arm's length. He argued that the allegation of the Department that there is a control of the appellant over Interglobe as on termination of the Distribution Agreement, Interglobe's contracts will get assigned to the appellant is erroneous. This clause applies only upon termination of the Di....
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.... Interglobe should be cash positive; • the advances available with Interglobe; • the appellant's efforts to increase Interglobe's productivity. 16.2 It was further submitted that, without prejudice to the above and in any event what is relevant to determine whether the payment to Interglobe is at arm's length is not why the processing fee was reduced from $ 1.52 to $ 1 but whether such processing fee after the reduction (i.e., US$1) was at arm's length. It was reiterated that even the reduced fee worked out to a 33 per cent rate of commission and was much higher than the commission of US $ 0.62 to 0.91 paid to other National Distributors as indicated in the appellant's letter to the CIT dated27-1-2000. Further, interest-free advances given by the appellant to Interglobe would be advantageous and not detrimental to the latter. It is only the latter which would make a payment not at arm's length. It was stressed that the comparable data of other National Vendors at page 285A of APB-I was given pursuant to a specific request of the CIT(A) and has not been controverted or questioned by the CIT(A) as being inadequate or insufficien....
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....ent year 1997-98, when GIPL came into existence as a 100 per cent subsidiary of Interglobe (at Interglobe's option), the fact remains that even this company was effectively and in substance and reality a part of the Interglobe group so that even in this assessment year it cannot be said that GIPL was wholly or almost wholly dependent upon the' appellant. GIPL was dependent upon the Interglobe group alone. 3. There is no material whatsoever in support of the allegation that Interglobe is authorised by the appellant to store the computers. In fact both, the Distribution Agreement (Clauses 16.1 and 16.2) and roe Model Subscriber Agreement (Clause 20.3) specifically provide that Interglobe is not an agent of the appellant. Even the Subscriber Agreement filed by the Department in the Paper Book relied upon by it contains similar provisions in clauses 17.1 and 17.2 of DPB-I, Page 42 which are reproduced below: "17.1 The parties hereto are entering into this Agreement on a principal-to-principal basis." "17.2 Nothing to this Agreement will create, or be deemed to create a joint venture, partnership or the relationship of principal and agent betw....
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....ncome and the source. Applying these tests, it is clear that alleged PE is not the source of the appellant's income as the immediate and direct source of the appellant's income lies elsewhere. The appellant's income is derived only from its MCS in the USA, as it is only there and then that the booking request is accepted and the appellant's income results. The alleged activities and assets of the appellant in India are certainly not the direct and immediate source of the appellant's income by way of booking fees. Hence, the appellant's income by way of the CRS booking fee cannot be taxed in India by virtue of article 7(5) of the DTAA. 16.5 Learned AR further submitted that strictly without prejudice to what has been stated earlier, the amount of income which can be considered to be attributable to India is a negligible and minuscule proportion of the booking income. It was submitted that, if at all any bf the appellant's income is to be attributable to India under section 5 or 9 of the Act, or under Article 7(1), read with article 7(5), of the DTAA, it can only be a negligible or minuscule part of the appellant's income. The learned....
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....projects or activities, if any) continue for a period of more than 120 days in any twelve-months period; (l) the furnishing of services, other than included services as defined in article 12 (royalties and fees for included services), within a Contracting Stateby an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating to more than 90 days within any twelve-month period; or (ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of article 9 (associated enterprises)]. 3 Notwithstanding the preceding provisions of this article, the term 'permanent establishment' shall be deemed not to include any one or more the following: (a) the use of facilities solely for the purpose of storage or display or occasional delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display or occasional delivery; (c) the maintenance of a stock of goods or me....
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....h is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other." Paragraph 1 of the Treaty gives a general definition of the term "Permanent establishment" which brings out its essential characteristic of a permanent establishment in the sense of convention, i.e., a distinct sites, a fixed place of business through which the business of an enterprises is wholly or partly carried on. Thus what is to be seen is whether there is existence of a place of business, i.e., a facility such as a premise or in certain instances machinery or equipment. The place of business must be fixed, i.e., it must be established at a distinct place where a certain degree of permanence can be attached. Carrying on of the business of the enterprise should be through such fixed place of business. This means that the person who is in one way or the other is dependent on the enterprise, conduct the business of the enterprises in which such fixed place i....
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....evant so long as he operates from the fixed place of business. The PE will nevertheless exist if the business of the enterprise is carried on mainly through automatic equipment and the activities. of the personnel being restricted to setting up and operating such equipment. A PE will still exist if the enterprise which sets up machine also operates and maintains them for its own account and whether operated by itself or by a dependent agent. 17.1 In the present case it is seen that the CRS, which is the source of revenue is partially existent in the machines namely various computers installed at the premises of the subscribers. In some cases, the appellant itself has placed those computers and in all the cases the connectivity in the form of nodes leased from SITA are installed by the appellant through its agent. The computers so connected and configured which can perform the function of reservation and ticketing is a part and parcel of the entire CRS. The computers so installed require further approval from appellant/Interglobe who allows the use of such computers for reservation and ticketing. Without the authority of appellant such computers are not capable of performing the ....
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....ity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. Since part of the function is operated in India which directly contributes to the earning of revenue, the activities as narrated above carried out in India is in no way of 'preparatory or auxiliary' character. Thus the exception provided in Paragraph 3 of Article 5 will not apply and hence as stated above, the assessee shall be deemed to have a permanent establishment inIndia. 17.3 The next question arises is whether the assessee has a PE in India in the form of a dependent agent. It is commonly accepted principle that an enterprise should be treated as having a PE in a State if there is under it a person acting for it, even though the enterprise may not have a fixed place of business. Thus there can be two forms of permanent establishment, (i) fixed place or (ii) through the dependent agent-An agent is a person employed to do any act for another or to represent another in dealing with third person. What an enterprise can do directly but if not so done directly but done through an agent appointed for the purpose, it will be deemed to have bee....
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....he business of Interglobe is to provide data processing and software development services together with relative distribution of 'Galileo System' to the subscribers in India. Interglobe has also an authority to enter into agreements with the subscribers. Interglobe installs the computers, configures the computers for accessing the CRS and also provides connectivity through SITA notes. Thus functionally as well as financially it is dependent entirely on the appellant. It can, therefore, be said that Interglobe is a dependent agent of the appellant. 17.4 The next question to be decided is whether Interglobe is habitually exercising an authority to conclude contracts on behalf of the appellant. Under the distribution agreement entered into by the appellant with Interglobe, it is responsible for effecting and contracting with subscribers in the Indian territory and is to use reasonable efforts to provide access to all the 'Galileo System' out of Indian territory. Though the appellant and even the participating airlines are not party to the agreement entered into by Interglobe with the subscribers, yet the appellant through the PCA has ensured that the subscribers wer....
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....t is not to be considered as PE unless he has authority to conclude contract on behalf of such enterprise. The authority to conclude contracts must be in respect of contracts relating to operations, which constitute the business proper of the enterprise. The appellant in the present case in order to enhance its business operations has appointed Interglobe as its agent who promote the 'Galileo System' inIndia. Interglobe in its turn has appointed various subscribers for use of 'Galileo System'. Though the revenue flows only from participants who have entered into PCA with the appellant, yet the revenue could not have been generated but for the subscribers using the 'Galileo System'. In a way the revenue is generated from the participants but only on the basis of use of CRS by the subscribers. But for such use no revenue would accrue to the appellant. Thus the agreements entered into by the Interglobe with the subscribers under an authority granted to it, are contracts relating to operations which constitute business proper and not merely in the nature of internal operations. Such contracts are habitually exercised and there is nothing on record to suggest tha....
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...., we shall examine as to what is the profit attributable to the PE in terms of Article 7 of the DTAA between India and USA. We shall also examine whether the income so computed would be absorbed by the expenses incurred to earn such income which will prima facie extinguish the assessment; Paragraphs 1 to 3 of the Article 7 of the DTAA are extracted hereunder:- Article 7 "Business profits. 1 The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment. 2 Subject to the provisions of paragraph 3, where an enterprise of a Contracting State ca....
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....the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices." Reading the above Article 7 of the treaty it is clear that the profit of an enterprise will be taxable only to the extent as is attributable to that permanent establishment. This is in pari materia with clause (a) of Explanation 1 to section 9(1)(i) of the Income-tax Act. Paragraph 5 of Article 7 of the treaty prescribes as to how the profits to be attributed to the PE is to be arrived at. It provides that only the profits derived from assets and activities of the PE shall be treated as attributable to the permanent establishment. It is argued that the clause 'derived from' should have narrower meaning and only the immediate and direct nexus should be between earning of income and assets and activities of the PE which can be brought to tax. For this purpose, heav....
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....ng with the question as to what is such part of income as is reasonably attributable to the operations carried out in India, we have held that only 15 per cent of the revenue generated from the bookings made within India is taxable in India. The same proportion has to be adopted here while computing profit attributable to the PE. We have also held that since the payment to the agent in India is more than what is the income attributable to the PE in India, it extinguish the assessment as no further income is taxable in India. It is to be noted that even in the first assessment framed by the Assessing Officer, the entire expenses in the form of remuneration paid to Interglobe was held as allowable deduction and was reduced while computing the income of appellant. If that be the case, the income attributable to PE inIndiabeing less than the remuneration paid to the dependent agent, it extinguishes the assessment and requires no further exercise for computation of income. We accordingly hold so and in view of the same the income of the appellant will be NIL. 18.1 Since we have held that the remuneration paid to the dependent agent is exceeding the income attributable to the PE in In....