TaxTMI 
TaxTMI 
2007 (11) TMI 330
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....omatic computer reservation and distribution system, with the ability to perform comprehensive information, communications, reservations, ticketing, distribution and related functions on a worldwide basis for the travel industry, particularly participating airlines, hotels, etc. (hereinafter referred to as 'CRS'). Various airlines all over the world have entered into 'Participating carriers agreements' ('the PCA') with the appellant for display of their informations/products, etc. through the CRS. The appellant receives payment from the airlines in the form of 'booking fee', which is computed on the basis of the 'net booking' made through the use of CRS. 2.1 The relevant clauses of the standard draft of the PCA are as under : "Participating Carrier Agreement This agreement, executed this day of, by and between Amdaeus Marketing A.S., a Spanish entity having its registered offices at Salvador de Madariaga 28027, Madrid, Spain hereinafter referred to as "Amadeus". And Corporation, with principal offices at hereinafter referred to as "Participant" Witnesseth : Whereas the Amade....
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....to a Participating Carrier agreement with Amadeus. Art. 2 Responsibilities and rights of the Participant (A) Services provided 1. The Participant shall, at its own cost, co-ordinate its information and reservations services with Amadeus and shall take such other steps as may be required to provide all Amadeus subscribers. ATOs and CTOs with information and reservations services as advantageous as those provided to any subscriber of any other computerized reservation and ticketing system. Such services shall include, but will not be limited to, passenger information, schedule, space availability faces and fare information and procedures. 2. The Participant shall offer Amadeus subscribers, ATOs and CTOs any improvements, enhancements or additional functions to its systems information and reservation services, on non-discriminatory terms subject to technical feasibility. 3. The Participant will ensure that any CRS in its control provides to all its subscribers display and booking facilities for all services of Amadeus affiliates on a level equal to the level it provides to any other carrier, including affiliated carriers, subject to technic....
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.... referred to in art. 3(A)(2) above subject to the editing rules, which are available for inspection at the Amadeus principal office, Amadeus will accept for storage in its database a maximum of 60 single routings and 60 double routings per city pair which will all be eligible for display according to the abovementioned input parameters and editing rules. XXXX Art. 4 Charges 1. The Participant shall pay Amadeus a booking fee for each Participant Net Booking made through the Amadeus system, including booking made by ATOs and CTOs. 2. The Participant shall pay Amadeus the applicable fees for the value added products elected by the Participant and listed in attachment A to this agreement. XXXX Art. 5 Payments Amadeus shall submit a monthly invoice to the Participant for all charges and fees due to Amadeus under Attachment A to this agreement and incurred during the preceding month. The Participant will settle the invoice by paying the amounts due to Amadeus or any entity Amadeus may designate, within thirty (30) days. The Participant will make payment in one of the following methods to settle the Amadeus invoice each month ....
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.... reservations and distribution system known as the Amadeus global travel distribution system, with the ability to perform comprehensive information, communications, reservations, ticketing and related functions on a worldwide basis ; Whereas, Amadeus India is willing to provide data processing and software development services together with related distribution of the Amadeus products to subscribers in India, on the terms and conditions set forth herein ; Now, therefore, in consideration of the mutual covenants set forth above and other good and valuable consideration, the parties hereby agree as follows : 1. Distribution of Amadeus Products Amadeus Marketing hereby authorizes Amaedus India to carry out the necessary acts to provide the subscribers with appropriate access to the Amadeus Products and to the computer database owned by Amadeus called "Amadeus Global Core" or to other computer databases offered by Amadeus under license from a third party for the period and upon the terms and conditions set forth in this agreement. 2. Definitions 2.1 Definitions. The following definitions shall apply to the terms used in this agreeme....
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....ting. XXXX 6. Fees payable by Amadeus Marketing 6.1 Amadeus Marketing shall pay to Amadeus India based on each segment processed through the Amadeus Global Core originated by a booking made by subscribers located in the Amadeus India territory (including branches located in the Amadeus India territory of a chain of travel agencies with headquarters in another NMC territory), at a level mutually agreed by the parties from time to time or under the terms and conditions established in Appendix A 6.2 Adjustments will be established annually, taking into account the development of e.g. exchange rates, inflation rates, consumer price indices, subject to the terms and conditions stated in Appendix A. 7. Agreements with subscribers 7.1 Amadeus India shall be responsible for affecting and contracting with subscribers in the Amadeus India territory and shall use reasonable efforts to provide access to all of the Amadeus products within the Amadeus India territory. 7.2 Amadeus India will ensure that its arrangements with subscribers conform to applicable laws, rules and regulations governing the operation of a distribution system.....
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....s and marks. 8.1.1 Amadeus India may use and offer only such equipment as has been certified by Amadeus Marketing to conform to the specifications provided pursuant to s. 8(b) Amadeus India may propose additional equipment for certification by Amadeus Marketing, which shall promptly perform any necessary tests, shall respond to such proposal promptly and shall not unreasonably withhold such approval. 9. Obligation of Amadeus Marketing 9.1. Amadeus Marketing shall provide the Amadeus products at a competitive level of quality and price for use by subscribers who have contracted with Amadeus India. These systems shall meet the targets for functionality, reliability and response time set from time to time by Amadeus Marketing. The targets in effect on the date of this agreement are set forth in Appendix B. 9.1.1 Amadeus Marketing shall provide Amadeus India the full corporate marketing and development resources of the Amadeus Group and the communication facilities of the Amadeus System and the full range of Amadeus products as they become available, in accordance with the terms of applicable licenses and subject to technical constraints. 9.....
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....ide, at its expense a central customer service/help desk to supplement the Amadeus India customer service/help desk; XXXX 10. Obligations of Amadeus India 10.1 Amadeus India shall be responsible for providing access to the subscribers of the Amadeus products within the Amadeus India territory and will use reasonable efforts to promote and install the Amadeus products as widely within the Amadeus India territory as possible, subject to technical and commercial constraints. 10.2 Amadeus India shall set up at its own cost and expense a demonstration and customer training facility with clear Amadeus identification to aid and to ensure efficient use of the Amadeus product. Materials used in demonstration and training shall reflect the Amadeus corporate identity. 10.3 Amadeus India shall maintain a training and support staff, consisting of persons fully trained in the use of the services provided by the Amadeus products and meeting any certificate of competence as may be introduced from time to time. To meet this obligation, Amadeus India shall participate in the training programs conducted by Amadeus Marketing as provided in ss. 9.2.1 and 9.3....
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.... in connection with the business operated hereunder : 14.2 Upon termination of this agreement by Amadeus India, pursuant to s. 13.2 or s. 13.3 of this agreement, Amadeus Marketing shall ; 14.2.1 Promptly pay to Amadeus India all sums owing from Amadeus Marketing to Amadeus India. Termination of this agreement under any circumstances shall not relieve Amadeus Marketing of any debt, obligation, or liability to Amadeus India which may have accrued under this agreement and all accrued obligations of Amadeus Marketing which expressly or by implication are to be performed after the termination of this agreement shall survive such termination. XXXX Appendix A to the Amadeus India Distribution Agreement With reference to the Appendix A to which art. 6.1 of the Amadeus India Distribution Agreement (the "agreement") refers, signed as of the 9th of March 1994, by and between : Amadeus Marketing, S.A., a Spanish corporation with principal offices at Salvador de Madariaga, 28027, Madrid, Spain (hereinafter referred to as "Amadeus Marketing") And Amadeus India Pvt. Ltd., an Indian corporation with principal offices at E-9 Co....
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....chedules, availability, fares and related services, and through which reservations can be made and/or tickets issued, and the Amadeus provided functions made available in the CRS terminal. 4. Location 4.1 Subscriber shall designate location for installation of the subscriber equipment, subject to Amadeus's approval. Subscriber warrants and represents that each location is owned by or controlled by subscriber, and that it has authority to enter into this agreement on behalf of each location. 4.2 Each location may be reviewed by Amadeus to determine what, if any, physical modifications will be required to support the CRS terminals and equipment at that location. Upon completion of the site review, Amadeus may issue a site survey report for the location detailing the layout of all CRS terminals, cables and back room support equipment. 4.3 Subscriber shall at its sole cost and expense prepare, at each location, a space acceptable to Amadeus for each CRS terminal and item of equipment and conforming to the site survey recommendations, if any. Subscriber shall also, at its sole cost and expense, meet all electrical requirements set by Amadeus, by t....
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....e charges shall commence upon the installation date of the CRS terminal and equipment set forth in Sch. B. Optional, variable and or non-recurring charges will be billed to subscriber after they have been incurred. XXXX 9. Use of the Amadeus System by subscriber 9.1 So long as it is connected to the Amadeus System, the subscriber equipment will be used by subscriber solely for the purposes and functions permitted by this agreement, and in strict accordance with operating procedures and rules issued from time to time by Amadeus and/or the manufacturer of the subscriber equipment. XXXX 11. Liability of Amadeus and subscriber XXXX 11.2 Subscriber acknowledges that neither Amadeus nor the other suppliers of data provided under the agreement warrants the accuracy, merchant ability or the fitness particular purpose of any data or CRS terminal or equipment provided under the agreement, regardless of the means used to provide the same to subscriber. XXXX 11.5. Amadeus disclaims and subscriber hereby waives any other warranties, guarantees of representation of any kind, express of implied, including but not lim....
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....ess model is summarized thus : Traditionally, a passenger intending to undertake a travel would approach a travel agent for booking of ticket on a particular airline. The travel agent would consult the ABC books of the various airlines to find out the airline which would suit the passenger. Once the flight on a particular airline was finalized, the travel agent would contact the airline through telephone or telex to obtain information about the availability of seat on the flight. If the seat is available the travel agent would book the ticket. On booking of ticket a contract would come into existence between the airline and the passenger. The travel agent would get commission from the airline for booking of ticket with that airline. The airline would earn revenue in the form of air fare. What CRS has done is made this whole process simpler, less time-consuming and cost effective. The ABC books of the airlines have been replaced by the CRS. The old means of communication have been replaced by electronic means of communication. Instead of telephone/telex, we now have terminal of the subscriber/travel agent connected with the mainframe of the appellant with the help of the lease....
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....tribution fees' for the aforesaid services rendered by the NMC. The 'distribution fee' is computed on the basis of the segments booked through the CRS by the subscribers/travel agents. The connectivity between the Amadeus mainframe computer and the PCs of the travel agents is provided by Societe Internationale Telecommunication Aeronautica (SITA) worldwide. The expenses in relation to such connectivity are borne by the appellant. 5.1 AIPL is the NMC in India with which the appellant has entered into the DA. The appellant does not have any financial interest or shareholding in AIPL. The job of AIPL is to canvass the use of CRS in India and enter into contract with the subscribers/travel agents willing to use CRS for which it receives 'distribution fee' from the appellant. The 'distribution fee' is computed on the basis of the segments booked using the CRS by the subscribers/travel agents in India. AIPL has, in turn, entered into the SBAs with the subscribers/travel agents in India willing to use CRS. The appellant is not party to such SBAs, but the terms agreed upon by AIPL with subscribers bind the assessee as well as the participants. As per....
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....ware and communication links the computer at the desk of the travel agent becomes the interface of the mainframe of the appellant in Germany and the computer at the desk of the travel agent and the mainframe of the appellant are one. 'AIPL is dependent agent of the appellant as AIPL is economically dependent on and wholly devoted for the appellant. AIPL has authority to conclude contract on behalf of the appellant and enters into contract with the travel agents in India on behalf of the appellant. 'The appellant has himself claimed deduction for certain expenses and therefore, the appellant cannot claim that income earned by the appellant relatable to the aforesaid expenses is not liable to tax in India. On the basis of the aforesaid, the AO brought to tax the entire revenue received by the appellant from the airlines for the segments booked from India through the CRS developed by the appellant. Further, the AO did not allow deduction for various expenses incurred by the appellant in relation to generation of the revenues brought to tax in India. However, the expenses in form of payment made to AIPL were allowed. In respect of other expenses, 5 pe....
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....) income accrues/arises or can be deemed to accrue/arise in India. 6.3 Subsequent to the direction given by the CIT(A), vide order dt. 23rd March, 2000, the AO recomputed the income of the appellant at Rs. 11,30,62,307 after making disallowance of, inter alia, (a) Product development charges, (b) International communication charges in excess of 4.5 per cent of booking fees (c) Data processing charges and (d) Equipment rental charges. Further, 100 per cent of the profits in respect of segments booked from India through the CRS developed by the appellant was held to be liable to tax in India. Interest under ss. 234A and 234B was also levied for late filing of return and for non-deposit of advance tax, respectively. 6.4 In appeal preferred by the appellant before the CIT(A) against the aforesaid appeal effect order passed by the AO, the CIT(A) partly allowed the appeal preferred by the appellant allowing deduction in respect of, (a) international communication cost (on the basis of average number of bookings per location per month as against the actual expenditure incurred as claimed by the appellant before him), (b) 50 per c....
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.... that : (a) Only the profits that are attributable to Indian operations are liable to tax in India. (b) While determining the quantum of profits of the PE liable to tax in India deduction for expenses incurred to earn such profits should be allowed. (c) AIPL's remuneration fully represents the value of the profit attributable to AIPL's service and therefore, it 'prima facie extinguishes the assessment' as explained in Circular No. 23 of the CBDT, dt. 23rd July, 1969. 7.2 The CIT(A), vide order dt. 23rd March, 2000, disposed of the appeals filed by the appellant for the asst. yrs. 1997-98 and 1998-99 and confirmed the findings of the AO in holding that : (a) the appellant has a PE in India (b) income accrued or arose to the appellant in India However, as regards the quantum of income liable to tax in India, the CIT(A) gave directions to the AO to recompute the income derived from the assets of the PE and the activities of the PE in India after considering the audited accounts. The appellant is in appeal before the Tribunal (ITA Nos. 2414/Del/2000 and 2145/Del/2000) against the aforesaid orders of CIT(A) for the as....
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....rlines in the form of 'booking fee' for dissemination of information about such airline which results in a confirmed booking. The charges for the services of the appellant could be provided by the airlines in any other form like a lump sum payment or fixed periodical charges outside India. However, the airlines have evolved a clever fee structure, which makes it impliedly necessary for the appellant to canvass the use of CRS amongst the travel agents. As per art. 4 of the PCA, the quantum of 'booking fee' to be received by the appellant for dissemination of information about the airlines is directly proportional to the number of confirmed bookings made through the CRS. The main function of AIPL vis-a-vis the appellant is to canvass with travel agents about the use of the system, assist/train them for using CRS, provide incentives to the travel agents by way of providing computers and connectivity/access to the mainframe in Germany, identify/authorize the travel agent, without any charge whatsoever. The activity of the appellant in India is restricted to the aforesaid. The aforesaid activities are of the nature of advertising and of supplying information. Such act....
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....Governments apply to taxation of conventional commerce should equally apply to e-commerce and that the taxation should seek to be neutral and equitable between forms of e-commerce and between conventional and e-commerce, so avoiding double taxation or unintentional non-taxation. The nature of the transaction undertaken by the appellant may be better appreciated through the following example without bringing in the complications of electronic devices. An advertiser advertises his products in a newspaper or through a newsletter. While advertising in the newspaper, the terms with the newspaper owners are that the payment for the advertisement in the newspaper will be based on the number of responses received from the readers. The newspaper is published outside India but there is circulation of the same in India. Can the newspaper be subjected to tax in India on the advertising revenue of the newspaper outside India ? In another case, the product company engages the services of a person to distribute its newsletters among the prospective customers. The services of the newsletter distributor are to be compensated based on the number of supply orders that the product manufacturer r....
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....ngs made from India, which, as stated earlier, only determines the point of time when income becomes payable for the services rendered outside India and with the printing of a confirmed ticket at the end of the travel agent. 8.2 The next question that arises is whether the computers provided to the travel agents constitute source of income of appellant in India in reply to which Shri Vohra submitted as under : The appellant provided computers to the travel agents in some cases as an incentive to subscribe to the appellant's CRS. The computers provided to the travel agents are standard IBM compatible computers and are dumb terminals which can only to be used for sending information and receiving information. The said computers are not capable of processing any information, insofar as the Amadeus CRS is concerned. The travel agents' computers were configured by AIPL and access was provided through the medium of software and communication link to the appellant's mainframe in Germany. It is the Revenue's contention that since the booking is made through the computers on the desks of the travel agents, who have access to the mainframe of the appellant in Germany, t....
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....ountries as where the users are located. This would lead to absurd results not intended by law. Submissions of the respondent Revenue 9. Shri Kapila, learned special counsel arguing for Revenue made detailed submission. Shri Kapila invited our attention to various clauses of PCA, DA and subscriber agreement. His submissions were as under : 9.1 The vendors who sell tickets and the subscribers who buy ticket on behalf of passengers, are integrated into a holistic and unified seamless system called CRS. Without integration of either in the CRS, the system would not be complete and no income would accrue to the assessee. It is so because its income by way of commission from the vendors is totally dependent on the bookings made by the subscribers. The CRS therefore comprises two equally vital components : (a) On-line upgrading of the flight schedules and seat availability on the CRS by the vendors through their own centralized reservation system and processing of booking by the subscribers through the computers installed in their office premises. (b) An integrated worldwide telecommunication network (including regional network) providing two-way instant con....
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....bscribers are not party to it. In other words, the subscriber has right to use CRS not under an agreement with the assessee but under the rental and subscriber agreement with its agent, Amadeus India and the vendors are also bound to honour the booking made by a subscriber not under any contract between the vendor and the subscriber but under participation agreement between the assessee and the vendor. Purchase order is made by the subscriber in India 'booking is made in India' sale of the ticket by vendors is made in India' subscriber makes the payment in rupees to the branch office of the vendors in India. The ticket which is the contract between the passenger and the airlines is made and delivered in India. Income accrues to the assessee as soon as the contract between the subscriber and the vendor is executed in India. 9.2 As regards nature of assessee's business, Shri Kapila submitted that over the years, the assessee has been engaged in an organized, systematic activity in India, which holistically constitutes its business in India. It is immaterial if the receipts from the vendors take place outside India. The moment a booking is made in India, the f....
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....n its system (CRS) within India and thereby enabling it to make booking of segmental flight reservation. Booking is automatically generated on the CRS seamlessly, which is binding on the vendors. Admittedly, the subscriber has entered into a contract with Amadeus India and not with the assessee; yet, not only does the assessee stand by it, but it also ensures that the airlines honour it as per the terms of the participation agreement. Generation of booking/reservation takes place because of sifting of information by the subscriber which is displayed on the computer installed in a fixed place in his premises and the necessary commands punched by him on the computer. Neither the vendors nor the subscribers are concerned with the location of the server or as to how the data is processed by it. What really is of vital importance to the business of the assessee is that there should be a continuous running of the CRS so that 'market place' is maintained in India round the clock and throughout the year. The assessee's business is not that of selling goods or 'product', but that of setting up market and thereby integrating Indian subscribers into the market. Though a do....
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....f the order and has noted that the travel agent with computer merely accesses or utilizes the relevant information, which appears on the database of the computer. It has been further noted that the travel agent merely makes use of, adds to, or alter information on the database, but does not deal with the process by which such information is brought on to the computer. The travel agents cannot make any changes in the airlines data. The airline data gets automatically updated on-line in real time, as soon as the booking crystallizes in the airlines inventory. The fact that the airlines are bound to honor the tickets generated through the appellant's CRS is of no consequence insofar as the issue of taxation of the appellant in India is concerned, as such clause is necessary in order to inspire confidence amongst the travel agents to subscribe to the system and ensure that the appellant's CRS has wide acceptance and credibility. As the agreement with the airlines is executed outside India and activity giving rise to the income viz., the display and dissemination of information takes place outside India in the appellant's CRS, the source of appellant's income, i....
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....ch airlines depending upon the request sought, provides information on-line which is processed by the Amadeus CRS and sent to the travel agents who requested for the information. In the case of stock exchange, the shares on sale are already available/committed to the stock exchange and the transaction fructifies if the bid of the purchaser matches the seller's bid. In the case of Amadeus CRS the seat inventory is not maintained at Amadeus CRS system. The airlines host maintains the seat inventory and the Amadeus CRS only channels the request for information and sends back the information as received from the airlines host, which may or may not culminate in a booking. Assuming that the airlines inventories were to reside in Amadeus CRS system in Germany, it may be possible to draw a parallel with the market place. However, such market place would exist in the Amadeus host in Germany, i.e., outside India, as the travel agents could converge on the appellant's host in Germany and not on computer system of each other. If the computers on the travel agents desk are held to be market place, this would lead to an absurd situation, as there would be as many market places as t....
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....ields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates 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 non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case...... Turning to the facts of the present case, as found by the Revenue authorities, contracts for the sale of goods took place outside the taxable territories, price was received by the non-residents outside the taxable territories, and delivery was al....
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....ors. Under an agreement with the non-resident company, the assessee, an India firm, was to provide necessary supervisory and other staff for maintenance and operation of such grainvayors, and the assessee was to be paid direct expenses in and towards the actual cost of labour and supervisory staff plus additional provision for gratuity and provident fund for labour and certain office and miscellaneous expenses. There was no profit sharing between non-resident company and the assessee and no amount was paid by the assessee to the non-resident firm. The issue before the Delhi High Court was whether there was a real and intimate connection between the assessee and the non-resident company and whether the assessee could be held an agent having 'business connection' with the non-resident company in terms of s. 163(l)(b) of the IT Act, 1961. The Delhi High Court, applying the test of real and intimate connection laid down by the Supreme Court in the case CIT vs. R.D. Aggarwal (supra) answered the question in the negative and held that there was no real and intimate connection between the assessee and non-resident company as the services performed by the assessee could have ....
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.... made reference to the OECD Model commentary on art. 5(5) of the OECD Model Convention relating to dependent agent PE. He submitted that the commentary clarifies that the authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise. It would thus be irrelevant, as per the commentary, if the person had authority to engage employees for the enterprise to assist that person's activity for the enterprise or if the persons were authorized to conclude, in the name of the enterprise, similar contracts relating to internal operations only. The facts of the decisions referred to above, need to be appreciated in the light of the above. In all the said cases, the agent only rendered services in India (which could be rendered by any other person), not leading to the accruing of income. The services rendered in India, being in the nature of internal operations of the non-resident assessees, no part of the income was held liable to accrue or arise in India through or from 'business connection'. The principle emerging out of the above case is that some part of the revenue generating activity should be carried ....
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....entially an offer by the subscriber and acceptance by the vendors. In absence of such a facility for making of a contract between the subscriber and the vendor (booking), the CRS cannot produce income. Activity of updating of information relating to flight schedules, latest position of availability of seats reservation etc. is carried out not by the assessee, but by a vendor at its own cost from its own internal CRS and posted electronically into the assessee's CRS [arts. 2(A)(1) and 2(A)(4) of participation agreement vide p. 69 of APB]. But, it will all come to naught if there is no facility for making instant booking by a travel agent. It is the act of providing of this facility in India which constitutes the assessee's main business. This facility is provided in India on a continuous and systematic manner. Therefore, this business of running a market place is actually carried on in India from which the assessee derives income. It cannot be said that this activity is preparatory or auxiliary activity. No booking is possible but for the telecommunication network, equipment and software provided and paid for by the assessee to the subscribers. The activity which creates ....
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...., the income also accrues outside India. This contention is misconceived. Place where the participation agreement is made is not determinative of the place of accrual of income. Accrual of commission income takes place where the subscriber-vendor contract is executed, i.e., place where the booking is made. Neither the data processing in Germany nor the contract with the vendors can be said to be the 'source of income' of the first degree. Processing of the data by the host computers is secondary to the booking made by the subscriber in India. It is merely one among many of business operations from which income has accrued. The 'source of income' of the assessee, if looked at from practical and commercial point of view, is the market place/exchange created in India where the reservation (booking) is made by the subscriber India. It is the 'use' of the CRS by the subscriber in India, which is the assessee's 'source of income'. It is so because, the booking made by a subscriber is the very basis of earning commission from vendors just as a stock exchange earns fee from a transaction put through its system. No income will arise without such use by th....
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....d on the premises of the subscriber. All the three services, namely host network and customer services are provided by the assessee. These three vital components of the CRS are clearly identifiable. It is also not correct to say that a subscriber uses the computer provided to him for his own business and not for the assessee's business. This computer is an essential and integral part of the central reservation system without which no income will accrue to the assessee. The assessee has, either on its own, or through the agency of Amadeus India, carried out following business operations in India on a continuous basis at its own cost : (a) (i) Maintenance and operation of the telecommunication 'Node' at Mumbai/ Delhi owned by SITA and hired by the assessee. (ii) Telecommunication lines between the node and the premises of the subscribers leased and paid for by the assessee (ii) The entire regional telecommunications network is maintained by the assessee at its own cost. These regional networks together with gateways to international network are essential parts of the CRS, the maintenance of which is the core business of the assessee. ....
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....ce with the provisions of the Act only. The assessee is admittedly tax resident of Spain. The convention for avoidance of double taxation with Spain (treaty) came into force w.e.f. 12th Jan., 1995. However, art. 30(2) of the treaty (p. 152/APB) provides that the provisions of the treaty shall have effect in India in respect of income arising in any financial year beginning on or after 1st April of the calendar year next following that in which the convention enters into force. Since the treaty came into force in the calendar year 1995, the calendar year next following 1995 is the calendar year 1996. The provisions of the treaty would therefore apply for the first time to income arising during the financial year 1996-97 relevant to asst. yr. 1997-98. Hence, in respect of income assessable for the asst. yr. 1996-97, the appellant cannot seek the protection of the treaty and its taxability will have to be adjudicated under the provisions of the IT Act only. Reference was made to following judgments : (1) Norasia Lines (Malta) Ltd. vs. Dy. CIT (2005) 199 CTR (Ker) 377 : (2005) 279 ITR 268 (Ker); (2) Performing Rights Society vs. CIT (supra). 13. In reply, the appel....
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....IPL. Thereafter, the processing is done by the appellant's CRS and the information of the airlines products is made available on the computers of the travel agents. The aforesaid decision of the Tribunal, therefore, has to be understood in context. The provisions of computers and leased lines to the travel agents through the medium of AIPL do not result in income in India (as no income is received from the travel agents for providing the aforesaid facility). The same, as stated earlier, is only part of internal operations of the appellant to maximize its revenues which are dependent upon the number of bookings made. The activity giving rise to the income, viz., the processing of airlines information and the display and dissemination of the same happens through the appellant's CRS outside India and the source of appellant's income is, therefore, outside India. AIPL has no authority to conclude contracts on behalf of the appellant and the travel agents who were provided computers and leased line connections did not have any privity of contract with the appellant. In any case, the appellant could have been considered as having a business connection in Ind....
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....dia on television channels broadcasting content to viewers in India. The Tribunal in that case came to the finding of fact that : (1) The channel companies were having business connection with India and were having continuous business operations in India and that the relationship between the assessee company and the channel companies was not that of principal-to-principal. (2) The assessee company, the channel companies and other players in the field, other than the cable operators in India were 100 per cent subsidiaries of a mother holding company, the players were not strangers to each other. (3) The "Ad Airtime" conceived in the agreements entered into between the assessee and the channel companies is born and instantly exhausted in India. The situs of the sale, delivery, purchase and consumption of the subject-matter of "Ad Airtime" is in India. (4) It was not possible to hold that the entire activities of the assessee were carried out abroad since the "Ad Airtime" is not detachable from the flow of the total telecast time used by the channel companies for Indian viewers. (Please refer paras 98/99 to 101 of the judgment) Since the....
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.... the appellant, no income would be chargeable to tax in India in the hands of the appellant as : (a) The income of the appellant arising from Indian operations would be limited to the amount of profits attributable to the services of the agent. (b) The income so computed would be completely absorbed by the expenses incurred to earn such income. Reference is made in this regard to cl. (c) of para 6 of Circular No. 23 (F.No. 7A/38/69-IT(A-II), dt. 23rd July, 1969, which provides as follows : "Extract from CBDT Circular No. 23 of 23rd July, 1969 : Sales by a non-resident to Indian customers either directly or through agents : (a) Where..................... (b) Where...................... (c) Where a non-resident's sales to Indian customers are secured through the services of an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit which is attributable to the agent's services, provided that : (iv) the non-resident principal's business activities in India are wholly channeled through his agent; (v) the contracts to sell a....
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....rmine and attributable to the conclusion of such contracts or procurement of such orders can be considered to be embedded in the income of the PE taxable in India, if the price charged in respect of the above services by the PE is at arm's length/fair market price. In such a situation, therefore, no income shall separately accrue or arise or be deemed to accrue or arise to the non-resident principal in India." The Authority for Advance Ruling (AAR) in the case of Morgan Stanley & Co. International Ltd. In re (2006) 201 CTR (AAR) 67 : (2006) 284 ITR 260(AAR), has approved the principle laid down in Circular No. 23 of 1969. In that case one of the issues before the AAR was whether even in the event that MSAS (an affiliate company of the applicant in India) constituted PE of the applicant in India, as long as MSAS was remunerated for its services at arm's length, any further income could be attributed to the PE of the applicant. The AAR answered the question in negative and observed as under : ".......However, in Annexure-III to the application, it is stated that as long as MSAS is remunerated for its services at arm's length price, there should be no additi....
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.... MTNL, etc. The appellant does not have any contract with local telecommunication companies. The appellant only picks up the telecommunication costs. The aforesaid circular squarely applies to the appellant's case and since the remuneration paid by the appellant to AIPL, is at arm's length, the same fully represents the value of profit attributable to the activities of the appellant in India and there is no further income liable to tax in India in the hands of the appellant. Findings : 17. 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 s. 5(2) of the Act and whether the assessee has any business connection in India as per s. 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 Spain, the appellant has any PE in India ? (3) If answer to question No. 1 is in affirmative what is the extent of income earned in India and whether the same can be held as paid by the appellant to AIPL and no further income is a....
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....tion. We shall, therefore, revert to some of the judicial pronouncements in this regard. Hon'ble Supreme Court in the case of CIT vs. R.D. Agarwal & Co., (supra) held thus : "The expression business connection undoubtedly means something more than business. A business connection in s. 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 non-resident through an agent or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case, the question whether there is a business connection from or through which income, pr....
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....cation, reservation, ticketing, distribution and related functions on a worldwide basis. Through this Amadeus 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 Amadeus system or the CRS is capable of 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 may or may not be provided by the appellant but which in all cases is 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 subscriber's computer ended at the subscriber's computer and on the basis of information made available to the subscriber, reservations were also possible. It is to be noted that all the subscribers in respect of which income is held ta....
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.... income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Thus in a given case if all the operations are not carried out in India, the income has to be apportioned between the income accruing in India and income accruing outside India. In the present case, we find that only part of CRS system operates or functions in India. The extent of work in India is only to the extent of generating request and receiving end-result of the process in India. The major functions like collecting the database of various airlines and hotels, which have entered into PCA with the appellant takes place outside India. The computer at Erding in Germany 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 they can perform a booking function but are not capable of processing the data of all the airlines toget....
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....ted from the computers at the desk of travel agent is once again routed through the facility of processing such information at AIPL. If AIPL finds that the subscriber accessing the CRS is authorized to do so, the request is further forwarded. AIPL is also responsible for establishing connectivity of the computers of the subscribers and maintaining them. AIPL is also responsible for training of the subscribers in respect of use of CRS. For all these services rendered by AIPL to the appellant, it is being paid remuneration in terms of distribution agreement. Broadly the assessee receives three 'Euros' as fees per 'net booking' i.e. gross booking minus cancellation. The assessee passed 0.84 dollar to AIPL for each net booking processed through Amadeus 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 AIPL has been allowed as expenses while computing total income of the appellant. In such a situation in view of Circular dt. 23rd July, 19....
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....nd 5.2 of the subscribers agreement clearly provide that the equipment given to the subscriber can be serviced or repaired by the Amadeus. Further, cl. 5.7 clearly provides that Amadeus has right to enter subscriber's premises for inspecting the equipment. It needs to be repeated that the equipment belongs to the assessee and Amadeus India derives authority to rent out the equipment to the subscribers from the distribution agreement. (v) It is contended by the assessee that equipment provided to the subscribers is light and therefore a distinction has to be made between "substantial machinery and light portable equipment". It is submitted that this contention is misconceived. It is not the size of the equipment which is relevant but it is its operational and economic significance to the enterprise which is the deciding factor. Without the use of computers installed in the premises of the subscribers, the CRS would be at standstill. Regarding portability of equipment, the facts noted in (ii), (iii) and (iv) (supra) make it clear that the equipment provided to the subscribers cannot be moved around, but remain fixed at one place within the specified place in the subscrib....
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....ormation, neither the vendors and nor the subscribers see it. They see and use the 'display' of information on computers set up in their offices. The assessee is maintaining CRS which is situated in India, which is its fixed place of business in India. As considered earlier, the assessee maintains an 'exchange' or a 'market place' in India by placing computers in fixed places and also by hiring fixed nodes and leased lines. Para 2 of art. 5 lists items, which are included in the term "permanent establishment". CIT(A) has held that the computers installed in the subscribers' premises fall within item (k). Para 3 of art. 5 lists items, which are excluded from the definition of the term 'permanent establishment'. Assessee has contended that assuming there is a 'fixed place of business', it is for the purpose of advertising and for activities which have a preparatory or auxiliary character, for the enterprise. This contention of the assessee is misconceived. It has been demonstrated in foregoing submissions that the assessee's network in India including the hardware/software installed in the subscribers' premises is integral ....
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....ate though a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise itself or on behalf of that enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise, he will not be considered an agent of an independent status within the meaning of this para. Para 4 of art. 5 reads as under : "Notwithstanding the provisions of paras 1 and 2, where a person other than an agent of an independent status to whom para 5 applies is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have PE in the first-mentioned State, if (a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) he has no such authority, but habitually maintains in the first-mentioned State a stock of good....
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....f under ss. 10A and 80HHE have been claimed and allowed on the profits derived from this undertaking. Hence, it cannot be said that the business which came its way was obtained by it in the 'course of the business', which it had been carrying on. Thus, right from the start, the activities of Amadeus India (P) Ltd. are wholly and exclusively devoted to providing services to the assessee. Therefore, a company which started such an exclusive business cannot be said to have obtained this agency "in the ordinary course of its business". The expression "course of business" axiomatically assumes a pre-existing business in the course of which the new business is undertaken. Hence, proviso to the first sentence of art. 5 (5) applies and Amadeus India is not an independent agent. (ii) Amadeus India is not an independent agent for another reason. As per the second sentence of art. 5(5) also, its activities are devoted wholly on behalf of the assessee and constitutes only source of its business income and it is economically dependent on the assessee. (iii) The distribution agreement between the assessee and Amadeus India is essentially an agency contract for ....
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....madeus India is economically wholly dependent on the assessee. Its main source of income is from the assessee and as held by the Tribunal in its own case it occupies a place between the host computer and the subscribers in India and actively modifies the programme in the host computer by creating 'partitions' and thus segmenting the orders of the subscribers. The assessee earns fees from the vendors on the basis of segment wise bookings made by the subscribers. 20.5 Shri Kapila also submitted that art. 5(4) of the treaty applies for the following reasons : (i) As per art. 1 of the distribution agreement, 'subscriber' is an entity who contracts to receive access to a Amadeus System. Clause 7.1 of the agreement also provides that Amadeus India shall contract with subscribers in India 'to provide access to all of the Amadeus products, which of course includes CRS. In other words, subscriber gets a right to 'use' the CRS owned by the assessee by virtue of contract entered into with its agent, namely Amadeus India. Amadeus India is therefore clearly permitted to conclude contracts with subscribers, for using business assets owned by it. T....
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....been habitually entering into subscriber agreement with travel agents etc., which in substance tantamount to securing of orders for the assessee's CRS. It is clear that Amadeus India has been habitually concluding contracts with subscribers in India on behalf of and with the consent of the assessee. The assessee on its part has also been habitually honouring such contracts. However, Amadeus India is free to fix any terms/consideration in its contracts with the subscribers. In the case of TVM Ltd., In re (1999) 151 CTR (AAR) 492 : (1999) 237 ITR 230 (AAR), the Authority for Advance Rulings has quoted Klaus Vogel and Commentary of the OECD Model of Double Tax Convention, which reads : "Also, the phrase 'authority to conclude contracts in the name of the enterprise' does not confine the application of the para to an agent who enters into contracts literally in the name of the enterprise; the para applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise........." "The authority to conclude contracts must cover contracts relating to operations which cons....
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....nstitutes the assessee's PE in India. The assessee is therefore taxable even under the provisions of Indo-Spain treaty for the asst. yrs. 1997-98 and 1998-99. Submissions by Appellant : 21. The submissions of the appellant in regard to existence of PE are as under : 21.1 The computers provided to the travel agents were not Amadeus proprietary and were standard IBM compatible computers. The same were not certified by the appellant as such and only certain standard technical characteristics of the computers provided to the travel agents were intimated to AIPL in order that the computers that they buy and provide to the travel agents were compatible with the appellant's CRS. The said computers were not customized and only configured in order to be compatible with the appellant's CRS. Due to high cost of computers in the relevant years not many travel agents could afford them. As an incentive to subscribe to the appellant's CRS, computers were provided to some of the travel agents only on need basis. There were many travel agents who were using their own computers, which were configured in order to be compatible with the appellant's CRS. Similarly,....
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....or image of the same is displayed on the computers of the travel agents. The activity resulting in display of information to the travel agents and the subsequent booking of the ticket is carried out in the appellant's mainframe only and the travel agents are communicated the result of the activity performed. It cannot be said that the appellant earns income by virtue of installation of computers and providing telecommunication network to the travel agents since no amount is received from the travel agents for providing the computers and telecom network. The appellant receives income from the airlines based on net booking irrespective of whether the booking(s) is/are generated on computers owned by the travel agents themselves or on the computers provided to the travel agents by the appellant. As regards the contention of the learned Departmental Representative regarding the location of the computers being fixed, it is submitted that the location of the computers can be changed with the permission of AIPL and since installation and reinstallation entails cost for AIPL and the appellant, the aforesaid clause is to restrain the travel agents from relocating computers unnecessar....
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....quipment has been used for carrying out the core business of the lessee or not to constitute fixed place PE and the mere leasing of equipment is not sufficient to constitute PE . (d) The German Pipeline (supra) case related to net wealth-tax, where the main business of the assessee, viz., transportation of oil, was carried through remotely operated pipelines and such pipelines were considered as PE. Amadeus is not in the business of transmission of voice or data through leased lines and that decision has no relevance to the facts of the appellant's case. (e) It is accepted that even automated equipment used for carrying on the core business of the enterprise without human intervention may result in PE. In the present case, the computers are operated not by the appellant but by the travel agents and SITA's telecommunication network is operated by SITA and not (by) the appellant. Further, the appellant is not in the business of data communication and the appellant's business cannot be said to be carried on through such computers and the telecommunication network leased by the appellant. It is not the appellant's case that the equipm....
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....elecommunication network provided to the travel agents do not form an integral part of the appellant's CRS and it cannot be said that by virtue of the aforesaid computers and telecommunication network a part of the appellant's CRS is in India, which constitutes fixed place through which the appellant carries out his business and, therefore, the appellant has a fixed place PE in India. 21.2 The submissions of the appellant in regard to installation of PE under art. 5(2)(k) are as under : The CIT(A) has stated that the appellant is installing computers at the premises of travel agents and, therefore, it has an installation project PE in terms of art. 5(2)(k) of the treaty. The appellant is not in the business of installing computers and has not taken any computer installation contract and the aforesaid provision has been wrongly invoked by the CIT(A) to hold that the appellant has PE in India. The learned Departmental Representative has not relied upon the aforesaid provision to contend that the appellant has PE in India. 21.3 The submissions of appellant as to exception under art. 5(3) of the treaty are as under : The core activity of the app....
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....ivity of contract between the appellant and the travel agents in terms of the subscriber agreement entered into between AIPL and the travel agents. The aforesaid terms in the PCA only convey that provision of access to the appellant's CRS to the travel agents is contemplated. Further, the airlines are under an obligation to honor the ticket booked through appellant's CRS by the travel agent since otherwise no one would subscribe to the appellant's CRS and no revenues would be received by the appellant, if no tickets are booked through the CRS. The distribution agreement clearly states that the appellant and AIPL are dealing vis-a-vis each other on principal-to-principal basis. Although the same is not conclusive, the said clause reflects the intention of the parties, in the absence of anything to the contrary in the terms of the agreement. In order that travel agents can access Amadeus CRS, it is necessary to authorize/permit AIPL to carry out the activity relating to providing computers, telecommunication link, etc. to the travel agents in order that AIPL can discharge its obligation under the distribution agreement efficiently. Such authority does no....
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....sale, financial matters to the company; (ii) selling the goods at the price fixed by the company; (iii) selling goods in a particular territory only fixed by the company; (iv) payment of commission and allowance to the dealer by the company at its sole discretion; (v) furnishing security for performance as per the stipulation in the contract. It was held by the apex Court that the aforesaid restrictions were necessary in order for the company to keep itself fully informed of the conduct of the business by the dealer in order to maintain its goodwill and would not make the dealer an agent of the company. The fact that AIPL has no property in the computers provided to the travel agents does not result in AIPL being considered as an agent of the appellant. AIPL only provides service to the appellant in the form of purchasing and supplying computers to the travel agents, assisting in providing telecommunication link to the travel agents, providing training to the travel agents, etc., for which it is remunerated at arm's length by the appellant. AIPL acts as a 'bailee' in respect of the computers purchased by it and provi....
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....urposes of art. 5(4)(a) of the treaty. Para 33 of the OECD Commentary is referred in this regard, wherein, it has been clarified that the authority to conclude contracts must cover contracts relating to operations, which constitute the business proper of the enterprise and the authority to conclude contracts relating to internal operations only would not be relevant for the purpose of the aforesaid article. The aforesaid para of the commentary has been referred to and relied upon by the AAR in TVM Ltd., In re (supra). The authority to conclude contracts in respect of transactions which may have some nexus with the business operations of the principal, as submitted by the Departmental Representative is not sufficient since the authority to conclude contracts must relate to operations, which constitute the business proper of the appellant and not in respect of any business operations. The aforesaid proposition is supported by the decision of the Tribunal, Delhi Bench in Western Union's case (supra), which squarely applies to the facts of the appellant's case. The subscriber's agreement entered into by AIPL with the travel agents, whereunder access is pro....
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....y course of business. Therefore, the arguments of the learned Departmental Representative in relation to art. 5(5) of the treaty are of no relevance. To sum up, it is the appellant's case that (i) it is not an agent of the appellant; (ii) if it is held to be an agent, it does not have authority to conclude contracts on behalf of the appellant; and (iii) even if it were to have such authority, such authority has not been habitually exercised by AIPL; and therefore, AIPL is not a dependent agent PE of the appellant under art. 5(4)(a) of the treaty. 21.5 As regards agency PE under art. 5(4)(b) of the treaty, Shri Vohra submitted as under : It is denied that AIPL stocks computers for the appellant. AIPL, on need basis purchases computers in India, provides the same to the travel agents as and when required and invoices the appellant or its affiliates. Without prejudice, even if AIPL were to stock computers, which are delivered to the travel agents on behalf of the appellant, the provisions of art. 5(4)(b) of the treaty do not apply since the appellant does not deal in computers and in any case the delivery of such computers does not result in any sourc....
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.... or accrue at the place where the manufacture is being done and the profits which arise by reason of sale are said to arise at the place where the sales are made. The aforesaid view was reiterated by the Supreme Court in the case of Anglo-French Textile Co Ltd. vs. CIT (1954) 25 ITR 27 (SC). It was observed in the aforesaid case that though profits may not be realized until the manufactured article is sold, profits are not wholly made by the act of sale and do not necessarily accrue at the place of sale. It was further observed that to the extent profits are attributable to the manufacturing operations, profits accrue at the place where the business operations are carried on. The question whether a particular part of income, profit or gain arose or accrued within the taxable territories or without the taxable territories would have to be decided having regard to the general principles as to where the income, profit or gain could be said to arose or accrue, the Court held. In the aforesaid case, the assessee company incorporated in the United Kingdom and having its registered office in London manufactured yarn and cloth in their mill at Pondicherry. The assessee had appointed ....
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.... (1987) 31 Taxman 444 (Cal) where the Court upheld the order of the Tribunal is directly to the point under consideration. In that case the Tribunal had noted that a large number of services were to be performed outside India as compared to the comparatively fewer services rendered in India. The Court upheld R the estimated 10 per cent of the net profits as income accruing or arising in India. Reliance is also placed on the decision of the Special Bench of the Tribunal in the case of Nokia Networks/Motorola Inc. vs. Dy. CIT (2005) 96 TTJ (Del)(SB) 1 : (2005) 95 ITD 269 (Del)(SB), regarding the manner in which the profits attributable to the PE are to be computed. In that case, the assessee engaged in the business of telecom equipment supply and erection, was held to have a PE in India, through which the activities relating to telecom network planning, negotiations relating to sale of equipment and signing of supply and installation contracts with Indian customers, were carried out in India. The issue before the Special Bench was, as to what was the income attributable to the PE of the assessee in India. The Special Bench found that the assessee made global net profit of 10.8 ....
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.... of the aforesaid facts and circumstances, it is further submitted, without prejudice, that the AO erred on facts and in law in attributing 100 per cent of the profits relating to the Indian distribution activity as computed by the AO, to the alleged PE of the appellant in India, in the assessment framed for the said assessment year without appreciating that since substantial and substantive part of the appellant's activities are carried outside India, only a small part of such profits could be attributed to the alleged PE of the appellant in India. To sum up, (i) the appellant does not carry on any activities in India, resulting in business profits arising to the appellant in India; (ii) the appellant does not have either a fixed place PE or dependent agency PE in India and therefore, the appellant cannot be subjected to tax in India, even if it were to be assumed that any part of the business profits arises in India; (iii) even if PE in India were to be assumed, there is no further income attributable to the alleged PE liable to tax in India, in view of AIPL having suffered tax on the booking fee received from the appellant. Finding as regards existence of permanent est....
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....: (a) the use of facilities solely for the purpose of storage or display 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; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods and merchandise, or of collecting information for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for supply of information, for scientific research or for similar activities which have a preparatory auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paras 1 and 2, where a person' other than an agent of an independent status to whom para 5 applies' is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have PE in the first- mentioned State, if (a) he has and habitually exercises i....
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....t is used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented or are otherwise at the disposal of the enterprise. A place of business may thus be constituted by a pitch in a market place or by a certain permanently used area. The place of business can be situated in the business vicinity of another enterprise. What is to be seen is that on fact an enterprise has a certain amount of space at its disposal, which is used for business activities and then it is sufficient to constitute a place of business. No formal legal right to use that place is visualized or required. A PE could exist even where an enterprise unauthorizingly or illegally occupies certain locations where it carried on its business. For a place of business to constitute a PE, the enterprise using it must be carrying on its business wholly or partly through it. It is not necessary that whole of the business should be carried on through such PE or fixed place. Time and aga....
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....ne person to another. Thus the appellant exercises complete control over the computers installed at the premises of the subscribers. In view of our discussion in the immediately preceding para, this amounts to a fixed place of business for carrying on the business of the enterprise in India. But for the supply of computers, the configuration of computers and connectivity which are provided by the appellant either directly or through its agent AIPL will amount to operating part of its CRS system through such subscribers in India and accordingly PE in the nature of a fixed place of business in India. Thus the appellant can be said to have established a PE within the meaning of para 1 of art. 5 of Indo-Spain treaty. 23.2 The next question to be considered is if there is a PE, whether the exception provided in para 3 of art. 5 applies so as to hold that there is no PE in India. The case of the appellant is that the existence of such computers is merely for the purpose of advertising and the activities are preparatory or auxiliary in character and hence there is no fixed place PE in India in view of the Explanation provided in para 3 of art. 5. We are unable to accept such a contenti....
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....y exercise in that State an authority to conclude contract or (ii) though he has no such authority but habitually maintains stock of goods from which he regularly delivers goods on behalf of the enterprise. Thus the first question to be decided is whether the agent is of a dependent status or of an independent status. In the present case we find that AIPL is totally dependent on the appellant. The entire business of AIPL is to provide data processing and software development services together with relative distribution of 'Amadeus products' to the subscribers in India. AIPL has also an authority to enter into agreements with the subscribers. AIPL installs the computers, configures the computers for accessing the CRS and also provides connectivity through SITA nodes. Thus functionally as well as financially it is dependent entirely on the appellant. It can therefore, be said that AIPL is a dependent agent of the appellant. 23.4 The next question to be decided is whether he is habitually exercising an authority to conclude contracts on behalf of the appellant. Under the distribution agreement entered into by the appellant with AIPL, AIPL is responsible for effecting and co....
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....act shall have a nexus with the business operations as such and not merely contracts for hiring employees, premises etc. What is taxable in the Contracting State is the income accruing to such enterprise and the activities are carried on either through the PE namely fixed place or through a dependent agent. The dependent agent 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 AIPL as its agent who promote the 'Amadeus products' in India. AIPL in its turn has appointed various subscribers for use of 'Amadeus products'. 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 'Amadeus products'. 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 app....
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....dia in two forms namely (1) fixed place PE under para 1 of art. 5 and (2) agency PE under cl. (a) of para 4 of art. 5, we shall examine whether as to what is the profit attributable to the PE in terms of art. 7 of the DTAA between India and Spain. 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. Paras 1 to 3 of the art. 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 PE 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 PE; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that PE; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that PE. 2. Subject to the provisions of para 3, wher....