TaxTMI 
TaxTMI 
2019 (7) TMI 1083
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....on of the assessing officer in holding the appellant to be liable to tax in India in respect of fees received from airlines, etc. relating to segments booked from India through the appellant‟s computer reservation system, not appreciating that no income accrued or arose to the appellant in India. 3. That the CIT (A) erred on facts and in law in confirming the action of the assessing officer in holding that computers, electronic hardware, and the connectivity provided by the appellant to the travel agents through SITA nodes located in India, collectively, constituted permanent establishment ("PE‟) of the appellant in India in terms of Article 5(1) of the Indo-Spain DTAA ("the Treaty‟) and the income arising to the appellant from the airlines, assessing officer in alleging that Amadeus India (P) Ltd. (AIPL) constituted dependent agent PE of the appellant in India and the income arising to the appellant from the airlines, etc., was attributable to the activities of the alleged etc. was attributable to the activities of the alleged PE in India. 4. That the CIT (A) erred on facts and in law in confirming the action of the Assessing Officer in alleging....
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....istribution fee. 9. That the CIT (A) erred on facts and in law in confirming the action of the assessing officer in disallowing deduction of Euro 4,167,000/- incurred by the appellant under the head "Development Cost‟, while computing the income attributable to the alleged PE. 10. That the CIT (A) erred on facts and in law in not appreciating that the appellant was engaged in the business of providing CRS services and the expenses incurred in connection with product development function carried out outside India were required to be excluded while computing the income of the alleged PE of the appellant in India. 11. That the CIT (A) erred on facts and in law in confirming the action of the assessing officer in attributing 75% of the profits of the alleged PE of the appellant as income chargeable to tax in India. 12. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in not following the order of the Delhi Bench of the Tribunal in the appellant‟s case for the assessment years 1996-97 to 1998-99 and the order of the CIT(A) for assessment years 2003-04 to 2005-06, wherein the Tribunal had attribute....
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.... permanent establishment in India, royalty income being effectively connected with the PE of the non-resident was required to be taxed as business income on net basis under Article 7 of the Treaty. 16. That the CIT (A) erred on facts and in law in not directing the assessing officer to allow credit for tax deducted at source of Rs. 56,693,368/- claimed by the appellant." 3. Brief facts of case shows that the appellant is a company Incorporated in Spain and was engaged in the business of development and distribution of computer reservation systems (CRS). Assessee filed its return of income on 29/11/2006 declaring total income of Rs. Nil. Assessment was completed by the learned Assessing Officer u/s 143 (3) of the income tax act on 31/12/2008 computing the total income of the assessee at INR 9 28446114/- against the returned income of the assessee of Rs. Nil. 4. The appellant has entered into agreements with various Airlines ["Participating Carrier Agreement] by providing interconnectivity between the host computer of the individual Airline and the Amadeus CRS created by the appellant at Erding, Germany. Amadeus also provides connectivity to its CRS to the travel agent....
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....dification and other activities in order to provide connectivity/access to the travel agents to the CRS host. Further, AIPL and ResBird also trains the travel agents regarding the use of the CRS system. The appellant pays AIPL and ResBird distribution fees for the aforesaid services rendered to the appellant, with reference to the segments booked in India by the travel agents through the CRS system as per the terms of the Distribution Agreement. The computers with the travel agents are standard third party compatible PCs. These PCs are not Amadeus proprietary. The PC is used to emulate a remotely located host terminal. The travel agent‟s PC is connected to the Amadeus mainframe computer located in Germany. The connectivity is provided by third party providers, using in India the DOT, MTNL or VSNL leased lines. The Amadeus mainframe is in turn connected to host computers of the various providers like Airlines, hotels, etc. around the world. The computers in the offices of the agents are not capable of processing/finalizing reservations it is the job of the Amadeus Data Center in Erding, Germany to ensure that the connectivity between the Amadeus Mainframe and the travel agents....
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....eedings assessee submitted invoices raised by Amedus India on the above company. On verification of the invoices raised by Amedus India and accepted by the assessee, which were found to be pertaining to account of export data, software response of the year. On verification of the invoices and on being questioned to the assessee, assessee submitted that as per the distribution agreement, it is Amedus India private limited was providing distribution services which involved provision of hardware support in respect of the hardware provided to the travel agents, marketing support services and providing connectivity to the appellant‟s computerized reservation system by creation of segment in appellant‟s CRS system for identification of travel agents to enable the CRS to provide access to the specific portion of the database and the remuneration paid by the appellant by AMedus India private limited was for the aforesaid activities. Based on the information provided by the assessee the learned AO noted that Amedus India has charged the assessee for export of processed data/software. The assessee is also paying Amedus India for receipt of processed data/software. The assessee ha....
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....hould be held to be an agency permanent establishment of the assessee in terms of article 5 of double taxation avoidance agreement dated 21/4/95. He further stated that the invoice of the Amedus India private limited elaborately demonstrate that the charges was for export of data processing and not for computerized reservation system business of ticket booking. Accordingly he sustained the action of the learned assessing officer. He further upheld the attribution of profit @ 75 %. Thus, he upheld the existence of the permanent establishment and attribution of profit as determined by the learned assessing officer. 8. With respect to the royalty taxation of the above sum he did not give any finding. Thus aggrieved by the order of the learned CIT - A assessee is in appeal before us. The learned authorised representative submitted that the issue is squarely covered in favour of the assessee by the decision of the Hon‟ble Delhi High Court in assessee‟s own case for earlier years. Even otherwise he submitted a detailed written submission on the whole issue as under: "Re: Ground of Appeal No. 2 to 4 - Permanent Establishment of Amadeus Given the background....
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....dvertise and make known to the travel agents the facility created by the appellant so that they use the facility for making bookings of seat for their traveler customers. 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. The revenues still arise to the appellant outside India. The Airlines have evolved a clever fee structure, which makes it impliedly necessary for the appellant to reach the Airline customers - that is the travel agents and canvass with them the use of appellant's CRS. It is, inter alia, for this purpose that the appellant engaged the services of AIPLand ResBird. It has to be noted that the main function of AIPL/ ResBird vis-à-vis the appellant is to disseminate information amongst the travel agents in India about the Amadeus CRS, canvass with them the use of the system and assist them in using the CRS, without any charge whatsoever. It has to be noted that 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 activity has a prep....
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.... appreciate that since the appellant is not carrying on any business in India and not earning any revenues in India, and is merely advertising and disseminating information about the Amadeus CRS, no business income liable to tax arises in India. Re: Agency PE The assessing officer, following the orders passed in the earlier years, held that AIPL is a dependent agent of the appellant and agency PE in terms of paragraph 5(4) of the DTAA, which is disputed for the reasons stated as under: As per paragraph 4 of Article 5 of DTAA between India and Spain, the so-called dependent agent may be deemed a permanent establishment if such agent has and habitually exercises authority to conclude contracts on behalf of the Spanish entity. It is to be appreciated that AIPL/ ResBirddoes not enter into any agreement with the travel agents on behalf of the appellant. In fact, the agreement has to be read along with the admitted understanding between AIPL/ ResBird, the appellant and the travel agents that no consideration will pass from the travel agents to AIPL/ ResBirdor for that matter to the appellant on account of the agreement. There is, therefore, no question of AIPL/....
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....They are appointed and known as distributors. It is not uncommon that a distributor carries out some functions and obligations similar to those of an agent. Improvement of the business of the appellant, assisting the appellant in formulating its marketing strategies and preventing the misuse of the product supplied to the end-users are all functions which are not extraneous to the distributorship. The business of the VAR is not controlled by the appellant except to the extent necessary to promote its own business. It is beyond dispute that the VAR does not negotiate or conclude contracts with the end-users on behalf of the appellant. As noticed earlier, the acceptance of the order placed by the end-user and procured by VAR is left to the discretion of the appellant. That authority is not delegated to VAR. Moreover, VAR is free to determine its own price while entering into the deal with the end-user on the acceptance of the order by the appellant. It is not possible to accept the contention that arriving at the price is an empty formality and always follows a set pattern. The VAR does not notify or render account to the appellant for the amount collected from the end-user. The VAR ....
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....ith an independent entities viz., AIPL/ ResBird. AIPL/ ResBirdcontacted the travel agents and provided them access to the airlines' inventory through the appellant's mainframe in Germany. This was done only to conclude the commitment of the appellant made outside India while entering into agreement with the airlines. AIPL by entering into subscription agreements with the travel agents was merely executing the last leg of the contact already concluded outside India. AIPL/ ResBirdhaving regard to the ratio laid down in the above case, cannot in such circumstances, be said to be concluding any contract for the appellant so as to be considered as a dependent agent having authority to conclude contract and, therefore, a PE of the appellant in India. In the past, a subscriber's agreement was entered into between AIPL/ ResBirdand the travel agents, where under computer hardware, etc. was provided to the travel agents, as an incentive, and certain obligations were cast on the travel agents regarding the use of such computers. However, under the present arrangement, the appellant neither provides computers to the travel agents, nor does it bear cost towards provision of computers p....
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....receipt by the assessee along with a computer-generated unique number which is referred to as MTCN (Money Transfer Control Number). The remitter would send the number to his relative in India who would take it to the assessee's representative/agent in India. Such representative/agent would access the mainframe computer of the assessee in USA, match the MTCN with the help of software and if the MTCN matches, the representative/agent would honour the transaction and pay the money to the claimant in India. For the aforesaid purpose the assessee had appointed agents in India. One of the issues before the Tribunal was whether the agent's premises-cum-software was PE of the assessee. It was argued on the behalf of Revenue that there is a fixed place of business in the form of various systems installed at the premises of various agents through which the business is carried on. The Tribunal, however, rejected the contention of the Revenue and observed as under: "26. The department has made out a case that the software, which affords access to the agents to the assessee's mainframe computers in USA for the purpose of finding out the matching of the MTCN numbers, has been in....
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....agent's desk is an extension of the mainframe at Erding and at the Airlines offices. Technically, Airlines host computer mainframe is an independent facility which has been created to store data, process data and provide information about the availability or non-availability of a seat pursuant to a booking request - an enquiry originating from a travel agent. Further, it may be pointed out that there is a certain time lag in making a request by the travel agent and its processing by the mainframe and the display of the information on the computer screen of the travel agent in India. Thus, for example where simultaneously two or more travel agents make a booking for a same sector and there is say only one seat available on such sector, a queue is certainly formed as only one travel agent will be able to get the booking depending upon who is first in the queue. Also, if the theory of the time and space collapsing and the mainframe of the appellant coalescing with the computers of the travel agent is accepted, it would have far reaching consequences in as much as the computer of any person in India accessing a web site (located on any server anywhere in the world), w....
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....n of the Supreme Court in the case of Formula One World Championship Ltd. vs. CIT: 80 taxmann.com 347 (SC) wherein the Court after referring to the OECD Model Tax Convention, Commentaries by Professor Philip Baker and Professor Klaus Vogel, international tax jurisprudence observed that in terms of Article 5(1) of the India-UK Tax Treaty, a fixed place PE is constituted in India, if twin conditions are satisfied viz, (i) Existence of a fixed place of business at the disposal of the foreign enterprise in India; (ii) through which the business of the foreign enterprise is wholly or partly carried on. Further, the Delhi High court in the case of CIT vs. eFunds IT Solution and Ors.: 364 ITR 256 while deciding the issue as to whether outsourcing of services to an Indian affiliate results in a PE in India for the foreign company under the provisions of the India-US Tax Treaty held that for the purposes of existence of fixed place PE under Article 5(1), there must be a fixed place of business at the disposal of the enterprise. The subsidiary constitutes an independent legal entity for taxation purposes, and hence the relationship of holding-subsidiary or control exercised by the p....
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.... degree of permanency attached to the fixed place of business before the same can be construed as a PE of an enterprise. The word permanent does not imply for all times to come but merely indicates a place which is not temporary, interim, short-lived or transitory The Andhra Pradesh High Court in the case of CIT vs. Visakhapatnam Port Trust [(1983)144 ITR 146],on the matter of permanency, has observed as under: "In our opinion, the words "permanent establishment" postulate the existence of 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". Attention in this regard is invited to the following observations of the Special Bench of the Tribunal in the case of Motorola &Ors. v. DIT: 95 ITD 269 (SB) (Del), wherein the Tribunal held that unless the office was at the disposal of the nonresident assessee, it could not be held to be constituting PE: 127. We now turn to the provisions contained....
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.... had at its disposal, as a matter of right, certain space which could be characterized as a fixed place of business. A travel agency in Paris had made an office available to the German company from time to time, and the manager of the German company had a flat in Paris. The Administrative Court of Appeal of Paris held that the German Touristik Service [1998] 1 I.T.L.R. 857, travel agency did not have a PE in France (Societe France). As against this, the Brussels Court of Appeal has held that a German resident engaged in the transportation of vehicles had a PE in Belgium as he had an office 3 m by 6 m at his disposal on the premises of his principal supplier in Belgium, together with telephone and telex, where the German and his tour employees worked (KH v. Belgium [1995] 3 R.G.F. 100). The assessee's case is akin to that of the German travel agency in the first mentioned case and not to the German resident in the second mentioned case. Therefore, in the light of this discussion, it cannot be said that the assessee had a PE in India as envisaged in Article 5.1 of the DTAA."[Emphasis supplied] From the aforesaid discussions, it would emerge that in order to constitute a ....
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....appellant. The existence of an office, per se, would not constitute PE of the assessee in India. Kind attention, in this regard, is also invited to the recent decision of the Mumbai Bench of the Tribunal in the case of Delmas France v. ADIT: 144 TTJ 273, wherein the Tribunal, while referring to the decision of the Special Bench of the Tribunal in Motorola Inc. (supra), held that that the onus is on the Revenue todemonstrate that PE of the foreign enterprise exists in India. The relevant observations of the Tribunal are as under: ".....As held by a coordinate bench of this Tribunal, in the case of Airlines Rotables Ltd Vs DDIT8, ―It is a settled position of law, as noted by the Special Bench of this Tribunal in the case of Motorola Inc. that the onus is on the Revenue to demonstrate that a PE of the foreign enterprise exists in India". In the present case, i.e. in the case of DAPE in accordance with provisions of Indo French DTAA, the onus is even greater inasmuch the very foundation of DAPE rests on a negative finding with respect to the wholly dependent or almost wholly dependent agent i.e. "if it is shown that the transactions between the agent and the ent....
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....he airlines and not the traveler in India. For example, a traveler domiciled in UK, wanting to travel from UK to Sri Lanka may book a ticket from London to New Delhi and from New Delhi to Colombo. However, for effecting the said bookings, he may use the services of an Indian travel agent, who is hooked on to the appellant's CRS. In the aforesaid example, the bookings made from India would give rise to booking fee relating to Indian distribution activity, but the traveler may not be in India. It is, therefore, an incorrect assumption drawn by the assessing officer that the source of income for the assessee is the traveler in India. c) The assessing officer (on page 21 of the order) has further alleged that the transaction is initiated in India, the CRS is used in India and transaction is completed in India and, therefore, the source of income of the appellant is in India. It has not been appreciated that only certain instructions/commands are sent through the computers of the travel agents in India. The booking gets completed outside India in the Airline host system and the only the result thereof is communicated back to the travel agent. d) The assessing ....
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....e of income for the travel agents or the airlines but not the source of income for the appellant. For the appellant, the source of income is the Airlines and no one else. It is like saying the source of salary paid to Government officers is the tax payer and not the Government. Information submitted by Amadeus India Pvt. Ltd. 1) The assessing officer has relied upon Form 3CEB submitted by Amadeus India to hold that no compensation for marketing support services was paid by the appellant to Amadeus India. Such report was never confronted to the appellant and therefore, no cognizance can be taken of the said report. 2) Similarly, the assessing officer has, on the basis of transfer pricing report submitted by Amadeus India, held that Amadeus India is a PE of the appellant in India. The said report, was never confronted to the appellant and, therefore, cannot be relied upon to draw an adverse inference against the appellant. 3) The assessing officer has also relied on letters, dated 8.12.08 and 16.12.08, written by Amadeus India to the assessing officer to hold that no compensation for marketing activity was paid by the appellant to Amadeus India. In....
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....iled the details/information called for by the assessing officer/appellate authorities in the earlier years and it has never been alleged that the appellant has been evasive in his replies or has not filed details/information. It has also not been appreciated that the appellant is a tax resident of Spain and has no office or place of business in India and cannot be expected to provide every information/detail in a short-span of time and cannot be put to enormous compliance burden. No cognizance can be taken of the adverse inference drawn by the assessing officer on the basis of the aforesaid evidence collected by the assessing officer under section 133(6) from AIPL and other entities which was never confronted to the appellant and the information/details alleged to have not been filed and the impugned assessment order framed in violation of the principles of natural justice, is bad in law and liable to be set aside. Re: Ground of Appeal Nos. 6, 11, 12, 13, 14 - Attribution of profits Without prejudice to the submissions that the appellant has no PE in India, it is respectfully submitted, that no income liable to tax arises to the appellant for reasons giv....
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....es like communication charges, advertisement and promotion, etc.) is much more than the revenues that could be attributed to the activity performed by AIPL and ResBird, considering AIPL to be a PE of the appellant. Therefore, the issue of any further income being taxed in the hands of the alleged PE of the appellant does not arise. It may be pertinent to point out that the Delhi Bench of the Tribunal in the case of the appellant for the assessment years 1996-97 to 1998-99, after considering the extent of activities in India and abroad, the assets employed and risks assumed, held 15% of the revenues relating to the bookings made from India as attributable to the appellant's PE in India. Since, the distribution fee paid in those years 33% (approx) of the booking fee per segment, i.e, more than twice the revenue attributed to the alleged PE, no income was held to be liable to tax India in the Tribunal. The assessing officer has grossly erred in not following the order of the Delhi Bench of Tribunal in the appellant's case for the assessment year 1996-97 to 1998-99. It may be pertinent to point out that the ITAT, vide order dated 16.11.2016 passed for assessment years....
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....n conjecture, surmises and assumptions without appreciating the real nature of the activity carried out by the appellant in India. It is further respectfully submitted, that the assessing officer had, in the assessment order for assessment year 2005-06, sought to distinguish the decision of the Tribunal in appellant's own case for assessment year 1996-97 to 1998-99 on similar grounds. However, the CIT(A), vide order dated 25.02.2010, allowed the appeal of the appellant holding that no more than 15% of the revenues generated from India could be attributed to the alleged PE of the appellant in India and since the payment to the agent in India exceeded those revenues, no further income of the appellant could be brought to tax in India. The aforesaid order passed by the CIT(A) for assessment year 2005-06 has been confirmed by the ITAT, vide order dated 29.10.2010 and the High Court vide order dated 31.05.2011 (Revenue appeal) and 13.08.2013 (Assessee appeal). It has not been appreciated that AIPL continued to provide to the appellant the same services in the relevant previous year as were being provided in the earlier assessment year and only the basis of remuneration....
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....ecision has no application to the facts of the present case, since (a) we understand the distribution fee paid by the appellant to AIPL has been held in AIPL's case to be at arm's length, (b) the appellant's activities are wholly channeled through AIPL and very recently through ResBird in India and no other entity is involved, and (c) the appellant's claim is not entirely based on Circular No. 23 of 1969. It may be pertinent to point out that the Tribunal in appellant's case for AY 1997-98 & 1998-99 interpreted the provisions of law independently after taking into account similar contention of the Revenue. Without prejudice to the aforesaid, even if the basis of computation followed by the Tribunal in the appellant's own case is to be ignored for some reason, then too, only a small part of such profits could, if at all, be attributed to the alleged PE of the appellant in India can be brought to tax in India as substantial and substantive part of the appellant's activities are carried outside India. The principle of attribution has been upheld by the Hon'bleSupreme Court of India in the case of CIT Vs AhmedbhaiUmarbhai& Co.: 18 ITR 472. The Court observed that wher....
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....charges was put down at the net figure of Rs. 4,58,026 which was shown as the British Indian income. It was, thus contended that the income arising in British India in the year of account did not exceed its income arising without British India and that therefore the assessee was non-resident in British India. This calculation of profits, at the rate of 10 per cent on British Indian sales did not make any allocation between manufacturing profits and merchanting profits and all the profits arising out of British Indian sales were shown in one lump sum. It was held on the aforesaid facts, that the income received in British India could not be said to wholly arise in British India and that there should be allocation of income between the various business operations of the assessee demarcating the income arising in the taxable territories in the particular year from the income arising without the taxable territories in that year. The Madras High Court in the case of Annamalais Timber Trust and Co. Vs CIT: 41 ITR 781, held that the apportionment of profits under the above provisions should not be arbitrary but on a rational basis. Where the only operation within the tax....
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....in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. It, therefore, recognizes two tax identities of an enterprise. The said paragraph makes it clear that the profits of the enterprise may be taxed in the other State only so much of the same which is attributable to that permanent establishment. 5. Paragraph 2 of Article 7 is as follows :- "Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment." 6. In the event, an enterprise having a tax identity in one Contracting State for having a permanent establishment there, and dealing wholly independently with its other tax entity situate in the other ....
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....on still remains, whether it was right on the part of the Taxing Authority to assess income-tax liability of the appellant as was assessed in the instant case. In other words, can it be said that the Agreement permitted the Indian Taxing Authority to arbitrarily fix a part of the revenue to the permanent establishment of the appellant in India? As aforesaid, appellant held out that a part of the revenue was received by it for doing certain work in India. It did not contend that even those works were done by or through its Project Office at Mumbai. On the other hand, there is not even a finding that 25 per cent of the gross revenue of the appellant was attributable to the business carried out by the Project Office of the appellant. One has to read Article 5 of the Agreement in order to understand what a permanent establishment is, in terms whereof ―permanent establishment" means a fixed place of business through which business of an enterprise is wholly or partly carried on. In the instant case, according to the revenue, the Project Office of the appellant in Mumbai is the ―permanent establishment" of the appellant in India through which it carried on business during the....
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....nbsp; xxx xxx F. In our considered opinion, the correct approach to arrive at the profits attributable to the PE should be as under: Step 1: Compute Global operating Income percentage of the customer care business as per annual report/10K of the company. Step 2: This percentage should be applied to the end-customer revenue with regard to contracts/projects where services were procured from CIS. The amount arrived at is the Operating Income from Indian operations. Step 3: The operating income from India operations is to be reduced by the profit before tax of CIS. This residual is now attributable between US and India Step 4: The profit attributable to the PE should be estimated on residual profits as determined under Step 3 above. The attribution of India profit shall be worked out as under, mentioned after the table: 11.18. In the computation based on the above approach for the assessment year 2006-07, the profits attributable to India comes as under: Particulars....
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....s a harmonious intermixed rationalization of TPO and CIT(A) method results into no further attribution of profits to Indian PE. 11.23. In this backdrop we are reminded of two case laws decided by Hon'ble Supreme Court which have dealt with attribution of the profits to the Indian PEs: (i) Anglo French Textile Company Ltd. vs CIT 23 ITR 101 (SC), in which 10% attribution has been held to be reasonable. (ii) Hukum Chand Mills Ltd. vs. CIT 103 ITR 548 (SC), in which 15% attribution has been held to be reasonable. 11.24. These cases decided by the Apex Court though are old, but they still hold the field as they have not been tinkered with. In our considered view, the adoption of higher figure of 15% as held by Hon'ble Supreme Court in the Hukum Chand Mills Ltd. (supra), for attribution of assessee's Indian PE operations will meet the ends of justice. Thus, the attribution of Indian PE income should be made at 15% of profit retained by CMG in the US. 11.25. In other words 15% of the placitum 'X' (result of G=E-F) in the chart at para 11.18, as mentioned above as a reasonable attribution of profit of India PE, will meet the ends of justice. Th....
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....at location. AIPL also creates user name and passwords per terminal/segment created by it. Further, a lot of times, travel agents are not able to price the fare correctly leading to data discrepancy in the PNR for fare discrepancy related to airline fare/taxes/commission and hence the booking does not get concluded on the CRS. The fares and support department of AIPL ensures that the travel agent's PNR is correct as per the fare filed by the Airline with the regulatory authorities and what is visible on the CRS. The aforesaid services are integral to the marketing of CRS and providing connectivity to the travel agents, for which AIPL has been engaged. The appellant remunerates AIPL under the Distribution Agreement and even though the payments are described as 'export of data processed/software', the said payments include all charges to be paid by the appellant to AIPL. The invoices raised by AIPL are, in fact, for the distribution activity undertaken by the latter as per the Distribution Agreement dated 01.10.2004. In the letter dated 08.12.2008 furnished by AIPL, the latter has confirmed that it had provided access to the subscribers of Amadeus in In....
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....t in the hands of the appellant. The assessing officer, in the preceding years, has not appreciated that had the appellant not made payment of distribution fee, the revenue from booking fee, subjected to tax would not have arisen in the first place, since there would have not been any connectivity provided to the travel agent and consequently, no bookings made by them. Even if the aforesaid expenses are considered as towards data processing, the same has to be considered for deduction while computing the income attributable to the alleged PE. It would, thus, be apparent that the aforesaid expenditure having been incurred wholly and exclusively for the purposes of the business of the appellant, is allowable deduction irrespective of the nomenclature used on the invoice. It may be pertinent to note that similar expenditure has been allowed deduction since inception, i.e., assessment year 1996-97 until 2005-06 and in view of there being no change in facts or law, no disallowance is unwarranted in the present year too. b) Re: Disallowance of development cost The assessing officer has, following preceding year's orders, also not allowed deduc....
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....revenues due to larger number of segments being booked through the use of the appellant's CRS vis-à-vis competitor's CRS in India as well. The aforesaid expenses, it will be appreciated, have a nexus with the earning of fee from bookings, made from India and the same are allowable deduction. Re: Ground of Appeal No. 15 - CRS income - Royalty Alternatively, the assessing officer has held that consideration of Euro 4,90,13,000 is taxable in India as royalty both under section 9(1)(vi) of the Act and Article 13 of the Indo-Spain DTAA (―the Treaty") by holding hold that the 'booking fee' received by the appellant from various airlines is payment for use of process and scientific equipment and therefore, taxable as royalty under section 9(1)(vi) of the Act. In this regard, our submission is as under: The term ―royalty" is defined in Explanation 2 to section 9(1)(vi) of the Act as 'consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) the transfer of all or any rights (including the granting of a licen....
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....ised doubts as to whether consideration for use of computer software is royalty or not; whether the right, property or information has to be used directly by the payer or is to be located in India or control or possession of it has to be with the payer. Similarly, doubts have been raised regarding the meaning of the term process. Considering the conflicting decisions of various courts in respect of income in nature of royalty and to restate the legislative intent, it is further proposed to amend the Income Tax Act in following manner:- (i) To amend section 9(1)(vi) to clarify that the consideration for use or right to use of computer software is royaltyby clarifying that transfer of all or any rights in respect of any right, property or information as mentioned in Explanation 2, includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. xxx xxx  ....
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.... specified territory, as the case may be, to promote mutual economic relations, trade and investment, or xxxxxxxxx, (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. Explanation 1...................... Explanation 3:- For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force" As the appellant, being a resident of Spain, has the option in law to apply the provision of the Act or the Treaty, the taxability of the appellant's income in relation to the CRS, has been....
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....haft: 310 ITR 320, wherein it was held that by an unilateral amendment it is not possible for one nation to tax income which otherwise was not subject to tax under the relevant Tax Treaty. Further, the Delhi High Court in the case of DIT vs. Nokia Network OY: ITA No. 359 of 2005, after considering the retrospective amendment to section 9(1)(vi) of the Act by Finance Act, 2012, observed that by virtue of such amendment, there was no change in the Tax Treaty and following the decision in the case of DIT vs. Ericsson A.B: 246 CTR 422, held that payment for a copyrighted article does not constitute royalty under Indo-Finland Treaty. Relevant extracts of the ruling are as under: He, thus submitted that the question of "copyrighted article" or actual copyright does not arise in the context of software both in the DTAA and in the IT Act since the right to use simpliciter of a software program itself is a part of the copyright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the Tribunal has dealt with this aspect in its judgment in Gracemac Corporation vs. Asstt. Director of IT (International Tax....
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....the Appellant, which in my view is without foundation in laws, that subs (2) authorises Canada or Germany to unilaterally amend the Tax Treaty from time to time as their domestic needs may dictate." The above decision has been relied on by the Mumbai High Court in the case of CIT vs. Siemens Aktiongesellschaft (supra). The assessing officer held that the payment made by the Airlines to the appellant constitute 'royalty' since the same involves use of or right to use a computer software or use of process and/or equipment. In the present case, the payment by the various Airlines to the appellant under agreement with the airlines, is for facilitating display of airlines information on the computer screen of the travel agents to enable them to obtain airlines information and make reservations. It is a static display used to communicate to the travel agents certain information pertaining to the participating airlines including but not limited to instructions for pricing support, marketing information, special request procedures and briefings. Any computer can be used to access the information and avail the aforesaid services once the connectivity is provided. ....
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....ngement of copyright. Examples of such arrangements include licenses to reproduce and distribute to the public software incorporating the copyrighted program, or to modify and publicly display the program. In these circumstances, the payments are for the right to use the copyright in the program (i.e., to exploit the rights that would otherwise be the sole prerogative of the copyright holder). It would be noted that where a software payment is properly to be regarded as a royalty there may be difficulties in applying the copyright provisions of the Article to software payments since paragraph 2 requires that software be classified as a literary, artistic or scientific work. None of these categories seems entirely apt. The copyright laws of many countries deal with this problem by specifically classifying software as a literary or scientific work. For other countries treatment as a scientific work might be the most realistic approach. Countries for which it is not possible to attach software to any of these categories might be justified in adopting in their bilateral treaties an amended version of paragraph 2 which either omits all references to the nature of the copyrights or refer....
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....―site licenses', ―enterprise Licenses', or ―network licenses'. Although these arrangements permit the making of multiple copies of the program, such rights are generally limited to those necessary for the purpose of enabling the operation of the program on the licensee's computers or network, and reproduction for any other purpose is not permitted under the license. Payments under such arrangements will in most cases be dealt with as business profits in accordance with Article 7." (emphasis supplied) As per the OECD Model Commentary to Article 12, not all transfers of copyright rights generate royalties; distinction is made between the transfer of partial rights and the transfer of the full copyright rights. Where under a transaction, rights acquired in relation to the copyright are limited to enable the user only to operate the program, such transaction would be dealt as a commercial income in accordance with Article 7 (Business Profits). It has also been clarified that where the transferee, obtains rights to make multiple copies of the program for operation only within its own business, referred to as ―enterprise licenses" or ―netwo....
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.... work; (vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi); (b) in the case of a computer programme,- (i) to do any of the acts specified in clause (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: PROVIDED that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental.] Explanation: For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation." In view of the above, it emerges that in terms of the definition of 'royalty' under Article 13 of the Treaty, unless any of the rights mentioned in section 14 of the Copyright Act, 1957 are transferred, it cannot be said that there is a transfer of all or any rights in a copyright, the consideration for which could be described as 'royalty'. In terms of section 14 of the Copyright Act, 'copyright' means the exclusive right to reproduce including storing in any me....
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....royalty. The Delhi High Court upheld the order of the Tribunal that amount received by the assessee under the license agreement for allowing the use of the software would not be royalty under the DTAA since what was transferred was neither the copyright in the software nor the use of the copyright in the software, but what was transferred was the right to use the copyrighted material or article which was distinguishable from the rights in a copyright. Accordingly, payments received by the assessee in this regard would be taxable as business income. "97. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. 98. We are not in agreement with the decision of the Karnataka High Court in the case of Samsung Electronics Co. Ltd (supra) that right to make a copy of the soft....
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.... hands of the non-resident in the absence of a permanent establishment of such non-resident in India. The Court held that the consideration paid for software purchase was not royalty since the purchaser has not been given any of the seven rights under Section 14 (a) (i) to (vii) of the Copyright Act, 1957 and, therefore what is transferred is not a copyright but actually a copyrighted article. Further, since the purchaser cannot commercially exploit the software, therefore a copyright is not transferred. In the case of Alcatel Lucent Canada v. CIT: 372 ITR 476 (Delhi), the assessee a French company was engaged in the manufacture, trade and supply equipments and services for GSM Cellular Radio Telephones Systems. The assessee had supplied hardware and software to various entities in India. Software licenced by the assessee embodied the process which was required to control and manage the specific set of activities involved in the business use of its customers. The AO alleged that the consideration of supply of software was taxable as royalty under section 9(1)(vi) of the Act. The High Court relied upon the rulings of Jurisdictional High Court in the case of DIT v. Ericsson ....
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....t, 1957, held that in order to bring a particular consideration within the definition of the term 'royalty' under the Act or the DTAA, it was necessary that the 'copyright' is actually transferred. Mere transfer of the end product embodying such copyright would not suffice. The Authority explained that copyright, in essence, is a negative right and restricts others from doing certain acts to the exclusive ownership of the copyright holder, the emphasis being on the word 'exclusive'. The Authority also highlighted the fact that ownership in copyright is different from ownership of the physical material or the product in which the copyright work may happen to be computed. It is only in a case where the copyright itself is made available to the other person, could it be said that there was a transfer of right to use the 'copyright'. However, where the product which embodies the copyright is sold or transferred the same would not amount to transfer of a copyright and the consideration therein would not come within the realm of 'royalty' under the Act/DTAA. The Authority, in this regard, quoted with approval the decision of the Special Bench of the Delhi Tribunal in the case of Motorola....
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....able for any use, directly or indirectly, by another are almost the same as in Dassault Systems K.K.'s case (supra). There is also a specific provision in both the Agreements that Intellectual Property Rights would always remain with the owner of the product or the licensor. Such restrictions placed on the user of software and the fact that the licensee/customer had no right to interfere with source code and that the licensed product cannot be commercially exploited by the licensee/customer are inconsistent with the inference that the rights in respect of copyright or the right to use the copyright of the computer programme have been conveyed to the customer. Further, there is nothing in the Agreement to suggest that the underlying technical knowledge in developing the software has been transferred. Notwithstanding the grant of authority to use the licence (on non-exclusive and non-transferable basis), the copyright imbedded in the software remains with the owner in tact. ........... 15. In the light of the foregoing discussion, we answer question No. 2 in the negative by holding that the amount payable under SLTC contract to the applicant does not amount to 'roya....
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....the Act). The software was customer specific and could not be reused or duplicated. The distinction between the payment made for copyrighted right and copyrighted article as made in the OECD commentary on Article 12, was appreciated by the Tribunal. The assessee acquired a Copyrighted article and not Copyright of the rights, i.e, there was no acquisition of rights in the Copyrighted program which could be exploited commercially. The Tribunal, therefore, concluded that the payment for the aforesaid software was not liable to tax in India and the assessee was not required to deduct tax at source under section 195 of the Act in respect of the aforesaid payment. In the case of Motorola Inc. vs. DCIT: 95 ITD 269 (SB) (Del) the assessee was the leading supplier of telecommunication equipments comprising of both hardware and software. They had entered into supply agreements with cellular operators in India for supply of hardware and software during the relevant assessment years and received payments therefore. The assessee had no permanent establishment in India and, therefore, payments received by it could not be taxed as business profits under article 7 of the....
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....Customer Management Group Inc. v. ADIT: 26 ITR(T) 443 (Delhi - Trib.) ADIT (IT) v. First Advantage (P.) Ltd.: ITA No.3031 & 3032/Mum/2010 (Mum) ADIT(IT) v. Baan Global BV: 49 ITR(T) 73 (Mum) Factset Research: 317 ITR 169 (AAR) DDIT vs. Solid Works: (2012) 51 SOT 34 (Mum) Kansai Nerolac Paints Ltd.: 134 TTJ 342 (ITAT Mum) DDIT v. Alcatel USA International: 43 SOT 31 (Mum) (URO) DDIT vs Reliance Industries Ltd.: (2011) 43 SOT 506 (ITAT Mum) Novel Inc. v DDIT [2011] 16 taxmann.com 186 (Mum.) ADIT vs TII Team Telecom International Private Limited (2011) 140 TTJ (Mum) 649 ADIT vs Siemens Aktiongesellschaft [2012] 19 ITR (Trib) 336 (Mum) WNS North America Inc. vs ADIT (2012) 152 TTJ (Mum) 145 Channel Guide India Ltd. vs ACIT (2012) 153 TTJ (Mum) 432 Allianz SE vs ADIT ITA No. 1569/Pune/ 2008 Daimler Chrysler India (P.) Ltd. vs Dy.CIT [2009] 29 SOT 202 (Pune) DCIT v.Metapath Software International Ltd. [2006] 9 SOT 305 (Del) Mphasis BFL Ltd. vs ITO [20....
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.... the expression "transfer of right to use any goods" occurring in a sales-tax enactment. Obviously, where there is a transfer, all the possessory rights including control over the goods delivered will pass on to the transferee. It was in that context, emphasis was laid on 'control'. The Supreme Court affirmed the conclusion of the High Court that the effective control of machinery even while the machinery was in use of the contractor remained with RIN Ltd. which lent the machinery. The distincti0n between physical use of machinery (which was with the contractor) and control of the machinery was highlighted. The ratio of that decision cannot be pressed into service to conclude that the right of usage of equipment does not carry with it the right of control and direction whereas the phrase 'right to use' implies the existence of such control. Even in a case where the customer is authorized to use the equipment of which he is put in possession, it cannot be said that such right is bereft of the element of control. We may clarify here that notwithstanding the above submission, it is the case of appellant that, it has neither possession nor control of any equipment of BT....
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....plement, instrument etc.) to work especially for a particular purpose; manipulate, operate". The various shades of meanings given in the decided cases in America are referred to in Words and Phrases, Permanent Edition Vol. 43A. Some of them are quoted below: "The word 'use' means to make use of; convert to one's service; to avail oneself of; to employ". (Miller v. Franklin County) "The word 'use' means the purpose served, a purpose, object or end for useful or advantageous nature". (Brown v. Kennedy) "'Use' means to employ for any purpose, to employ for attainment of some purpose or end, to convert to one's service or to put to one's use or benefit." (Beach v. Liningston) "'Use', as a noun, is synonymous with benefit and employment and as a verb has meaning to employ for any purpose, to employ for attainment of some purpose or end, to avail one's self, to convert to one's service or to put to one's use or benefit." (Esfeld Trucking Inc. v. Metropolitan Insurance Co.) 12.8 The word 'use' in relation to equipment occurring in clause (iva) is not to be understood in th....
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....', the payment made by the appellant to BTA cannot be brought within the royalty clause (iva). In our view, the answer cannot be in the affirmative. Assuming that circuit is equipment, it cannot be said that the appellant uses that equipment in any real sense. By availing of the facility provided by BTA through its network/circuits, there is no usage of equipment by the appellant except in a very loose sense such as using a road bridge or a telephone connection. The user of BT's equipment as such would not have figured in the minds of parties. As stated earlier, the expression 'use' occurring in the relevant provision does not simply mean taking advantage of something or utilizing a facility provided by another through its own network. What is contemplated by the word 'use' in clause (iva) is that the customer comes face to face with the equipment, operates it or controls its functioning in some manner, but, if it does nothing to or with the equipment (in this case, it is circuit, according to the revenue) and does not exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of ent....
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....e of affording the facility, has provided special infrastructure/network such as a dedicated circuit (as in the instant case), controversies may arise as to the nature of payment received by the service provider because it may not stand on the same footing as standard facility. However, even where an earmarked circuit is provided for offering the facility, unless there is material to establish that the circuit/equipment could be accessed and put to use by the customer by means of positive acts, it does not fall under the category of 'royalty' in clause (iva) of Explanation 2." (emphasis supplied) Kind attention is further invited to the decision of the Madras High Court in the case of Skycell Communications Ltd. v. Dy. CIT: 251 ITR 53. In that case, the Court, in the context of section 9(1)(vii) of the Act dealing with 'fees for technical services', held that rendering of a service which involves use of technical/sophisticated equipment would not ipso facto lead to the conclusion that the payment is for rendering of a ―technical" service. The relevant observations of the Court are as under: "Satellite television has become ubiquitous, and is....
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..... .... ..... ..... "Technical service" referred in section 9(1)(vii) contemplates rendering of a "service" to the payer of the fee. Mere collection of a "fee" for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services." [Emphasis supplied] It is further submitted that the reliance placed upon by the assessing officer on the decision of the Delhi Bench of the Tribunal is entirely misplaced. Reference in this regard made to the recent decision of the Authority for Advance Rulings in the case of Dassault Systems KK [AAR 821/2009] wherein the Authority negated the contention of the Revenue that the consideration paid to the owner of the software license by the software distributors/end user (licencees) was for the use of process in the software. The Authority held that since the essence of the transaction was not to make the use of process available to the end user or the reseller but limited to the sale and supply of the software, the consideration arising therefrom could not be held to be 'royalty'. The Authority further held that the process in the software was ....
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....he right of using the process involved in the software has been conveyed to the end-user in the instant case. Usage of process contained in the software or acquisition of rights in that process is not the real nature and substance of the transaction. The 'process' contemplated by the definition clause is broadly referable to know-how. The scope of preceding expression 'formula' too belongs to the same genus. By making use of or having access to the computer programs embedded in the software, it cannot be said that the customer is using the process that has gone into the end-product or that he acquired any rights in relation to the process as such. Nor can it be said that following the series of instructions so as to be able to effectively make use of the programs contained in the software amounts to the use of process or acquisition of any rights in relation thereto. The Revenue's contention on this score therefore fails. [Emphasis supplied] In the present case, too, as submitted hereinabove, the appellant uses sophisticated technology/software in the course of providing a service/facility but the appellant does not divulge any process involved in the technology/software t....
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....ts in India. The booking gets completed outside India in the Airline host system and the only the result thereof is communicated back to the travel agent. Paragraph (6) of Article 13 of the Treaty provides the source rule regarding royalties. It states that royalties shall be deemed to arise in the Contracting State when the payer is a resident of that State. Subject to other considerations, therefore, if the receipts of the appellant under consideration are treated as of the nature of royalties, the booking fee paid by non-resident airlines cannot be deemed to arise in India. However, the said paragraph (6) further provides that if the payer has in a Contracting State a permanent establishment or fixed base in connection with which the liability to pay the royalties was incurred and such royalties are borne by such permanent establishment or fixed base, then, such royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated, irrespective of whether the person paying the royalties is a resident of that Contracting State or not. Kind attention in this regard is invited to the decision of the Mumbai Bench of....
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....ppellant that the payment for live feed rights does not constitute Royalty, I do not consider it necessary to decide on this issue. This is because I am in full agreement with the contention of the appellant that even if one assumed that the payment was in the nature of Royalty, such a Royalty does not arise in India having regard to the provisions of Article 12(7) of the Treaty. I concur with the opinion of Mr. Phillip Baker on the subject and hold that unless there is a direct nexus with the activities of the PE and the incurring of the said expenditure, the Royalty cannot be said to arise in India. Since there is no such nexus in this case, I hold that the payment to GCC cannot be said to arise in India with the meaning of Article 12(7) of the Treaty." Aggrieved by the order of CIT(A), the Revenue filed an appeal before the Tribunal. The Tribunal, while dismissing the appeal of the Revenue held that the mere existence of a PE in India cannot lead to a conclusion that royalties arise in India. In addition to the existence of PE, for royalties to arise in India under Article 12 of the Treaty, it is essential that liability to pay such royalties has been "incurred in conne....
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....r fixed base , trade or business located in India, the amount is not taxable in India. Further on going through Schedule-XV, we find that SET Satellite Singapore has not recovered any amount from the Indian PE, In the Royalty to arise in India as envisaged under Article 12(7) of the Treaty, the condition which reads as follows:- "Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority, a statutory body or a resident of t. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated." 20. Firstly the payer is not a resident of India. Secondly the liabilit....
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....king fees' received by the appellant from the airlines is held to in the nature of 'royalty', the assessing officer could tax such income only as business income as per the mandate of section 44DA of the Act and Article 13(5) of the Treaty. Reliance in this regard is placed on the following decisions: Article 13(5) of the Treaty provides as under: "5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 15, as the case may be, shall apply." Similarly, section 44DA of the Act, reads as under: 1. The income by way of royalty or fees for technical ....
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....hold that Article 12 of the DTAA is not applicable. Sequitor is Article 7 of the DTAA is applicable. Interpretation and provisions of Article 7 have been examined while answering question No.3. Question Nos. 1 and 2 are accordingly answered. 12. Article 7 deals with business profits and will apply, once it is held that Article 12 is not applicable. Paragraph 3 of Article 7 is the edifice which is to be examined to answer the substantial question No.3 mentioned above. A careful examination of the said paragraph shows that to determine the profits of a PE, the assessee is to be allowed deductions "in accordance with and subject to limitations of the law" relating to tax in the contracting State, i.e., in the present case Income Tax Act in India. It further stipulates that expenses incurred for the purpose of the business of a PE would include executive and general administrative expenses so incurred regardless whether they have incurred in any contracting State, i.e., India/Australia or elsewhere. However, the material words in paragraph 3 of Article 7 are "the assessee shall be allowed as deduction, in accordance with and subject to limitation of the law relating to tax (i.....
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....yalty'. Even otherwise, it is submitted that the Revenue has to come to a firm conclusion whether the booking fee received by the appellant is taxable as income of the PE or as royalty. The flip-flop attitude adopted by the assessing officer clearly demonstrates that he was not sure about the nature of income and its taxability in India.The assessment order, in our respectful submission, it vitiated for the above reason too. Re: Ground of Appeal No. 16 - Non grant of TDS The AO be directed to grant credit of TDS of Rs. 5,66,93,368 Re: Ground of Appeal No: 17 -No interest chargeable under section 234B of the Act At the outset it is submitted that the revenues receivable by the applicant non-resident company are subject to deduction of tax at source. Accordingly, the question of payment of advance tax and consequent levy of interest under section 234B of the Act for shortfall in payment of advance tax does not arise.In that view of the matter, levy of interest under section 234B of the Act is liable to be deleted for the following reasons: As per the provisions of section 234B of the Act, an assessee who is liable to pay ad....
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....he further submitted that even while raising the bill, the assessee used to mention the amount of the TDS and thus, the rate of TDS was determined by the assessee and not by the payers i.e. BGEPIL. In support of her contention, she has relied upon the decisions of Hon'ble Delhi High Court in the case of DIT vs. Jacobs Civil Incorporated/Mitsubishi Corporation, 235 CTR 123 (Delhi) and in the case of DIT vs., Alacatel Lucent USA, Inc., 264 CTR 240 (Delhi). After considering the arguments of both the sides and perusing the decisions of Hon'ble Uttarakhand High Court and Delhi High Court, we are unable to agree with the contention of Ld. CIT-DR (Intl. Tax). The Hon'ble Jurisdictional High Court in the case of DIT vs. Maersk Co. Ltd., 334 ITR 79, held as under: "17. Thus, from a combined reading of sections 190, 191, 192, 198, 200, 201, 203 and 204 of the Act, it is clear that as soon as tax is deducted at source by the person responsible to make the payment, the liability of the assessee to pay the tax gets discharged. If the tax is not deducted, it remains payable by the assessee direct as provided under section 191 of the Act. Further, the liability to pay interest under sec....
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....to the case of the assessee. Though the decision of Delhi High Court in the case of Alcatel Lucent USA. Inc. (supra) relied upon by the Ld. CIT-DR, supports the case of the Revenue under certain circumstances, however, when there is a decision of Hon'ble Jurisdictional High Court, the ITAT is bound by the decision of Hon'ble Jurisdictional High Court in preference to any other High Courts. We, therefore, respectfully following the above decision of Hon'ble Jurisdictional High Court, hold that the assessee was not liable to pay interest u/s 234B of the Act. Accordingly, the same is deleted. Reliance is further placed on decision of the Delhi High Court in the case of DIT v. GE Packaged Power Inc.: 373 ITR 65, wherein the High Court held that no interest under section 234B of the Act can be levied on the assessee-payee on the ground of non-payment of advance tax because the obligation was upon the payer to deduct the tax at source before making remittances to them. The relevant extracts of the decision are reproduced hereunder: "22. This Court, therefore, holds that Jacabs(supra) applies in such situations; Alcatel Lucent (supra) can be explained as a decision turni....
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....g effect: "Provided that for computing liability for advance tax, income-tax calculated under clause (a) or clause (b) or clause (c) shall not, in each case, be reduced by the aforesaid amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from any income, if the person responsible for deducting tax has paid or credited such income without deduction of tax or it has been received or debited by the person responsible for collecting tax without collection of such tax." The said proviso is applicable from assessment year 2013-14 and is, therefore, prospective in operation. The insertion of the proviso cannot be construed to have retrospective effect so to expose a non-resident company to levy of interest under section 234B of the Act for assessment years prior to assessment year 2013-14, where tax was deductible at source on the income payable to the non-resident, if such income is held to be chargeable to tax in India." 9. The learned departmental representative vehemently contested the argument of the learned authorised representative and submitted that the order of the tribunal has....
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....d hence in terms of s.9 (l)(i) the income in respect of the bookings which take place from the equipment in India can be deemed to accrue or arise in India and hence taxable in India (paragraph 17.2 of the order). The Hon'ble Tribunal has briefly summarized the facts in this paragraph and the Revenue strongly urges the Hon'ble Tribunal to confirm the order of the lower authorities in on this issue for AY 2006-07 for the reasons that all the facts available and considered by the Hon'ble Tribunal in those years not only continue to remain present in this year but the assessee's business presence in India has increased substantially as noted in the assessment order and briefly stated in this note. The issue of PE based on new facts brought on record is discussed in paragraph 8 of the assessment order (page 32 to 37 of the order). 4. The Hon'ble Tribunal in paragraph 23.1 of the said order (page 310 of the PB) had held that the appellant can be said to have established a PE within the meaning of paragraph 1 of Article 5 of Indo- Spain treaty. Further, in paragraphs 23.3 and 23.4 it was held that Amadeus India Private Limited (AIPL) is a dependent agent of t....
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....hi High Court has dismissed the appeals filed by the assessee. Copy of this Order is available on pages 348 to 350 of the PB for AY 2009-10. With regard to the assessee's appeals whether it is running permanent establishment in India or not, the Hon'ble Court observed that, ' We find that all the Authorities below, caking into consideration various facts, have arrived at the finding of fact that the assessee is having permanent establishment in India. This being a finding of fact, no question of law arises. These appeals are accordingly dismissed'. It appears with regard to the Department's appeals the Hon'ble Court noted that, "The issue raised in these appeals is covered by the judgment in the case of Director of Income Tax Vs. Galileo international Inc." And following that decision, appeals were dismissed. 7. Copy of the decision in the case of Galileo International Inc is available at pages 245-249 of the PB. The questions before the Hon'ble Court were: whether the Tribunal attributed revenue or income to the Indian operations and whether the payments made to Indian agent is further allowable as expense. The Hon‟ble Court in deciding t....
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.... to consider our reservations and above ITAT and High Court judgment to decide the same afresh in accordance with law and above observations after giving the assessee an opportunity of being heard. It is not out of place to state that the Hon'ble Tribunal set aside the issue taking into account the order of the Hon'ble Tribunal for AY 1996-97 to 1998-99. Accordingly, the claim of the Ld AR that the method of attribution of profits as given in the order of the Hon'ble Tribunal for AY 1996-97 to 98-99 directly apply is against the law and has not been accepted by the Tribunal for AY 2001-02 and 2002-03. The Hon'ble Delhi High Court vide judgment in I.T.A. No.1040 of 2009 dated 24.1.2011 did not interfere in the matter and therefore the order of Hon'ble Tribunal is final. Assessment Years 2003-04 to 2005-06 10. Pages 381 to 390 of the PB contains the order of the Hon'ble Tribunal dated 29.10.2010 in the case of the assessee. In these cases the Revenue was in appeal against the order of the Ld CIT (A) and the assessee had filed cross objections. 11. The Ld AR's arguments are noted at paragraphs 3 to 6 of the Order and it was argued....
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.... in India. Therefore, attribution of profits depends on the facts and circumstances in each year. Each year is a separate unit of assessment and income tax proceedings are applicable from year to year depending upon facts of each year and the principle of res judicata do not apply to income tax proceedings and therefore the facts in the case of the assessee for AY 1996-96 being the start of the business of the assessee cannot be relied for the year under appeal. Attribution of profits needs to be based on the facts and circumstances for the relevant year. 15. The claim of Ld AR that there is no change in activities in comparison to the year corresponding to assessment years 1996-97 to 1998-99 is baseless and facts are contrary and speak for itself. During the year there has been significant increase in the business of the assessee in India in comparison to the years 1995-96 to 1997-98 earlier decided by the Hon'ble Tribunal. This has been explicitly brought out in the assessment order and those findings stand confirmed by the Ld CIT (A). Accordingly it is prayed that the order of the lower authorities be confirmed and the appeal of the assessee be dismissed. 1....
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....ers for their leisure requirements (Page 4 of the assessment order) Agreement with Cox and kings, an international travel agent in India provides various products andi services by Amadeus India which were not provided in earlier years (Page 4 and 5 of the assessment order). No bookings for car and hotel segments Booking for car and hotel segment added (Page 5 of the assessment order). This indicates that Amadeus has PCA in India with regard to cars and hotels also No charges have been received from subscribers by the assessee or its agent namely AIPL for allowing use of CRS( paragraph 401 on page 282 of the PB) Amadeus is paying a service fee to travel agent (subscriber) and this is based on productivity targets (Page 4 and 5 of the assessment order). No incentive was paid in those years Travel agents and Airlines in India are being paid incentives (paragraph 7 of the order). Total incentives of EUR 8,755,000 have been paid during the year (page 18 of the assessment order) (This indicates robust business and aggressive marketing in India. Aggressive marketing is also indicated by paying incentive to travel agents for their agreeing to use....
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..... The product that is the services of the airlines exists outside India. The information conveyed from the use CRS exists outside India (9th sub -paragraph of paragraph 801 of the ITAT order on page 286 of the PB Airlines companies of India are the major revenue source now. 17. The Ld AR has claimed that the fresh agreement between the assessee and AIPL effective 1.10.2004 has been considered in the order for AY 2005-06 and Hon'ble Tribunal has followed the order for AY 1996-97 to 1998-99. For the reasons mentioned in paragraph 10 to 12 of this written submission and also that the assessee had suppressed the important fact of availability of the Tribunal Order for immediately preceding years that had differed with the earlier decision. This makes the tribunal Order as not a good law. Therefore, this claim of the assessee requires to be rejected." 10. The learned authorised representative submitted a rejoinder to the above submission of the learned departmental representative which is as under:- "Rejoinder to the Submission of the Ld. Departmental Representative In response to the reply to the appellant‟s submissions, filed by the ....
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....998-99. However. in the A.Y. 2005-06, the AO has stated that the facts of this assessment year are different from the facts of the earlier assessment years. The principle of res-judicata is not applicable in income-tax proceedings. Each year is a separate and distinct year and a different view can be taken in an assessment year based on the facts of the case. Keeping in view the above facts, discussion of various issues and the Hon‟ble ITAT Delhi‟s decision in appellant‟s own case it is held as under: 1............. 2. Keeping in view the facts of the appellant‟s case for the years under consideration and the FAR analysis carried out in its case by the Hon‟ble ITAT for AYs 1996-97 to 1998- 99, (the facts of the years under consideration being identical), 15% of the revenue accruing or arisine to it in India is held as a reasonable attribution as income accruing or arising to the appellant in India and chargeable under section 5(2) read with section 9(1 )(i) of the Act. ............. 6. As already held above, 15% of the revenue generated for the bookings made within India is the profit attributable to the PE.....
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....e assessee, the Hon'ble Delhi Tribunal passed order on 27 April 2009. Ground Nos. 1, 2 and 3 dealing with the liability to tax and permanent establishment were held against the assessee. Regarding attribution of profit to the PE, the Hon'ble Tribunal, as per paragraph 7, has set aside the issue about estimate of taxability of Indian PE back to the file of AO to consider our observations and above ITAT and High Court judgment to decide the same afresh in accordance with law and above observations after giving the assessee an opportunity of being heard. It is not out of place to state that the Hon 'ble Tribunal set aside the issue taking into account the order of the Hon'ble Tribunal for AY 1996-97 to 1998-99. Accordingly, the claim of the LdAR that the method of attribution of profits as given in the order of the Hon 'ble Tribunal for AY 1996-97 to 98- 99 directly apply is against the law and has not been accepted by the Tribunal for AY 2001-02 and 2002-03. The Hon 'ble Delhi High Court vide judgment in IT.A. No. 1040 of2009 dated 24.1.2011 did not interfere in the matter and therefore the order of Hon 'ble Tribunal is final. Reply: The ....
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....2 and 2002-03, was limited to examination of expenditure incurred by the appellant and not the issue of attribution of revenue. Thus, the assessing officer in terms of the aforesaid decision of the Tribunal (as modified by the High Court) is only required to determine the expenses allowable against 15% of the revenues from Indian bookings while computing the income attributable to the PE of the appellant in assessment years 2001-02 and 2002-03. The assessing officer in terms of the aforesaid order of the Delhi High Court cannot tinker with the percentage (15%) of the revenues which is to be attributed to the activities of the alleged PE of the appellant in India in computing the income attributable to the PE in India. The Ld. CIT DR, has thus misread the findings of the Hon‟ble High Court. In fact, the department, in the Special Leave Petition No. 32062 of 2011, for assessment year 2001-02 (and similarly in assessment year 2002-03) has agitated the issue of attribution of revenue and not the issue of taxability of the permanent establishment in entirety, which demonstrates that the Revenue has accepted the modification made by the Hon‟ble High Court. 3. "....
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.... of the Delhi Bench of the Tribunal in the case of Sabre Inc. vs DDIT and DCIT: ITA Nos. 1215 and 1216/Del/2005, which is in the same business as the appellant, wherein the Tribunal took cognizance of the fact that the ratio of attribution fixed on the basis of relevant material should not be arbitrarily disturbed. The relevant observations of the Tribunal read as under: "6. High Court upheld the approach adopted by the Tribunal to first arrive at the figure relating to the revenue generated in India and abroad and concluding that out of the revenue accrued to the assessee in respect of these bookings 15% thereof should be attributed to India, which was keeping in view a very minor portion of the activity being carried out outside India. It also so observed that the Tribunal focused its discussion to the relevant consideration namely how much out of the aforesaid would be attributable "profits". The High Court concluded that the Tribunal addressed itself to the issue of profit that while giving a finding of fact that 15% of the revenue can be attributed to the activities in India, the Tribunal had not taken into consideration the commission paid to Interglobe and answered ....
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....case for assessment year 2001-02 and 2002-03. However, the Delhi High Court‟s order modifying the aforesaid order of the ITAT in appellant‟s own case for assessment year 2001-02 and 2002-03 was not brought to the notice of the Tribunal by the Department and was hence not considered by the ITAT in Galileo‟s case. The aforesaid order of the Tribunal in Galileo‟s case, therefore, has no precedent value, having been rendered without considering the decision of the Hon‟ble High Court modifying the decision of the co-ordinate Bench of the Tribunal followed in the case of Galileo. In any case the decision of the ITAT has been set aside by the Delhi High Court in 224 CTR 251. 5. 15. The claim of Ld AR that there is no change in activities in comparison to the year corresponding to assessment years 1996-97 to 1998-99 is baseless and facts are contrary and speak for itself. During the year there has been significant increase in the business of the assessee in India in comparison to the years 1995-96 to 1997-98 earlier decided by the Hon'ble Tribunal. This has been explicitly brought out in the assessment order and those findings stand confi....
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.... of the assessment order). A. Position of appellant accepted in AY 2005-06 In AY 2005-06, the same assessing officer held that Amadeus Global is paying no compensation to Amadeus India for the main activity of marketing the CRS and providing the support to travel agents, therefore a profit is required to be attributed (refer pg 461/ 471-473 of the PB). The CIT(A), in that year, after examining the Distribution Agreement (refer Pg 334- 337 of the PB) held that ―payment to Amadeus India is being made for all the services being performed by it in India including distribution/ marketing of Amadeus Products in India, training to personnel of subscribers, maintenance of computer hardware and software at the subscribers' locations and providing access to subscribers to the Amadeus CRS. The aforesaid order has been confirmed by the Tribunal and the Hon'ble High Court. Further, in AY 1996-97, the appellant was held to have 'business connection' under section 9(1 )(i) of the Act on account of the Indian distributor, who was under the distribution agreement required to market/ distribute the CRS amongst travel agents and provide them connectivity to the appellant's ....
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....eus India to use when defining the access rights of a travel agency. Without prejudice, if the DR's contention is that the Indian distributor is not involved in any software/data export, then the assessing officer's submission that the ITAT in earlier years did not attribute any income to the marketing/distributor activity carried Amadeus India has set up key Amadeus value services in India that consists of toll free numbers for help desk, 24 hours help desk in three cities (Page 4 of the more than 15% of the revenues need to be allocated to the alleged PE I suggest an additional scope of service carried out for the appellant There was no hotel reservation service in India assessmenIndian Hotels reservation System, ord r). a unique Amadeus reservation service for hotels in the two and three star range. These hotels are widely used in India for the junior and mid-level staff of corporations and by many business travelers for their leisure requirements (Page 4 of the assessment order) in India.The hotels are additional content added to the existing Global Distribution System [―GDS"] in the same way that new....
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....es to Airlines, it is submitted that the Airlines are given discounts/rebates and are not paid any incentive. Further, it would be pertinent to point out that not all the Indian airlines receive such discounts. As regards the submissions of the Ld. CIR DR that payment of incentives by the appellant indicates aggressive marketing in India, it is submitted that payment of incentive(s) and offering of discount(s) is a common business tactic and such offerings are commensurate with growth in the Indian travel market, which should not be looked at as an expansion of scope of business activities. Aggressive marketing is also indicated by paying incentive to travel agents for their agreeing to use only Amadeus system (Page 8 of the assessment order). Same as above Started providing satellite ticket printers (page 8 of the assessment order). Total assets in India increased to EUR 12,508,073 (Page 21 of the order). Providing satellite ticket printers is simply a use of newer technology to support the existing businesses effectively. The use of emulation software has changed the use of CRS (Page 21 of the order). The CRS ....
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....#39;s computer in Germany is also responsible for all other functions like keeping data of booking made worldwide and also keeping track of all the airlines/hotels worldwide who have entered into PCA (Paragraph 18 of the Order on pages 298 and 299 of the PB). Various domestic airlines (Indian) are now using the Amadeus system not only for international travel but domestic travel. So all the elements travelers, ticket agent, airlines are in India. Therefore, situation has changed and activities outside India are ONLY MINISCULE PORTION. Same as above. Further, it is to be appreciated that substantial efforts/ investment is made and expenditure is incurred by the appellant outside India on an ongoing basis to develop new products, adding new international airline content to the CRS, improving the existing CRS, upgrading the huge and sophisticated infrastructure so as to be ahead of competition and in order to make its CRS appeal more to the subscribers. The marketing/ distribution activity carried out in India by the Indian distributor is neither sophisticated nor cerebral and does not require intellectual involvement of the level/kind exercised at appellant's end abroad. In ....
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.... in facts were also noted by the CIT(A), which is evident from Page 331 of the PB. It is only after considering the orders of the lower authorities, which sufficiently records the changes and the facts, that the Tribunal and thereafter the High Court held 15% as reasonable attribution, after following the orders of the preceding years. (ii) Regarding reliance on the Hon'ble Tribunal's order for AY 2001-02 and 2002-03, we rely on our submissions in point 3 above. Submissions: In so far as the activity of booking of tickets by travel agents in India using CRS owned by the appellant is concerned, there is no change in the business model in the year under consideration as compared to earlier years. The role of the travel agents located in India in respect of booking of tickets using CRS system, as in earlier years, is limited to initiating a request for booking, which is processed in the appellant's main frame located at Erding, Germany and finally generating the ticket for a confirmed reservation. The computers at the desk of the travel agents in India are configured only for the aforesaid limited purpose, viz., to display information on the screen of comput....
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....A) confirming the action of the AO in alternatively holding that the fees of Euro 49013000 received by the asssessee was taxable in India as royalty under the Indian Income Tax Act and Article 12 of the treaty. The ld CIT(A) held that as he has already held that assessee has a permanent establishment in India therefore, he did not decide the issue of alternative taxation of royalty. The ground No. 5 relates to the alternative ground of taxation. Ground number 6, 11, 12, 13 and 14 relates to the attribution of profits to the permanent establishment of the assessee. The ld CIT(A) held that as he has already held that assessee has a permanent establishment in India therefore, he did not decide the issue of alternative taxation of royalty. 13. Now the above issue is already been decided by the coordinate bench in assessee‟s own case for AY 2003-04 to 2005-06 in ITA No. 2424, 2425, 2426/Del/2010 as per order dated 29/10/2010 wherein, the whole issue is considered as under:- "7. We have heard both the parties on this issue. So as it relates to the attribution of income arising to assessee in India, the issue is covered by para 18 of the aforementioned order of the Tribu....
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.... carried out in India, the same has to be determined on the factual situation prevailing in each case. However, broadly to determine such attribution one has to look into the factors like functions performed, assets used and risk undertaken. On the basis of such analysis of functions performed, assets used and risk shared in two different countries, the income can be attributed. In the present case, we have found that majority of the functions are performed outside India. Even the majority of the assets i.e. host computer which is having very large capacity which processes information of all the participants is situated outside India. The risk in this regard entirely rests with the appellant and that is in Spain, outside India. However, it is equally important to note that but for the presence of the assessee in India and the configuration and connectivity being provided in India, the income would not have generated. Thus the initial cause of generation of income is in India also. On the basis of above facts we can reasonably attribute 15 per cent of the revenue accruing to the assessee in respect of bookings made in India as income accruing or arising in India and chargeable under....
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....se. Even the amended definition will not determine as to what constitutes business connection as the same is not an exhaustive definition but is a definition which also includes 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 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 nonresident 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 busine....
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....ronouncements, we may appreciate the facts and deal within the issue. The appellant has developed a fully automatic reservation and distribution system known as Amadeus system with ability to perform comprehensive information, communication, 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 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 in....
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....forementioned order of the Tribunal dated 30.11.2007. We dismiss the cross-objections filed by the assessee. 11. In the result, the appeals filed by the department as well as crossobjections of the assessee both are dismissed." 14. Aggrieved with the above order the revenue filed miscellaneous application on 21.02.2014 which was further revised on 03.03.2014. On this miscellaneous application the coordinate bench passed an order and dismissed the applications of the revenue. 15. The matter reached the Hon‟ble Delhi High Court in assessee‟s own case which was dismissed holding that the issues raised in this appeal has arisen in the assessment orders in the case of the assessee and such appeals have already been disposed off in ITA No. 900-905/2008 and 689/2011 dismissing the appeal. In view of this it is apparent that the order of the coordinate bench in assessee‟s own case for AY 2003-04 to 2005-06 squarely covers the points raised by the revenue. 16. Further, the appellant also challenged the order of the coordinate bench for AY 2003-04 to 2005-06 before the Hon‟ble Delhi High Court which was also dismissed as it was delayed. In view of th....