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2016 (11) TMI 1676

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....9;permanent establishment' ('PE') in India, in terms of the Double Taxation Avoidance Agreement ('DTAA') entered into between India and Spain. 2.1 That the CIT(A) erred on facts and in law in holding the computers on the desks of the travel agents/airlines, through which the bookings are made using the appellant's Computer Reservation System (CRS) constitutes a fixed place of business and, therefore, a PE of the appellant in India, in terms of paragraph (1) of Article 5 of the DTAA between India and Spain. 2.2 That the CIT(A) erred on facts and in law in observing that the appellant has installed computers in the premises of the travel agents for the purposes of display of airlines information and such 'installation' can be said to constitute a PE of the appellant in India as per Article 5(2)(k) of the DTAA between India and Spain. 2.3 That the CIT(A) erred on facts and in law in observing that the computers on the desk of the travel agents in India are extended arms of the mainframe of the appellant situated in Germany and the computers of the travel agents and the mainframe of the appellant become one for all practical purposes, as the time a....

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....ounsel for the assessee submitted that almost all the issues involved in these appeals are covered by the decisions of Tribunal and of Hon'ble Delhi High Court in the cases of assessee itself for assessment years 19996-97 to 1998-99 and 2001-02 to 2005-06. The ld. DR, on the other hand, relied on the orders of the authorities below. 3. After hearing the submissions of both the parties and perusing the entire material available on record, we deal with various grounds of these appeals as under : 4. Ground No. 1 is general in nature and needs no specific adjudication by us. The same is dismissed as such. 5. Grounds Nos. 2 to 2.5 relate to the issue whether the appellant had a permanent establishment (PE) in India in terms of Double Taxation Avoidance Agreement (DTAA). This issue is covered against the assessee by the order of Tribunal in the case of assessee itself for A.Y. 1996-97 to 1998-99, wherein the Tribunal has observed in para 23 to 23.5 as under : 23. The next question to be decided is whether the appellant has any PE in India within the meaning of art. 5 of DTAA between India and Spain. Art. 5 of the treaty provides as under : "Indo-Spain treaty Article 5 - Permanent ....

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....her enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods and merchandise, or of collecting information for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for supply of information, for scientific research or for similar activities which have a preparatory auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paras 1 and 2, where a person-other than an agent of an independent status to whom para 5 applies-is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have PE in the first- mentioned State, if (a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of good or merchandise for the enterprise; (b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a PE i....

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....lace of business can be situated in the business vicinity of another enterprise. What is to be seen is that on fact an enterprise has a certain amount of space at its disposal, which is used for business activities and then it is sufficient to constitute a place of business. No formal legal right to use that place is visualized or required. A PE could exist even where an enterprise unauthorizingly or illegally occupies certain locations where it carried on its business. For a place of business to constitute a PE, the enterprise using it must be carrying on its business wholly or partly through it. It is not necessary that whole of the business should be carried on through such PE or fixed place. Time and again it is being contended on behalf of appellant that for application of para 1 of art. 5 of the treaty to apply, it must have a productive character i.e. contribution to the profits of the enterprise. However, considering para 1 of art. 5 of the treaty, it is not so mentioned within the framework of established business. It will be appropriate to presume that each part of the activities carried on contributes to the productivity of the whole. Thus even if some contribution is ma....

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.... its CRS system through such subscribers in India and accordingly PE in the nature of a fixed place of business in India. Thus the appellant can be said to have established a PE within the meaning of para 1 of art. 5 of Indo-Spain treaty. 23.2 The next question to be considered is if there is a PE, whether the exception provided in para 3 of art. 5 applies so as to hold that there is no PE in India. The case of the appellant is that the existence of such computers is merely for the purpose of advertising and the activities are preparatory or auxiliary in character and hence there is no fixed place PE in India in view of the Explanation provided in para 3 of art. 5. We are unable to accept such a contention. The function of the PE in India is not only to advertise its products. The activity of the appellant is developing and maintaining a fully automatic reservation and distribution system with the ability to perform comprehensive information, communication, reservation, ticketing, distribution and related functions on a worldwide basis. The computers installed at the premises of the subscribers are connected to the global CRS owned and operated by the appellant. Using part of the....

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....bution of 'Amadeus products' to the subscribers in India. AIPL has also an authority to enter into agreements with the subscribers. AIPL installs the computers, configures the computers for accessing the CRS and also provides connectivity through SITA nodes. Thus functionally as well as financially it is dependent entirely on the appellant. It can therefore, be said that AIPL is a dependent agent of the appellant. 23.4 The next question to be decided is whether he is habitually exercising an authority to conclude contracts on behalf of the appellant. Under the distribution agreement entered into by the appellant with AIPL, AIPL is responsible for effecting and contracting with subscribers in the Indian territory and is to use reasonable efforts to provide access to all the 'Amadeus products' out of Indian territory. Though the appellant and even the participating airlines are not party to the agreement entered into by AIPL with the subscribers, yet the appellant through the PCA has ensured that the subscribers were authorized to use 'Amadeus products'. Under an authority granted to them, subscribers use such products. The reservations and ticketing done using the CRS products are....

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....ness proper of the enterprise. The appellant in the present case in order to enhance its business operations has appointed AIPL as its agent who promote the 'Amadeus products' in India. AIPL in its turn has appointed various subscribers for use of 'Amadeus products'. Though the revenue flows only from participants who have entered into PCA with the appellant, yet the revenue could not have been generated but for the subscribers using the 'Amadeus products'. In a way the revenue is generated from the participants but only on the basis of use of CRS by the subscribers. But for such use no revenue would accrue to the appellant. Thus the agreements entered into by the AIPL with the subscribers under an authority granted to it, are contracts relating to operations which constitute business proper and not merely in the nature of internal operations. Such contracts are habitually exercised and there is nothing on record to suggest that such authority was cancelled at any point of time. We, therefore, hold that AIPL is dependent agent of the appellant who has habitually exercised the authority to conclude contracts on behalf of the appellant. To that extent the appellant has a PE in India.....

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....by the orders of Tribunal and Delhi High Court in the cases of assessee for the assessment years as mentioned in the foregoing paragraph of this order. For the sake of convenience, we reproduce the relevant findings of Tribunal recorded in para 24 of the order for A.Y. 1996-97 to 1998-99 : 24. Having considered that the appellant has a PE in India in two forms namely (1) fixed place PE under para 1 of art. 5 and (2) agency PE under cl. (a) of para 4 of art. 5, we shall examine whether as to what is the profit attributable to the PE in terms of art. 7 of the DTAA between India and Spain. We shall also examine whether the income so computed would be absorbed by the expenses incurred to earn such income which will prima facie extinguish the assessment. Paras 1 to 3 of the art. 7 of the DTAA are extracted hereunder : "Article. 7 Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a PE situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as i....

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.... only to the extent as is attributable to that PE. This is in pari materia with cl. (a) of Expln. 1 to s. 9(1)(i) of the IT Act. Thus where the entire activities of an enterprise are not carried out in a Contracting State where the PE is situated, then only so much of the profit as is attributable to the functions carried through the PE can be taxable in such source State. While dealing with the question as to what is such part of income as is reasonably attributable to the operations carried out in India, we have held that only 15 per cent of the revenue generated from the bookings made within India is taxable in India. The same proportion has to be adopted here while computing profit attributable to the PE. We have also held that since the payment to the agent in India is more than what is the income attributable to the PE in India, it extinguishes the assessment as no further income is taxable in India. It is to be noted that even in the first assessment framed by the AO, the entire expenses in the form of remuneration paid to AIPL were held as allowable deduction and were reduced while computing the income of appellant. If that be the case, the income attributable to PE in Indi....