AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (1) TMI 212
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....essee has raised the following grounds of appeal in ITA NO. 5782/Del/2017 for Ay 2014-15:- "1. That on facts and in law the AO has erred in assessing the total income of the appellant at Rs 121,09,51,819/- as against a returned total income of Rs 1,60,78,620/-. 2. That on facts and in law the AO / DRP have erred in holding / upholding that the appellant has a Permanent Establishment (PE) in India. 2.1 That on facts and in law the AO erred in presuming that appellant has admitted existence of PE in India. 3. That on facts and in law the AO / DRP erred in not appreciating that business model of appellant was materially different from the erstwhile business model of M/s Sabre GLBL Inc. 3.1 That on facts and in law the DRP erred in relying upon extraneous material not relevant to the appellant. 4. That on the facts and in law AO has erred in holding and the DRP has erred in upholding that the amounts received by the appellant from its customers in India (i.e. various airlines) are chargeable to tax as income from "Royalty" as defined u/s 9 of the Act. 4.1 That on facts and in law the AO/DRP have erred in holding that receip....
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.... of the ld. CIT(A) holding that the receipts of the assessee from Indian customers constitute royalty u/s 9(1)(iv) of the Income Tax Act, 1961. 6. The assessee's objection for the A.Y. 2014-15 against the decision of the ld. DRP holding that the assessee has a PE in India and also for holding that the amounts received by the assessee from his customers are chargeable to tax as income from royalty as defined u/s 9 of the Income Tax Act, 1961. 7. The pertinent facts relevant to the adjudication of the issue are as under: 8. The assessee is a Delaware registered Limited Liability Company. It is directly held by Sabre International B.V. and indirectly held by Sabre GLBL Inc. The assessee markets and provides travel related products and services to airlines such as Airline decision support applications, passenger solutions, consulting services etc. These services are rendered using servers located in USA. 9. For the year under consideration, the assessee derived revenues from its airline customers in India for the above mentioned services. The assessee has also submitted that the services rendered by it are similar to the ones rendered by its group enterprise - Sabre GLBL In....
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.... CIT(A) examined the issue primarily whether there is any PE of the assessee in India or not. The order of the ld. CIT(A) Sh. Raman Chopra is as under: It is however seen that the concept of PE is narrower than the concept of business connection. A business connection referred to in Sec. 9 of the Income tax Act is an inclusive definition given in Explanation 2 only for the purpose of defining a situation where a non resident operating through an agent is deemed to have a business connection in India. That may not be relevant to the present case. Therefore the facts of the case are per se required to be examined as to what is the business of the assessee and how it operates. On the other hand, the term 'Permanent Establishment' (PE) is not defined for the purposes of Sec. 9 of the Income-tax Act or for the Act as a whole in section 2. However an inclusive definition is given in Sec.92F. Same is also reproduced here under: In Sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,- .....[(iii) "permanent establishment", referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or....
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.... 1961, clearly states that any income arising through or from a business connection is liable to tax in India. However no PE in India is made out in the assessee's case." 16. Against the decision of the ld. CIT(A), before us, the ld. DR, Sh. Gangadhar Panda filed his arguments in writing which are as under: "Sub: Written Submission in the above case-reg. During the course of hearings on 07-11-2022, the Hon'ble Bench directed the undersigned to give a short written submission on the issues under consideration i.e. Issue 1: Receipts earned by the appellant from its Indian customers fall under the definition of "Royalty" for use of a process or the imparting of any information concerning commercial knowledge, experience or skill. Issue 2: Whether the assessee has a business PE in India? 2. Submission of the Revenue: On the issue of receipts earned by the appellant being in the nature of Royalty, it is submitted that the Revenue has relied on the findings of the CIT (Appeals) in addition to the oral arguments made during the course of the hearing. On the issue of whether the assessee has a PE in India, following submission is mad....
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....e arising from business connection is liable to tax in India. However, the CIT gave a ruling that no PE in India is made out in the assessee's case as assessee did not have a fixed place of business nor any dependent agent PE (DAPE). 2.4. In regard to existence of PE in India, the AO has brought out in the assessment order (para -2) that in order to provide these specialized resources/services, the applicant facilitates access for the ticket agents/passengers to flight reservation information, On-Real Time basis, through the Main Sabre Ticket booking System, by pulling out customers' ticket booking data and provides further supporting services as mentioned above. Therefore, the Revenue is of the view that going by the nature of supporting services i.e. advance seat purchases, food and beverages booking, extra baggage booking etc. by the clients already booked the air tickets from Sabre Main Ticket booking systems, such real time data access and accelerated data exchange not possible unless dedicated Sabre interface system is activated in the clients' computer terminals, and certainly not possible through remote access to the server located in USA. Therefore, contrary t....
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.... the ability to perform comprehensive information, communication, reservations, ticketing, distribution, and related functions on a worldwide basis for travel industry, particularly participating airlines, hotels etc. (referred as CRS). In India CRS was installed on the computer of travel agents. Customers approached the travel agent who used this CRS to transfer the requests to main server outside India which did processing to throw up the best possible results for hotels and airlines, matching the customers' preferences. On these facts, it was held that CRS constituted PE of the non-resident in India. (C) In the case of Mater Card before the Hon'ble AAR, [2018] 94 taxmann.com 195 (AAR - New Delhi) (copy annexed), Revenue relied upon the above decisions to establish that Mastercard Interface Processor (MIPs) along with the master card network consisting of transmission towers, leased lines, fiber optic cables, nodes, internet etc., though provided by third party service provider but at disposal of MAPL, constituted PE in India. (a) After considering submissions of the assessee and the Revenue, the Hon'ble AAR at para 16.2.2 of its order held that MIPs placed at t....
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....eiving the result. Furthermore, the Hon'ble AAR held that case of MAPL was stronger than the case of Galileo for creation of PE. The Hon'ble AAR vide para 17.5.6, 17.5.7and 17.6 concluded that MIPs and Mastercard network constituted fixed place PE in India. The relevant part of the order is reproduced below: 17.5.6 The Applicant has stated that use of MasterCard Connect and MasterCard File express is incidental to the main activity of transaction processing service and they perform preparatory and auxiliary services. We have already discussed how the role of these two application software is similar to what CRS was doing in Amadeus and Galileo cases in India. Thus, the objection of the Applicant is not valid. In addition, when we talk about MasterCard network, we have to see as a whole whether all the constituents of MasterCard network, i.e. MIP, transmission tower, leased lines, fiber optic cable, nodes, internet, Master Connect and Master Card File express, together, perform activities which can be considered as preparatory or auxiliary. We have already demonstrated that MIP alone does activities which are not preparatory or auxiliary. When combined with transmission tow....
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....are license and since it is effectively connected to PE, as discussed in preceding paragraphs, it would be taxed under article 7 of India-US DTAA as well as under Sec. 44DA of the IT Act." 17. For the A.Y. 2014-15, the ld. DRP held that the assessee had PE in India the services provided by the assessee are software services covered under Explanation 2 to Section 9(1)(vi) of the Act. 18. Having heard the arguments of both the parties who reiterated the similar arguments taken up before the authorities below, we decline to interfere with the reasoned order of the ld. CIT(A) resulting in dismissal of the appeal of the Revenue on the issue of PE in India. Royalty: 19. While the AO taxed the entire receipts as income of the assessee to be taxed @ 40%, the ld. CIT(A) held that the gross income has to be taxed @ 10% in accordance with the provisions of Section 9(1)(vi) and Section 115A of the Income Tax Act, 1961. 20. The ratio of the of ld. CIT(A) while reducing tax rate of 40% to 10% is as under: "4.3 Now the two fundamental questions remain to be addressed. 1. Whether the income of the assessee is in the nature of royalty under section 9(l)(vi) of the A....
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.... 2. Usage Rights Granted Use Rights, Effective upon the date on which the Functionality is made available to Customs for productive use, and provided that Customer is and remains in compliance with the terms of the Agreement and this Work Order, the System license set out in the CSS Work Order shall apply with respect to the Functionality. The fees being charged for such functionality is also given in Para 4 of the Work Order. This is also reproduced as under: a. Customer shall pay Sabre the following fees for Sabre's provision of access and use of the Functionality and Services described herein: i. Functionality Implementation Fee. Customer shall pay Sabre, upon execution of this Work Order, an implementation fee of USD $40,000. ii. Functionality Usage Fee. For access and use of the System(s) described Appendix A of this Work Order. Customer will pay Sabre a monthly fee equal to (i) US$34,000 per month upon the Commencement Date and continuing for the first twelve (12) months from that date (the "First Year System Usage Fee"); and (ii) US$0.04 per Passenger Boarded during such month from the second year onwards, for all ....
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....vel-related products and sendees to its customers i.e. airlines in India. The appellant has not transferred any intellectual property rights but has only provided standardized products and allied services using its computer systems located in USA. Reference in this regard may also be drawn to the appellant's master service agreement with Jet Airways, submitted with the Ld. AO vide submissions dated February 12, 2016 wherein it has been clearly specified that no intellectual property rights of SDT shall be transferred to Jet Airways (copy of agreement with Jet Airways is enclosed as Item IV of the Paperbook). It is further submitted that sale of the Sabre Airline Solutions products and rendering of aforesaid services by SDT shall not constitute grant or transfer or use of any of the aforesaid intellectual property rights in view of the following: Invention, Patent, model, design or secret formula It is further submitted that if any patents exist which may have been registered by SDT, SDT does not give its Indian customers the right to use such patents and SDT only uses such patents, if they exist, to provide products and services to its Indian....
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....vely. The fact remains that there is no use of 'process' by the TV channels." The above ruling of Asia Satellite Telecommunication (332 ITR 340) in fact clearly states that the process of conversion of frequencies is not an item of intellectual property. The assessee's present case is totally different and distinguishable on the ground that the client is basically using services provided by the assessee which are based on the data furnished by the client. There is no concept of a simplicitor use of electronic equipment such as a transponder or a transmitting channel for which a payment is required to be made by the client to the service provider. In the assessee's case the data transmitted to the assessee by the client is analyzed and a solution provided. Therefore, this decision is not applicable to the assessee's case. Further the High Court has held that the process applied i.e. changing of frequency and amplifying the signal, is not at all an item of intellectual property; thereby implying that if the process involves an intellectual property, then the consideration would qualify as royalty. The assessee further submitted the following decisions which ....
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....ll the above decisions are not even remotely linked to the assessee's business per se. It is seen that the assessee provides a specialized login portal to its clients which are the Airlines and these clients use the portal for taking business decisions. The advice for such business decisions is provided by the assessee through the use of its experience, data base and other intellectual properties which are located at its Head Office in the USA. Comparison to a simplicitor rent payment or lease charges for use of equipment such as a transponder is out of place and incorrect. 4.4.5 To understand the business of the assessee, the public website of the assessee also provided some inputs. The business activities are to provide functionalities to the client airlines. The Appendix A which states the functionality is partly reproduced here under. Only a part of the Appendix is reproduced to highlight the activities and what is actually being delivered by the assessee to its clients. The activity of product merchandising is studied and then analyzed: Appendix. A: Functionality Description Product Merchandising is an end to end solution allowing for the distributio....
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....ay for baggage (e.g. Pre-sale of baggage, pay for excess baggage, pay for oversized baggage) From the above it is seen that Product Merchandising has been referred to in the Appendix A which states the functionality to be enabled for the client M/s Jet Airways in the Master Agreement. An extract from the website (Sabre Air Solutions) of the assessee related to one of the primary services provided by the assessee which is of "Product Merchandising" is given hereunder: - Product Merchandising the Comprehensive Solution More than just selling additional products and services, product merchandising is a business strategy that touches all phases of the customer experience. We provide an end-to-end product merchandising solution that aligns with your needs. Create, sell, deliver and account for all products and services that increase revenue using our solution. Your team will be empowered to offer customers the right product and services at the right price and the right time while being assured of complying with industry standards and regulations when using our solution. Our product merchandising solution will enable you to: ....
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....ee quotes the case of AAR in Dell International Services India (P) Ltd. In Re (2008) [305 ITR 37(AAR)]. The relevant paragraphs of that judgment are reproduced below - 13.1 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 entire network and related equipment. There is no scope to invoke clause (iv.a) in such a case because the element of service predominates". The aforesaid decision relates to a case where there is passive use of a facility created by a network operator and the equipment put in place by such network operator is used by the client as such. This is not the case of the assessee. Again, the ....
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....lty. ....The Hon'ble ITAT also observed that CPE is not personalized/sophisticated equipment for specific and exclusive use of the assessee. The aforesaid citation of Qualcomm is in fact going against the assessee. The Hon'ble ITAT has clearly stated that the CPE is not personalized/sophisticated equipment for specific and exclusive use of the assessee. A simple deduction from this finding of the ITAT is that, if the assessee is provided a personalized and specific and exclusive use of a sophisticated property, the payment for the same can be said to be in the nature of royalty under the Act. The assessee is clearly provided with an exclusive use from an electronic portal and this use is of an intellectual property. Both indicators of exclusive use and intellectual property make the payments received to be in the nature of royalty. The assessee further submitted: It is submitted that SDT has only provided standardized product and services which did not impart any technical know-how related to intellectual property rights or equipment to its customers in India. Hence, provision of services by SDT to its customers does not qualify as imparting any information co....
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.... this has been further elaborated later in this order. 4.5.1 The assessee also submitted that the consideration for services rendered does not fall in the ambit of fee for technical services as provided in section 9(l)(vii) of the Income-tax Act. Though royalty being a more specific clause, and as the services being rendered by the assessee, as discussed above clearly fall in the ambit of Royalty, there is no requirement to separately deal with this argument. However, the reasoning given by the assessee is nevertheless controverted hereunder. 4.5.2 The assessee has stated that FTS means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient chargeable under the head Salaries. The assessee has picked up the definition of Consultancy Services from Black's law dictionary as "The act of asking the advice or opinion of someone (such as lawyer)" or Webster's Encyclopedia states that to consult is to "seek ....
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....ment of the user would be merely in the nature of a facility offered and consequently, would not fall within Explanation 2 to Section 9(l)(vii)of the Act. The aforesaid citations are also against the assessee as the Hon'ble Supreme Court held that services which do not satisfy test of catering to specialized, exclusive and indimdual requirement of the user would he merely in the nature of a facility offered and consequently, would not fall within Explanation 2 to Section 9(l)(vii) of the Act. In the assessee's case, the services or the advice rendered is specialized, exclusive and based on the individual requirement of the user and also has a human input or analysis. So these clearly fall within explanation 2 of Sec. 9(1)(vii). Therefore, they can also be classified as technical services and the consideration received for these services fall under the head 'Fee for technical services'. 4.5.4 The assessee also referred to the case of Escotel Mobile and Hutchison Essar Telecom, the Hon'ble Delhi High Court where it was held "...It is obvious that the service of consultancy also necessarily entails human intervention:. Consequently, applying the rule of ....
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.... the clients, personnel and provide day to day support. In this context, after analyzing the activities of the aforesaid entity the AAR held as under: The applicant is engaged in the business of providing access to an Internet based Air Cargo Portal known as Ezycargo at Singapore. An agent who books cargo through various airlines can subscribe for the portal - Ezycargo - which enables him to access the data bank of the airlines like flight schedules, availability of cargo space etc. The portal enables an agent to check the connect flight details to the desired place and enables him to arrive at the economics of transporting the cargo to the desired destination After carefully going through the above provisions we find that meaning of the term 'Royalty' as used in Explanation (2) to clause (vi) of sub-section (1) of section 9, is at par with the term 'Royalties' as used in article 12 (3)(b) of the DTAA. The term 'Fees for technical services' as used in Explanation (2) of clause (vii) of sub-section (1) of section 9, is analogous to the term 'Fees for technical services' as used in article 12 (4)(a) of the DTAA. In view of this positi....
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....ay of royalty is a species or one of the categories of a larger class mentioned in clause (i) of s. 9(1) and, hence, the specific instance having been provided by clause (vi), once we come across the question of royalty, we have only to look at that clause (vi) and not to the more general provision of clause (i) of s. 9(1). Similarly, income by way of fees for technical assistance, which is covered by clause (vii), is a more general category as compared to the royalty which is referred to in clause (vi), particularly in the light of the definition of "royalty" in Expln. 2 to clause (vi) of s. 9(1). Again, the same principle of particular excluding the general has to be applied. Therefore as the payments received by the assessee are in the nature of royalty, these and are mandatorily required to be assessed under the clause (vi) of section 9 relating to royalty. 5. The taxability of the income of the assessee is now discussed in a consolidated manner, integrating the aforesaid arguments. In the present case as discussed, while dealing with the specific judgments above, the assessee company is offering specific solutions on a day to day basis to the airlines. The me....
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....are and the experience and data analyzed by experts, which has been developed by the assessee company. This protected software offers facility to the clients to login, furnish some data and then access reports generated on the data. Now it is important to see the definition of Royalty under the Act. Again it is reiterated that the assessee does not have a TRC of the US and therefore the taxability is to be determined only in accordance with the domestic tax law. The definition 'royalty' under section 9 of the Income-tax Act is as under: Explanation 2.-For the purposes of this clause, "royalty" means 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 licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of ....
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....services is for the use of a process. It is also noteworthy that this process [ a dedicated software] is actually Intellectual Property of the client. On both accounts, the use of such process or property is in the nature of royalty. The assessee in his submission has tried explaining that the consideration received is for use of a standardized product. The detailed submission by the assessee has already been discussed on various limbs of the definition of royalty. A number of case laws have been also quoted by the assessee to be in its favor. It is however seen that almost all the judgments are distinguishable on facts which have been discussed above. The assessee is not providing standardized services. In its submission dated 24.7.2017 it is submitted that SDT is responsible for configuration of its services according to customer specifications. The nature of services is dependent on the client inputs. 5.5 In the present case, the basic structure of the business activity of the assessee is that the portal has been provided to the client. The client enters specific data and seeks a solution from the assessee. The assessee on the basis of its own knowledge base and develop....