TaxTMI 
TaxTMI 
2023 (1) TMI 212
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.... 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 receipts of the appellant fall under the definition of "Royalty" for alleged use of system / software l....
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....he 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 Inc. It has been further submitted by the assessee that the services are rendered to the airline customers in India using the similar modus operandi as Sabre GLBL Inc i.e. services are ren....
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....arrower 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 partly carried on;] This definition is for Sec.92, 92A, 92B, 92C, 92D & 92E. A reasonable guidance however, may be drawn from this definition for other sections in the Act in respect of a fixed place PE. The above....
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.... 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 made for consideration in addition to the oral arguments made during the hearing: 2.1. In this case, the appellant (Sabre Decision Technologies, hereafter referred as SDT) markets and provides travel related products and services to airlines including applications like Passe....
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....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 to the claims of the applicant that there is no PE as its server is outside India, the computer terminals of the clients of the applicant are enabled to be an integral part of the Main Ticket booking system of Sabre group , which has been accessed and exploited by the applicant in an integrated manner ....
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....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 the site of customer banks in India, can create a PE provided other tests are satisfied. Hon'ble AAR held that MIPs passed test of permanency as they were placed at the site of customer banks throughout the year. (b) At para 17.5.2 of its order, Hon'ble AAR has discussed the above two case laws relied upon by the Revenue. Hon'ble AAR held th....
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....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 tower, leased lines, fiber optic cable, nodes, internet, application software, the scope of activity gets even bigger and cannot be called preparatory or auxiliary. 17.5.7 The Applicant has also claimed that net debit/credit balance calculation of millions of transactions by GCMS and SAM involve high power computers and analysis. We have already discussed that settlement position of t....
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....ents 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 Act? 2. Whether the income of the assessee is of the nature of "fee for technical services" under the section 9(1)(vii) of the Income Tax Act 1961? This is required to be determined in view of the fact that, where a specific provision in the Act is laid down for determining the taxability of any income, the general provision is overridden. This implies that if the income is classifiable under the head 'royalty', then is mandatorily....
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....llowing 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 subsequent months for the remainder of the Term (the "System Usage Fee"). Commencement Date means the date on which the Functionality or any part of the Functionality is cutover and made available for Customer's use. iii. Travel and Incidentals Fee. Travel and other out of pocket Expenses are paid as they are incurred and invoiced in accordance- with the Agreement. 4.4.1 The mechanism to provide these services, in plain terms, is that the assessee would provide the login and password to the client through which the client would be able ....
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.... 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 customers. Further, Black's Law Dictionary has defined a "model" as a "preliminary pattern or representation of something to be made or something already made. A facsimile of something invented, made on a reduced scale, in compliance with patent laws. A replication of something made to scale style or design of product or item. Only when a payment is made towards use of such model or design, it could give rise to royalty." It can be observed that a model refers more to a tangible product, which has been developed for industrial purposes. The same analogy applies to design as well. In the present case, as speci....
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....ssee'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 were also primarily of the same format as the decision discussed above. * In Pan Anxsat International Systems Inc. (9 SOT 100), of the Hon'ble Delhi Income-tax Appellate Tribunal ('ITAT') held that the service fee received from non-resident television channels for use of its transponder to transmit signals to Indian viewers is neither Royalty nor Fees for included services, as no secret formula or process was involved therein * Skycell Communications Limited (251 ITR 53), the Hon'ble Madras High Court held that when a person subscribes to a cellular telephone service for communicating with others, he does not receive a technical service. * In ISRO Satellite Ce....
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....ies 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 distribution, pricing, reservations and fulfillment via Electronic Miscellaneous Documents (EMD-A) of ancillary product and services. The system integrates industry standards such as ATPCO Optional Services and EMD fulfillment together with, pricing and reporting tools, to create, sell, deliver and account for a variety of new ancillary products and services. Ancillary Services - provides the capability of generating non air revenue via add-on or ancillary sales. Includes support of ATPCO Optional Services (OC) or Merchandising Manager filings for display and pricing of ancillaries and integrating them into the reservation/ check-in workflow in a way that an agent can see what services are offered, understand what they represent, and is able to fulfill the ancil....
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....ing 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: Increase Revenue * Provides opportunity to generate incremental revenue through the sale of ancillary products and services * Provides connection to the largest global travel marketplace with access to more than 55,000 agency locations, 3,000 corporations and 250,000 points of sale in 113 countries Deliver a Unique Customer Experience * Allows an airline to differentiate, brand, market and merchandise its products and services within its direct channels while optionally supporting indirect channels * Enables the delivery of a consistent customer experience - across offline and online channels Reduce Costs * By utilizing ATPCo's "Optional Services", ancillaries may be distributed through multiple channels in the same way as fares, and modifications can be made to respond to market opportunities The replies and arguments of the assessee are considered with the above business model....
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....e 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 use by the client is not of any equipment and the payment made to the assessee is not for use of equipment. The payment is for advice rendered through an electronic platform. It is incorrect to compare it to a passive use as decided in the case of Dell by the AAR. However, even here the concept of interactive use where "the customer comes face to face with the equipment, operates it or controls its functioning in some manner" , has been held to qualify under the meaning of Mse' under the clause of Royalty. On an electronic platform, a unique login which enables upload of data is certainly an interactive use where the outputs of the intellectual property equipment are controlled by the inputs of the client. 4.4.9 The assessee has further compared to the consideration paid for web hosting services and quoted the case of Sawis Communication Corporation (ITA 7340/2012), The Hon'ble Mumbai ITAT and the case of ITO vs People Interactive (I) P. Limited (ITA No.2179-2182/2012). ....
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....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 concerning intellectual property rights or industrial, commercial or scientific equipment. Further, it is also relevant to note here that Explanation 5 to Section 9(l)(vi) of the Act would not get attracted to the present case as it covers consideration received in respect of any right, property or information. In the present case, there is no right or property which is granted by SDT to its customers in India. Further, as discussed above, the word information would allude to know-how and that in the present case there is no know-how which is being transferred to customers in India. 4.4.11 The assessee's argument that SDT has only provided only standardized product to the clients and therefore, no technical knowhow is imparted to its customers, is not on a sound footing. The assessee provides a data entry portal at the login platform. This data collected is analyzed by the assessee and a decision and advice is passed on to the client. If this does not constitute information based on intellectual proper....
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....tionary 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 from a presumably qualified personal or an impersonal source advice, opinion, etc." Though the assessee claims that has not provided any advice or opinion to its customers, the statement is without any basis. The assessee is certainly providing solutions to aid decisions to airline clients. The name of the assessee is itself, Sabre Decision Technologies which reflects the business and the website is Sabreairsolutions. If solutions which aid decisions do not constitute advice, then nothing can. The payments received by the assessee are therefore, for services absolutely of the nature of consultancy. The mode of delivery of services which is an electronic platform in this case, or the basis of processing the data which results in the information to be delivered, can in no way, change the substance of the information which is in the nature of advice. Therefore, the services also can be categorized as consultancy services and the consideration thereof fall within the meaning of fee for technical services. 4.5.3 Assessee also quoted the case....
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....service of consultancy also necessarily entails human intervention:. Consequently, applying the rule of noscitur a sociis, the word - "technical" as appearing in Explanation 2 to Section 9 (1) (vii) would also have to be construed as involving a human element. In the facts of the present appeals, the services rendered qua interconnection/Port access do not involve any human interface and, therefore, the same cannot be regarded as -technical services ... as contemplated under Section 194J of the said Act." The finding of the Delhi HC in the aforesaid case cannot be interpreted to say that where services are delivered through an electronic platform, there is no human interface. The database and intellectual property, on which the solutions provided to the clients are based, cannot be created by a machine. In the assessee's case, specialized sequences based on experience, data and IP rights have been created to provide solutions. These specialized sequences and IP rights necessarily require a human background. The client may not interact with a human being while logging in to an electronic portal but the advice and consultancy received by him on the electronic platform is certainly ....
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....rvices' as used in article 12 (4)(a) of the DTAA. In view of this position, the payments being made by the agents/subscribers (residents), to the C.C.N Pvt. Ltd. (a non-resident), are chargeable to tax in India, under article 12 of the DTAA as also under section 9 of the Act. In as much as we have concluded that the payments made by the subscribers to the applicant are in the nature of "Royalties and fees for technical services" and taxable under article 12 of the DTAA, the said payments cannot, therefore, be treated as business income. 4.6.2 In the above case the payments made for the use of assessee cargo portal by the Indian clients was held to be in the nature of royalties. Secondly, the payments for training etc. were held to be in the nature of fee for technical services as these were ancillary and subsidiary to the application and enjoyment of the use of scientific equipment for commercial purposes. From the above discussions in Para 4.1 to Para 4.5, it is seen that * The assessee has a business connection but no permanent establishment * The income or receipts can be classified as royalty * The receipts can also be classified as fee for technical service. In....
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....lines. The mechanism for offering these solutions is through functionality which has been mentioned clearly in the Work Order with one of the clients i.e. M/s Jet Airways. The extract of the functionality is already given above in para 4.4.5 of the order. 5.2 The fees being charged for such functionality is also given in Para 4 of the Work Order. This is also reproduced again as under: 4. Fees 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 subsequent months for the remainder of the Term (the "System Usage Fee"). Commencement Date means the date on whi....
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....e mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;] (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films 5.4 As seen above the nature of services rendered by the assessee qualify under three clauses of the definition of royalty: - (ii) the imparting of any information concerning the use of, a process (iii) the use of any process; (iv) the imparting of any information concerning commercial knowledge, experience or skill ; Sub-clause (iii) clearly mentions that royalty means consideration for the use of any process. Sub clause (ii) refers to the imparting of any information concerning the use of a process and the sub-c....
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....tion is wholly for commercial purposes in the client's case. So much so, even specific passenger based payment is also being made to the assessee company by the client airlines. Therefore the services being rendered are in the nature of royalty in the assessee's case. The principal reliance of the assessee on DIT VS Nokia Networks states that the purpose of payment or consideration should be for obtaining of copyrights of literary work being on software is misplaced. The assessee as explained above is not receiving consideration for supply of software and therefore the case is distinguished. Here the consideration is for solutions. Further the assessee quotes the Metapath Software which states that commercial exploitation of the acquired right to use is the underlying necessity to qualify as royalty. Again the judgment is in the context of supply of computer software which is not the assessee's case. Therefore the payment received by the assessee for offering solutions on a login platform by using the IP protected software at an offshore location as in the nature of royalty covered by Explanation 2 u/s 9(l)(vi). 6.1 Once it has been held that the payment is in the nature of royal....