2016 (11) TMI 1676 - AT - Income Tax

Income accrued in India - PE in India - receipts from airlines relating to booking of segments from India - installed computers in the premises of the travel agents for the purposes of display of airlines information - DTAA entered into between India and Spain - Whether CIT(A) erred 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? - HELD THAT - 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 observed The computers so connected and configured which can perform the functions of reservation and ticketing is a part and parcel of the entire CRS. The computers so installed require further approval from AIPL who allows the use of such computers for reservation and ticketing. Without the authority of AIPL such computers are not capable of performing the reservation and ticketing part of the CRS system. The computer so installed cannot be shifted from one place to another even within the premises of the subscriber leave apart the shifting of such computer from one person to another. Thus the appellant exercises complete control over the computers installed at the premises of the subscribers. In view of our discussion in the immediately preceding para this amounts to a fixed place of business for carrying on the business of the enterprise in India. But for the supply of computers the configuration of computers and connectivity which are provided by the appellant either directly or through its agent AIPL will amount to operating part of its CRS system through such subscribers in India and accordingly PE in the nature of a fixed place of business in India. Thus the appellant can be said to have established a PE within the meaning of para 1 of art. 5 of Indo-Spain treaty. Whether the exception provided in para 3 of art. 5 applies so as to hold that there is no PE in India? - 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 CRS system the subscribers are capable of reserving and booking a ticket. Thus it cannot be considered as solely for the purpose of advertising of such CRS system. Similarly it is not in the nature of preparatory or auxiliary character. It is difficult to distinguish between the activities which are preparatory or auxiliary character and those which are not. The decisive criteria is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. Since part of the function is operated in India which directly contributes to the earning of revenue the activities as narrated above carried out in India are in no way of preparatory or auxiliary character. Thus the exception provided in para 3 of art. 5 will not apply and hence as stated above the assessee shall be deemed to have a PE in India. Whether the assesses has a PE in India in the form of a dependent agent? - In the present case we find that AIPL is totally dependent on the appellant. The entire business of AIPL is to provide data processing and software development services together with relative distribution of Amadeus products to the subscribers in India. AIPL has also an authority to enter into agreements with the subscribers. AIPL installs the computers configures the computers for accessing the CRS and also provides connectivity through SITA nodes. Thus functionally as well as financially it is dependent entirely on the appellant. It can therefore be said that AIPL is a dependent agent of the appellant. - Decided against assessee. Attribution of income to the PE of assessee company in India - HELD THAT - As decided in assessee s own case 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. 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 India being less than the remuneration paid to the dependent agent it extinguishes the assessment and requires no further exercise for computation of income. We accordingly hold so and in view of the same the income of the appellant for asst. yrs. 1997-98 and 1998-99 will be nil . Allowability of project development expenses incurred/allocated to the Indian activity and levy of interest u/s. 234A and 234B - HELD THAT - Since we have held that the remuneration paid to the dependent agent is exceeding the income attributable to the PE in India the question of allowability of various expenses as are in appeal do not survive. - Decided in favour of assessee.

Summary

Issues Involved:
1. Tax liability in India for receipts from airlines related to booking segments from India.
2. Determination of the existence of a 'Permanent Establishment' (PE) in India under the Double Taxation Avoidance Agreement (DTAA) between India and Spain.
3. Attribution of income to the PE in India.
4. Allowability of project development expenses.
5. Attribution of 100% profit related to Indian distribution activity to the PE.
6. Levy of interest under sections 234A and 234B of the Act.

Issue-wise Detailed Analysis:

1. Tax Liability in India for Receipts from Airlines:
The CIT(A) upheld the action of the assessing officer in treating the appellant as liable to tax in India for receipts from airlines related to booking segments from India. The appellant contested this, but the Tribunal found this ground to be general in nature and dismissed it without specific adjudication.

2. Determination of the Existence of a 'Permanent Establishment' (PE) in India:
The CIT(A) confirmed the assessing officer's decision that the appellant had a PE in India under the DTAA between India and Spain. The Tribunal referred to its previous decisions for the assessment years 1996-97 to 1998-99, which were also upheld by the Hon’ble Delhi High Court. The Tribunal reiterated that the appellant's Computer Reservation System (CRS) constituted a fixed place of business in India, thereby establishing a PE under Article 5 of the DTAA. The Tribunal also dismissed the appellant's argument that the activities were of an auxiliary and preparatory character, concluding that the activities in India were essential and significant parts of the appellant's business, thus constituting a PE.

3. Attribution of Income to the PE in India:
The Tribunal addressed whether any income should be attributed to the PE in India. It referred to its previous findings that only 15% of the revenue generated from bookings made within India is taxable in India. Since the remuneration paid to the dependent agent in India exceeded the income attributable to the PE, the Tribunal concluded that no further income was taxable in India. This position was upheld by the Hon’ble Delhi High Court for the relevant assessment years.

4. Allowability of Project Development Expenses:
The CIT(A) had confirmed the disallowance of project development expenses by the assessing officer, but the Tribunal noted that this issue was not adjudicated in previous appeals because the payment to the Indian National Marketing Company exceeded the income attributable to the PE. Therefore, no income was liable to tax in India, making the issue of project development expenses moot. The Tribunal followed this reasoning and decided the issue in favor of the appellant.

5. Attribution of 100% Profit Related to Indian Distribution Activity to the PE:
The CIT(A) had attributed 100% of the profit related to the Indian distribution activity to the PE, but the Tribunal found that the activities of the alleged PE in India constituted only a small part of the overall activities of the appellant. The Tribunal held that only a part of the profit arising from the bookings made in India through the appellant's CRS was attributable to the PE in India. This position was consistent with previous Tribunal and High Court decisions.

6. Levy of Interest under Sections 234A and 234B:
The Tribunal noted that the levy of interest under sections 234A and 234B was consequential and dependent on the outcome of the main issues. Since the remuneration paid to the dependent agent exceeded the income attributable to the PE, no further income was liable to tax, and thus, the question of charging interest did not survive.

Conclusion:
In summary, the Tribunal dismissed the appellant's grounds related to the existence of a PE in India and the attribution of income to the PE. However, it allowed the grounds related to the attribution of 100% profit to the PE and the allowability of project development expenses, following the reasoning that no further income was liable to tax in India. The appeals were partly allowed, and the order was pronounced in the open court on 16.11.2016.