2009 (6) TMI 1021 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of income in India u/s 5(2) and business connection u/s 9(1)(i).
2. Existence of Permanent Establishment (PE) in India under DTAA.
3. Attribution of income to PE in India.
4. Deduction of expenditure.
5. Levy of interest u/s 234A and 234B.

Summary:

Issue 1: Taxability of Income in India u/s 5(2) and Business Connection u/s 9(1)(i)
The Tribunal held that the income was chargeable to tax under section 5(2) of the Act as the assessee had a business connection in India as per section 9(1)(i) of the Act. It was determined that 15% of the revenue accrued to the assessee in respect of the bookings made in India should be treated as income accrued or assessed in India.

Issue 2: Existence of Permanent Establishment (PE) in India under DTAA
The Tribunal concluded that the assessee had a permanent establishment in India based on Circular No 23 of 1969 and the Supreme Court judgment in DIT (International Taxation) v. Morgan Stanley & Co. [2007] 292 ITR 416. The High Court upheld this finding.

Issue 3: Attribution of Income to PE in India
The Tribunal attributed 15% of the revenue accruing to the assessee in respect of bookings made in India as income accruing or arising in India. This was based on the principle that the major part of the work was processed at the host computer in the USA, and the activities in India were only a minuscule portion. The High Court upheld this approach, emphasizing that the proportion fixed by the Tribunal was based on relevant material and should not be disturbed.

Issue 4: Deduction of Expenditure
The CIT (Appeals) upheld the Assessing Officer's decision regarding the deduction of expenditure. However, the Tribunal noted that the assessee paid 60% of the receipts to Sitar, which was far in excess of the proportion of income attributable to India, and therefore, no income would be chargeable to tax in India.

Issue 5: Levy of Interest u/s 234A and 234B
The Tribunal did not specifically address the levy of interest u/s 234A and 234B in the summarized judgment.

Conclusion:
The assessee's appeals were allowed by respectfully following the decision of the High Court in the case of DIT v. Galileo International Inc. [2011] 336 ITR 264. Consequently, the penalty under section 271(1)(c) was also deleted, and all six appeals were allowed.