2021 (10) TMI 1004 - AT - Income Tax

Income accrued in India - Business Connection and Permanent Establishment - Assessee is a company incorporated in The United Kingdom as providing electronic global distribution services in the 'rest of the world' territory (including the Indian region) for the travel industry, by utilizing a Computer Reservation System ('CRS'), which is an automated system which processes booking data - HELD THAT - As relying on TRAVELPORT INTERNATIONAL OPERATIONS LTD. VERSUS ACIT, CIRCLE-3 (1) (1) , INTL. TAXATION, NEW DELHI 2021 (10) TMI 1023 - ITAT DELHI the assessee has Business Connection and Permanent Establishment (PE) in India. Attribution to the PE in India - The correct attribution rate be taken at 15% of the gross booking fee for the years in appeal before us.As per the table above, Indian related expenses are more than attributed gross booking fees to the PE in India, it would extinguish the assessment of tax as no further income is taxable in India. The AO may check the correctness of the figures before giving effect to this order. Allowability of distribution expenses - As duly accepted by the revenue authorities that the distribution expenses incurred by the assessee is for maintaining their network of subscribers/travel agents and thus, an inseparable part of the business and thus it cannot be denied that the expenses have been incurred for the purpose of the business. It is also an accepted fact that there is only one business of the Company i.e., the CRS business. Therefore, all expenses incurred by Company including distribution expenses can only be related to such business. Thus, the AO's argument that distribution fees is not related to its business since its nomenclature in invoices is specified as 'data processing charges' instead of distribution fees lacks basic fallacy. As distribution commission has been made to resident of India and duly offered to tax. Hence, the provisions of Section 40(a)(ia) are not attracted in the instant case. Since, there is no change in the factual matrix and legal proposition, we hereby allow the claim of the assessee. Allowability of other expenses - AO disallowed entire amount (100%) claimed by the assessee on account of other expenses such as royalty, vendor cost, license fee owing to non-deduction of withholding tax - As the position of the profit/loss of the assessee is evident. After deduction of the distribution expenses and 15% booking fee, the assessee is left with no taxable profit. Considering the disallowance @ 30% u/s. 40(a)(ia) in accordance with the law laid down by the Hon'ble Delhi High court in case of CIT Vs. Herbalife International India (P.) Ltd. 2016 (5) TMI 697 - DELHI HIGH COURT wherein the High Court struck down discriminating treatment of disallowance u/s. 40(a)(i) and Section 40(a)(ia) of the Act by relying on Article 26(3) of the DTAA between India and US, we hereby direct the AO to re-compute the net losses computing the disallowance on other expenses @ 30%.

Summary

Issues Involved:
1. Business Connection (BC) and Permanent Establishment (PE) in India.
2. Attribution to the alleged PE in India.
3. Allowability of distribution expenses.
4. Allowability of other expenses.

Detailed Analysis:

Business Connection and Permanent Establishment:
The issue of the Company's BC/PE in India is covered against the assessee by the decisions of the Hon'ble Delhi High Court and Delhi ITAT in the Company's or its predecessor's case for the earlier assessment years (AYs) 1995-96 to 2006-07. For AY 2017-18, in the case of the Company's successor entity, the issue on BC/PE has been held against the successor entity by the Hon'ble Delhi ITAT, relying on previous decisions. The Tribunal found that the CRS, which is the source of revenue, is partially existent in the machines installed at the premises of the subscribers in India, and the connectivity provided by the appellant amounts to a fixed place of business, thus establishing a PE in India.

Attribution to the PE in India:
The issue of attribution in India is covered in favor of the Company by the decisions of the Hon'ble Delhi High Court and Delhi ITAT in the Company's or its predecessor's case for AYs 1995-96 to 2006-07. The Hon'ble Delhi High Court and the Delhi ITAT have held that the attribution rate to the alleged India PE is 15% of gross booking fees. For AY 2017-18, the Delhi ITAT reiterated that PE attribution at 15% of gross revenue, less the expenses, reduces the taxable income to Nil, thus no income is taxable in India. The ITAT in the case of Galileo International Inc. (GII) held that only 15% of the revenue could be attributed to India, which was completely exhausted by the commission paid to the Indian distributor, resulting in no income remaining to be taxed in India.

Allowability of Distribution Expenses:
For AYs 1995-96 to 2006-07, the Assessing Officer allowed the distribution expenses incurred by the Company. The Delhi ITAT and Hon'ble Delhi High Court for these years allowed 100% deduction of distribution expenses, holding the overall taxability as Nil of the alleged PE in India. For AY 2016-17 and AY 2017-18, the Assessing Officer and Ld. DRP allowed deduction of distribution expenses (70%) from attributed revenue. For AY 2012-13, both the ld. DRP and the Assessing Officer allowed 100% distribution expenses by relying on the Hon'ble Delhi High Court's decision in the Company's or its predecessor's case. It was accepted that distribution expenses are integral expenses for CRS companies and should be allowed. The Delhi ITAT in the case of another CRS entity, Amadeus IT Group SA, also allowed the distribution expenses incurred by the assessee.

Allowability of Other Expenses:
The AO disallowed the entire amount claimed by the assessee on account of other expenses such as royalty, vendor cost, and license fee due to non-deduction of withholding tax. However, after deduction of the distribution expenses and 15% booking fee, the assessee is left with no taxable profit. The Tribunal directed the AO to re-compute the net losses, considering the disallowance on other expenses at 30% in accordance with the law laid down by the Hon'ble Delhi High Court in the case of CIT Vs. Herbalife International India (P.) Ltd.

Conclusion:
All the appeals of the assessee and the cross objections are allowed, and the appeal of the revenue is dismissed. The Tribunal's order was pronounced in the open court on 13/10/2021.