2007 (11) TMI 330 - AT - Income Tax

Business connection and/or PE in India as per section 9(1) or not - Income deemed to accrue or arise in India - Indo-Spain Treaty - Computing the profit attribution to the PE in India - interest under ss. 234A and 234B - computers installed at the premises of the subscribers constitutes a PE of the taxpayer in India in terms of Article 5(1) of India Spain Tax Treaty - remuneration paid to the dependent agent. Whether the appellant has any PE in India within the meaning of art. 5 of DTAA between India and Spain - HELD THAT - In the present case it is seen that the CRS, which is the source of revenue is partially existent in the machines namely various computers installed at the premises of the subscribers. In some cases, the appellant itself has placed those computers and in all the cases the connectivity in the form of nodes leased from SITA are installed by the appellant through its agent. 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 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 - 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 - The agents can be considered as PE only and only if when a person other than agent of an independent status, (i) has and habitually exercise in that State an authority to conclude contract or (ii) though he has no such authority but habitually maintains stock of goods from which he regularly delivers goods on behalf of the enterprise. Thus the first question to be decided is whether the agent is of a dependent status or of an independent status. 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. Whether the appellant has PE in India within the meaning of cl. (b) of para 4 of art. 5 of the treaty - The reference to stock of goods in cl. (b) of para 4 of art. 5 has to be understood in the sense the business proper carried on by the enterprise. The delivery should be from the stock of goods which if considered in proper prospective will only be of the stock of goods dealt with by the assessee in regular course of its business. If the agent is to deliver the goods either the goods should be such in which the enterprise deals in or which are regularly hired out which may be considered as given on bailment from which the revenue is to be generated. But in the present case the computers supplied by AIPL to the subscribers are not dealt with by the assessee or which by themselves are the source of revenue. Thus cl. (b) of para 4 of art. 5 will not apply to consider the dependent agent as PE of the appellant in India. Attribution of Profits Having considered that the appellant has a PE in India in two forms namely (1) fixed place PE under para 1 of art. 5 and (2) agency PE under d. (a) of para 4 of art. 5, we shall examine whether as to what is the profit attributable to the PE in terms of art. 7 of the DTAA between India and Spain. We shall also examine whether the income so computed would be absorbed by the expenses incurred to earn such income which will prima facie extinguish the assessment. Whether he is habitually exercising an authority to conclude contracts on behalf of the appellant - The appellant in the present case in order to enhance its business operations has appointed AIPL as its agent who promote the 'Amadeus products' in India. AIPL in its turn has appointed various subscribers for use of 'Amadeus products'. Though the revenue flows only from participants who have entered into PCA with the appellant, yet the revenue could not have been generated but for the subscribers using the 'Amadeus products'. In a way the revenue is generated from the participants but only on the basis of use of CRS by the subscribers. But for such use no revenue would accrue to the appellant. Thus the agreements entered into by the AIPL with the subscribers under an authority granted to it, are contracts relating to operations which constitute business proper and not merely in the nature of internal operations. Such contracts are habitually exercised and there is nothing on record to suggest that such authority was cancelled at any point of time. We, therefore, hold that AIPL is dependent agent of the appellant who has habitually exercised the authority to conclude contracts on behalf of the appellant. To that extent the appellant has a PE in India. 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. The question of charging interest under ss. 234A and 234B will also not survive. In the result, appeals in ITA are partly allowed and appeals in ITA have become infructuous on the ground that the computation of income is a mere academic exercise and hence not considered. Thus these appeals will be treated as partly allowed.

Summary

Issues Involved:
1. Business Connection in India
2. Permanent Establishment (PE) in India
3. Attribution of Profits to PE
4. Allowability of Expenses
5. Interest under Sections 234A and 234B

Detailed Analysis:

1. Business Connection in India
The Tribunal examined whether the appellant had a business connection in India under Section 9(1)(i) of the Income-tax Act, 1961. The appellant, a Spanish company, developed a Computer Reservation System (CRS) used by travel agents in India to book airline tickets. The Tribunal found that the CRS system extended into India through computers and connectivity provided to travel agents, thus establishing a business connection. The income from bookings made in India was deemed to accrue or arise in India, making it taxable under Section 5(2) r/w Section 9(1)(i) of the Act.

2. Permanent Establishment (PE) in India
The Tribunal considered whether the appellant had a PE in India under the India-Spain DTAA. It concluded that the appellant had a fixed place PE in India through the computers and connectivity provided to travel agents, which were integral to the CRS. Additionally, the appellant had a dependent agent PE in India through Amadeus India Pvt. Ltd. (AIPL), which was wholly dependent on the appellant and had the authority to conclude contracts with subscribers on behalf of the appellant.

3. Attribution of Profits to PE
The Tribunal held that only 15% of the revenue generated from bookings made in India could be attributed to the PE in India. This was based on the fact that the major functions of the CRS, including data processing and storage, were carried out outside India. The Tribunal emphasized that the income attributable to the PE should be proportionate to the activities carried out in India.

4. Allowability of Expenses
The Tribunal noted that the remuneration paid to AIPL for its services in India exceeded the income attributable to the PE. Consequently, the expenses incurred by the appellant in India, including payments to AIPL, were allowable deductions. This effectively extinguished the assessment of any further income in India.

5. Interest under Sections 234A and 234B
Given the Tribunal's findings that no further income was attributable to the PE in India, the question of charging interest under Sections 234A and 234B became moot.

Conclusion:
The Tribunal concluded that the appellant had a business connection and a PE in India. However, the income attributable to the PE was fully absorbed by the expenses incurred, particularly the remuneration paid to AIPL. Consequently, no further income was taxable in India for the relevant assessment years, and the appeals were partly allowed.