2025 (1) TMI 759 - AT - Income Tax

Income deemed to accrue or arise in India - Appellant has a business connection or a Permanent Establishment (PE) in India u/s 9(1) - whether the assessee a conduit entity? - Appellant is a company incorporated in the United Kingdom - HELD THAT - We observe that the issue raised by the assessee in this appeal are exactly similar to the facts in the AY 2018-19 and AY 2019-20 2023 (1) TMI 1464 - ITAT DELHI decided grounds against the assessee by holding that the assessee has business connection and PE in India and 15% of the booking fees should be attributed to the PE in India. Conduit entity determination - As decided in own case 2023 (10) TMI 1482 - ITAT DELHI the status of the assessee as a conduit entity was ever an issue. Therefore, in our considered opinion, the observations of the AO regarding the status of the assessee as a conduit company are not based on any cogent material brought on record, and rather unnecessary and irrelevant for deciding the issue, as to whether, assessee s income is taxable in India or not. Appeal filed by the assessee is allowed.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment involves several core issues:

Whether the Appellant has a business connection or a Permanent Establishment (PE) in India under Section 9(1) of the Income Tax Act, 1961.
The appropriate attribution of income to the alleged PE in India.
The applicability of the India-UK Double Taxation Avoidance Agreement (DTAA) to the Appellant's case.
Whether the Appellant is a 'conduit entity' and thus not entitled to treaty benefits.
The allowability of distribution and other expenses in determining taxable income.

2. ISSUE-WISE DETAILED ANALYSIS

Business Connection and Permanent Establishment (PE)

Legal Framework and Precedents: The concept of 'business connection' and 'PE' is governed by Section 9(1) of the Income Tax Act, 1961, and relevant international tax treaties.
Court's Interpretation and Reasoning: The Tribunal and High Court have consistently held that the Appellant has a business connection and PE in India based on the functions, assets, and risks (FAR) analysis.
Key Evidence and Findings: The Appellant's activities through its distributor ITQPL and the use of a Computer Reservation System (CRS) in India were deemed to create a business connection.
Application of Law to Facts: The court applied the FAR analysis to attribute 15% of the booking fees to the PE in India.
Treatment of Competing Arguments: The Appellant argued against the PE attribution, but the court relied on previous judgments affirming the existence of a PE.
Conclusions: The court upheld the existence of a PE in India.

Attribution of Income

Legal Framework and Precedents: Attribution of income to a PE is generally based on the functions performed, assets used, and risks undertaken (FAR analysis).
Court's Interpretation and Reasoning: The court adhered to the 15% attribution rate established by previous judgments.
Key Evidence and Findings: The revenue attributable to the PE was calculated after deducting distributor fees.
Application of Law to Facts: The court applied the FAR analysis consistently with past decisions.
Treatment of Competing Arguments: The Appellant contended that the attribution rate was excessive, but the court found it reasonable based on precedent.
Conclusions: The court maintained the 15% attribution rate for the PE in India.

Applicability of India-UK DTAA

Legal Framework and Precedents: The India-UK DTAA aims to prevent double taxation and provide tax relief.
Court's Interpretation and Reasoning: The court found that the Appellant was entitled to treaty benefits, rejecting the AO's claim of the Appellant being a conduit entity.
Key Evidence and Findings: The court noted the consistent business model and legal framework applied in past cases.
Application of Law to Facts: The court determined that the Appellant was not a conduit entity and could avail treaty benefits.
Treatment of Competing Arguments: The AO's arguments regarding the Appellant as a conduit entity were dismissed as baseless.
Conclusions: The Appellant was entitled to the benefits of the India-UK DTAA.

Allowability of Expenses

Legal Framework and Precedents: The allowability of expenses is governed by the Income Tax Act and relevant judicial precedents.
Court's Interpretation and Reasoning: The court allowed the deduction of distribution and other expenses based on past rulings.
Key Evidence and Findings: The expenses were deemed necessary and ordinary for the Appellant's business operations.
Application of Law to Facts: The court applied the non-discrimination clause to allow expense deductions.
Treatment of Competing Arguments: The AO's objections to expense deductions were overruled based on precedent.
Conclusions: The court allowed the deduction of distribution and other expenses.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes: "The Tribunal rightly concluded that the same extinguished the assessment."
Core Principles Established: The court reinforced the principle of consistency in applying legal precedents to similar factual scenarios.
Final Determinations on Each Issue: The court upheld the existence of a PE in India, attributed 15% of revenue to the PE, allowed treaty benefits, and permitted expense deductions.

The judgment underscores the importance of judicial consistency and adherence to established legal principles in tax matters, particularly concerning international transactions and treaty applications.

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