2014 (8) TMI 902 - HC - Income Tax

Profit attribution to Indian operations Permanent Establishment (PE) in India or not - business connection in India u/s 9(1)(i) booking of air tickets - electronic distribution services to travel industry through Computerised Reservation System (CRS) - Held that - Each assessment year is separate and distinct and principle of res judicata does not apply to proceedings for subsequent or other years - it was/is possible for the AO to depart from the finding or a decision in one year as it is final and conclusive only in relation to a particular year for which it is made but as observed in Radhasoami Satsang versus Commissioner of Income Tax, 1991 (11) TMI 2 - SUPREME Court - when a fundamental aspect pervading through different assessment years has been found as a fact in one way or the other, it would inappropriate to allow the position to be changed in a subsequent year particularly when the said finding has been accepted - The principle is also based upon the rules of certainty and consistency that a decision taken after due application of mind should be followed consistently as this lead to certainty, unless there are valid and good reasons for deviating and not accepting the earlier decision. The role performed by the computers in India or the Indian agents was to merely get connected or be configured so that the travel agents could perform the booking function - The computers in India were not capable of processing data, which was processed abroad - the functions required huge investment and capacity, which was not installed and available in the computers at the desk of the travel agents in India but were available in the host computer in the USA - it was looking at the nature and the character of the functions undertaken in India viz., the functions and assets outside India, 15% was attributed to India - This worked out to Euro 0.45 and this was less than the commission of Euro 1, which was paid by the appellant-assessee to the distributor in India - The Tribunal has wrongly observed that earlier appellant-assessee was in losses - There is no such finding in the earlier orders - assessee was maintaining globalised accounts and India specific attribution of profits/losses was not undertaken in the accounts being maintained Decided in favour of assessee.

Summary

Issues Involved:
1. Attribution of profits to Indian operations.
2. Applicability of the 15% profit attribution ratio.
3. Consistency with previous judgments.
4. Tax liability based on expenses incurred in India.

Detailed Analysis:

1. Attribution of Profits to Indian Operations:
The primary issue in these appeals is the determination of profits attributable to the appellant-assessee's operations in India. The appellant, a Netherlands-based company, provided electronic distribution services to the travel industry through a Computerised Reservation System (CRS). The CRS allowed travel agents in India to make bookings using data stored on the appellant's computer systems in the USA. The Assessing Officer (AO) attributed three-fourths of the profit generated from Indian operations to the Permanent Establishment (PE) in India, based on the significant role played by Indian operations in generating profits.

2. Applicability of the 15% Profit Attribution Ratio:
The Tribunal had previously fixed a 15% ratio for attributing profits to Indian operations for Assessment Years (AYs) 1995-96 to 1998-99. The appellant argued that this ratio should continue to apply for AYs 2003-04 to 2006-07. However, the Tribunal, in its impugned order, remitted the issue back to the AO for fresh determination, citing changes in globalisation and increased bookings from India. The Tribunal believed that the earlier 15% ratio might no longer be appropriate due to the evolving business environment.

3. Consistency with Previous Judgments:
The appellant contended that the Tribunal misinterpreted the High Court's order in the Amadeus IT Group case and incorrectly departed from the reasoning applied in earlier years. The High Court had previously upheld the 15% profit attribution ratio, and the appellant argued that this should be consistently applied. The Tribunal's decision to remit the issue for fresh determination was seen as inconsistent with the High Court's earlier rulings.

4. Tax Liability Based on Expenses Incurred in India:
The appellant also argued that even if any income was attributable to India, it would be offset by the expenses incurred in India, resulting in no tax liability. The Commissioner of Income Tax (Appeals) had observed that the payment made to the Indian distributor (Euro 1 per booking) exceeded the income attributable to India (15% of Euro 3 per booking), thereby extinguishing the appellant's tax liability. This reasoning was based on the Tribunal's findings for earlier years, which were upheld by the High Court.

Judgment Summary:

The High Court addressed the appellant's contention that the Tribunal erred in not applying the 15% profit attribution ratio consistently. The Court noted that the Tribunal's reasoning, which suggested that globalisation necessitated a fresh determination of the profit attribution ratio, was not accepted by the High Court in the Amadeus IT Group case. The High Court had clarified that the 15% ratio should continue to apply, subject to the deduction of expenses.

The High Court emphasized that the principle of consistency should be followed unless there are substantial reasons to deviate. The Tribunal's decision to remit the issue back to the AO was found to be inconsistent with the High Court's previous rulings, which had upheld the 15% profit attribution ratio.

The High Court concluded that the Tribunal fell into error by misinterpreting the High Court's order in the Amadeus IT Group case and by departing from the reasoning applied in earlier years. The Court held that the earlier decisions of the High Court, which consistently applied the 15% profit attribution ratio, should be followed. The appeals were disposed of in favor of the appellant, and the Tribunal's order was set aside.

In conclusion, the High Court reaffirmed the applicability of the 15% profit attribution ratio for the appellant's Indian operations and held that the expenses incurred in India offset the attributable income, resulting in no tax liability for the appellant.