2023 (5) TMI 227 - SC - Income Tax

Income taxable in India - Income attributable to the operations carried out in India - Assessee is into business of providing electronic global distribution services to Airlines through what is known as Computerized Reservation System - In order to market and distribute the CRS services to travel agents in India, the respondents have appointed Indian entities and have entered into distribution agreements with them - Assailing the Judgment of the High Court, as argued learned Additional Solicitor General that the attribution of only 15% of the revenue as income accruing /arising in India within the meaning of Section 9(1)(i) read with Article 7 of the Treaty, was completely wrong. HELD THAT - Under Explanation 1(a), what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India. What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact. On this question of fact, the Tribunal has taken into account relevant factors. Additional Solicitor General referred to Article 7 of the Convention between the Government of the United States of America and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income which is called in popular parlance as Double Taxation Avoidance Agreement . The above Article may not really go to the rescue of the Revenue for the reason that in the contracting state, the entire income derived by the respondents, namely, USD/EURO 3 will be taxable. This is why Section 9(1) confines the taxable income to that proportion which is attributable to the operations carried out in India. Therefore, we are of the view that the impugned order(s) of the High Court do not call for interference. Insofar as the second issue, namely, the question of permanent establishment is concerned, we are not going into the same, as we have concurred with the High Court on the first issue.

Summary

Issues involved:
The judgment deals with the issues of taxation of income earned by a business providing electronic global distribution services through a Computerized Reservation System (CRS) in India, attribution of income accruing in India, and the existence of a Permanent Establishment (PE) in India.

Taxation of Income:
The appeals by the Revenue were against orders dismissing appeals filed against Income Tax Appellate Tribunal orders. The respondents provide CRS services and earn USD 3/EURO 3 per booking in India, paying a portion to Indian entities. The Assessing Officers concluded the entire income earned abroad is taxable. The Tribunal found the respondents had a PE in India and attributed 15% of the revenue to India, which was already paid to Indian entities, thus no further income was taxable.

Attribution of Income:
The Tribunal's attribution of 15% of revenue to India based on Functions performed, assets used, and risks undertaken (FAR) was deemed fair and reasonable. The Commission paid to distribution agents exceeded the attributed income, thus no further income was taxable in India. The Tribunal and High Court's concurrent findings on the attribution of income were upheld.

Permanent Establishment (PE):
The Revenue argued for a fixed place PE in India due to hardware installed at travel agents' premises. However, the Tribunal and High Court's approach on attribution was considered reasonable. The judgment did not delve into the PE issue as the attribution of income was found to be fair and no interference was warranted.

Conclusion:
The High Court's orders were upheld as reasonable, and the Revenue's appeals were dismissed. The judgment clarified that only income attributable to operations in India is taxable under Section 9(1) of the Income Tax Act, rather than the entire income earned abroad. The judgment did not address the PE issue further, as the attribution of income was found to be appropriate.