2007 (11) TMI 329 - AT - Income Tax

Deemed To Accrue Or Arise In India - Existence of Permanent Establishment (PE) - Attribution of Profits to PE - Validity of Assessment and Tax Rate - resident of USA - DTAA between India and USA -business of maintaining and operating the system for providing electronic global distribution services to airlines, hotels, tour and cab operators by connecting to travel agents ('the TAs') utilising a Computerised Reservation System ('CRS') - Whether the assessee has any income chargeable to tax in India u/s 5(2) of the Act and whether the assessee has any business connection in India as per section 9(1)(i) of the Act? If yes, to what extent it is taxable inIndia. Existence of Business Connection - HELD THAT - It is to be noted that all the subscribers in respect of which income is held taxable are situated inIndia. The equipment, i.e., computer in some cases and the connectivity as well as configuration of the computer in all the cases are provided by the appellant. The booking takes place inIndiaon the basis of the presence of such seamless CRS system. On the basis of booking made by the travel agent in India, the income generates to the appellant. But for the booking no income accrues to the appellant. Time and again it is contended that the whole of the processing work is carried out at host computer situated at Denverin Colorado, USA and only the display of information is in India for the proposition that there is no business connection in India. We are unable to agree with such proposition. The CRS extends to Indian territory also in the form of connectivity in India. But for the request generated from the subscriber's computer's situate in India, the booking is not possible which is the source of revenue to the appellant. The assessee is not to receive the payment only for display of information but the income will accrue only when the booking is completed at the desk of the subscriber's computer. In such a situation, there is a continuous seamless process involved, at least part of which is in India and hence, there is a business connection in India. The computers at the subscriber's desk are not dumb or are in the nature of kiosk incapable of performing any function. The computers along with the configuration has been supplied either by the appellant or through its agent Interglobe and the connectivity being provided by the appellant enables the subscribers to access the CRS and perform the ticketing and booking functions. Whether having held that there is business connection in India, how much income is chargeable to tax in India - In the present case, we have found that majority of the functions are performed outside India. Even the majority of the assets, i.e., host computer which is having very large capacity which processes information of all the participants is situated outside India. The CRS as a whole is developed and maintained outside India. The risk in this regard entirely rests with the appellant and that is in USA, outside India. However, it is equally important to note that but for the presence of the assessee in India and the configuration and connectivity being provided in India, the income would not have generated. Thus the initial cause of generation of income is in India also. On the basis of above facts we can reasonably attribute 15 per cent of the revenue accruing to the assessee in respect of bookings made in India as income accruing or arising in India and chargeable under section 5(2) read with section 9(1)(i) of the Act. Whether any income still is left to be taxed in India - Broadly the assessee receives three 'Euros' as fees per 'net booking', i.e., gross booking minus cancellation. The assessee passed one dollar to Interglobe for each net booking processed through Galileo system by subscriber. Thus in respect of the activities carried out in India and considering the income accruing in India, remuneration paid to the Indian agents consumes the entire income accruing or arising in India. It is also to be noted that the entire payment made by appellant to Interglobe has been allowed as expenses while computing total income of the appellant. In such a situation in view of Circular No. 23 of 23rd July, 1969 no income can be further charged to tax in India. As rightly contended by Shri Vyas the Circular equally applies to the sale of goods as well as rendering of services. The Hon'ble Supreme Court has taken judicial note of said Circular in the case of Morgan Stanley Co. Inc. 2007 (7) TMI 201 - SUPREME COURT and have held that once associated enterprise which is considered as PE of the non-resident assessee is remunerated at arm's length, nothing further would be left to be attributed to the PE of the non-resident. We, therefore, hold that in view of the above facts, n o income is taxable in India. Permanent establishment - 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 function of reservation and ticketing is a part and parcel of the entire CRS. The computers so installed require further approval from appellant/Interglobe who allows the use of such computers for reservation and ticketing. Without the authority of appellant 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 paragraph, this amounts to a fixed place of business for carrying on the business of the enterprise inIndia. But for the supply of computers, the configuration of computers and connectivity which are provided by the appellant either directly or through its agent Interglobe will amount to operating part of its CRS system through such subscribers in India and accordingly PE in the nature of a fixed place of business inIndia. Thus the appellant can be said to have established a PE within the meaning of paragraph 1 of Article 5 of Indo-Spain Treaty . 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 is in no way of 'preparatory or auxiliary' character. Thus the exception provided in Paragraph 3 of Article 5 will not apply and hence as stated above, the assessee shall be deemed to have a permanent establishment inIndia. PE in India in the form of a dependent agent - In the present case we find that Interglobe is totally dependent on the appellant in respect of rendering services to subscribers in India. Thus that part of Interglobe's activities which earns its revenue by rendering services to the subscribers is carried on solely for the appellant. Though Interglobe might be carrying on any other activities, like a full fledge travel agency business, yet in respect of activity relating to installing CRS system of appellant at Subscribers Computers Provide connectivity, configuring the computers to enable it to access CRS, train the subscribers etc. is only and only for the appellant. Such type of activities are not carried on for any other person. Hence, the appellant and Interglobe are interdependent in this regard. The business of Interglobe is to provide data processing and software development services together with relative distribution of 'Galileo System' to the subscribers in India. Interglobe has also an authority to enter into agreements with the subscribers. Interglobe installs the computers, configures the computers for accessing the CRS and also provides connectivity through SITA notes. Thus functionally as well as financially it is dependent entirely on the appellant. It can, therefore, be said that Interglobe is a dependent agent of the appellant. Whether Interglobe is habitually exercising an authority to conclude contracts on behalf of the appellant - The dependent agent is not to be considered as PE unless he has authority to conclude contract on behalf of such enterprise. The authority to conclude contracts must be in respect of contracts relating to operations, which constitute the business proper of the enterprise. The appellant in the present case in order to enhance its business operations has appointed Interglobe as its agent who promote the 'Galileo System' in India. Interglobe in its turn has appointed various subscribers for use of 'Galileo System'. 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 'Galileo System'. 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 Interglobe 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 Interglobe 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 Interglobe is a dependent agent of appellant in India, we need not discuss para (5) of Article 5 of the treaty regarding independent agent form of PE. Whether the appellant has PE in India within the meaning of clause (b) of paragraph 4 of Article 5 of the Treaty - Since the appellant is not dealing in any goods, the question of delivery of such goods does not arise. The contention of learned DR that Interglobe maintains stock of computers which are delivered to the subscribers should be treated as delivery of goods. He also submitted that what is mentioned in Treaty is that there should be delivery of goods which may not necessarily be sale of goods. We are unable to accept such contention of the learned DR. The reference to stock of goods in clause (b) of paragraph 4 of Article 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 Interglobe to the subscribers are not dealt with by the assessee or which is by itself is the source of revenue. Thus clause (b) of paragraph 4 of Article 5 will not apply to consider the dependent agent as PE of the appellant in India. Attribution of Profits to the PE in terms of Article 7 of the DTAA between India and USA - Reading the above Article 7 of the treaty it is clear that the profit of an enterprise will be taxable only to the extent as is attributable to that permanent establishment. This is in pari materia with clause (a) of Explanation 1 to section 9(1)(i) of the Income-tax Act. Paragraph 5 of Article 7 of the treaty prescribes as to how the profits to be attributed to the PE is to be arrived at. It provides that only the profits derived from assets and activities of the PE shall be treated as attributable to the permanent establishment. It is argued that the clause 'derived from' should have narrower meaning and only the immediate and direct nexus should be between earning of income and assets and activities of the PE which can be brought to tax. We have also held that since the payment to the agent in India is more than what is the income attributable to the PE in India, it extinguish the assessment as no further income is taxable in India. It is to be noted that even in the first assessment framed by the Assessing Officer, the entire expenses in the form of remuneration paid to Interglobe was held as allowable deduction and was reduced while computing the income of appellant. If that be the case, the income attributable to PE in India being less than the remuneration paid to the dependent agent, it extinguishes the assessment and requires no further exercise for computation of income. We accordingly hold so and in view of the same the income of the appellant will be NIL. 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 appeals by the appellant were partly allowed, and the cross objections raised by the revenue were allowed.

Summary

Issues Involved:
1. Whether the assessee has any income chargeable to tax in India u/s 5(2) and u/s 9(1)(i) of the Act.
2. Whether the assessee has a Permanent Establishment (PE) in India under Article 5 of the Indo-US DTAA.
3. Determination of the extent of income attributable to the PE in India.
4. Whether the income attributed to the PE is exhausted by payments made to the Indian agent.
5. Applicability of interest u/s 234A and 234B.

Summary:

1. Income Chargeable to Tax in India:
The assessee, a US resident, operates a Computerised Reservation System (CRS) for airlines, hotels, etc., and has appointed Interglobe Enterprises Pvt. Ltd. as a distributor in India. The assessee contended that no income accrued or arose in India, and it had no operations in India u/s 5(2) or u/s 9(1)(i) of the Act. The Assessing Officer (AO) held that the booking activities in India through the CRS constituted business connection, making the income taxable in India. The CIT(A) upheld this view, stating that the assessee had a business connection in India from which income accrued or arose.

2. Permanent Establishment (PE) in India:
The Tribunal examined whether the assessee had a PE in India under Article 5 of the Indo-US DTAA. It concluded that the assessee had a fixed place PE in India through the computers installed at the subscribers' premises, which were connected to the CRS and controlled by the assessee. The Tribunal also found that Interglobe acted as a dependent agent PE, habitually exercising authority to conclude contracts on behalf of the assessee.

3. Attribution of Income to PE:
The Tribunal held that only 15% of the revenue generated from bookings made in India was attributable to the PE. This was based on the functions performed, assets used, and risks undertaken in India. The majority of the CRS operations, including data processing, were conducted outside India, and only a small portion of the activities occurred in India.

4. Payments to Indian Agent:
The Tribunal noted that the payments made by the assessee to Interglobe for its services were at arm's length and consumed the entire income attributable to the PE in India. Thus, no further income was taxable in India. The Tribunal relied on Circular No. 23 of 1969 and the Supreme Court's decision in DIT v. Morgan Stanley & Co. Inc. to support this conclusion.

5. Interest u/s 234A and 234B:
Since the income attributable to the PE was exhausted by the payments made to Interglobe, resulting in no taxable income in India, the question of charging interest u/s 234A and 234B did not arise.

Conclusion:
The Tribunal partly allowed the assessee's appeals, holding that the income attributable to the PE in India was fully offset by the arm's length payments made to Interglobe, resulting in no taxable income in India. The cross objections raised by the revenue were allowed, upholding the validity of the assessment and the tax rate applicable to the assessee.