9911796707
TMI Blog2007 (11) TMI 329X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods 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 app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erglobe 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 'Gal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... booking capabilities etc. As a CRS service provider to Airlines, the appellant performs the following: It receives all relevant information from the various Participant airlines, processes this information and stores it on its database in a standard format, and has processes in place for receiving updates to this information on a continuous basis It receives from the TAs requests for information contained in the database, booking requests, enables booking and requests for changes in bookings It forwards the booking initiation or update requests from the TAs to the Airlines Servers, receives responses thereto from the Airlines Server and forwards the responses to the TAs It provides reports to airlines about the bookings made through its CRS in various forms and using various parameters. The appellant has entered into an agreement with various participants (hereinafter referred as 'Participating Carrier Agreement or PCA'). A sample copy of such agreement has been filed at Assessee's Paper Book (APB) at pages 1-97. Relevant clauses of said agreement are extracted herein: Introduction . Whereas, Galileo International provides computerized reservations and ticketing and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lay of flight availability status, and provision of booking capability. The scope of the standard services provided shall be determined, and may be amended from time to time, by Galileo International. Such standard services shall not include the optional services listed in Schedule 4. Where Participant uses a computer to computer communications link between the System and Participant's System, Galileo International shall offer certain point(s) of entry into the System communications network and will specify the connectivity parameters that must be used in order that Participant's System can send and receive Type A and/or unsecured Type B messages. Subject to Articles 3F and 3G below Galileo International will pay all costs of communication between Participant's point of entry, as specified by Galileo International, and the System. Upon receipt of documented evidence from Participant of speculative booking or other abusive practices by a Galileo International subscriber involving the sale of Participant's air transportation services, Galileo International shall assist efforts by Participant to initiate appropriate, timely and reasonable remedial measures against such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough the System to Galileo International and all Galileo International Subscribers that hold validation approval to issue transportation documents on Participant's behalf in each territory in which Participant is, at the subject time, a member of any authorized ticketing arrangement and in which the System is authorized to operate in the capacity of a 'System Provider' or in another comparable capacity. Participant expressly agrees to execute promptly all agreements and other authorisations specified by the local settlement plan or any other operator of an authorised ticketing arrangement that Galileo International reasonably believes are necessary to implement such authority for the System. 4. Charges. Participant shall pay to Galileo International (or such other Person as Galileo International shall direct) on a monthly basis the charges, for use of the System and other services rendered under this Agreement, as specified in the Schedules. Schedule 2: Charges for standard services. This Schedule describes the charges for certain basic standard services and for segments created through the use of certain optional services provided to Participant and forms part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt's System within the primary availability displays of the System according to the journey requested by the Galileo International Subscriber. 2. Responsibilities of Galileo International B. The System will send to Participant's System information to facilitate the identification of each Galileo International Subscriber seeking an availability that involves one or more of Participant's flights together with the city pair requested by the Galileo International Subscriber. The System will display availability data returned from Participant's System in preference to the data stored in the System availability status tables, provided that Participant returns this information to the System within an agreed period of time from the point at which the initial interrogation request leaves the System. Schedule 25: Ticketing Facility. This Schedule describes the Ticketing Facility service offered in Schedule 4 and forms part of the Galileo International Global Airline Distribution Agreement. Available only for Territory 2; may be extended to Territory 1 later. 1. General. Ticketing Facility refers to the functionality whereby Galileo International enables a Galileo Internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 1.1 As used in this agreement, the following terms will have the meaning provided for each: 'Booking' means in relation to an Air Vendor, a booking made in the Galileo System in respect of a Passenger Segment and, in relation to a Non-Air Vendor, the unit of measurement used by Galileo International for charging purposes; 'Computerised Reservation System' or 'CRS' means an automated system which processes Booking data and other data to provide any or all of the following functions: (a) the ability to display flight scl1edules and seat availability; (b) the ability to display and/or quote airline fares; (c) the ability to make airline seat reservations; (d) the ability to issue airline tickets; and (e) the ability to perform any or all of the functions similar to the above functions in respect of hotel, car and other travel related services other than air services; 'CRS Services' means services of the types described in the definition of CRS which are provided by a CRS directly or indirectly to subscribers; 'Data Processing Fees' means the fees payable by Galileo International to Interglobe asset forth in Schedule 3 read with clause 8; &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the term of this agreement and of any extensions or renewals of this agreement Galileo International shall not: (a) appoint any other person as its distributor or agent for the provision of its CRS Services in the Market Region, or (b) supply its CRS Services to any other person in the Market Region for use by or provision to a subscriber. 2.8 Notwithstanding clause 2.3: (a) Interglobe undertakes to Galileo International that it is and will continue to be prepared to accept Air India or Indian Airlines as a participant, associate or shareholder in the Indian NDC on reasonable terms, and (b) Interglobe undertakes to Galileo International that, in the event that either party identifies a potential interested and commercially viable participant, associates or shareholder in the Indian NDC, Interglobe will negotiate in good faith with such party with a view to accepting such party as a participant, associate or shareholder in the Indian NDC upon reasonable terms: Provided that the induction of such participant, associate or shareholder shall not in any way affect the shareholding pattern, control, management or functioning of Interglobe. 2.9 During the term of this agreement Inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall provide to Interglobe details of the hardware and software specifications approved from time to time by Galileo International for use in conjunction with Galileo International's CRS Services and including, but not limited to, operating, performance or other parameter. Interglobe shall use its best endeavours to ensure that all hardware and software used to access Galileo International's CRS Services in the Market Region comply with such specifications and including, but not limited to, any operating, performance or other parameter imposed by Galileo International'. 4.3 Galileo International shall apply to Interglobe licences for all such software products developed by Galileo International as are commercial desirable or necessary for use by Subscribers in the Market Region in conjunction with Galileo International's CRS Services, to enable Interglobe to supply such software products to Galileo Subscribers in the Market Region provided always that nothing in this clause shall oblige Galileo International to supply any particular software product. 4.5 Galileo International and Interglobe shall enter into a service level agreement based upon the Model Services Lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computer hardware supplied to Interglobe as contemplated in this clause 6.5. 9.12 In the event of termination of these agreements under clause 9.4 or 9.5, parts (b) through (f), upon the expiry of the notice period as specified hereunder:- (a) all subscriber Agreements concluded by Galileo India shall be automatically assigned to Galileo International at no cost to Galileo International and Galileo India shall physically deliver to Galileo International its signed originals of all such Subscriber 19 reements within thirty (30) days of such termination takings effect, and (b) Galileo International, at its sole discretion, may purchase all or part of the Subscriber hardware, title to which at the time of termination is vested in Interglobe at the lower of Net Book Value or market value in the India market where Net Book Value is defined to be original purchase price inclusive of freight and duty only and no other costs, depreciated on a straight line basis from the date of delivery to Interglobe, using a 6 (six) year useful life or existing market value in Indian market thereof at that point in time, whichever is the lower. 12. Intellectual Property Rights: 12.1 Subject to the condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and/or obtains and distributes products and services to subscribers for the display of information on air carrier schedules, fares, seat availability and other travel related products and provides subscribers with the ability to make reservations and/or tickets and/or provide other related services. 1.2 Subscriber wishes to have access to and use of the products and services provided by Galileo. 'Communication Link' means the telecommunications lines and associated equipment which link the Galileo System to the Equipment at the location. 'Computer Reservation System' or 'CRS' means a computerised system containing or providing information about schedules, fares, seat availability and other services of air carriers and about the services of other travel related companies, through which reservations can be made. 'Galileo System' means the CRS operated or accessed by or for Galileo. 'Location' means those premises at the address or addresses specified in the Appendices, where equipment and/or Software Products are installed under the terms of this agreement. 4. Location 4.1 Galileo will, at no cost to Subscriber, liaise with and provide informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vel of service each commits to deliver to the TA. Its purpose is to establish the responsibilities of each party involved and to clarify and establish expectations on all sides. It forms the foundation of the Galileo International Service Plan that aims to deliver stable, acceptable service to End Subscribers and provides the basis for improved communication between the Service Providers. Other relevant clauses of said agreement are extracted herein: 3. Service Plan 3.1 Concept There are two key areas of measurement when considering services to the End Subscriber. These are System Availability and Response Times. This document recognizes that both of these categories are affected by Global. Regional and Market based influences and that measurement of these services can effectively be divided into host (H) network (N), and customer premises (P) components. The goal is that Service Level Measurement and Reporting will be the combined function of all Service Providers in the Galileo International Delivery Chain. End to End measurement of standard focal point sites will be catered for by Galileo International. Where non-focal point installations exist it will become even more critical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reporting of premises availability shall rest with the NDC. 6. Service Management Problem Management Refer to Galileo International's Problem Management Procedures for complete documentation on the Problem Management System (PMS). 6. Host, Network and Premises 6.1 Problem Management-Refer to Galileo International's Problem Management Procedures for complete documentation on the Problem Management System (PMS). 6.1-1 Host, Network and Premises-For problems to be recognized and addressed they must be logged into the Galileo International PMS. Typically problems are recognized as originating at either Host, Network or the Customer Premises components. Currently all problems identified by the End Subscriber, the NDC, the Partner or Associate, and subsequently logged and escalated via PMS, are assigned a Business Impact value based on the nature of the problem as defined below: - Critical: Critical impact on business. Severe loss of revenue. No work arounds or alternatives. (This value should be assigned with due regard to the nature of the problem). - High: High impact on business. Complex work around required. Serious user dissatisfaction. - Medium: Medium impact on business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the communication services which it provides. Interglobe was entitled to charge fees from the TAs for providing support services, equipment etc. but is stated not to have charged the same. 2.2 The appellant filed its return of income on January 28, 1999 pursuant to notice under section 142(1) of the Income-tax Act, 1961 (the 'Act') for the assessment years 1996-97, 1997-98 and 1998-99 and under section 148 for assessment year 1995-96 with NIL income contending that it does not have any income liable to be taxed in India under the Act, as: 1. No income accrued or arose to it in Indian or could any such income be deemed to accrue or arise in India; 2. In any event, it had no operations in India which gave rise to taxable income under section 5(2) or section 9(1)(i) of the Act. Without prejudice to its non-taxability under the Act, it contended that it did not have any Permanent Establishment ('PE') in India within the meaning of Article 5 of the Double Taxation Avoidance Agreement between India and USA ('Treaty') and, therefore, the booking fees received by the appellant from the airline companies outside India, being business profits were not liable to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rglobe was an agent covered under Article 5(5) of the Treaty as the transactions between the two were not at arm's length as: there was close business connection hardware and software were provided by the appellant training and help desk were provided by the appellant. 4. The Commissioner of Income-tax Appeals ['the CIT(A)'] in his order held that the appellant had a business connection in India from which income accrued or arose in India as: information was carried to the TAs in India by providing connectivity and computers through Interglobe; operations in regard to booking were initiated and completed in India. He even held that income was deemed to accrue or arise in India from the property owned by the appellant and situated in India. He observed that the appellant: has invested substantial money in computers which were given to the TAs without receiving any charges; provides continuous display of information through leased lines. He further held that activities of PE constitute display of information on the screen of the TAs. On page 15 of his order, the CIT(A) observed as follows: I am in agreement with the ld. counsel that the profit which can be brought to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to the fact that the appellant receives booking fees from the Airlines for the vide range of services, inter alia, for: Enabling Airlines to determine the geographical locations where its tickets may be sold; Making available to the Airlines a point of sale table, to enable the Airlines to establish a series of rules by which the availability status of its tickets can be controlled; Enabling TA's to access the Airlines' system for the purpose of creating and/or amending ground arrangement requests, such as stop-overs and mini-stays; Making available to the Airlines access to the data stored in the CRS relating to travel itinerary involving multiple Airlines; Making available Airline's information pages in the CRS system for use of the TAs; Provision of data for transactions i-elating to Direct Flight Segments on a monthly basis; Supplying Billing Information Data Transfer ('BIDT') or Marketing Information Data Transfer ('MIDT') by magnetic tapes or other method as may be agreed upon by the parties on a monthly basis. 5.1 Shri Vyas contended that the database relating to seat availability, etc., is on the appellant's MCS, which is located outside t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement was for a initial period of 10 years and the computers were provided only in June 1995 i.e., assessment year 1996-97 and only for 2 years, facility which was only by way of financial assistance to Interglobe. On page 8 of the submissions filed by the appellant, it is mentioned that: (i) the computers provided were of a value of only USD 495,712 and not USD 3,000,000, as wrongly alleged in the order of the CIT(A) and in the submissions made by the revenue [the latter figure is contrary to the record]; (ii) the said computers have been provided by the appellant to Interglobe only in assessment year 1996-97 and not in the earlier or subsequent appeal years; (iii) the computers were rendered obsolete within 2 years; (iv) these computers were provided to Interglobe whose responsibility was to provide computers to the TAs, to assist in market penetration; (v) the computers have no role in the earning of the appellant's income as is shown by the fact that after assessment year 1996-97 (after which no computers were provided), the appellant's income from CRS not only continued but actually increased, as is shown below: Gross revenue in the assessment years from 1996-97 Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame and from there it is distributed to the airline concerned. Through the same route the communication comes back. All this process takes a few seconds and once the travel agent receives back the communication, he issues the ticket. He submitted that the display on the TA's screen is only an invitation to offer. The TA, by punching in the seat requests, only makes an offer. The booking is concluded and the appellant's fee accrues, not when the TA clicks on his computer screen in India, but when the TA's request is accepted on the Airline Server through the appellant's CRS. He referred to clause 2B (i) and (ii) on Pages 46 and 49 of APB-I Upon request from a Galileo International Subscriber, the System will interrogate Participants System in order that the Galileo International Subscriber may view certain information stored in Participant's System. Upon request by a Galileo International Subscriber through a secondary 'follow-up' input, the System will interrogate Participant's System with a flight specific availability inquiry. He submitted that the acceptance is not made in India and, therefore, the contract is not made in India. The TA in India, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paying lease rent to SITA, but service charges. He further submitted that whether an activity adds value is irrelevant for determining accrual of income. If such value is added by the appellant's act of purchasing the services of an independent contractor/service provider, it does not lead to the appellant's income accruing in India as SITA's activities are not the appellant's activities or operations at all but are merely services purchased by the appellant. He further submitted that an argument similar to the Department's argument viz. that but for SITA, the appellant would not have been able to earn its revenue, was rejected by the Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd v. DIT [2007] 288 ITR 408, where the revenue had urged that but for the offshore services, the onshore services (which were admittedly taxable) could not have been performed and, therefore, even the offshore component was taxable. The Hon'ble Supreme Court, in this case, inter alia on pages 420 and 421 of the case, held that even if a contract was a lump sum, firm, fixed price, time certain, and indivisible turnkey contract, yet no Indian tax could be imposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, when the Supreme Court has held that an assessee's own activities carried on in India have to be separated from his activities outside India, there is even less of a basis for linking the appellant's activities outside India with the activities of unrelated entities in India. Thus, the telecommunication connectivity provided by SITA/local vendors in India and the computers provided by Interglobe in India cannot be merged with the appellant's CRS as: (i) the telecommunication nodes and lines in India are provided to the appellant as a service by an independent contractor/service provider (SITA) who is remunerated on an arm's length basis by the appellant. These are not assets or activities or operations of the appellant, as contended in the written synopsis submitted by the learned DR. (ii) the computers provided to the TAs are not in any way an essential part of the appellant's earning apparatus as is shown by the fact that even after the computers supplied by the appellant were no longer used, the appellant's CRS earnings actually increased. The learned AR contended that the appellant's booking fee accrues when the booking request is accepted through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the absence of its own business operations in India, the income of the appellant cannot be said to accrue in India. Thus, there have to be operations in India for income to accrue under section 5 of the Act (and not merely for deemed accrual under section 9 of the Act). The operations of unrelated parties, viz. Interglobe and SITA cannot be considered as operations of the appellant. The appellant's income by way of booking fees also cannot be deemed to accrue or arise in India under section 9 of the Act because its income as pointed out above, does not accrue or arise through or from: (i) any asset in India; (ii) any source of income in India. The learned AR clarified that the computers at the TAs desk do not process the information, it only displays the information viz. seat availability, booking confirmation, generates the request. He further submitted that no business connection can exist, in law, if the agent/person has no authority to bind the principal by concluding contracts and relied on the tests laid down by the Supreme Court in the case of CIT v. R.D. Aggarwal Co. [1965] 56 ITR 20 inter alia, because: (1) the appellant's commercial connection, if any, with I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (U.K.) [1993] 201 ITR 534 (Cal.) it was observed that there exists no business connection as the assessee has not rendered any services on its own. 5.4 It was further contended by the learned AR that without prejudice to the appellant's submission that no income accrues or arises or is deemed to accrue or arise in India and that the appellant has no operations in India, in any event, even if it is assumed, while denying, that any income can at all be regarded as accruing, really or fictionally to the appellant in India, such income is completely offset and exhausted, inter alia, by the arm's length payments made by the appellant as supported by the test/principle laid down by Supreme Court in the case of DIT (International Taxation) v. Morgan Stanley Co. Inc. [2007] 292 ITR 416 as under: As regards attribution of further profits to the PE of MSCs where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case noth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een. Under the Participation Agreement, the vendor is contractually bound to honour the booking made by a subscriber. The booking by the Subscriber results in a confirmed travel ticket - either E-ticket or printed ticket, which is produced by the computer/printer, being part of the equipment supplied to a Subscriber by the assessee. Purchase order is made by the Subscriber in India- booking is made in India- sale of ticket by Airlines is made in India. The contract (booking) between the Subscriber and the Airlines is concluded in India. Subscriber makes the payment in rupees to the Branch office of the International Airlines in India or to a domestic airlines. Income accrues to the assessee in India from the bookings because of assets provided to the subscribers in India and the telecommunications infrastructure set up by the assessee in India at its own cost as also from the operations of GalileoIndia. 6.1 Shri Kapila submitted that the true nature of the assessee's business in such a scenario can be compared with that of a stock exchange like National Stock Exchange (NSE), which provides a platform for trading. The system installed by NSE is accessed by brokers etc. from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts. The making of booking and generations of tickets take place because of sifting of information by the Subscriber on the computer installed in his premises and the necessary commands punched by him on the computer. The moment a subscriber accesses the host computer, its computer gets integrated with the host computer. Neither the Airlines nor the Subscribers are concerned with the location of the host computer or how it processes the data. From practical and commercial point of view of the Airlines and the subscribers, what is material is that the online information supplied by the Airlines is displayed on the computer screen of the subscribers for their decision making so that they can make bookings on their computers. The assessee is clearly in the business of running a technologically complex and state-of-the art electronic platform, which acts as a flight reservation exchange or 'market place' in India. The communication network in India, display on subscriber's screen and accessibility to the CRS for user by the subscribers are integral components of the commercial operations of the CRS. The business of the assessee can also be compared with that of a commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the assessee have any business operations through the asset owned or leased by it in India? The following operations are carried on in India on continuous basis by the assessee on its own or hired by it at its own cost is providing for: (i) Provision of the telecommunication 'Nodes' situated at Mumbai/Delhi owned by SITA. (ii) Provision of telecommunication lines between the Node and the premises of the Subscribers. (iii) The entire regional telecommunications network is maintained by the assessee at its own cost. The regional networks together with gateways to international network are essential parts of the inter-active worldwide CRS. (iv) Without provision for telecommunication network, the host computer would not have any business value. The fact that the assessee may have entered into a worldwide contract with SITA (a French company) outside India is immaterial. As observed by the Hon'ble Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd., it is not the situs of making of the contract which is relevant but it is the situs where the services are rendered which is relevant. The assessee has rendered services to the vendors within India by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It needs to be emphasized that the subscriber could not have made the booking but for the Node and the domestic network hired/leased by the assessee and the hardware and software provided to the Subscribers. The activity which creates the charge of fees from the Airlines is the booking made by the Subscriber in India. Therefore, the source of income of the assessee is the bookings made by the Subscriber. (iii) The Subscribers are resident of India. The assessee provides them with computers and connectivity for making bookings. They place the purchase order on the Airlines in India and the sale also takes place in India. Payment to Airlines is made by the Subscribers in India in Indian rupees. Without the bookings by Travel Agents, there is no business and no revenue. It is for this reason that the assessee provides at its own cost communication network in India as also equipment to the Travel Agents so that they can make bookings on its system and generate income for the assessee by way of commission from the Airlines. There is no merit in the assessee's plea that such equipment is used by the subscribers for their own business and not for the business of the assessee. The v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition. In the present case the assessee's source of income is the booking made by a travel agent in India on the computer provided by the assessee. The booking is made by the subscriber on the basis of display of information on the computer and necessary sifting of informations and commands made through the computer installed at his premises. Looked at from another angle, it is the business of maintaining the CRS, part of which (telecommunications network, computers and modem etc. and other activities through the agent in India) has produced income in India. Enquiry must stop at this stage. (v) The assessee has explained its business in its letter dated 26th January, 1999 addressed to the Assessing Officer (DPB) in the following words:- The CRS consists of software owned by the assessee. The software is accessed by the travel agent (the subscriber) by means of a modem for purpose of undertaking flight bookings for the Participant. The software enables the subscriber to access information such as display of schedules and fares, building of connections, display of flight availability status and provision of booking capability. Therefore, the booking fees paid by the Partici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is an admitted fact that hardware costing USD 0.5 Million was provided by the assessee free of cost in first two years. The economic life of hardware has been fairly estimated by the assessee to be six years. The assessee has claimed and it has been allowed depreciation on this hardware for all the assessment years under appeal (including assessment year 1998-99). Therefore, its statement before the CIT(A) that all the computers supplied to Interglobe during financial year 1995-96 were 'junked' within two years is patently wrong as no material has been produced to establish that the equipment was scrapped. On the other hand, the assessee itself has been claiming depreciation thereon in all of subsequent years. (iii) Providing free of cost its proprietary software products. These have been provided to the subscribers through the agency of Galileo India for installation on their computers. In the above-mentioned activities in India form part of its business of running the CRS. Indeed, the assessee itself has claimed in the remand proceedings the expenses under the following heads as allowable business expenditure incurred for earning income from Indian operations: (1) Marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 98-99. Therefore, depreciation was claimed in the three assessment years 1996-97 to 1998-99 as the two years period got over in assessment year 1998-99. Further, no depreciation was claimed on these computers from assessment year 1999-2000, consistent with scrapping of these computers after two years and is supported by the fact that scrapping of the computers was specifically averred to before the CIT(A) by letter dated 27-1-2000 and this was recorded by the CIT(A) in Para 6.2 of his order but was not in any way controverted by him. An economic life of 6 years was adopted only for a limited purpose of calculating the depreciated value at which the appellant was entitled to purchase the computers from Interglobe, but it was recognised that the market value could be lower (as it did, in fact, turn out to be nil, due to obsolescence, which is evidenced by the letter dated 27-1-2000 at Page 285A of APB-I). Even otherwise, the fact that these computers (which were 486 models as evidenced from letter) were rendered obsolete is shown by the fact that in 1998 Interglobe was supplying to the TAs, Pentium Computers as stated in the Subscriber Agreement between Interglobe and TAs submitted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Hon'ble Supreme Court is completely distinguishable because in that case royalty income received by the Performing Rights Society for broadcasting, from stations of All India Radio within India, was held to be taxable inIndiaon the ground that the same arose in India. Also, since the case involved a non-profit-making organisation, it is not a relevant precedent for a profit-making business enterprise. 7.4 The learned AR further submitted that it is also contrary to the following uncontroverted factual clarification given by the appellant pursuant to the specific queries of the CIT(A) on which the learned DR has himself relied upon: The CRS does not contain airline inventory, but rather contains the status of an airline flight as provided by the airline. Typically, the travel agent begins the booking process by looking at flight availability between an origin and a destination. The status of a flight is maintained by the airline. If the flight status indicates that a seat is available, the agent will initiate a sell request. Most airline vendors provide real-time access to their inventory and thus control their inventory when they receive a sell request. The majority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are independent parties dealing with each other at arm's length. In any case, no contracts are concluded on the appellant's server. Hence, the appellant's server is neither a trading platform nor an integrated market place. He contended that the allegation of the Department that the moment a subscriber accesses the host computer, its computer gets integrated with the host computer is erroneous as it is not uncommon for a computer to access two servers at the same time. For instance, with today's technology, a person might access his bank account in one window, while he is trying to book a train ticket in another, while at the same time, his access to Google and Yahoo is on in two other windows. This, in fact, does often happen. In such a case, by the logic of the Department, the computer will be integrated with each of the host computers, which seems impossibility. Alternatively, on the basis of this argument, all the various servers, together with all the computers connected with them, would become integrated. In effect, on the basis of this argument, given the number of computers in any network, ultimately, the world would either gravitate towards a single 'in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1)(i) of the Act. The case law cited by the appellant in the case of Cutler and Hammer has not been dealt with by the Department. (ii) in any event, there are no activities of the appellant in India, and, therefore, there is no tax liability in India. Finding as to existence of Business Connection 8. We have heard the parties at length. In our opinion, following questions arise for consideration: (1) Whether the assessee has any income chargeable to tax in India under section 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 in India. (2) If the answer to Question No. 1 is in affirmative, whether, in terms of DTAA between India and USA, the appellant has any PE in India? (3) If answer to Question No. 1 is in affirmative, what is the extent of income earned in India and whether the same can be held as paid by the appellant to Interglobe and no further income is attributable to the PE in India? (4) If the answer to Question No. 3 above is in negative, to what extent the income arises in India which can be charged to tax in India. (5) Whether interest under sections 234A and 234B is cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held thus: The expression 'business connection' undoubtedly means something more than business. A business connection in section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicated an element of continuity between the business of the non-resident and the activity in the taxable territories, a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms. It may include carrying on a part of the main business or activity incidental to the main business of the nonresident though an agent or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case, the question whether there is a business connection from or through which income, profits or gains arise or accrue to a nonresident must be determined upon the facts and circumstances of the case. A relation to be a business connection must be real ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pants, i.e., Airlines and hotels etc. whereby the subscribers who are enrolled through the efforts of NMC can perform the functions of reservations and ticketing etc. Thus the Galileo system or the CRS is capable not only processing the information of various Airlines for display at one place but also enables the subscribers to book tickets in a way which is a seamless system originating from the desk of the subscriber's computer which mayor may not be provided by the appellant but which in all cases are configured and connected to such an extent that such computers can initiate or generate a request for reservation and also receive the information in this regard so as to enable the subscriber to book the airlines seat or hotel room. The request which originated from the subscriber's computer ended at the subscriber's computer and on the basis of information made available to the subscriber, reservations were also possible. It is to be noted that all the subscribers in respect of which income is held taxable are situated in India. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manual prescribed by it as per clause 14 of Distribution Agreement. (5) Assessee allots access code to the travel agents for using the CRS. (6) The assessee's business comprises of: (a) Maintenance and running of CRS; (b) Providing computer modem and software to the travel agents inIndiaso that they can use the CRS for making the bookings which generate charge on the airlines; (c) Assessee hires from SITA and maintains and operates telecommunication network in India so that travel agents could make the bookings. All these activities are integral part of the core business carried on by the assessee and these are not auxiliary or preparatory in nature. The contention of Shri Vyas regarding reliance on the decision in the case of Fisher in this case is misplaced. Whether the contract for sale of ticket is completed in India or outside is irrelevant for the purpose of present discussion as we are not to determine the taxability of income of various airlines accruing as a result of sale of tickets through the CRS in India. Thus, the availability of the tickets displayed through the CRS at the desk of travel agents in India is whether offer for sale or an invitation to an offer is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion but are not capable of processing the data of all the airlines together at one place. Such function requires huge investment and huge capacity, which is not available to the computers installed at the desk of subscriber inIndia. The major part of the work or to say a lion's share of such activity, are processed at the host computer in Denver in USA. The activities in India are only minuscule portion. The appellant's computer in Germany is also responsible for all other functions like keeping data of the booking made worldwide and also keeping track of all the airlines/hotels worldwide that have entered into PCA. Though no guidelines are available as to how much should be income reasonably attributable to the operations carried out in India, the same has to be determined on the factual situation prevailing in each case. However, broadly to determine such attribution one has to look into the factors like functions performed, assets used and risk undertaken. On the basis of such analysis of functions performed, assets used and risk shared in two different countries, the income can be attributed. In the present case, we have found that majority of the functions are perform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terglobe 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. 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, no income is taxable in India. Whether a Permanent Establishment Exists 11. Shri Vyas submitted that without prejudice to the fact that the appellant is not subject to tax under the domestic law, the liability to tax in India has also to be examined under the provisions of the Treaty. It was highlighted that the objective of the Treaty is to grant relief in respect of income on which income-tax has been paid both under the Act and income-tax in that country; or avoid double taxation of income under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch such income may be quantified, or the rate at which it may be taxed. In the context of business income, the conditions to be satisfied are set out in Article 7(1) of the Treaty, and include the requirement that a non-resident should have a permanent establishment, as defined in Article 5 of the Treaty. Where these conditions are satisfied, the further condition is that the income which may be taxed must be attributable to the permanent establishment and must be derived from the assets and activities of the permanent establishment. It should be noted that the conditions specified in Article 7(1), read with Article 5, and in Article 7(5) are intended to achieve the objective of the avoidance of double taxation. 11.1 In this background, the learned AR submitted that for good and cogent reasons, the dominant aim of the Treaty is the avoidance of double taxation and the provisions of the Treaty should be interpreted with that aim in mind. Therefore, any interpretation which is likely to lead to double taxation is to be avoided. Consequently, for instance, if there is a doubt regarding the existence of a PE, it should be held that there is no PE. The Courts should adopt a liberal appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the soil of another country. It was submitted that the appellant has nothing in India which satisfies the above tests of a Permanent Establishment , as generally understood as above, at all, and hence is saved from Indian taxation. Without prejudice to the above, in order for a non-resident to have a Fixed Place PE in India: He should have a fixed place of business in India; and His business should be carried on through that fixed place. The learned AR submitted that the Supreme Court in the case of Visakhapatnam Port Trust (supra) and jurisdictional Tribunal in the case of Motorola Inc. and Western Union Financial Services Inc. v. Addl. DIT [2006] 101 TTJ (Delhi) 56 has interpreted the meaning of fixed place of business as a specific geographical point at the disposal of the non-resident through which a business is carried on. He submitted that the test of a Permanent Establishment and a Fixed place of business as laid down by the Special Bench of the Tribunal in the case of Motorola Inc. are as under at page 401: Article 5.1 states that the term 'Permanent Establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent' would be deemed to constitute a PE, and, secondly, that the enterprise concerned would be deemed to carryon business through that deemed PE. Had it been intended that the term 'fixed place of business' should include assets or equipment, a provision to that effect would have been expressly included in the Treaty. This proposition is observed by the Supreme Court in the case of Azadi Bachao Andolan at p. 747, as follows: It is urged by learned counsel for the appellants, and rightly in our view, that if it was intended that a national of a third State should be precluded from the benefits of the DT AC, then a suitable term of limitation to that effect should have been incorporated therein. The appellants rightly contend that in the absence of a limitation clause, such as the one contained in article 24 of the Indo-US Treaty, there are no disabling or disentitling conditions under the Indo-Mauritius Treaty prohibiting the resident of a third nation from deriving benefits thereunder. In summary, from the above judicial precedents, three tests to determine fixed place of business could be laid down as under: Place of business test; Right to use test; Business activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the activity, i.e., that the activity has to be conducted 'through' the place of business. It is common ground, for instance, that a warehouse owned by a foreign enterprise and at the entire disposal of a domestic enterprise (consignment stocks) does not constitute a PE for the foreign enterprise. at page 229 The PE definition not only examines the physical connection of a taxpayer's business to a foreign territory and the duration of his right to use a fixed place of business, but also the activities carried out there. Tax treaties characterize a fixed place of business as a PE only if the enterprise undertakes a 'business' activity through the place of business. The basic rule requires the activity performed through the place of business to be 'the business of an enterprise: The definition of PE in the tax treaties thus presupposes the performance of a 'business activity' (As per OECD Commentary 1977 as Article 5). at page 230 To constitute a PE, the business activity must be performed 'through' the place of business. This is the 'business connection test'; The performance of a business activity through a fixed place of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that both SITA and the appellant are carrying on their business operations through the Nodes/Telecommunication Lines. SITA, by providing the Nodes/Telecommunication Lines, is carrying on its own operations of providing telecommunication services to the appellant, which services the appellant is purchasing as a means or tool to conduct its business of providing CRS services. For example, if an independent car hire company is engaged by a foreign engineering consultant firm to transport its engineers whom it has sent to India to conduct a preparatory survey, the engineering firm cannot be regarded as carrying on its operations in India through the car hire company. The provision of transport is the car hire company's business operations in India and not the business operations of the engineering firm, which is only using the services of the car hire company as a means or a tool to conduct its own business. 11.6 The learned AR clarified that the appellant does not have an Installation PE as defined in the Treaty, which speaks of Installation PEs only in relation to installation projects [Article 5(2)(k)] or to installations for the exploration or exploitation of natural resour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... need to be connected to the data centre i.e., the travel agencies. In consideration for such telecommunication services, it pays monthly connection charges to SITA in accordance with the telecommunication agreement with SITA. (ii) Nature of network expenses SITA also provides network connections (routers) for processing of data, for which Galileo pays network charges to SITA. Network expenses also include manpower costs, software costs and maintenance costs for network identified equipment. Therefore, network expenses include the following costs: Telecommunication expenses paid to SITA; Telecommunication expenses paid to other telecommunication providers; Manpower costs; Software costs; and Maintenance and depreciation costs for the network identified equipment. The SITA and other telecommunications providers' expenses are specifically allocated to the country identified on the bills from these providers. The remainder of the network expenses, manpower, software, maintenance and depreciation are allocated based on a formula. Specific cost centres are identified for the network costs to be allocated. Relevant clauses of the Distribution Agreement are listed below:- Clause 3.1(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee itself should own the network and nodes. Suffice it for our purpose if the assessee has based such equipment on a continuous and 'permanent' basis. (iv) 'Location' of the 'Equipment' (hardware supplied to a Subscriber) is 'fixed' in the premises of the Travel Agent. (v) All these assets in India taken together constitute a fixed market place in India for flight reservation. (vi) A Travel Agent cannot relocate the computers without permission Ref. Clause 2.1 read with Clause 4 of the Model Agreement in terms of Clause 6.5 of the Model Distribution Agreement. The specimen Subscriber Agreement between Galileo India and Bajaj Travels (Subscriber) contains similar terms. Clause 10.1 of the specimen Subscriber Agreement specifically provides that Galileo's representative can enter the subscribers office premises for installing, inspecting and view the apparatus and its operation . (vii) It is contended by the assessee that (a) that equipment provided to the Travel Agents is relatively of little value and (b) a distinction has to be made between substantial machinery and light portable equipment . This contention is misconceived. It is not the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther than necessary for allowing the permanent establishment to function. The assessee satisfies the following four conditions, which have come to signify the expression fixed places of business employed in Article 5(1) of the Treaty: There must be a place of business in India- Place of business test; The place of business should be at the disposal of the applicant - Disposition test; The activities performed through the place of business must constitute a business activity of the applicant Business Activity Test The place of business must be fixed and the activity should last for a certain period of time - Permanence test. The Nodes in India and hired by the assessee is clearly fixed place of business so are the premises of the travel agents who use the computers and network provided by the assessee for making the bookings. The Network and Nodes are always at the disposal of the assessee from where assessee's business activities are carried out. Since these activities are continuous over past several years, it also satisfies the permanence test. Learned DR accordingly submitted that there is nexus of fixed place with assessee's business through network in India. He next su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n costs, It is well-accepted commercial principle that remuneration should be commensurate with the services provided. Accordingly, the data processing fee payable to the Distributor had to be scaled down to reflect this position. The letter of appellant to Interglobe dated12-12-1995clearly establishes that even this statement is misleading. The documents produced by the assessee clearly show that the revision in price had no nexus with the fact that the assessee eventually had to pay for the maintenance of nodes and the regional network in India. However, even going by the second version it is clear that the assessee has not only hired the facilities of the telecommunication centre of SITA at Delhi/Mumbai, for uplinking and down linking the host computer in USA with the computer installed in the premises of the subscribers in India, but it also maintains the entire communication network within India enabling the travel agents to make booking on the CRS. Hence, the network in India together with the equipment and software provided to the travel agents in India constitute fixed place of assessee's own business in India without which it could not have carried on its business. 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court in Azadi Bachao Andolan's case, the conclusion is that the US Treaty did not envisage plant or equipment to constitute a PE. Even apart from Article 5.3 of the Indo-Australian Treaty, Article 5.2(j) of the Indo-Australian Treaty further makes it clear that the Indo-Australian Treaty, unlike the Indo-US Treaty, specifically indicates plant or equipment in the definition of a PE. Article 5.2 (j): An installation or structure, or a plant or equipment used for the exploration or exploitation of natural resources. Therefore, it is clear that a plant or equipment cannot be a PE under the Indo-US Treaty. Therefore computers, nodes or lines, cannot be regarded as constituting a PE under the Indo-US Treaty at all. Further, the Indo-US Treaty in Article 5(2)(j) refers only to a specific and limited installations or structures e.g., those which are used for exploration or exploitation of natural resources but only if so used for a period of more than 120 days in any 12 months period. All other installations or structures are excluded. It is, therefore, clear that even if it is accepted (while denying) that SITA nodes and lines constitute installations, they would not come within t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other party, nor hold itself out as the agent of the other party (Clauses 16.1 and 16.2 of the Distribution Agreement). He referred that the agreement provided an option that the distribution of CRS services can be undertaken by Interglobe through a division or a subsidiary (GIPL) of Interglobe and if a subsidiary is established it can be added as a party to the Agreement. (Clause 2.2 of the Agreement) and the primary responsibility would be of Interglobe. He submitted that based on the Distribution Agreement, the appellant agreed to the following services: - Procure the provision, operation and maintenance of a communication network and associated equipment from the appellant's MCS to the Nodes in India. - Provide licences for software products developed by appellant which are necessary for use by the Subscribers in conjunction with the CRS services. - Share technological innovation, advancements and additions with Interglobe. He argued that the appellant does not have any Agency PE in the form of Interglobe because Interglobe carries on its own business in India and hence, it is not a person acting on behalf of the appellant in India within the meaning of Article 5(4) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitute a permanent establishment. Hence, Article 5(4) only encompasses a part of the second limb of the definition of 'agent' when he were to act on behalf of a non-resident, and that too only if his actions fell within the categories specified in clauses (a) to (c) of Article 5(4). An agent falling only within the first limb of the definition would not constitute an Agency PE. Hence, any judgments or commentaries on what constitutes an agent under general law have to be read with great caution while interpreting Treaty, and a person who may be an agent under the Contract Act need not be an 'agent' under the Treaty. 14.2 The learned AR without prejudice to above, contended that Interglobe does not carry out any of the activities specified in clauses (a) to (c) of Article 5(4), so as to attract the provisions of Article 5(4) of the Treaty and the activities of the alleged agent are not 'income-earning' activities. The learned AR elaborated that under Article 5(4)(a) of the Treaty, only a person having, and habitually exercising, an authority to conclude contracts on behalf of aUSresident can lead to the creation of a PE for the US resident. Thus, Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld, in terms of its legal effects, be a contract between the appellant and the TAs and that there should be consideration flowing from the appellant to each TA, and vice versa; and the appellant should have the legal right to sue the TA to enforce contractual terms, and vice versa. He argued that the contention of the department that the appellant grants access to the TAs with whom Interglobe has contracts, indicates that there are binding contracts between the appellant and those TAs is inconsistent with the law of contract, which requires mutual agreement, mutual consideration and, above all, mutual enforceability, for a contract to exist between two parties. He pointed out that it is quite common for hotels, airlines, credit card companies, and other companies to tie up with each other or with other businessmen to provide benefits to each other's customers. Such granting of benefits does not result in a contract between the airlines, etc., and the customers, and no enforceable rights accrue to the customers. Thus the allegation of the Assessing Officer that the Distributor is concluding contracts on behalf of the appellant is plainly erroneous, and unsupported and in the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded to deal with those cases where the parties are related and the dealings between them are not at arm's length. In the ordinary sense, the term arm's length refers to dealings between two unrelated parties and in the present case, it cannot be disputed that the appellant and Interglobe are unrelated parties, and hence the dealings between them, by definition, are arm's length dealings. For the said test for Arm's length, reliance was placed on meaning of Arm's length in Black's Law Dictionary, Seventh Edition. It was pointed out that the reference in Article 5(5) is to the conditions under which the transactions are made, and not to specific prices. He further submitted that the Department has not suggested why the payment of US $1 per segment was not made under arm's length conditions or why the amount of US $1 was inadequate. A commission of 33.3 per cent can never be treated as anything but reasonable and at arm's length. Further, the rate of 33.3 per cent was higher than the rates paid to distributors in other countries as was evident from the letter dated 27-1-2000 filed before the CIT(A) and appearing at page 285A of APB-I. The AR argued that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 5(5) of the Indo-US DTAA extracted herein:- An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph. He invited our attention to some of the relevant clauses of the Distribution Agreement are reproduced below: Clause 4.3 (P. 107 of APB) Galileo International shall supply to Interglobe licences for all such software products developed by Galileo International as are commercially desirable of necessary for use by Subscribers in the Market Region in conjunction with Galileo Internationals CRS Services, to enable Interglobe to supply such software products to Galileo Subscribers in the Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auses, Shri Kapila submitted that Galileo India is a dependent agent of Galileo International for the following reasons: (i) Galileo India has been set up first as an independent division as a separate undertaking in terms of section 10A of the Act of Interglobe. This undertaking was subsequently taken over with effect from 1-4-1997 by Galileo India (P.) Ltd., exclusively for providing distribution and support services to Galileo International. Reference Clauses 2.1 and 2.2 of the Distribution Agreement (ii) Initially, Interglobe had undertaken the activities under the Distribution Agreement for one year not in the ordinary course of its business. Indeed, the undertaking was set up exclusively for assisting the Indian operations of the assessee. Interglobe was carrying on business of travel agency, tour operator etc. The business started by Interglobe under the Distribution Agreement is totally a different kind of business which cannot be said to have been undertaken in ordinary course of business hitherto carried on by Interglobe. The new business of providing support services to Galileo International is a distinct business requiring specialized skills for which the employees of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S owned by it. The assessee has also ensured in its agreements with the Airlines that the bookings made by the subscribers under the 'Subscriber Agreement' with Galileo India must be honoured by the Airlines. In other words, the terms of the 'Subscriber Agreement' concluded independently by Galileo India with the subscribers has not only been honoured by the assessee, but it has also ensured that the vendors (Airlines etc.) are contractually committed to honour it. (d) The Distribution Agreement clearly states that Galileo India would be paid 'data processing fees' for processing data received from the subscribers in India. The assessee is, therefore, not factually correct when it says that the data inputs received directly from the subscribers is processed in the host computer in USA. Indeed, it has been specifically contended by Galileo India that as a matter of fact it processes the data inputted by the subscribers in India before its transmission to the host computer in USA. Galileo India also undertakes the task of suitably modifying the configuration of the computers supplied to the subscribers in order to make them compatible to the host computer inUS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om Interglobe at Page 308 of the assessee's Paper Book is not on the record of the Assessing Officer. It is not indicated when it was made out and to whom was it submitted. It has neither been referred to in the assessment order and nor in the appellate order. It is, therefore, not admissible. In any case, it pertains to assessment year 1995-96 only and, therefore, has no relevance for other years under appeal. In these years, it was Galileo India (P.) Ltd., which was set up exclusively for providing support service in India to the assessee. Further, it has been explained that the undertaking of Interglobe providing various support services to the assessee is a separate section 10A undertaking independent of other business of that company. It is settled law that business of such an undertaking must not be confused with or identified with the other business of the company owning the undertaking. (c) The nature of work done by Galileo India for which 'data processing fees' was paid has been explained by the assessee in the remand proceedings, which has been reproduced by the CIT(A) in para 6.1 (ii) at page of his order dated 15-12-2004, which reads as under:- Nature of da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the Galileo CRS and related facilities. Article 3.1 of Service Agreement in terms of Distribution Agreement Service Plan. There are two key areas of measurement when considering services to the End Subscriber. These are System Availability and Response Times. This document recognizes that both of these categories are affected by Global. Regional and Market based influences and that measurement of these services can effectively be divided into host (H) network (N), and customer premises (P) components. Responsibility for the stability and performance of Core Host Service, and any part of the Network that exists at a Core Host site, rests with Galileo International. Further down the Service Delivery Chain is the Network component. Responsibility for stability and performance of this component shall rest with the Partner or Associate and/or the Network Provider in co-operation with Galileo International, as detailed in the Market Specific section. The combined availability of H, N and P forms the total System Availability as the End Subscriber would experience. Similarly the sum of the response time within each component forms the total Response Time as perceived by the End Subsc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er has given a clear finding that assessee has not established arm's length payment. That the actual commission has been arbitrarily and without any justification reduced to US $1 per segment booked as against US$ 1.52 stipulated in Schedule 3 of the Distribution Agreement. The assessee subsequently tried to explain before the CIT(A) that Galileo India refused to bear cost of networking in India, i.e., payments for leased lines from SITA Node to Travel Agents premises and the fees agreed upon was revised accordingly . The assessee has not furnished any explanation as to how reduction of fees by 52 cents per segment (33 per cent) is justified as compared to the additional expenditure it had to incur on Indian network. The whole exercise is arbitrary and against principles of arm's length negotiations for revision of fees. Further, hiring of SITA's nodes inIndiais a part of worldwide contract between the assessee and SITA. Therefore, there could be no question of Galileo India entering into a separate contract with SITA. (ii) Evidence on record clearly suggests that the parties to the Distribution Agreement never intended to implement Clause 3 of the Agreement read with S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple. Incidentally, the fact that Galileo India has been authorised to distribute assets (both hardware and software) of which Galileo International continue to be the owner clearly establishes that the premises in which Galileo India stores the equipment for distribution is a 'fixed place' of assessee's business. (v) As per Schedule 5 of the Distribution Agreement, Galileo International also earns service fees from the Airlines for optional services booked by the travel agents and yet no commission is paid to the Galileo India on this account. 15.3 Learned DR would submit that appellant has an agency PE in the form of Dependent Agent Interglobe in terms of article 5(4) of Treaty. (1) Clause 6.3 of the Distribution Agreement clearly authorises the Galileo India to conclude contracts with the Subscribers broadly in accordance with terms of that Agreement. A Model subscriber Agreement is also annexed to that Agreement. Some of the relevant clauses of the Distribution Agreement etc. below:- (i) Clause 2.4 Notwithstanding clauses 2.1 and 2.3 and subject to clause 10, nothing in this agreement shall prevent Galileo International from distributing Galileo Internationals CRS Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. Such contracts shall be consistent with the terms of this agreement and consistent with the local laws of the relevant jurisdiction and shall provide the Interglobe is acting as a principal and not as agent for Galileo. Interglobe shall give reasonable consideration to Galileo International proposals with regard to the terms of such contracts. Schedule 5 contains Galileo International's Model Subscriber Agreement which Interglobe may use as a guideline in drafting its subscriber agreements. Article 3 Duties of Participant (B) Participant, at its own cost, shall provide Galileo International with data that are at least as complete, timely, accurate, and advantageous, and that are delivered in as favourable a manner, as those it provides to any other CRS, including Participant's CRS. Participant shall provide any such data in a format and through a supplier (if a supplier is used) that are acceptable to Galileo International. (D) Participant shall ensure that Participant's CRS offers services to all air carriers with an ownership interest in Galileo International to the same extent and on terms conditions that are at least as favourable as those on which Participant&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essary for use by Subscribers in the Market Region in conjunction with Galileo International's CRS Services, to enable Interglobe to supply such software products to Galileo Subscribers in the Market Region provided always that nothing in this clause shall oblige Galileo International to supply any particular software product. Clause 4.5 Galileo International and Interglobe shall enter into a service level agreement based upon the Model Services Level Agreement which forms Schedule 4 hereto. Galileo International and Interglobe shall use all reasonable endeavours to achieve the objectives set out in such service level agreement, which shall be reviewed at intervals of not less than one year. Clause 4.6 Galileo International undertakes to ,share with and provide to Interglobe any such innovations, technological advancements, improvements and additions to its CRS. Services and related services and facilities as it deems commercially desirable or necessary for the Market Region. Galileo International will give due weight to any recommendation which Interglobe may make with respect to such innovation and its introduction in the Market Region. From time to time Galileo International ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the CRS from which the assessee earns income. 15.6 Summing up the arguments, Shri Kapila submitted that (A) The assessee's income is taxable in terms of section 9 read with section 5(2) of the Act as it has assets in India, source of income in India as also business connection in India. (B) The assessee has a PE in India on account of: (i) having 'fixed place of business' through which its business is carried on in India as per article 5(1) of the Indo-US DTAA. (ii) It also has an agency PE in terms of the proviso to the first sentence of article 5(5). (iii) Without prejudice, it also has an agency PE in terms of second sentence of article 5(5). (iv) The activities of the assessee do not fall under any of the negative items mentioned in article 5(3). (v) The fees payable to the dependent Indian agent is not an arm's length price. (vi) Conditions laid down in articles 4(a), 4(b) 4(c) are also satisfied. (vii) The assessee is taxable both under the provisions of the Act as well as those of Indo-US DTAA. 16. As regards the exclusivity clause in the contract between Interglobe and the appellant, the learned AR replied that this does not mean that there is no princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her equipments Information of the Location, the installation and operations of the equipment, software and communication links ('Apparatus'). Non-exclusive licence to TAs to use Software Products and the Manuals TAs would prepare the appropriate Location and ensure that the installation and operation is safe and satisfactory Interglobe is the owner or licensee of the Rented Equipment and the Software Products and does not warranty the accuracy or reliability of any schedule, fare quotation or any other information Interglobe would charge specified fees for the equipment/services to TAs 16.1 The learned AR emphasised that the training cost incurred by the appellant shows that Interglobe is being given beneficial and preferential treatment rather than being discriminated against or dominated by the appellant and, hence, as per the Jurisdictional Tribunal decision in the case of Western Union, Financial Services Inc.'s case, this established that Interglobe was being remunerated at more than arm's length. He argued that the allegation of the Department that there is a control of the appellant over Interglobe as on termination of the Distribution Agreement, Interglobe&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the 100,000 segment barrier ; the projection that Interglobe should be cash positive; the advances available with Interglobe; the appellant's efforts to increase Interglobe's productivity. 16.2 It was further submitted that, without prejudice to the above and in any event what is relevant to determine whether the payment to Interglobe is at arm's length is not why the processing fee was reduced from $ 1.52 to $ 1 but whether such processing fee after the reduction (i.e., US$1) was at arm's length. It was reiterated that even the reduced fee worked out to a 33 per cent rate of commission and was much higher than the commission of US $ 0.62 to 0.91 paid to other National Distributors as indicated in the appellant's letter to the CIT dated27-1-2000. Further, interest-free advances given by the appellant to Interglobe would be advantageous and not detrimental to the latter. It is only the latter which would make a payment not at arm's length. It was stressed that the comparable data of other National Vendors at page 285A of APB-I was given pursuant to a specific request of the CIT(A) and has not been controverted or questioned by the CIT(A) as being inadequat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to existence as a 100 per cent subsidiary of Interglobe (at Interglobe's option), the fact remains that even this company was effectively and in substance and reality a part of the Interglobe group so that even in this assessment year it cannot be said that GIPL was wholly or almost wholly dependent upon the' appellant. GIPL was dependent upon the Interglobe group alone. 3. There is no material whatsoever in support of the allegation that Interglobe is authorised by the appellant to store the computers. In fact both, the Distribution Agreement (Clauses 16.1 and 16.2) and roe Model Subscriber Agreement (Clause 20.3) specifically provide that Interglobe is not an agent of the appellant. Even the Subscriber Agreement filed by the Department in the Paper Book relied upon by it contains similar provisions in clauses 17.1 and 17.2 of DPB-I, Page 42 which are reproduced below: 17.1 The parties hereto are entering into this Agreement on a principal-to-principal basis. 17.2 Nothing to this Agreement will create, or be deemed to create a joint venture, partnership or the relationship of principal and agent between the parties. The burden of proving that these clauses have no effect a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the immediate and direct source of the appellant's income lies elsewhere. The appellant's income is derived only from its MCS in the USA, as it is only there and then that the booking request is accepted and the appellant's income results. The alleged activities and assets of the appellant in India are certainly not the direct and immediate source of the appellant's income by way of booking fees. Hence, the appellant's income by way of the CRS booking fee cannot be taxed in India by virtue of article 7(5) of the DTAA. 16.5 Learned AR further submitted that strictly without prejudice to what has been stated earlier, the amount of income which can be considered to be attributable to India is a negligible and minuscule proportion of the booking income. It was submitted that, if at all any bf the appellant's income is to be attributable to India under section 5 or 9 of the Act, or under Article 7(1), read with article 7(5), of the DTAA, it can only be a negligible or minuscule part of the appellant's income. The learned CIT(A) himself, at Page 15 of his appellate order for assessment year 1996-97, has observed: I am in agreement with the ld. counsel that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating to more than 90 days within any twelve-month period; or (ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of article 9 (associated enterprises)]. 3 Notwithstanding the preceding provisions of this article, the term 'permanent establishment' shall be deemed not to include any one or more the following: (a) the use of facilities solely for the purpose of storage or display or occasional delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display or occasional delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods and merchandise, or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out its essential characteristic of a permanent establishment in the sense of convention, i.e., a distinct sites, a fixed place of business through which the business of an enterprises is wholly or partly carried on. Thus what is to be seen is whether there is existence of a place of business, i.e., a facility such as a premise or in certain instances machinery or equipment. The place of business must be fixed, i.e., it must be established at a distinct place where a certain degree of permanence can be attached. Carrying on of the business of the enterprise should be through such fixed place of business. This means that the person who is in one way or the other is dependent on the enterprise, conduct the business of the enterprises in which such fixed place is situated. The term 'place of business' covers any premises, facility or installation used for carrying on the business of the enterprise, whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pendent agent. 17.1 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, the assessee shall be deemed to have a permanent establishment inIndia. 17.3 The next question arises is whether the assessee has a PE in India in the form of a dependent agent. It is commonly accepted principle that an enterprise should be treated as having a PE in a State if there is under it a person acting for it, even though the enterprise may not have a fixed place of business. Thus there can be two forms of permanent establishment, (i) fixed place or (ii) through the dependent agent-An agent is a person employed to do any act for another or to represent another in dealing with third person. What an enterprise can do directly but if not so done directly but done through an agent appointed for the purpose, it will be deemed to have been done indirectly. Even in such a situation it can be said that the enterprise carrying on the business through the efforts of such agent and hence can be said to have established a PE. In the present case the appellant avails the services of Interglobe to promote the use or CRS inIndiaand for that purpose to appoint subscribers in India. Interglobe is authorized to enter into contract with the subscribers in terms of authority generated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dependent entirely on the appellant. It can, therefore, be said that Interglobe is a dependent agent of the appellant. 17.4 The next question to be decided is whether Interglobe is habitually exercising an authority to conclude contracts on behalf of the appellant. Under the distribution agreement entered into by the appellant with Interglobe, it is responsible for effecting and contracting with subscribers in the Indian territory and is to use reasonable efforts to provide access to all the 'Galileo System' out of Indian territory. Though the appellant and even the participating airlines are not party to the agreement entered into by Interglobe with the subscribers, yet the appellant through the PCA has ensured that the subscribers were authorized to use 'Galileo System'. Under an authority granted to them, subscribers use such products. The reservations and ticketing done using the CRS product are being honoured by the participants and for which the remuneration will be payable by the participants to the appellant. Thus Interglobe can be said to have and having exercised an authority to conclude contracts on behalf of the appellant. What the appellant could have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 17.5 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment. 2 Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arm's length with the enterprise of which it is a permanent establishment and other enterprise contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise 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. For this purpose, heavy reliance is placed on the decision of Hon'ble Supreme Court in the case of CIT v. Sterling Foods [1999] 237 ITR 579 and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278. While we broadly agree that the profits to be attributed to the PE as provided in Paragraph 1 (a) of Article 7 shall include only the profits derived from assets and activities of the PE, the reference to the judgment of Hon'ble Supreme Court in this regard is misplaced. The judgment rendered by Hon'ble Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her 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 inIndiabeing 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. 18.1 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 in ITA Nos. 820 to 823/Delhi/2005 do not survive. The question of charging interest under sections 234A and 234B will also not survive. 19. In the Cross Objections, the revenue has contended that the assessment was completed after issue and service of notice under section 143(2). Thus, the ground raised by the appellant that the assessment was framed without issue of notice under section 143(2) is incorrect. In the cross object ..... X X X X Extracts X X X X X X X X Extracts X X X X
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