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Attribution of Profit from Permanent Establishment is Question of Fact – Supreme Court of India

Facts of the Case:

  • The Assessee (Travelport Inc) is a company engaged in business of providing electronic global distribution services to Airlines through Computerized Reservation System (CRS). For the said purpose, the Assessee maintain and operate a Master Computer System, consist of several main frame computers and servers located in other countries, including USA. This Master Computer System is connected to airlines servers, to and from which data is continuously sent and obtained regarding flight schedules, seat availability, etc.
  • The Assessee used to earn an amount of USD 3/EURO 3 as the case may be, per booking made in India. Since, the Assessee has to market and distribute the CRS services to travel agents in India, it has appointed Indian entities and have entered into distribution agreements with them. To oblige such agreements, the Assessee used to pay in range of 33.33% to 60% of their total earning to the Indian entities.
  • During the course of assessment proceedings, the Assessing Officer (AO) came to conclusion that the entire income earned out of India by the Assessee is taxable on the reasoning that income earned through the hardware installed in the premises of the travel agents hence it is liable to be taxed.
  • Aggrieved by the order of AO the Assessee preferred an appeal before the Commissioner of Income Tax (Appeals) (CIT), but without any success to the Assessee, order of AO has been upheld by the CIT. Thereafter, the Assessee preferred an appeal before the Income Tax Appellate Tribunal (ITAT) wherein it has been observed that the Assessee constituted a fixed place of business and dependent agent permanent establishment (PE) and with respect to the attribution to the PE in India, 15% of the total revenue was assessed as the income accruing or arising in India based on the functions performed, assets used and risks undertaken (FAR).
  • The Revenue filed miscellaneous applications, but the same were dismissed by the Tribunal clarifying that after apportioning the revenue, no further income was taxable in India, as the remuneration paid to the agent in India exceeded the apportioned revenue.
  • Aggrieved by the decision of the ITAT, the Assessee and AO preferred an appeal before the Hon’ble High Court of Delhi, however the Hon’ble court dismissed the appeal of revenue on ground that no question of law arose in these matters and insofar as attribution is concerned, the Tribunal had adopted a reasonable approach.
  • Thereafter, AO preferred an appeal before the Hon’ble Supreme Court of India wherein it has been contended that computers placed in the premises of the travel agents and the nodes or leased lines form a fixed place PE of the Assessee in India and further attribution of only 15% of the revenue as income accruing or arising in India within the meaning of section 9(1)(i) of the Income Tax Act 1961 (the Act) read with article 7 of the India-US Double Taxation Avoidance Agreement (DTAA) is entirely incorrect.

Issue before the Hon’ble Supreme Court:

  • What proportion of profits arose or accrued in India in connection with the Permanent Establishment of the entity is question of fact or question of law and whether the quantum of revenue derived by the ITAT was correct or not on the basis of FAR analysis?

Decision of the Hon’ble Supreme Court:

  • The Hon’ble court observed that Tribunal has arrived at the Assessee’s quantum of revenue accruing in respect of bookings in India which can be attributed to activities carried out in India is based on the FAR analysis.
  • It has been further observed that the commission paid to the distribution agents by the Assessee was more than twice the amount of attribution, and this had already been taxed. Consequently, the Hon’ble Supreme Court held that the Tribunal has rightly concluded that the same had extinguished the assessment.
  • Thereafter, the Hon’ble court held that the question as to what proportion of profits arose or accrued in India is essentially one of the facts and concurrent orders of the Tribunal, and the High Court does not call for any interference and also dismissed the contention of the AO that entire income will be taxable as per DTAA based on section 9(1)(i) of the Act, which confines the taxable income to the attributable to the operations carried out in India.
  • Hence, the Hon’ble Court has dismissed the appeal of the AO.

SW Point of View: Vide this order the Hon’ble Supreme Court has clearly spelled its intention that if the ITAT has dealt the matter with reasonable and fair basis i.e., if there is no perversity in the findings of the ITAT, then there is no question of law which arises before it. Reading the judgement of Hon’ble Supreme Court in case of SAP Labs India Pvt along side this, it can be said that to make a question of law for adjudication before the Supreme Court, it there has to be pervestiy in the lower court’s order.

Virendra Vikram, Tax Associate, SW India

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