AMADEUS IT GROUP SA,NEW DELHI vs. DCIT (INTERNATIONAL TAXATION),CIRCLE-1(1)(1), NEW DELHI

per Article 13(2)(ii) of the DTAA between India & Spain amounting to Rs.104,31,57,000/-. AO also levied the interest under section 234B and charging of interest levied u/s 234A, 234C and 234D is mandatory and consequential. AO accordingly the profit attributable to PE is taxed at normal rate and the income from royalty is taxed @ 10% as per the provisions of Article 13 of India-Spain DTAA.

7. At the very outset, ld. AR for the taxpayer contended that the grounds raised in the present appeals are covered in taxpayer’s own case vide order dated 26.10.2020 passed in AYs 2007-08, 2008-09, 2009-10, 2010-11, 2011-12 & 2012-13 in 5150/Del/2011, 60/Del/2013, 1824/Del/2014, 1204/Del/2015 & 1626/Del/2016 respectively.

GROUNDS NO.1 & 2 OF ITA No.2007/Del./2017 (AY 2013-14) ITA No.3494/Del./2018 (AY 2014-15) ITA No.7970/Del./2018 (AY 2015-16) ITA No.7047/Del./2019 (AY 2016-17)

10. Grounds No.1 & 2 are general in nature, hence do not require any specific adjudication.

GROUNDS NO.3, 4, 5 & 6 OF ITA No.2007/Del./2017 (AY 2013-14) ITA No.3494/Del./2018 (AY 2014-15) ITA No.7970/Del./2018 (AY 2015-16) ITA No.7047/Del./2019 (AY 2016-17)

11. Grounds No.3, 4, 5 & 6 are pertaining to the issue that the computers installed at the premises of the subscribers constitute a PE of the taxpayer in India in terms of Article 5(1) of India Spain Tax Treaty. It is the case of the Revenue that that computers provided to the travel agent through which sales are constituted amounts to Fixed Place PE of the taxpayer in India under Article 5 (1) of the India-Spain Tax Treaty and likewise held the taxpayer to Tax Treaty.

12. AO computed the profit attributed to PE at Rs.311,87,23,875/- taxable @ 40% plus surcharge and education cess i.e. 42.024%. which has been confirmed by the ld. DRP.

GROUNDS NO.7, 8, 9 & 10 OF ITA No.2007/Del./2017 (AY 2013-14) ITA No.3494/Del./2018 (AY 2014-15) ITA No.7970/Del./2018 (AY 2015-16) ITA No.7047/Del./2019 (AY 2016-17)

17. Ld. DR for the Revenue has not controverted these facts nor controverted the fact that the grounds raised and facts and law are identical to the earlier assessment years 2006-07 and 2007-08 to 2012-13 already decided in favour of the taxpayer.

“9. The AO held that the assessee has earned a profit of Rs.1,452,550,424/- or Euro 2,50,90,000 from India. The ratio of attribution is to be worked out, by considering the importance & range of functions of AIPL especially in the new agreement dated 01.10.2004. The AO held that as the competition is growing in the market, the role of marketing functions in earning profit increases. Further, it was held that the number of assets of the assessee is growing in India and new facts relating to presence of assets in India have also been found out. Holding thus, the AO worked out the profit attributable to India @ 75% of the total profit. The AO held that the Profit attributable to Indian Permanent Establishments was Rs.1,08,94,12,818/- taxable at the rate of 40% plus surcharge & education cess i.e. 41.82%.

13. The Hon'ble Delhi High Court following its decision in the case of DIT v. Galileo International 224 CTR 251, has affirmed the orders of the Tribunal passed for assessment years 1996-97 to 2006-07.

14. It was brought to our notice that the Assessing Officer had, in the assessment order for assessment year 2005-06, sought to distinguish the decision of the Tribunal in assessee's own case for assessment years 1996-97 to 1998-99 on similar grounds. However, the ld. CIT (A), vide order dated 25.02.2010, allowed the appeal of the assessee holding that no more than 15% of the revenues generated from India could be attributed to the alleged PE of the assessee in India. The aforesaid order passed by the ld. CIT(A) for assessment year 2005-06 has been confirmed by the ITAT, vide order dated 29.10.2010 and the Hon'ble High Court vide order dated 31.05.2011 (Revenue appeal) and dated 13.08.2013 (Assessee appeal).

15. Since, the facts remained unaltered and since payment to the agent is already @33%, no further addition is warranted in the case of the assessee.”

GROUNDS NO.11, 12, 13 & 14 OF ITA No.2007/Del./2017 (AY 2013-14) ITA No.3494/Del./2018 (AY 2014-15) ITA No.7970/Del./2018 (AY 2015-16) ITA No.7047/Del./2019 (AY 2016-17)

20. AO disallowed expenditure to the tune of Euro 27,577,000 claimed to have incurred by the taxpayer under the head “distribution fee” while computing the income attributed to the taxpayer’s PE in India by following assessment order for Assessment Year 2007-08.

21. It is contended by the ld. AR for the taxpayer that description of services is “export of processed data/software” and not “distribution fee”, as has been held by the AO. It is also contended by the ld. AR for the taxpayer that AO also disallowed development cost and marketing costs incurred for earning revenue from bookings made from India. the AO/DRP.

Operative part of which is as under :-

“16. The Assessing Officer has disallowed the claim of the assessee on account of the distribution expenses. The ld. DRP upheld the addition on the grounds that no documents have been filed in support of the distribution activity.

18. This expenditure has been allowed by the Co-ordinate Bench of the Tribunal from the assessment years 1996-97 to 2006-07. Since, the facts have not been disputed, in the absence of any material change, we hereby allow the claim of distribution expenses.”

24. So, following the order passed by the coordinate Bench of the Tribunal in taxpayer’s own case vide order (supra), we are of the considered view that the AO has erred in treating the “export of processed data/software” as distribution fee and has also erred in disallowing development cost and marketing cost incurred for expenditure have been allowed by the coordinate Bench of the Tribunal in earlier years. So, the claim of the taxpayer raised vide grounds no.11, 12, 13 & 14 of ITA Nos.2007/Del./2017, 3494/Del./2018, 7970/Del./2018 & 7047/Del./2019 for Assessment Years 2013-14, AY 2014-15, AY 2015-16 & AY 2016-17 respectively are allowed.

GROUNDS NO.15, 16 & 17 OF ITA No.2007/Del./2017 (AY 2013-14) ITA No.3494/Del./2018 (AY 2014-15) ITA No.7970/Del./2018 (AY 2015-16) ITA No.7047/Del./2019 (AY 2016-17)

“19. The AO has held that the income received by the assessee with respect to bookings arising from India is also taxable as royalty income. The AO observed that the assessee supplies/ licenses its proprietary products free of charge to Amadeus India for distribution to the Subscribers. As per the Distribution Agreement, the assessee has authorized Amadeus India to conclude "Subscriber Agreement" with the Subscribers which allows the Travel Agents to use the CRS Owned by it. The Assessing Officer has given a finding that the paying airlines have offices in India. The assessee has granted to Amadeus India the right to further grant the right to access and right to use its platforms/ software/ product offerings to Subscribers. Amadeus India has the exclusive rights to distribute the CRS in India.

23. The Delhi Tribunal in assessee's own case for the assessment year 2006-07 has held that booking fee received by 19 ITA No.2007/Del./2017 ITA No.3494/Del./2018 ITA No.7970/Del./2018 ITA No.7047/Del./2019 the assessee is taxable as business income and not under the head royalty. For the sake of ready reference and brevity, the relevant portion of the order of the ITAT in is reproduced below: "In the present case, too, as sub mitted herein above, the appellant uses sophisticated technology/software in the course of providing a service/facility but the appellant does not divulge any process involved in the technology/software to the user of the CRS. The appellant does not make available to the participating airlines any secret formula or process. Also, no equipment is provided by the appellant for use to the participating airlines. Further, no payment is made by the subscribers, viz., the travel agents to the appellant, unlike the aforesaid case. In that view of the matter, the booking fee received by the appellant from the participating airlines does not answer the description of 'royalty' and, thus, is not chargeable to tax in India."

29. AO as well as ld. DRP has on ad hoc basis taxed the amount of Euro 50 million as ‘royalty’ in respect of Altea system, inventory management and hosting system development.

30. It is contended by the ld. AR for the taxpayer that AO/DRP have erred in holding that payment received from the British Airways for alleged use of Altea system as taxable in India as ‘royalty’ both under section 9(1)(vi) and under Article 13 (3) of the Treaty on the ground that Altea system is not merely an inventory management and hosting system rather it provides key operational services to various airlines like accepting payment and issuance of travel documents, performing credit card validation, maintaining data security, manage customer check-ins, etc.. It is brought to our notice that this issue has also been decided by the coordinate Bench of the Tribunal in taxpayer’s own case for Assessment Years 2007-08 to 2012-13 (supra) by holding that Altea system cannot be characterized as ‘royalty’ either under the Act or under the Treaty by returning following findings :- ./2017 ITA No.3494/Del./2018 ITA No.7970/Del./2018 ITA No.7047/Del./2019 “27. It was canvassed before us, the ARS system is installed at the Airports and is accessed only by the Airlines and no t by the agents of the assessee. It was argued that the system was available only to British Airways for the purpose of accepting payment and travelled documentation only at the Airport counters. It was argued that the payment made by British Airways to the assessee in relation to the ARS is for services rendered by the Amadeus and not for use of any process. It was argued that since the inventory hosting takes place outside India and payment is made by non-resident Airlines to another non- resident outside India, in terms of Article 13(6) of the treaty, the payments deemed to have been not sourced in India. We find that the revenue has brought out information which proclaim that the assessee with British Airways developed Altea Reservation System for distribution through British Airways Sales Outlets, the products namely Altea Inventory for Global Inventory Management and Altea Departure Control for passenger checking and flight departure management. The British Airways uses ARS on its website and for revenue management system. We also heard the argument of the assessee that the ARS has no relation to the PE of the assessee in India. The source of revenue received by the assessee in connection with ARS is not situated in India. We find that ARS is essentially an inventory hosting and management system developed by the assessee which some airlines outsourced to Amadeus, with British Airways as a launch customer. The payment for the ARS is made by the British Airways for the use of the system for the business in India at the Indian Airport is an undisputable fact. While the contention of the assessee is that the software was not available outside the Indian Airport or to any of the agents of the assessee in India, the revenue contended that the ARS also provides key operational services to British Airways like accepting payment and issuance of travel documents and manage customer checking. It was also submitted by the assessee that the arguments taken up with regard to CRS activity as royalty may also be considered while dealing with ARS issue.

28. The Article 7 reads as under:

ARTICLE 7

BUSINESS PROF ITS

2. Subject to the provisions of paragraph 3, where an enterprise of on e of the States carries on business in the other State through a permanent establishment situated therein, there shall in each State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on the basis of an apportionment of the total profits of the enterprise to its various parts, provided, however, that the result shall be in accordance with the principles contained in this Article.

3. (a) In determining the profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. Provided that where the law of the State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention between that State and a third State which enters into force after the date of entry into force of this Convention, the competent authority of that State shall notify the competent authority of the other State of the terms of the corresponding paragraph in the Convention with that third State immediately after the entry into force of that Convention and, if the competent authority of the other State or requests, the provisions of this sub-paragraph shall be amended by protocol to reflect such terms.

(b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards ./2017 ITA No.3494/Del./2018 ITA No.7970/Del./2018 ITA No.7047/Del./2019 reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use o f patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise, or any of its other offices.

4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.

5. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.

6. `Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article."

ARTICLE 13

ROYALT IES AND FEE S FOR TECHNICAL SERVICE S

1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

(i) in the case of royalties relating to the payments for the use of, or the right to use, industrial, commercial or scientific equipment, 10 per cent of the gross amount of the royalties;

(ii) in the case of fees for technical services and other royalties, 20 percent of the gross amount of fees for technical services or royalties.

3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or films or tapes used for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

./2017 ITA No.3494/Del./2018 ITA No.7970/Del./2018 ITA No.7047/Del./2019 6. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer in that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred , and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

31. During the arguments, the ld. AR raised a point regarding the taxability of royalty income in the hands of the assessee as per DTAA. He argued that in the absence of corresponding change in the DTAA with regard to interpretation of royalty in the domestic law. He relied on the ratio law laid down by the Hon'ble Jurisdictional High Court in the case of Director of Income Tax vs New Skies Satellite Bv vide order dated 8 February, 2016. The ld. DR argued that the provisions of DTAA would have primacy over the domestic provisions.

32. The operative part of the said judgment is as under:

"54. Neither can an Act of Parliament supply or alter the boundaries of the definition under Article 12 of the DTAAs by supplying redundancy to any part of it. This ./2017 ITA No.3494/Del./2018 ITA No.7970/Del./2018 ITA No.7047/Del./2019 becomes especially important in the context of Explanation 6, which states that whether the 'process' is secret or not is immaterial, the income from the use of such process is taxable, nonetheless. Explanation 6 precipitated from confusion on the question of whether it was vital that the "process" used must be secret or not. This confusion was brought about by a difference in the punctuation of the definitions in the DTAAs and the domestic definition. For greater clarity and to illustrate this difference, we reproduce the definitions of royalty across both DTAAs and sub clause (iii) to Explanation 2 to 9(1)(vi).

Article 12(3), Indo Thai Double Tax Avoidance Agreement:

Article 12(4), Indo Netherlands Double Tax Avoidance Agreement

"4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright o f literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." (emphasis supplied)

Section 9(1)(vi), Explanation 2, Income Tax Act, 1961

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (emphasis supplied)

In any event, the precincts of Indian law may not dictate such conclusion. That conclusion must be the result of an interpretation of the words employed in the law and the treatises, and discussions that are applicable and specially formulated for the purpose of that definition. The following extract from Asia Satellite58 takes note of the OECD Commentary and Klaus Vogel on Double Tax Conventions, to show that the process must in fact be secret and that specifically, income from data transmission services do not partake of the nature of royalty.

./2017 ITA No.3494/Del./2018 ITA No.7970/Del./2018 ITA No.7047/Del./2019 "74. Even when we look into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA), the case of the appellant gets boost. The Organisation of Economic Cooperation and Development (OECD) has framed a model of Double Taxation Avoidance Agreement (DTAA) entered into by India are based. Article 12 of the said model DTAA contains a definition of royalty which is in all material respects virtually the same as the definition of royalty contained in clause (iii) of Explanation 2 to Section 9(1) (vi) of the Act. This fact is also not in dispute. The learned counsel for the appellant had relied upon the commentary issued by the OECD on the aforesaid model DTAA and particularly, referred to the following amendment proposed by OECD to its commentary on Article 12, which reads as under:

'9.1 Satellite operators and their customers (including broadcasting and telecommunication enterprises) frequently enter into transponder leasing agreements under which the satellite operator allows the customer to utilize the capacity of a satellite transponder to transmit over large geographical areas. Payments made by customers under typical transponder leasing agreements are made for the use of the transponder transmitting capacity and will not constitute royalties under the definition of paragraph 2; these payments are not made in consideration for the use of, or right to use, property, or for information, that is referred supra note to in the definition (they cannot be viewed, for instance, as payments for information or for the use of, or right to use, a secret process since the satellite technology is not transferred to the customer). As regards treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties, the characterization of the payment will depend to a large extent on the relevant contractual arrangements. Whilst the relevant contracts often refer to the lease of a transponder, in most cases the customer does not acquire the physical possession of the transponder but simply its transmission capacity: the satellite is operated by the lessor and the lessee has no access to the transponder that has been assigned to it. In such cases, the payments made by the customers would therefore be in the nature of payments for services, to which Article 7 applies, rather than payments for the use, or right to use, ICS equipment. A different, but much less frequent, transaction would be where the owner of the satellite leases it to another party so that the latter may operate it and either use it for its ./2017 ITA No.3494/Del./2018 ITA No.7970/Del./2018 ITA No.7047/Del./2019 own purposes or offer its data transmission capacity to third parties. In such a case , the payment made by the satellite operator to the satellite owner could well be considered as a payment for the leasing of industrial, commercial or scientific equipment. Similar considerations apply to payments made to lease or purchase the capacity of cables for the transmission of electrical power or communities (e.g. through a contract granting an indefeasible right of use of such capacity) or pipelines (e.g. for the transportation of gas or oil).

'The use of a satellite is a service, not a rental (thus correctly, Rabe, A., 38 RIW 135 (1992), on Germany's DTC with Luxembourg); this would not be the case only in the event the entire direction and control over the satellite, such as its piloting or steering, etc. were transferred to the user.'

'On the other hand, another distinction to be made is letting the proprietary right, experience , etc., on the one hand and use of it by the licensor himself, e.g., within the framework of an advisory activity. Within the range from services', viz. outright transfer of the asset involved (right, etc.) to the payer of the royalty. The other, just as clear- cut extreme is the exercise by the payee of activities in the service of the payer, activities for which the payee uses his own proprietary rights, know-how, etc., while not letting or transferring them to the payer.'

(a) Commissioner of Income Tax Vs. Ahmedabad Manufacturing and Calico Printing Co., [139 ITR 806 (Guj.)] at Pages 820-822.

(b) Commissioner of Income Tax Vs. Vishakhapatnam Port Trust [(1983) 144 ITR 146 (AP)] at pages 156-157.

(c) N.V. Philips Vs. Commissioner o f Income Tax [172 ITR 521] at pages 527 & 5 38-539."

32. In view of the law laid down, the revenue is here by directed not to tax the royalty in accordance with the judgment of the Hon'ble High Court.”

GROUND NO.21 OF ITA No.2007/Del./2017 (AY 2013-14) ITA No.3494/Del./2018 (AY 2014-15) ITA No.7970/Del./2018 (AY 2015-16) ITA No.7047/Del./2019 (AY 2016-17)