AMADEUS GLOBAL TRAVEL DISTIRBUTION S.A. vs. DDIT, INTL. TAXATION,,

Per L.P. Sahu, Accountant Member:

1. That the CIT(A) erred on facts and in law in upholding the action of the assessing officer in treating the appellant as liable to tax in India

in respect of receipts from airlines relating to booking of segments from India .

2. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in holding that the appellant had a 'permanent establishment' ('PE') in India, in terms of the Double Taxation Avoidance Agreement ('DTAA') entered into between India and Spain.

2.1 That the CIT(A) erred on facts and in law in holding the computers on the desks of the travel agents/airlines, through which the bookings are made using the appellant's Computer Reservation System (CRS) constitutes a fixed place of business and, therefore, a PE of the appellant in India, in terms of paragraph (1) of Article 5 of the DTAA between India and Spain.

2.2 That the CIT(A) erred on facts and in law in observing that the appellant has installed computers in the premises of the travel agents for the purposes of display of airlines information and such 'installation' can be said to constitute a PE of the appellant in India as per Article 5(2)(k) of the DTAA between India and Spain.

2.3 That the CIT(A) erred on facts and in law in observing that the computers on the desk of the travel agents in India are extended arms of the mainframe of the appellant situated in Germany and the computers of the travel agents and the mainframe of the appellant become one for all practical purposes, as the time and space collapses at the time of booking the tickets through the appellant's CRS.

2.4 That the CIT(A) erred on facts and in law in not appreciating that the activities of the appellant in India were of auxiliary and preparatory character and, therefore. the appellant cannot be said to have a PE in India, having regard to the provisions of Article 5(3)(e) of the DTAA between India and Spain.

2.5 That the CIT(A) erred on facts and in law in holding that the NMC is the dependent agent of the appellant for rendering services to the travel agents.

3. That without prejudice the C1T(A) erred on facts and in law in not holding that the substantial and substantive part of the appellant's

activities are carried outside India and no revenues/income can, therefore, be said to arise/generate in India.

3.1 Without prejudice, even if it is assumed that NMC constitute PE of the appellant in India, the CIT(A) erred on facts and in law in not appreciating that the income derived from such PE would be completely consumed by distribution and other expenses relating thereto and that no income would survive for taxation.

4. Further, without prejudice, the CIT(A) erred on facts and in law in confirming the disallowance made by the assessing officer, in respect of project development expenses incurred by the appellant, while computing the income attributable to the alleged Permanent Establishment ('PE') of the appellant in India, alleging that no details/evidence have been furnished to establish that any new product was developed which was utilised by the PE in India or Indian customers.

5. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in attributing 100% of the profit relating to the Indian distribution activity to the alleged PE of the appellant in India.

5.1 That the CIT(A) erred on facts and in law in not appreciating that the activities of the alleged PE of the appellant in India constituted only a small part of the overall activities of the appellant and only a part of the profit arising to the appellant from the bookings made in India through the appellant's computer reservation system was attributable to the alleged PE of the appellant in India.

6. That the CIT(A) erred on facts and in law in confirming the levy of interest under section 234A and 234B of the Act.”

2. At the outset, the ld. Counsel for the assessee submitted that almost all the issues involved in these appeals are covered by the decisions of Tribunal and of Hon’ble Delhi High Court in the cases of assessee itself for assessment years 19996-97 to 1998-99 and 2001-02 to 2005-06. The ld. DR, on the other hand, relied on the orders of the authorities below.

3. After hearing the submissions of both the parties and perusing the entire material available on record, we deal with various grounds of these appeals as under :

4. Ground No. 1 is general in nature and needs no specific adjudication by us. The same is dismissed as such.

5. Grounds Nos. 2 to 2.5 relate to the issue whether the appellant had a permanent establishment (PE) in India in terms of Double Taxation Avoidance Agreement (DTAA). This issue is covered against the assessee by the order of Tribunal in the case of assessee itself for A.Y. 1996-97 to 1998-99, wherein the Tribunal has observed in para 23 to 23.5 as under :

2. The term ‘permanent establishment’ includes especially :

(a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop;

(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

(g) a warehouse in relation to a person providing storage facilities for others;

(h) a farm, plantation or other place where agriculture forestry, plantation or related activities are carried on;

(i) a premises used as a sales outlet;

(j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than three months;

(k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than six months in any twelve months period, or where such project or supervisory activity, being incidental to the sale of machinery or equipment continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment :

Provided that, for the purpose of this para an enterprise shall be deemed to have a PE in a Contracting State and to carry on business through that PE if it provides services or facilities in connection with or supplies plant and machinery on hire used or to be used in the prospecting for, or extraction or production of mineral oils in the State if the activities continue for a period of more than thirty days in any twelve-month period.

(a) the use of facilities solely for the purpose of storage or display 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;

(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 supply of information, for scientific research or for similar activities which have a preparatory auxiliary character, for the enterprise.

(b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise.

6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a PE or otherwise), shall not of itself constitute either company a PE of the other."

Para 1 of the treaty gives a general definition of the term ‘Permanent Establishment’ which brings out its essential characteristic of a PE in the sense of convention i.e. a distinct site, 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 premises 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 dependent on the enterprise, conducts the business of the enterprise 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 it is 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, facilities or installations are owned or rented or are otherwise at the disposal of the enterprise. A place of business may thus be constituted by a pitch in a market place or by a certain permanently used area. The place of business can be situated in the business vicinity of another enterprise. What is to be seen is that on fact an enterprise has a certain amount of space at its disposal, which is used for business activities and then it is sufficient to constitute a place of business. No formal legal right to use that place is visualized or required. A PE could exist even where an enterprise unauthorizingly or illegally occupies certain locations where it carried on its business. For a place of business to constitute a PE, the enterprise using it must be carrying on its business wholly or partly through it. It is not necessary that whole of the business should be carried on through such PE or fixed place. Time and again it is being contended on behalf of appellant that for application of para 1 of art. 5 of the treaty to apply, it must have a productive character i.e. contribution to the profits of the enterprise. However, considering para 1 of art. 5 of the treaty, it is not so mentioned within the framework of established business. It will be appropriate to presume that each part of the activities carried on contributes to the productivity of the whole. Thus even if some contribution is made in carrying on the business as a whole, even then it can be said that the business of an enterprises would partly be carried on from such place and accordingly a PE of such enterprise. Where the business of an enterprise is carried on mainly by the entrepreneurs or employees who receive instructions from the enterprise, the rights of such persons in its relationship with third parties are irrelevant. So far as para 1 of art. 5 is to apply whether or not, the dependent agent is authorized to conclude contracts is irrelevant so long as he operates from the fixed place of business. The PE will nevertheless exist if the business of the enterprise is carried on mainly through automatic equipment and the activities of the personnel being restricted to setting up and operating such equipment. A PE will still exist if the enterprise which sets up machine also operates and maintains them for its own account and whether operated by itself or by a dependent agent.

23.1 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 functions of reservation and ticketing is a part and parcel of the entire CRS. The computers so installed require further approval from AIPL who allows the use of such computers for reservation and ticketing. Without the authority of AIPL 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 para, this amounts to a fixed place of business for carrying on the business of the enterprise in India. But for the supply of computers, the configuration of computers and connectivity which are provided by the appellant either directly or through its agent AIPL will amount to operating part of its CRS system through such subscribers in India and accordingly PE in the nature of a fixed place of business in India. Thus the appellant can be said to have established a PE within the meaning of para 1 of art. 5 of Indo-Spain treaty.

23.2 The next question to be considered is if there is a PE, whether the exception provided in para 3 of art. 5 applies so as to hold that there is no PE in India. The case of the appellant is that the existence of such computers is merely for the purpose of advertising and the activities are preparatory or auxiliary in character and hence there is no fixed place PE in India in view of the Explanation provided in para 3 of art.

5. We are unable to accept such a contention. The function of the PE in India is not only to advertise its products. The activity of the appellant is developing and maintaining a fully automatic reservation and distribution system with the ability to perform comprehensive information, communication, reservation, ticketing, distribution and related functions on a worldwide basis. The computers installed at the premises of the subscribers are connected to the global CRS owned and operated by the appellant. Using part of the CRS system, the subscribers are capable of reserving and booking a ticket. Thus it cannot be considered as ‘solely for the purpose of advertising’ of such CRS system. Similarly it is not in the nature of ‘preparatory or auxiliary’ character. It is difficult to distinguish between the activities which are ‘preparatory or auxiliary’ character and those which are not. The decisive criteria is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. Since part of the function is operated in India which directly contributes to the earning of revenue, the activities as narrated above carried out in India are in no way of ‘preparatory or auxiliary’ character. Thus the exception provided in para 3 of art. 5 will not apply and hence as stated above, the assessee shall be deemed to have a PE in India.

23.3 The next question arises is whether the assesses 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 PE, (i) fixed place or (ii) through the dependent agent. 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. However, all the persons other than agent of an independent status cannot be deemed to be a PE of the enterprise. The agents can be considered as PE only and only if when a person other than agent of an independent status, (i) has and habitually exercise in that State an authority to conclude contract or (ii) though he has no such authority but habitually maintains stock of goods from which he regularly delivers goods on behalf of the enterprise. Thus the first question to be decided is whether the agent is of a dependent status or of an independent status. In the present case we find that AIPL is totally dependent on the appellant. The entire business of AIPL is to provide data processing and software development services together with relative distribution of ‘Amadeus products’ to the subscribers in India. AIPL has also an authority to enter into agreements with the subscribers. AIPL installs the computers, configures the computers for accessing the CRS and also provides connectivity through SITA nodes. Thus functionally as well as financially it is dependent entirely on the appellant. It can therefore, be said that AIPL is a dependent agent of the appellant.

23.4 The next question to be decided is whether he is habitually exercising an authority to conclude contracts on behalf of the appellant. Under the distribution agreement entered into by the appellant with AIPL, AIPL is responsible for effecting and contracting with subscribers in the Indian territory and is to use reasonable efforts to provide access to all the ‘Amadeus products’ out of Indian territory. Though the appellant and even the participating airlines are not party to the agreement entered into by AIPL with the subscribers, yet the appellant through the PCA has ensured that the subscribers were authorized to use ‘Amadeus products’. Under an authority granted to them, subscribers use such products. The reservations and ticketing done using the CRS products are being honoured by the participants and for which the remuneration will be payable by the participants to the appellant. Thus AIPL can be said to have and having exercised an authority to conclude contracts on behalf of the appellant. What the appellant could have done directly by entering into an agreement with the subscribers, was done through AIPL. The subscribers agreements were entered into by AIPL under an authority available to it in view of the distribution agreement. What could have been done directly is now done indirectly through the offices of AIPL under an authority granted to it. The phrase ‘authority to conclude contracts on behalf of the enterprise’ does not confine to application of para 4 to an agent who enters into contract literally in the name of enterprise. The para applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of enterprise. Lack of activity involved by enterprise in the transactions may suggest of an authority being granted to the agent. It is contended that the agent to be called dependent agent should have an authority to conclude such contract which contributes to the income of appellant and no other ancillary contract. It is contended on behalf of the appellant that the contracts which generate revenue are the contracts with participating airlines and since the dependent agent has no authority to conclude contracts with such participants, AIPL cannot be branded as a dependent agent within the meaning of para 4 of art. 5 of the treaty. On the other hand, the learned Departmental Representative has submitted that on the plain reading of treaty, there is no such provision that the contract to be habitually concluded should contribute to the revenue. In our opinion, what is relevant is that such contract shall have a nexus with the business operations as such and not merely contracts for hiring employees, premises etc. What is taxable in the Contracting State is the income accruing to such enterprise and the activities are carried on either through the PE namely fixed place or through a dependent agent. 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 AIPL as its agent who promote the ‘Amadeus products’ in India. AIPL in its turn has appointed various subscribers for use of ‘Amadeus products’. 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 ‘Amadeus products’. 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 AIPL 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 AIPL 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.

23.5 The next question that arises is whether the appellant has PE in India within the meaning of cl. (b) of para 4 of art. 5 of the treaty. Clause (b) of para 4 of art. 5 will apply only where the dependent agent habitually maintains stock of goods from which he regularly delivers goods on behalf of the enterprise. In the present case, it is seen that the appellant is not dealing in any stock of goods. Since the appellant is not dealing in any goods, the question of delivery of such goods does not arise. The contention of learned Departmental Representative that AIPL maintains stock of computers which are delivered to the subscribers should be treated as delivery of goods. He also submitted that what is mentioned in treaty is that there should be delivery of goods which may not necessarily be sale of goods. We are unable to accept such contention of the learned Departmental Representative . The reference to "stock of goods" in cl. (b) of para 4 of art. 5 has to be understood in the sense the business proper carried on by the enterprise. The delivery should be from the stock of goods which if considered in proper prospective will only be of the stock of goods dealt with by the assessee in regular course of its business. If the agent is to deliver the goods either the goods should be such in which the enterprise deals in or which are regularly hired out which may be considered as given on bailment from which the revenue is to be generated. But in the present case the computers supplied by AIPL to the subscribers are not dealt with by the assessee or which by themselves are the source of revenue. Thus cl. (b) of para 4 of art. 5 will not apply to consider the dependent agent as PE of the appellant in India.

24.1 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 1023 and 1024 do not survive. The question of charging interest under ss. 234A and 234B will also not survive.”

Order pronounced in the open court on 16.11.2016.