TRAVELPORT INTERNATIONAL OPERATIONS LIMITED,UNITED KINGDOM vs. ACIT CIRCLE- 3(1)(1) INTERNATIONAL TAXATION, NEW DELHI

Per Dr. B. R. R. Kumar, Accountant Member:

"1. That on the facts and circumstances of the case and in law, the Assessing Officer has erred in completing the assessment at the total income of INR 213,13,12,965 as against 'NIL' income declared.

2. That the Assessing Officer and the Dispute Resolution Panel ("DRP") ought to have held that the Appellant has no income chargeable to tax in India either under the Act or under the provisions of the Double Taxation 2 Aspect Software Inc. Avoidance Agreement between India and the United Kingdom ("DTAA").

3. That the Assessing Officer and the DRP ought to have held that no income had accrued or deemed to accrue or received or deemed to have received by the Appellant in India.

4. That on the facts & circumstances of the case and in law, the Assessing Officer and the DRP have erred in holding that the Appellant has business connection in India and as such is liable to tax in India as per the provisions of Act.

5. That on the facts and circumstances of the case and in law, both the Assessing Officer and the DRP have erred in holding that the Appellant has: • A fixed place PE in India under Article 5(1) of the DTAA; and • A dependent agent PE in India in the form of Interglobe Technology Quotient Private Limited ('ITQPL') under Article 5(5) of the DTAA.

5.1. That on the facts and in the circumstances of the case and in law, the Assessing Officer and the DRP have erred in holding that the Appellant has a PE in India based on inter- alia following allegations: • authority has been delegated to ITQPL to conclude contracts on Appellant's behalf • ITQPL is wholly dependent on Appellant for arranging the communication services from SITA in India • ITQPL is an exclusive distributor of India • Model agreements shared by Appellant with ITQPL which is to be compulsorily used in the agreements entered into by ITQPL with various subscribers • Business of the Appellant continues to be carried out on the computer terminals of the travel agents 3 Aspect Software Inc. 5.2. That on the facts and in the circumstances of the case and in law, the Assessing Officer and the DRP have erred in holding that the Distributor is fully dependent on the Appellant.

6. Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, the Assessing Officer and the DRP has erred in attributing 75% of the India related net profit to the alleged activities of the Appellant in India which is being excessive and unwarranted, by refusing to take into consideration that the Appellant's operations and activities are conducted outside lndia.

6.1. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in not placing reliance on the order of the Hon'ble DRP in Appellant's predecessors, (i.e. Travelport Global Distribution System BV) case for the AY 2012-13 wherein the Hon'ble Delhi High Court's order dated August 25, 2014 was relied upon to decide that the attribution of 15% of the revenue to Indian related operations and after a I Iowa nee of expenses no income was held to be chargeable to tax in India.

7. Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, the Assessing Officer and the DRP while attributing Appellant's taxable income to alleged Indian permanent establishment ('PE') as per India-UK Treaty, have erred in not allowing deductions for India related expenses.

7.1. That on the facts and in the circumstances of the case and in law, the Ld. AO and the DRP has erred in not allowing deduction of distribution fees amounting to USD 69,512,742 paid to the distributors, despite same being allowed to the Appellant's predecessor for A Y 2015-16.

7.1.1. That on the facts and in the circumstances of the case and in law, the Ld. AO and the DRP has erred in allowing only 70% of distribution expenses under Section 40(a)(ia) of the Act by alleging that:

4 Aspect Software Inc. — Distribution fees is in nature of commission; and — Since taxes are not deducted on such payments, expenses should be disallowed under Section 40a(ia) of the Act

7.2. That on the facts and in the circumstances of the case and in law, the Ld. AO and the DRP has erred is not allowing the deduction of Apportionment of Technology service fees for US$ 8,460,978 and Vendor cost for US$ 164,832 merely by following the DRP directions for AY 2016-17 not providing any cogent reason for disallowing such expenses.

7.3. That on the facts and in the circumstances of the case and in law, the Assessing Officer and the DRP have erred in not allowing the deduction of amortization on all Intangible assets amounting to USS 12,293,433, on the basis of the DRP directions for AY 2016-17 (passed pursuant to Rule 13), wherein following reasoning was accorded by DRP for not allowing complete claim of depreciation. a) No amortization/depreciation on Goodwill and Trademark/tradename has been claimed in the UK corporate tax return of Appellant. b) No amount is debited as depreciation on Goodwill and Trademark/tradename in the global accounts therefore there is no base to determine the proportionate expenses to be allowed for the purpose of computing the profit of the alleged PE in India. c) No reasoning has been accorded by the DRP for disallowing amortization/depreciation on Vendor Relationship.

7.3.1. That on the facts and in the circumstances of the case and in law, the Assessing Officer and the DRP have erred in disallowing the deduction of these expenses by incorrect application of Article 7 of the India-UK Double Taxation Avoidance Agreement.

7.4. That on the facts and in the circumstances of the case and in law, the Assessing Officer and the DRP have erred in not allowing the deduction of the claim 5 Aspect Software Inc. of finance cost expenditure for US$ 11,014,744 on following allegations – a) That finance cost may be for the purpose of expenses towards capital account and may not be in nature of revenue expenses b) Failed to establish that such expenses have been wholly and exclusively incurred for the purpose of business.

8. Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, the Assessing Officer and the DRP have erred in not allowing to Appellant, deduction of education cess forming part of such tax liability.

9. The Appellant denies each and every allegation and statement made by the Assessing Officer in the impugned order and orders relied upon by him, unless the same Is specifically admitted by the Appellant or is otherwise borne out by the record.

10. Without prejudice to the generality of the above, the Appellant denies the following amongst other, incorrect allegations of the Assessing Officer that: • The Appellant has a PE in India in the form of fixed place business and agency PE and this finding has been upheld by the Hon'ble Delhi High Court in case of the Appellant's predecessor itself; • The Appellant has business connection in India and is receiving income from the sources in India; • The payments made by the Appellant to ITQPL are in the nature of commission • The payments made by the Appellant to ITQPL are in the nature of data processing fees • Major part of the activities of the Appellant resulting to the income are attributable to its activities in India; • Only activities carried on by the Appellant outside India correspond to the services provided by IBM; • The tickets are being booked in India; 6 Aspect Software Inc. • The Appellant is having assets in India; • The Appellant is having its sales team in India; • The Appellant is providing training to its distributors

11. That on the facts and in the circumstances of the case and in law, the Ld. AO and the DRP have erred in making factually incorrect allegations with respect to the various expenses and income.

12. That on the facts and in the circumstances of the case and in law, the authorities below have erred in charging interest under section 234B of the Act."

a) The ability to display flight schedule and seat availability b) The ability to display and/or quote airline fare c) The ability to make airline seat reservation d) The ability to issue airline tickets, etc.

History of Appellant and its predecessor entities i.e. GII and TGDSBV

Description Amounts in USD Booking Pees (A) 103,090,523 Less: Subscriber fees paid to Interglobe (ITQPL) 69,512,742 Less: Apportionment of technology service fee (incl IBM), 8,460,978 licence fee Less: Finance Cost 1 1,014,744 Less: Amortization of Intangibles 12,293,433 Less: R&D Cost Share 5,173,904 Less: Vendor costs 164,832 Total expenses (B) 106,620,633 (Loss) (A) - (B) (3,530,110)

"9.1 Here is it again emphasized that the Hon'ble Delhi High Court has categorically held that the assessee has a PE in India. It is a settled law that the determination of a PE is a mixed question of fact and law. Accordingly, the Hon'ble Delhi High Court has settled the issue against the predecessor entities of the assessee and in favour of revenue authorities. Largely, the present set of facts and circumstances are similar in nature. Hence, respectfully, following the decision of Hon'ble Delhi High Court it is held by the undersigned that assessee has a PE in India as a Fixed Place PE and an Agency PE."

"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 place of business for carrying on the business of the 13 Aspect Software Inc. 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 Interglobe will amount to operating part of its CRS system through such subscribers in India and accordingly PE in the nature of a fixed place of business in India. Thus the appellant can be said to have established a PE within the meaning of paragraph 1 of Article 5 of Indo-Spain Treaty."

"17.4 …………………..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 PGA 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 14 Aspect Software Inc. 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."

"These appeals were listed along with the appeals filed by Revenue against the same judgment. The appeals filed by Revenue have been dismissed by us vide our orders passed in today's date in WP(C) No. 851/2008.

In view of this dismissal of those appeals of the Revenue, learned counsel for appellant submits that the question raised in these appeals have become academic and are therefore, dismissed."

"4. Regarding various grounds raised by the assessee in the cross objections relating to existence of business connections in India and accrual and arising of Income in India and the deemed accrual and deemed arising of Income in India and existence of PE in India etc., it was submitted that these issues were decided by the tribunal against the assessee in assessment year 1995-96 to 1998-99. He submitted a copy of tribunal decision in assessee's own case for these assessment years 1995-96 to 1998-99 in 2473- 2475/D/2000 and 820-823/D/2005 and CO. No. 47 to 54/D/2006 dated 30.11.2007. It is also submitted that against this tribunal order; both the assessee and revenue were in appeal before the Hon'ble High Court of Delhi. It is submitted that revenue's appeal were dismissed by the Hon'ble High Court of Delhi in its judgment dated 25.02.2009 in ITA No. 851 to 860/2008 and it was held by Hon'ble Delhi High Court that no questions of law arises in this matter which needs further determination by this court. It is also submitted that in the assessee's appeal, it was held by the Hon'ble Delhi High Court that in view of the dismissal of appeals of the revenue, the question raised by assessee in these appeals have become academic and are therefore dismissed. It is submitted that this judgement of Hon'ble High Court of Delhi in respect of assessee's appeal is also dated 25.02.2009 in ITA Nos 17408, 17409, 17437, 17438, 17473-74, 17469-70, 17410, 17439 and 17471- 72/2008. He submitted a copy of both these judgements of Hon'ble Delhi High Court rendered in the assessee's appeals as well as 16 Aspect Software Inc. revenue's appeals. Ld. DR also agreed that these issues are covered as per these judgements."

Hon'ble Delhi High Court in its order dated 25th September 2012 27. (ITA No. 1148 to 1151/2011 and to 472/2012) in case of GII for such second batch of 4 years from AY 1999-00 to AY 2002-03 relied on the decisions of Hon'ble Delhi ITAT and Hon'ble Delhi High Court in case of GII for first batch of 4 years and held that since factual matrix is same, the earlier decision of Hon'ble Delhi High Court in case of 25.02.2009 is squarely applicable i.e. issue of PE/BC is academic.

"21. Now coming to the cross objections filed by the assessee in all these years four years. The Ld. AR did not argue the cross objections and therefore these cross objections are treated as not pressed. Therefore, the assessee's cross objections in all four years are dismissed"

17 Aspect Software Inc. The Hon'ble Delhi High Court in its order dated 25th August 2014 30. (ITA No. 654/2012 656/2012, 659/2012 & 661/2012) in case of Galileo Netherlands B.V (GNBV) (Successor of GII and Predecessor of the Appellant) for third batch of years i.e. AY 2003-04 to AY 2006-07 refrained from forming any opinion on GNBV's PE/BC in India. Relevant extract of this order is reproduced as under:

(Please refer Para 2 on Page 313 of Paperbook Part 1) "2. We begin with a caveat that a limited issue and question arises for consideration in these appeals and we are not required are not pronouncing any opinion and finding on whether the appellant- assessee had a Permanent Establishment (PE) in India and other related issues. The only question and issue raised in these appeals relates to profit attribution to Indian Operations on the assumption that the appellant- assessee had a PE in India."

Ground No. 6 is related 'Excessive attribution to alleged PE of the Appellant in India'

"9. ……………….....In the present case, we find that only part of CRS system operates or functions in India. The extent of work in India is only to the extent of generating request and receiving end-result of the process in India. The major functions like collecting the database of various airlines and hotels, which have entered into PCA with the appellant takes place outside India. The computer at Denver in USA processes various data like schedule of flights, timings, pricing, the availability, connection, meal preference, special facility, etc. and that too on the basis of neutral display real time on line takes place outside India. The computers at the desk of travel agent in India are merely connected or configured to the extent that it can perform a booking function 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 in India.The major part of the work or to say a lion's 19 Aspect Software Inc. 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 performed outside India. Even the majority of the assets, i.e., host computer which is having very large capacity which processes information of all the participants is situated outside India. The CRS as a whole is developed and maintained outside India. The risk in this regard entirely rests with the appellant and that is in USA, outside India. However, it is equally important to note that but for the presence of the assessee in India and the configuration and connectivity being provided in India, the income would not have generated. Thus the initial cause of generation of income is in India also. On the basis of above facts we can reasonably attribute 15 per cent of the revenue accruing to the assessee in respect of bookings made in India as income accruing or arising in India and chargeable under section 5(2) read with section 9(1)(i) of the Act."

(Para 10 on Page 224 of Paperbook Part 1)

"10. Next question to be decided is if it is found that the income accruing in India is consumed by the payment made to the 20 Aspect Software Inc. agents in India, whether any income still is left to be taxed in India. The activities of the appellant in India are entirely routed through the efforts of NMC namely Interglobe India (P.) Ltd. (Interglobe). Interglobe is responsible for monitoring the activities of the subscribers enrolled in India. The request originated from the computers at the desk of travel agent is once again routed through the facility of processing such information at Interglobe. If Interglobe finds that the subscriber accessing the CRS is authorized to do so, the request is further forwarded. Interglobe is also responsible for establishing connectivity of the computers of the subscribers and maintaining them. Interglobe is also responsible for training of the subscribers in respect of use of CRS. For all these services rendered by Interglobe to the appellant, it is being paid remuneration in terms of distribution agreement. Broadly the assessee receives three 'Euros' as fees per 'net booking', i.e., gross booking minus cancellation. The assessee passed one dollar to Interglobe for each net booking processed through Galileo system by subscriber. Thus, in respect of the activities carried out in India and considering the income accruing in India, remuneration paid to the Indian agents consumes the entire income accruing or arising in India………………."

(Para 18 on Page 251 of Paperbook Part 1)

"18…………………………While dealing with the question as to what is such part of income as is reasonably attributable to the operations carried out in India, we have held that only 15 per cent of the revenue generated from the bookings made within India is taxable In India. The same proportion has to be adopted here while computing profit attributable to the PE. 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 21 Aspect Software Inc. India. It is to be noted that even in the first assessment framed by the Assessing Officer, the entire expenses in the form of remuneration paid to Interglobe was held as allowable deduction and was reduced while computing the income of Appellant. If that be the case, the income attributable to PE in India being less than the remuneration paid to the dependent agent, it extinguishes the assessment and requires no further exercise for computation of income. We accordingly hold so and in view of the same the income of the Appellant will be NIL."

"5. The next contention of applicant is that instead of estimating or apportioning income or profits the Tribunal has attributed the revenue. In our opinion this is not a mistake apparent from record. For computation of any income, the first point is to apportion the revenue from the operations carried out in India. Unless the revenues are 22 Aspect Software Inc. attributed, the income which is a second step cannot be attributed. However, after apportioning revenue, since it was found that out of the apportioned revenue, the remuneration payable to the agent in India exceeds such apportioned revenue, no further income is taxable in India………"

"…………9. We find that all issues arising in the appeal have beenanswered. Neither any argument nor any ground is left out. In view of overall situation if the tribunal has consciously come to the conclusion that no income accrues in India and in respect of which elaborate reasons are given, if the applicant do not agree with the reasoning, it cannot be said that any mistake has crept in the order of the Tribunal which is rectifiable under section 254(2) of the Act. We therefore decline to interfere".

"The Tribunal thereafter discussed the principle which is to be followed in apportioning the Income-tax accruing in India and the Income accruing outside India. The Tribunal found that only a part of CRS order operates and functions in India. The extent of working in India is only to the extent of channelizing the request and receiving the result of the process in India and the major functioning and collecting the data base of various airlines and hostels which have entered into PCA with the respondent takes place outside the India. The Tribunal also took into consideration the fact that the computer of Denver at USA processes various data like schedule of flights, timings, pricing, the availability, 23 Aspect Software Inc. connection, meal preference, special facility, etc. and that too on the basis of neutral display real time on line takes place outside India. Insofar as the role played in India is concerned, that is limited to the computers at the desk which are merely connected or configured to the extent that it can perform a booking function but are not capable of processing the data of all the airlines together at one place. The Tribunal was also influenced by another important fact viz., such functioning requires huge investment and huge capacity which is not available in the computers installed at the desk of the subscriber in India. On this basis, the Tribunal formed the opinion that major part of the work are processed at the host computer in Denver in USA and the activities in India are only minuscule portion. Taking into consideration all these factors the Tribunal was of the opinion that one could reasonably attribute 15 per cent of the "revenue" accruing to the respondent in respect of bookings made in India as major expenses in that behalf is incurred in activities carried out in US………."

(Please refer Para on Page 272 of Paperbook Part 1) "Thus, the approach adopted by the Tribunal was to first arrive at the figure relating to the revenue generated in India and abroad. It concluded that out of the revenue accrued to the respondent in respect of these bookings 15 per cent thereof should be attributed to India, keeping in view a very minor portion of the activity being carried out here"

(Please refer Para on Page 273 of Paperbook Part 1)

"After formulating the aforesaid question, the Tribunal answered the same holding that since the revenue attributable in respect of the booking made in India is only 0.45 Euro (15 per cent of Euro 3) and 24 Aspect Software Inc. commission paid to Interglobe was Euro 1, there was no income which was taxable in India." "The Tribunal in this behalf has noted that the entire payment made by the respondent to the Interglobe has been allowed as expenses while computing total Income of the respondent. After arriving at these findings of facts, the Tribunal referred to Circular No. 23 of 23-7-1969 which prescribes that no income can be further charged to tax in India. To same effect is the judgment of the Supreme Court in Morgan Stanley & Co. Inc.'s case (supra)"

(Please refer last Para on Page 276 of Paperbook Part 1)

"We, therefore, are of the opinion that no question of law arises in these matters which needs any further determination by this Court. These appeals are accordingly dismissed in limine."