Amadeus Global Travel Distribution S.A. V. Dy CIT & Anr.

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The Tax Publishers2008 TaxPub(DT) 1311 (Del-Trib) : (2008) 022 (II) ITCL 0282 : (2008) 113 TTJ 0767 : (2008) 002 DTR 0153 Amadeus Global Travel Distribution S.A. V. Dy CIT & Anr. INCOME TAX ACT, 1961 Income deemed to accrue or arise in India- Under section 9(1)(i)-Business profit-Permanent establishment Assessee, a tax resident of Spain, had developed a fully automatic computer reservation and distribution system known as AMADEUS system, with the ability to perform comprehensive information, communications, reservations, ticketing, distribution and related functions on a worldwide basis for the travel industry, particularly participating airlines, hotels etc. `CRS`. Various Airlines all over the world had entered into `Participating Carriers Agreements` (`the PCA`) with the assessee for display of their information/products, etc. through the CRS. The assessee received payment from the Airlines in the form of `booking fee`, which was computed on the basis of the `net booking` made through the use of CRS. In order to promote the use of CRS in various countries, the assessee has entered into `Distribution Agreement` (`the DA`) with a National Marketing Company (NMCs) incorporated in India, viz., (AIPL), for distribution/marketing of the CRS in India. The assessee had entered the DAs with various NMCs incorporated in the respective countries for distribution/marketing of the CRS, in order to promote the use of CRS in various countries. As per the DA, the NMCs were required to seek subscribers to the CRS (normally travel agents) and enter into subscribers agreement (SBA) with them. As per the provisions of the SBAs, the NMCs configured the computers, etc. installed at the premises of the travel agents and carried out certain programming/modification and other activities in order to provide connectivity/access to the travel agents to the CRS. The NMCs also trained the travel agents regarding the use of the CRS. The assessee paid the NMCs `distribution fees` for the aforesaid services rendered by the NMC. The `distribution fee` was computed on the basis of the segments booked through the CRS by the subscribers/travel agents. The connectivity between the Amadeus mainframe computer and the PCs of the travel agents was provided by SITA worldwide. The expenses in relation to such connectivity were borne by the assessee. AO brought to tax the entire revenue received by the assessee from the airlines for the segments booked from India through the CRS developed by the assessee holding that:(a) The assessee had a business connection in India and AIPL was the Permanent Establishment (PE) of the assessee in India, and (b) Computer hardware/software provided by the assessee to travel agents also constituted PE of the assessee in India. *Held:*The assessee had developed a fully automatic reservation and distribution system known as AMADEUS system, through this Amadeus system, the assessee provided service to various participants i.e. Airlines and hotels, etc. whereby the subscribers who were enrolled through the efforts of NMC could perform the functions of reservations and ticketing etc. Thus the Amadeus system or the CRS was capable not only processing the information of various Airlines for display at one place but also enabled the subscribers to book tickets in a way which was a seamless system originating from the desk of the subscriber`s computer which might or might not be provided by the assessee but which in all cases were configured and connected to such an extent that such computers could 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 was to be noted that all the subscribers in respect of which income was held taxable were 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 were provided by the assessee. The booking took place in India on the basis of the presence of such seamless CRS system. On the basis of booking made by the travel agent in India, the income generated to the assessee. But for the booking no income accrued to the assessee. Time and again it was contended that the whole of the processing work was carried out at host computer situated at Erding in Germany and only the display of information was in India for the proposition that there was no business connection in India. The contention was not agreeable. The CRS extended 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 was not possible which was the source of revenue to the assessee. The assessee was not to receive the payment only for display of information but the income would accrue only when the booking was completed at the desk of the subscriber`s computer. In such a situation, there was a continuous seamless process involved, at least part of which was in India and hence, there was a business connection in India. The computers along with the configuration had been supplied either by the assessee or through its agent AIPL and the connectivity being provided by the assessee enabled the subscribers to access the CRS and perform the ticketing and booking functions. Thus there was a direct business connection established in India and, hence, in terms of section 9(1)(i) the income in respect of the booking which took place from the equipment in India could be deemed to accrue or arise in India and, hence, taxable in India. As per clause (a) of Explanation 1 to section 9(1)(i) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Thus in a given case if all the operations are not carried out in India, the income had to be apportioned between the income accruing in India and income accruing outside India. In instant case, it was found that only part of CRS system operated or functioned in India. The extent of work in India was 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 had entered into PCA with the assessee took place outside India. The computer at Erding in Germany processed 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 took place outside India. The computers at the desk of travel agent in India were merely connected or configured to the extent that it could perform a booking function but were not capable of processing the data of all the airlines together at one place. Such function required huge investment and huge capacity, which was 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 share of such activity, were processed at the host computer in Erding in Germany. The activities in India were only minuscule portion. The assessee`s computer in Germany was also responsible for all other functions like keeping data of the booking made worldwide and also keeping track of all the airlines/hotels worldwide who had 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, majority of the functions were performed outside India. Even the majority of the assets i.e. host computer which was having very large capacity which processed information of all the participants was situated outside India. The CRS as a whole was developed and maintained outside India. The risk in this regard entirely rested with the assessee and that was in Spain, outside India. However, it was 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 was in India also. On the basis of above facts one could 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 ). The activities of the assessee in India were entirely routed through the efforts of NMC, namely AIPL was responsible for monitoring the activities of the subscribers enrolled in India. The request originated from the computers at the desk of travel agent was once again routed through the facility of processing such information at AIPL. If AIPL found that the subscriber accessing the CRS was authorized to do so, the request was further forwarded. AIPL was also responsible for establishing connectivity of the computers of the subscribers and maintaining them. AIPL was also responsible for training of the subscribers in respect of use of CRS. For all these services rendered by AIPL to the assessee, it was being paid remuneration in terms of distribution agreement. Broadly the assessee received three `Euros` as fees per `net booking` i.e. gross booking minus cancellation. Thus in respect of the activities carried out in India and considering the income accruing in India, remuneration paid to the Indian agents consumed the entire income accruing or arising in India. It was also to be noted that the entire payment made by assessee to AIPL, had been allowed as expenses while computing total income of the assessee. In such a situation in view of Circular No. 23 of 23-7-1969 no income could be further charged to tax in India. The circular equally applies to the sale of goods as well as rendering of services. The Supreme Court has taken judicial note of said Circular in the case of Director of Income-tax (IT) Morgan Stanley & Co. [2007] 292 ITR 416 / 162 Taxman 165 (SC) 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. Therefore, in view of the above facts, no income was taxable in India for the relevant assessment year. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2008 TaxPub(DT) 1311 (Del-Trib) : (2008) 022 (II) ITCL 0282 : (2008) 113 TTJ 0767 : (2008) 002 DTR 0153

Amadeus Global Travel Distribution S.A. V. Dy CIT & Anr.

INCOME TAX ACT, 1961

Income deemed to accrue or arise in India- Under section 9(1)(i)-Business profit-Permanent establishment

Assessee, a tax resident of Spain, had developed a fully automatic computer reservation and distribution system known as AMADEUS system, with the ability to perform comprehensive information, communications, reservations, ticketing, distribution and related functions on a worldwide basis for the travel industry, particularly participating airlines, hotels etc. `CRS`. Various Airlines all over the world had entered into `Participating Carriers Agreements` (`the PCA`) with the assessee for display of their information/products, etc. through the CRS. The assessee received payment from the Airlines in the form of `booking fee`, which was computed on the basis of the `net booking` made through the use of CRS. In order to promote the use of CRS in various countries, the assessee has entered into `Distribution Agreement` (`the DA`) with a National Marketing Company (NMCs) incorporated in India, viz., (AIPL), for distribution/marketing of the CRS in India. The assessee had entered the DAs with various NMCs incorporated in the respective countries for distribution/marketing of the CRS, in order to promote the use of CRS in various countries. As per the DA, the NMCs were required to seek subscribers to the CRS (normally travel agents) and enter into subscribers agreement (SBA) with them. As per the provisions of the SBAs, the NMCs configured the computers, etc. installed at the premises of the travel agents and carried out certain programming/modification and other activities in order to provide connectivity/access to the travel agents to the CRS. The NMCs also trained the travel agents regarding the use of the CRS. The assessee paid the NMCs `distribution fees` for the aforesaid services rendered by the NMC. The `distribution fee` was computed on the basis of the segments booked through the CRS by the subscribers/travel agents. The connectivity between the Amadeus mainframe computer and the PCs of the travel agents was provided by SITA worldwide. The expenses in relation to such connectivity were borne by the assessee. AO brought to tax the entire revenue received by the assessee from the airlines for the segments booked from India through the CRS developed by the assessee holding that:(a) The assessee had a business connection in India and AIPL was the Permanent Establishment (PE) of the assessee in India, and (b) Computer hardware/software provided by the assessee to travel agents also constituted PE of the assessee in India. Held:The assessee had developed a fully automatic reservation and distribution system known as AMADEUS system, through this Amadeus system, the assessee provided service to various participants i.e. Airlines and hotels, etc. whereby the subscribers who were enrolled through the efforts of NMC could perform the functions of reservations and ticketing etc. Thus the Amadeus system or the CRS was capable not only processing the information of various Airlines for display at one place but also enabled the subscribers to book tickets in a way which was a seamless system originating from the desk of the subscriber`s computer which might or might not be provided by the assessee but which in all cases were configured and connected to such an extent that such computers could 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 was to be noted that all the subscribers in respect of which income was held taxable were 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 were provided by the assessee. The booking took place in India on the basis of the presence of such seamless CRS system. On the basis of booking made by the travel agent in India, the income generated to the assessee. But for the booking no income accrued to the assessee. Time and again it was contended that the whole of the processing work was carried out at host computer situated at Erding in Germany and only the display of information was in India for the proposition that there was no business connection in India. The contention was not agreeable. The CRS extended 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 was not possible which was the source of revenue to the assessee. The assessee was not to receive the payment only for display of information but the income would accrue only when the booking was completed at the desk of the subscriber`s computer. In such a situation, there was a continuous seamless process involved, at least part of which was in India and hence, there was a business connection in India. The computers along with the configuration had been supplied either by the assessee or through its agent AIPL and the connectivity being provided by the assessee enabled the subscribers to access the CRS and perform the ticketing and booking functions. Thus there was a direct business connection established in India and, hence, in terms of section 9(1)(i) the income in respect of the booking which took place from the equipment in India could be deemed to accrue or arise in India and, hence, taxable in India.

As per clause (a) of Explanation 1 to section 9(1)(i) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Thus in a given case if all the operations are not carried out in India, the income had to be apportioned between the income accruing in India and income accruing outside India. In instant case, it was found that only part of CRS system operated or functioned in India. The extent of work in India was 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 had entered into PCA with the assessee took place outside India. The computer at Erding in Germany processed 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 took place outside India. The computers at the desk of travel agent in India were merely connected or configured to the extent that it could perform a booking function but were not capable of processing the data of all the airlines together at one place. Such function required huge investment and huge capacity, which was 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 share of such activity, were processed at the host computer in Erding in Germany. The activities in India were only minuscule portion. The assessee`s computer in Germany was also responsible for all other functions like keeping data of the booking made worldwide and also keeping track of all the airlines/hotels worldwide who had 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, majority of the functions were performed outside India. Even the majority of the assets i.e. host computer which was having very large capacity which processed information of all the participants was situated outside India. The CRS as a whole was developed and maintained outside India. The risk in this regard entirely rested with the assessee and that was in Spain, outside India. However, it was 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 was in India also. On the basis of above facts one could 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 ).

The activities of the assessee in India were entirely routed through the efforts of NMC, namely AIPL was responsible for monitoring the activities of the subscribers enrolled in India. The request originated from the computers at the desk of travel agent was once again routed through the facility of processing such information at AIPL. If AIPL found that the subscriber accessing the CRS was authorized to do so, the request was further forwarded. AIPL was also responsible for establishing connectivity of the computers of the subscribers and maintaining them. AIPL was also responsible for training of the subscribers in respect of use of CRS. For all these services rendered by AIPL to the assessee, it was being paid remuneration in terms of distribution agreement. Broadly the assessee received three `Euros` as fees per `net booking` i.e. gross booking minus cancellation. Thus in respect of the activities carried out in India and considering the income accruing in India, remuneration paid to the Indian agents consumed the entire income accruing or arising in India. It was also to be noted that the entire payment made by assessee to AIPL, had been allowed as expenses while computing total income of the assessee. In such a situation in view of Circular No. 23 of 23-7-1969 no income could be further charged to tax in India. The circular equally applies to the sale of goods as well as rendering of services. The Supreme Court has taken judicial note of said Circular in the case of Director of Income-tax (IT) Morgan Stanley & Co. [2007] 292 ITR 416 / 162 Taxman 165 (SC) 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. Therefore, in view of the above facts, no income was taxable in India for the relevant assessment year.