2025 (7) TMI 436 - AT - Income Tax

CRS income being taxed as Royalty - Taxability of receipts from airlines in India - assessee is tax resident of Spain and has developed a fully automated Computer Information System (hereinafter referred to as CRS) which enables display and dissemination of information supplied by various Airlines which in turn facilitates inter alia reservations communications ticketing and related functions on a worldwide basis for the travel industry - AO held that the booking fee received by the assessee was taxable as royalty both u/s 9(1)(vi) and Article 13 of the Indo-Spain Treaty on the ground that the booking fees received by the assessee from various airlines is payment for use of process and scientific equipment - HELD THAT - We find that this issue is squarely covered in favour of the assessee and against the Revenue by decision of the co-ordinate bench 2023 (10) TMI 1138 - ITAT DELHI wherein it has been held that the booking fee received by the assessee is taxable as business income and not as royalty . Taxing payments received in relation to the Altea System (an inventory management and hosting system developed by the assessee) as royalty - HELD THAT - We find that the co-ordinate bench in assessee s own case for the A.Ys 2007-08 to 2021-22 under similar circumstances has held that payment received by the assessee from the airlines for the Altea system cannot be characterized as royalty either under the Act or under the Indo-Spain Treaty. We also find that the Revenue s appeal with respect to question of taxability of Altea Payments was not admitted by the Hon ble High Court and hence the order of the Tribunal attained finality. Accordingly we hold that payment received by the assessee from the airlines for the Altea System is not royalty either under the Act or the Treaty. Accordingly ground 4 is allowed. Permanent Establishment of Amadeus - AO following the orders passed in the earlier years held that the computers provided to the travel agents through which sales are conducted constituted fixed place PE of the assessee in India under Article 5(1) of the India-Spain Tax Treaty and also held the assessee to be dependent agency PE in terms of paragraph 5(4) of the India Spain Tax Treaty - HELD THAT - We find that the Delhi High Court in assessee s own case for the A.Ys 1996-97 to 2019-20 2023 (5) TMI 1249 - DELHI HIGH COURT has upheld the orders of the Tribunal that the PE of the assessee exists in India. The issue of PE is no longer res-integra as the Hon ble Supreme Court has decided this issue in favour of Revenue vide its order 2023 (8) TMI 165 - SC ORDER and considered it as academic in nature. Further the Hon ble Supreme Court vide order dated 19.04.2023 has decided the issue of profit accruing/arising to the assessee attributable to the Permanent Establishment in India wherein it has upheld the order of the High Court on the aspect that 15% of the revenue earned by the assessee being taxable in India and that since the assessee pays 33% of the booking fees to the distributors no income is attributable to tax in India. We therefore are of the considered view that the issue of attribution has attained finality. Ground No. 5 is accordingly dismissed. Interest u/s 234B - assessee submitted that in the absence of any liability for payment of advance tax since tax is deductible at source on the income of the assessee held liable to tax in India the levy of interest under section 234B of the Act is not warranted - HELD THAT - We find that the co-ordinate bench in assessee s own case allowed the ground of the assessee and the Hon ble High Court of Delhi dismissed the appeals filed by the department against the findings of the Tribunal for AYs 2009-10 2012-13 and 2013-14 to 2016- 17. 2023 (5) TMI 1249 - DELHI HIGH COURT Thus direct the AO to delete the interest so levied u/s 234B.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the gross booking revenue/fees received by the assessee from Indian sources in relation to the Computer Reservation System (CRS) activity is taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 ("the Act") and Article 13 of the India-Spain Double Taxation Avoidance Agreement (DTAA), or as business income attributable to a Permanent Establishment (PE) in India;

(b) Whether payments received by the assessee in respect of the Altea System, an inventory management and hosting system, constitute royalty income taxable in India under the Act and the DTAA;

(c) Whether the assessee has a Permanent Establishment in India under Article 5 of the India-Spain Tax Treaty, and if so, the extent of income attributable to such PE;

(d) Whether interest under section 234B of the Act is leviable on the assessee for non-payment of advance tax, given that tax has been deducted at source on income taxable in India;

(e) General grounds and other ancillary contentions raised by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Taxability of CRS Income as Royalty or Business Income

Legal Framework and Precedents: Section 9(1)(vi) of the Act defines royalty and includes payments for the use of any patent, invention, model, design, secret formula or process or for information concerning industrial, commercial or scientific experience. Article 13 of the India-Spain DTAA deals with income from royalties, defining the scope and taxing rights. Section 44DA of the Act and Article 13(5) of the Treaty provide that royalty income effectively connected with a PE is to be taxed as business income on a net basis.

Relevant precedents include the coordinate bench decisions in the assessee's own case for AYs 2006-07 to 2021-22, affirmed by the Hon'ble Delhi High Court, which held that the booking fees received by the assessee are taxable as business income and not as royalty. The Supreme Court decisions in Rio Tinto Technical Services (340 ITR 507) and Engineering Analysis Centre of Excellence (432 ITR 471) were relied upon to emphasize the principle of taxing such income on net basis when attributable to a PE.

Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer treated the booking fee as royalty on the ground that it was payment for use of a process and scientific equipment. However, the Tribunal found that this issue was squarely covered against the Revenue by earlier coordinate bench decisions and affirmed by the Delhi High Court. The Tribunal observed that the payment is effectively connected with the PE of the non-resident and hence taxable as business income on a net basis, not on gross basis as royalty.

Key Evidence and Findings: The assessee is a tax resident of Spain and operates a fully automated CRS that facilitates airline reservations and related services worldwide. The booking fees received from Indian airlines were substantial. Earlier years' assessments and judicial pronouncements have consistently treated such income as business income attributable to PE.

Application of Law to Facts: Applying the legal principles and precedents, the Tribunal held that the gross booking fees cannot be taxed as royalty on a gross basis. Instead, such income is attributable to the PE in India and taxable as business income on a net basis.

Treatment of Competing Arguments: The Revenue did not press the objection seriously and conceded to the assessee's submissions based on binding precedents. The Tribunal respectfully followed the decisions of the coordinate bench and the Delhi High Court.

Conclusion: Ground No. 3 relating to CRS income being taxed as royalty was allowed in favour of the assessee.

(b) Taxability of Payments Received for Altea System

Legal Framework and Precedents: The characterization of payments for software or systems as royalty depends on the nature of the payment and the rights transferred. The India-Spain DTAA Article 13 and section 9(1)(vi) of the Act are relevant. Earlier coordinate bench decisions in the assessee's own case for AYs 2007-08 to 2021-22 have held that payments for the Altea system are not royalty.

Court's Interpretation and Reasoning: The Assessing Officer treated payments received for the Altea system as royalty on the ground that the system provides key operational services to airlines. The Tribunal rejected this view, noting that the system is installed at airports and accessed only by airlines, not by the assessee's agents in India. The control of the system remains with the assessee, and payments are for services rendered, not for use of any process or equipment.

Key Evidence and Findings: The Altea system was available only to British Airways at Indian airports during the relevant year. The software was not accessible outside the airport or by the assessee's Indian agents. Payments were made by non-resident airlines to the non-resident assessee outside India.

Application of Law to Facts: The Tribunal applied the legal principles and prior decisions, concluding that payments for the Altea system do not constitute royalty either under the Act or the Treaty.

Treatment of Competing Arguments: The Revenue relied on the orders of the lower authorities, but the Tribunal noted that the Revenue's appeals on this issue were not admitted by the Delhi High Court, rendering the Tribunal's order final.

Conclusion: Ground No. 4 was allowed in favour of the assessee, holding that payments for the Altea system are not taxable as royalty.

(c) Existence and Attribution of Permanent Establishment (PE) in India

Legal Framework and Precedents: Article 5 of the India-Spain DTAA defines PE, including fixed place PE and dependent agency PE. The Supreme Court and Delhi High Court have ruled on the existence of PE in the assessee's case for AYs 1996-97 to 2019-20. The Supreme Court's recent orders dated 20.07.2023 and 19.04.2023 have upheld the existence of PE and the attribution of 15% of the revenue earned to India.

Court's Interpretation and Reasoning: The Tribunal observed that the Assessing Officer and the DRP had upheld the existence of PE based on computers provided to travel agents and dependent agency arrangements. The Tribunal found that this issue is no longer res integra, with the Supreme Court having decided in favour of the Revenue on the existence of PE and attribution of income.

Key Evidence and Findings: The assessee's operations in India through agents and computer systems constitute a fixed place PE and dependent agency PE. The revenue attributable to the PE has been determined at 15%, consistent with judicial precedents.

Application of Law to Facts: The Tribunal applied the binding Supreme Court and High Court rulings, dismissing the assessee's ground challenging the PE determination and attribution of income.

Treatment of Competing Arguments: The assessee's submissions were considered but found to be contrary to binding judicial decisions.

Conclusion: Ground No. 5 was dismissed, affirming the existence of PE and attribution of income in India.

(d) Levy of Interest under Section 234B of the Act

Legal Framework and Precedents: Section 234B imposes interest for default in payment of advance tax. The proviso to section 209(1)(d) introduced by Finance Act, 2012, applies where tax is not deducted at source but income is credited or paid without deduction. The coordinate bench and Delhi High Court have held that where tax is deducted at source, interest under section 234B is not leviable.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee's income was received after deduction of tax at source. Therefore, the proviso to section 209(1)(d) does not apply, and no liability for advance tax arises. The Tribunal relied on the coordinate bench decision in BG International Ltd. and the Delhi High Court's dismissal of departmental appeals on this issue.

Key Evidence and Findings: The assessee's income was subject to tax deduction at source, negating the applicability of interest under section 234B.

Application of Law to Facts: The Tribunal held that since no addition to income was sustained and tax was deducted at source, interest under section 234B cannot be levied.

Treatment of Competing Arguments: The Revenue's submissions were considered but found unpersuasive in light of binding precedents.

Conclusion: Ground No. 6 was allowed, directing deletion of interest levied under section 234B.

(e) General Grounds

The general grounds (Ground Nos. 1 and 2) were not specifically elaborated upon and are presumably dismissed or rendered infructuous in view of the detailed findings on other grounds.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning and core principles established include:

"The booking fee received by the assessee is taxable as 'business income' and not as 'royalty'. The Hon'ble Delhi High Court has dismissed the appeals filed by the Revenue recording that the booking fee is not royalty but business income attributable to the PE in India."

"Payments received by the assessee from airlines for the Altea system cannot be characterized as 'royalty' either under the Act or under the India-Spain Treaty."

"The existence of Permanent Establishment of the assessee in India is upheld based on computers provided to travel agents and dependent agency arrangements, with 15% of revenue attributable to the PE taxable in India."

"In the absence of any liability for payment of advance tax since tax is deductible at source on the income of the assessee held liable to tax in India, the levy of interest under section 234B is not warranted."

Final determinations on each issue are:

(i) Ground No. 3 (CRS income as royalty) is allowed in favour of the assessee;

(ii) Ground No. 4 (Altea system payments as royalty) is allowed in favour of the assessee;

(iii) Ground No. 5 (existence and attribution of PE) is dismissed;

(iv) Ground No. 6 (interest under section 234B) is allowed in favour of the assessee;

(v) General grounds (Nos. 1 and 2) are not specifically dealt with and presumably dismissed.