2009 (2) TMI 497 - HC - Income Tax

Income chargeable to tax in India under section 5(2) of the Act and whether the assessee has any business connection in India as per section 9(1)(i) of the Act - Tribunal opined that the respondent s income was chargeable to tax in India under section 5(2) of the Income-tax Act as it had business connections in India as per section 9(1)(i) of the said Act. Tribunal was of the opinion that 15 per cent. of the revenue accruing to the respondent in respect of bookings made in India should be treated as income accruing or assessed in India and chargeable under section 5(2) read with section 9(1)(i) of the Act Held that - no guidelines are available as to how much should be the income reasonably attributable to the operations carried out in India the same has to be determined on the factual situation prevailing in each case In the absence of some statutory or other fixed formula any finding on the question or proportion involves some element of guess work no question of law arises in these matters which needs any further determination by this court. These appeals are accordingly dismissed in limine

Issues Involved:
1. Taxability of income under Section 5(2) and business connection under Section 9(1)(i) of the Income-tax Act.
2. Permanent Establishment (PE) in India under the Double Taxation Avoidance Agreement (DTAA) between India and the USA.
3. Attribution of income to the PE in India and the extent of such income.
4. Chargeability of interest under Sections 234A and 234B of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Income under Section 5(2) and Business Connection under Section 9(1)(i) of the Income-tax Act:
The Tribunal concluded that the respondent's income was chargeable to tax in India under Section 5(2) of the Income-tax Act due to its business connections in India as per Section 9(1)(i) of the Act. The Tribunal determined that 15% of the revenue from bookings made in India should be treated as income accruing or assessed in India and chargeable under Section 5(2) read with Section 9(1)(i). Since the respondent charged Euro 3 per booking, 15% amounted to 0.45 Euro. However, after paying a commission of Euro 1 per booking to Interglobe, it was concluded that no income or profits were left to be taxed in India.

2. Permanent Establishment (PE) in India under DTAA:
The Tribunal found that the respondent had a PE in India based on the installation and operation of computers connected to the CRS system at the premises of subscribers in India. These computers, configured and controlled by the respondent or through its agent Interglobe, constituted a fixed place of business. This finding was supported by Circular No. 23 and the Supreme Court judgment in DIT (International Taxation) v. Morgan Stanley and Co. Inc.

3. Attribution of Income to the PE in India and the Extent of Such Income:
The Tribunal adopted the approach of attributing profits rather than revenue. It assessed the revenue attributable to operations in India and concluded that 15% of the revenue from bookings made in India could be attributed to the activities in India. The Tribunal noted that the major functions, including data processing, occurred outside India, primarily in Denver, USA. Thus, only a minor portion of the activity was carried out in India. The Tribunal reasoned that 15% of the revenue accruing to the respondent from bookings made in India could be attributed to India, considering the significant expenses incurred in the USA.

4. Chargeability of Interest under Sections 234A and 234B of the Income-tax Act:
The Tribunal did not find it necessary to discuss the findings on other issues, including the chargeability of interest under Sections 234A and 234B, as the primary issue of income attribution was resolved in favor of the respondent.

Additional Observations:
The Tribunal referred to Circular No. 23 and the Supreme Court judgment in Morgan Stanley to support its decision. The Tribunal emphasized that the commission paid to Interglobe was allowed as an expense while computing the respondent's total income. The Tribunal's approach was to first determine the revenue generated in India and then focus on the profits attributable to the PE in India. The Tribunal concluded that after deducting the commission paid to Interglobe, no further income was taxable in India.

The court upheld the Tribunal's findings, noting that the proportion of profits attributable to India was based on relevant material and did not warrant further examination. Consequently, the appeals were dismissed in limine.

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