TMI Blog2007 (11) TMI 329X X X X Extracts X X X X X X X X Extracts X X X X ..... 000. C.O. Nos. 51 to 54 of 2006 by the revenue are in respect of ITA Nos. 820 to 823 of 2005. Since common issues are involved in all these appeals and cross objections were heard together and are being disposed of by this common order. 2. Galileo International Inc. ('the appellant'), a resident of USA, is in the business of maintaining and operating the system for providing electronic global distribution services to airlines, hotels, tour and cab operators by connecting to travel agents ('the TAs') utilising a Computerised Reservation System ('CRS'), which may, inter alia, include a system which receives, processes, stores and disseminates data about flight schedules, seat/room availability, fare information and provision for booking capabilities etc. As a CRS service provider to Airlines, the appellant performs the following: - It receives all relevant information from the various Participant airlines, processes this information and stores it on its database in a standard format, and has processes in place for receiving updates to this information on a continuous basis - It receives from the TAs requests for information contained in the database, booking requests, enables b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber of seats available for sale. 'Participating Carrier' means any airline that has entered into a Global Airline Distribution Agreement with Galileo International. 'System' means any CRS operated by Galileo International, not including the Apollo by Gemini CRS. 2. Duties of Galileo International-Galileo International shall maintain and operate the system and shall provide to Participant various standard services at the charges set out in Schedule 2, as it may be amended by Galileo International from time to time. Depending on the options selected by Participant under Schedule 1, these services may include, among other things, display of schedules and fares, building of connections, display of flight availability status, and provision of booking capability. The scope of the standard services provided shall be determined, and may be amended from time to time, by Galileo International. Such standard services shall not include the optional services listed in Schedule 4. Where Participant uses a computer to computer communications link between the System and Participant's System, Galileo International shall offer certain point(s) of entry into the System communications network a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record of that booking may exist in Participant's System, overbooking may result therefrom, and denied boarding compensation may be required. Participant shall accept a ticket for transportation at the fare shown on that ticket provided that the ticket was automatically issued by a Galileo International and Galileo International Subscriber shall have no liability to Participant (and Participant hereby waives any rights and remedies against Galileo International and Galileo International Subscribers) for any inaccuracies in the fares data shown on such a ticket. Participant hereby grants ticketing authority to issue Participant's transportation documents through the System to Galileo International and all Galileo International Subscribers that hold validation approval to issue transportation documents on Participant's behalf in each territory in which Participant is, at the subject time, a member of any authorized ticketing arrangement and in which the System is authorized to operate in the capacity of a 'System Provider' or in another comparable capacity. Participant expressly agrees to execute promptly all agreements and other authorisations specified by the local settlement plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to an availability display and Participant has not selected one of the optional booking services described in Schedule 11 or 12, the System will interrogate Participant's System and, subject to seats being available, will send an 'LK' or other applicable message, to Participant's System as if the sell had been made with reference to an overlaid availability display. Schedule 10: Inside Availability: This Schedule describes the Inside Availability service offered in Schedule 4 and forms part of the Galileo International Global Airline Distribution Agreement. 1. General-Inside Availability refers to the functionality whereby, via a computer-to-computer capability between the System and Participant's System, Galileo International enables Participant to display real time flight availability information directly from Participant's System within the primary availability displays of the System according to the journey requested by the Galileo International Subscriber. 2. Responsibilities of Galileo International B. The System will send to Participant's System information to facilitate the identification of each Galileo International Subscriber seeking an availabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad, Rosemont, Illinois 60018, USA, And Interglobe Enterprises (P.) Ltd. (a company constituted under the laws ofIndia) its successor, nominees and assigns whose registered office is at 66, Janpath,New Delhi- 110 001,India. Recitals A. Whereas Galileo International has developed and/or owns and is entitled to commercially exploit and distribute globally, and particularly in India, the software, hardware, Intellectual property rights and other properties relating to the Galileo System, CRS Services and connected services/facilities forming the subject-matter of this agreement. B. And whereas Galileo International and Interglobe have agreed to the latter distributing the said services and facilities in the Market Region on mutually agreed terms set out hereinafter. Now therefore it is agreed as follows: 1. Definitions 1.1 As used in this agreement, the following terms will have the meaning provided for each: 'Booking' means in relation to an Air Vendor, a booking made in the Galileo System in respect of a Passenger Segment and, in relation to a Non-Air Vendor, the unit of measurement used by Galileo International for charging purposes; 'Computerised Reservation S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct in that capacity, subject to the terms and conditions of this agreement. 2.2 Interglobe shall establish the Indian NDC, the name of which shall be 'GalileoIndia'. GalileoIndiashall be, at Interglobe's discretion, either a division or a subsidiary of Interglobe. In the event that the Indian NDC is established as or is converted into a subsidiary of Interglobe, it shall by an amendment to this agreement be added as a party to this agreement. Notwithstanding any such amendment, Interglobe shall at all times ensure that the Indian NDC has sufficient share capital and/or funding (as appropriate) to enable it to acquire the necessary resources and personnel in order for it to fulfil its obligations under this agreement. 2.3 During the term of this agreement and of any extensions or renewals of this agreement Galileo International shall not: (a) appoint any other person as its distributor or agent for the provision of its CRS Services in the Market Region, or (b) supply its CRS Services to any other person in the Market Region for use by or provision to a subscriber. 2.8 Notwithstanding clause 2.3: (a) Interglobe undertakes to Galileo International that it is and will conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Note or Router as appear to both parties to be commercially desirable or necessary for the Market Region and whilst Galileo International will use all reasonable efforts to provide continuous CRS Services, both parties acknowledge that it is impossible for Galileo International to guarantee the provision of uninterrupted or error free CRS Services. 4.2 'Interglobe shall at its own cost and responsibility provide Galileo International's CRS Services without alteration, except as may be mutually agreed, from the Node or Router to Subscribers in the Market Region and shall either provide equipment to Subscriber or facilitate the connection of equipment to access Galileo International's CRS Services. Galileo International shall provide to Interglobe details of the hardware and software specifications approved from time to time by Galileo International for use in conjunction with Galileo International's CRS Services and including, but not limited to, operating, performance or other parameter. Interglobe shall use its best endeavours to ensure that all hardware and software used to access Galileo International's CRS Services in the Market Region comply with such specifications and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired by Interglobe during the first two years hereof in order for Subscribers to use the Galileo System shall be provided by Galileo International at no cost to Interglobe. For the avoidance of doubt, it is the intention of the parties that the costs herein borne by Galileo International are the cost of the hardware and the costs associated with delivery to Interglobe in India inclusive of freight and duty (duty to be initially paid by Interglobe and reimbursed by Galileo International) and that all costs incurred after delivery including but not limited to installation, testing, maintenance and post customs warehousing shall be the responsibility of Interglobe. Galileo International will retain title to all computer hardware supplied to Interglobe as contemplated in this clause 6.5. 9.12 In the event of termination of these agreements under clause 9.4 or 9.5, parts (b) through (f), upon the expiry of the notice period as specified hereunder:- (a) all subscriber Agreements concluded by Galileo India shall be automatically assigned to Galileo International at no cost to Galileo International and Galileo India shall physically deliver to Galileo International its signed originals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereby the Subscriber indemnifies Galileo International against any claim in respect of inaccurate data supplied by the Subscriber." Interglobe in turn enters into Subscriber Agreements with various TAs to provide the TAs with access codes, equipment, communications link and support services. The TAs may chose to obtain access to the appellant's CRS through the access code provided by the Interglobe or they may chose to independently access the CRS of the appellant's competitor. A model subscriber agreement is prescribed as part of DA; As in Clause 6.3 is the DA, Interglobe enters into Subscriber Agreement with the subscribers. Relevant clauses of said Agreement are extracted herein: "Agreed: 1. Introduction 1.1 Galileo produces and/or obtains and distributes products and services to subscribers for the display of information on air carrier schedules, fares, seat availability and other travel related products and provides subscribers with the ability to make reservations and/or tickets and/or provide other related services. 1.2 Subscriber wishes to have access to and use of the products and services provided by Galileo. 'Communication Link' means the telecommunicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary Equipment and/or Software Products, Galileo will facilitate the automatic issuance of tickets for those scheduled airlines which participate in the Galileo System." Within the DA, the appellant has also entered into an agreement with Interglobe called 'Service Level Agreement'. The intent for such agreement is to outline the level of service each commits to deliver to the end subscriber, i.e., the Travel Agents appointed by Interglobe who are to use the CRS System for booking the air tickets/hotel room etc. In the preamble of said agreement it is provided: "This agreement shall be valid for 12 months from the date of signing between Galileo International and... as the National Distribution Company. It outlines the level of service each commits to deliver to the TA. Its purpose is to establish the responsibilities of each party involved and to clarify and establish expectations on all sides. It forms the foundation of the Galileo International Service Plan that aims to deliver stable, acceptable service to End Subscribers and provides the basis for improved communication between the Service Providers." Other relevant clauses of said agreement are extracted herein: "3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Galileo Host complexes were available for the end subscriber. This component shall be measured and reported by Galileo International. Network availability is the combined availability of all relevant upline and down-line components in the network for the Market represented by this agreement. This component shall be measured and reported by the Network Provider/s in accordance with joint requirements of all parties. Any Network components residing at the Host site will be monitored by Galileo International. The Customer Premises component availability shall be deemed 100 per cent except where the NDC has facilities in place to measure terminal hours available for the market. In this case, the responsibility for measurement and reporting of premises availability shall rest with the NDC. 6. Service Management Problem Management-Refer to Galileo International's Problem Management Procedures for complete documentation on the Problem Management System (PMS). 6. Host, Network and Premises 6.1 Problem Management-Refer to Galileo International's Problem Management Procedures for complete documentation on the Problem Management System (PMS). 6.1-1 Host, Network and Premises-For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those nodes through communication links. The appellant at its own cost, has obtained connectivity services from its Data Centre inUSAto, inter alia the nodes of SITA inIndia. SITA does not own local communication lines withinIndiaand, therefore, contracts with the local telephone companies for the appropriate circuits. 2.1 There are, therefore, six players in this business, namely the passenger or the traveller, the TA, Interglobe, SITA, the appellant and the Airlines. The TAs are remunerated by the airlines. The appellant is also remunerated outsideIndiaonly by the airlines and does not receive any remuneration from the TAs. The appellant pays fees to Interglobe for acting as distributor. The appellant also pays SITA for the communication services which it provides. Interglobe was entitled to charge fees from the TAs for providing support services, equipment etc. but is stated not to have charged the same. 2.2 The appellant filed its return of income on January 28, 1999 pursuant to notice under section 142(1) of the Income-tax Act, 1961 (the 'Act') for the assessment years 1996-97, 1997-98 and 1998-99 and under section 148 for assessment year 1995-96 with NIL income contending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omically dependent on the appellant for its source of business and its activities were devoted wholly and exclusively for the appellant and as, according to the Assessing Officer, it enters into and concludes contracts on behalf of the appellant. On page 11 of his order, he observed as follows: "In view of the above, it is clear that Galileo India Ltd. (another name of Interglobe) is nothing but a dependent agent permanent establishment of Galileo International and, therefore, the income of Galileo International is taxable inIndiaas per Article 7 read with Article 5 of the Double Taxation Avoidance Agreement betweenIndiaandUSA." In addition to above, the Assessing Officer observed that Interglobe was an agent covered under Article 5(5) of the Treaty as the transactions between the two were not at arm's length as: - there was close business connection - hardware and software were provided by the appellant - training and help desk were provided by the appellant. 4. The Commissioner of Income-tax Appeals ['the CIT(A)'] in his order held that the appellant had a business connection inIndiafrom which income accrued or arose inIndiaas: - information was carried to the TAs i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the appellant is in the business of CRS services. He further submitted that the appellant being tax resident ofUSAis taxable outsideIndia, airlines are taxable inIndiasubject to Treaty benefit, Interglobe and TAs are taxable inIndia. The learned AR submitted that based on the Participation Agreement between the appellant and the Airlines, appellant will offer various standard and optional services inter alia, display of schedules and fares, building of connections, display of flight availability status and provision of booking capability to the Participating Airlines. He referred to the clause 2 of the Participant Agreement and schedules attached thereto and drew our attention to the fact that the appellant receives booking fees from the Airlines for the vide range of services, inter alia, for: - Enabling Airlines to determine the geographical locations where its tickets may be sold; - Making available to the Airlines a point of sale table, to enable the Airlines to establish a series of rules by which the availability status of its tickets can be controlled; - Enabling TA's to access the Airlines' system for the purpose of creating and/or amending ground arrangement reques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that in the agreement both the parties have agreed that Interglobe will exclusively markets appellant's CRS services to TA's inIndiaand will engage its own staff with appropriate experience and expertise. Interglobe will provide, at its own cost, support services relating to hardware and software installation, hardware maintenance, training and help desk services to the Subscribers (clause 7.2 of the Distribution Agreement). He emphasised that to facilitate the work of Interglobe, appellant agreed to provide computer hardware for the first 2 years out of the initial term of 10 years (clause 6.5 of the Distribution Agreement). He clarified that the agreement was for a initial period of 10 years and the computers were provided only in June 1995 i.e., assessment year 1996-97 and only for 2 years, facility which was only by way of financial assistance to Interglobe. On page 8 of the submissions filed by the appellant, it is mentioned that: "(i) the computers provided were of a value of only USD 495,712 and not USD 3,000,000, as wrongly alleged in the order of the CIT(A) and in the submissions made by the revenue [the latter figure is contrary to the record]; (ii) the said compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accrues to each party. Once a customer goes to a travel agent and requests for a booking in a particular class on a particular date on a particular airline, the travel agent, with the help of certain commands, gets the information on his screen whether any seat is available on that date or not, and makes the fare calculation, prepares the itinerary, gets the details of connecting flights and tells it to the customer. Once the customer gives the clearance, the travel agent, with the help of certain other commands, books the ticket for that particular passenger. This whole process starts from the computer of the travel agent, goes to the modern of the travel agent which is provided by SITA, and from there through lease lines it goes to SITA node, from there, through lease lines it goes to VSNL office where an interface is installed and from there it goes to SITA international office. From there it goes to Galileo's mainframe and from there it is distributed to the airline concerned. Through the same route the communication comes back. All this process takes a few seconds and once the travel agent receives back the communication, he issues the ticket." He submitted that the displa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vities or operations inIndiaor that its income accrues inIndia. Even in Wipro Ltd.'s case there was a link between the server abroad and the user in India but yet the Hon'ble Tribunal gave due recognition to the fact that the server was located outside India. The appellant's CRS was connected to TAs through the nodes owned by SITA and communication network hired by SITA inIndia. SITA, an unrelated third party, provides these services to the appellant as an independent service provider/contractor on a principal-to-principal basis. SITA does not own local communication lines withinIndiaand, therefore, contracts with the local telephone companies for the appropriate circuits. The appellant at its own cost, obtained connectivity services from its Data Centre inUSAto, inter alia the nodes of SITA inIndia. The learned AR clarified that the appellant is not paying lease rent to SITA, but service charges. He further submitted that whether an activity adds value is irrelevant for determining accrual of income. If such value is added by the appellant's act of purchasing the services of an independent contractor/service provider, it does not lead to the appellant's income accruing in India as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out SITA connectivity the appellant would not be able to earn its revenue is shown by the absurd consequences which would flow from its acceptance. Its acceptance would mean that a foreign supplier of equipment who is asked to deliver the equipment to a particular site would be regarded as carrying on business in India merely because he engages a specialised service provider to unload the equipment from ship, unpack it and transport it to the site where it is to be erected, on the argument that but for such unloading, unpacking and transport, the foreign supplier would not have been able to earn its revenue. Therefore, it would be contrary to the above principles laid down by the Supreme Court to argue that the appellant was providing a 'platform' or a 'composite' or 'integrated service'. Also, when the Supreme Court has held that an assessee's own activities carried on in India have to be separated from his activities outside India, there is even less of a basis for linking the appellant's activities outside India with the activities of unrelated entities in India. Thus, the telecommunication connectivity provided by SITA/local vendors inIndiaand the computers provided by Interglo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a passage in Ahmedbhai Umarbhai Co.'s case judgment ending with the above sentence, the Court observed as follows: "The above passage is also sufficient in our opinion to establish that the apportionment of income, profits and gains between those arising from business operations carried on in the taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of section 42(3) of the Act but on general principles of apportionment of income, profits and gains." The decision of the Supreme Court in the case of Toshoku Ltd. would, therefore, apply not only to 'deemed accrual' under section 9(1)(i), but also to 'accrual' under section 5. As such, in the absence of its own business operations inIndia, the income of the appellant cannot be said to accrue inIndia. Thus, there have to be operations inIndiafor income to accrue under section 5 of the Act (and not merely for deemed accrual under section 9 of the Act). The operations of unrelated parties, viz. Interglobe and SITA cannot be considered as operations of the appellant. The appellant's income by way of booking fees also cannot be deemed to accrue or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the scope of section 9(1)(i), unless he has operations in India, he would not be taxable in India as held by the Supreme Court in CIT v. Toshoku Ltd. [1980] 125 ITR 525. Even in the case of Ishikawajma it was held that "Mere existence of business connection may not result in income of the non-resident assessee from transaction with such a business connection accruing or arising inIndia". Even in the case of Carborandum Co. v. CIT [1977] 108 ITR 335 (SC) it was held that even assuming there is business connection, to tax income under section 9(1), the non-resident should have operations of its own in India. In the case of Citizen Watch Co. Ltd. v. IAC [1984] 148 ITR 774 (Kar.) and CIT v. Dunlop Ltd. (U.K.) [1993] 201 ITR 534 (Cal.) it was observed that there exists no business connection as the assessee has not rendered any services on its own. 5.4 It was further contended by the learned AR that without prejudice to the appellant's submission that no income accrues or arises or is deemed to accrue or arise in India and that the appellant has no operations in India, in any event, even if it is assumed, while denying, that any income can at all be regarded as accruing, really ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed inIndiaprovide gateways to and fromIndiaboth to the Airlines and the subscribers. The 'nodes' are situated in the premises of Telecommunications centre of SITA in Mumbai andDelhi. The expenditure on leasing the nodes and leasing of regional communications network withinIndia, is borne by the assessee. The subscribers use the CRS through the computers installed in their premises. The telecommunications infrastructure right up to subscribers' premises is set up by the assessee at its own cost. As a result, instant connectivity with the mainframe is available to the subscribers for booking reservations on the basis of real-time information displayed on his screen. Under the Participation Agreement, the vendor is contractually bound to honour the booking made by a subscriber. The booking by the Subscriber results in a confirmed travel ticket - either E-ticket or printed ticket, which is produced by the computer/printer, being part of the equipment supplied to a Subscriber by the assessee. Purchase order is made by the Subscriber inIndia- booking is made inIndia- sale of ticket by Airlines is made inIndia. The contract (booking) between the Subscriber and the Airlines is concluded in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of contract between the assessee and the vendor. On the other hand, the assessee has also not directly entered into an agreement with a subscriber inIndia, but always honours and abides by the terms of the contract between GalileoIndiaand an Indian Subscriber. Indeed it has prescribed a standard Subscriber Agreement for use by GalileoIndia. Thus, the three contracts have to be read together in order to understand the exact legal obligations of the five parties; namely, assessee, vendor, GalileoIndia, SITA and Indian Subscriber. None of the four contracts could become operational without implementation of other two contracts. The making of booking and generations of tickets take place because of sifting of information by the Subscriber on the computer installed in his premises and the necessary commands punched by him on the computer. The moment a subscriber accesses the host computer, its computer gets integrated with the host computer. Neither the Airlines nor the Subscribers are concerned with the location of the host computer or how it processes the data. From practical and commercial point of view of the Airlines and the subscribers, what is material is that the online informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve regard to one of the reasons on which the conclusion that compensation paid for the cancellation of agency rights is a capital receipt is sometimes rested It is that, in substance, the agent assigns the agreement to the principal and the compensation is price paid therefor." The assessee, therefore, facilitates conclusion of contract between the airlines etc. and a subscriber inIndiafor which it earns service fees from the airlines. 6.2 Shri Kapila submitted that the next question which needs to be addressed is: Does the assessee either wholly or partly carry on any business inIndia? Put in other words, does the assessee have any business operations through the asset owned or leased by it inIndia? The following operations are carried on inIndiaon continuous basis by the assessee on its own or hired by it at its own cost is providing for: (i) Provision of the telecommunication 'Nodes' situated at Mumbai/Delhi owned by SITA. (ii) Provision of telecommunication lines between the Node and the premises of the Subscribers. (iii) The entire regional telecommunications network is maintained by the assessee at its own cost. The regional networks together with gateways to intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... availability of seats reservation etc. is carried out by the Airlines at its own cost through its own internal reservation system into the assessee's CRS. But it will all come to naught if there is no facility for making the booking by a Subscriber. (ii) Schedule 2 give the charges for certain basic standard services and Schedules 4-11.Indiafalls in Territory 2. In all cases it is made clear that for the purposes of all these schedules, "Territory 1 and Territory 2 refer to location of the Galileo International subscriber that performs the activity that creates a charge". It needs to be emphasized that the subscriber could not have made the booking but for the Node and the domestic network hired/leased by the assessee and the hardware and software provided to the Subscribers. The activity which creates the charge of fees from the Airlines is the booking made by the Subscriber inIndia. Therefore, the source of income of the assessee is the bookings made by the Subscriber. (iii) The Subscribers are resident ofIndia. The assessee provides them with computers and connectivity for making bookings. They place the purchase order on the Airlines inIndiaand the sale also takes place in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Narayan Singh [1948] 16 ITR 325 (PC), which construed the word 'derived' as follows: "The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition." In the present case the assessee's source of income is the booking made by a travel agent inIndiaon the computer provided by the assessee. The booking is made by the subscriber on the basis of display of information on the computer and necessary sifting of informations and commands made through the computer installed at his premises. Looked at from another angle, it is the business of maintaining the CRS, part of which (telecommunications network, computers and modem etc. and other activities through the agent inIndia) has produced income inIndia. Enquiry must stop at this stage. (v) The assessee has explained its business in its letter dated 26th January, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es inIndiaon a continuous basis: (i) (a) The telecommunication 'Nodes' at Mumbai/Delhi hired by the assessee from SITA at its own cost. (b) Telecommunication Lines between the Node and the premises of a Subscriber for which lease rent/service charges etc. are paid for by the assessee. (ii) Providing free-of-charge its own equipment to the Subscribers for integrating them into the CRS:- (i) Two computers (ii) Printer [Subscriber Agreement P. 46/DPB] (iii) PAD MICRO card [Modem] It is an admitted fact that hardware costing USD 0.5 Million was provided by the assessee free of cost in first two years. The economic life of hardware has been fairly estimated by the assessee to be six years. The assessee has claimed and it has been allowed depreciation on this hardware for all the assessment years under appeal (including assessment year 1998-99). Therefore, its statement before the CIT(A) that all the computers supplied to Interglobe during financial year 1995-96 were 'junked' within two years is patently wrong as no material has been produced to establish that the equipment was scrapped. On the other hand, the assessee itself has been claiming depreciation thereon in all of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years 1996-97, 1997-98 and 1998-99]. Hardware of the value of only US$ 4,95,712 was provided to Interglobe, and that too, only in assessment year 1996-97. No computers were provided in the first assessment year 1995-96 and, therefore, there was no depreciation claim in assessment year 1995-96. The computers were imported between June and October 1995 relevant to assessment year 1996-97. Two years from June 1995 expired in June 1997 relevant to assessment year 1998-99. Therefore, depreciation was claimed in the three assessment years 1996-97 to 1998-99 as the two years period got over in assessment year 1998-99. Further, no depreciation was claimed on these computers from assessment year 1999-2000, consistent with scrapping of these computers after two years and is supported by the fact that scrapping of the computers was specifically averred to before the CIT(A) by letter dated 27-1-2000 and this was recorded by the CIT(A) in Para 6.2 of his order but was not in any way controverted by him. An economic life of 6 years was adopted only for a limited purpose of calculating the depreciated value at which the appellant was entitled to purchase the computers from Interglobe, but it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of context. They only mean that the appellant "makes arrangements" e.g. through VSNL, for the provision, operation and maintenance of network to the SITA node. They do not in any way mean that these arrangements, which are with independent third party service providers like VSNL, are the appellant's operations. 7.3 He clarified that reliance placed by DR on the case of Performing Rights Society Ltd. v. CIT [1977] 106 ITR 11 is misplaced. The decision of the Hon'ble Supreme Court is completely distinguishable because in that case royalty income received by the Performing Rights Society for broadcasting, from stations of All India Radio withinIndia, was held to be taxable inIndiaon the ground that the same arose inIndia. Also, since the case involved a non-profit-making organisation, it is not a relevant precedent for a profit-making business enterprise. 7.4 The learned AR further submitted that it is also contrary to the following uncontroverted factual clarification given by the appellant pursuant to the specific queries of the CIT(A) on which the learned DR has himself relied upon: "The CRS does not contain airline inventory, but rather contains the status of an airline ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erroneous and untenable as this argument and approach has been specifically rejected by the Hon'ble Supreme Court in three separate decisions, namely, Ishikawajma-Harima Heavy Industries Ltd., Sri ram Bearings Ltd. and CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482. 7.7 It was argued that the analogy with the NSE is completely inapt and erroneous because, in the appellant's case, the Airline, SITA, Interglobe and the TAs are independent parties dealing with each other at arm's length. In any case, no contracts are concluded on the appellant's server. Hence, the appellant's server is neither a trading platform nor an integrated market place. He contended that the allegation of the Department that the moment a subscriber accesses the host computer, its computer gets integrated with the host computer is erroneous as it is not uncommon for a computer to access two servers at the same time. For instance, with today's technology, a person might access his bank account in one window, while he is trying to book a train ticket in another, while at the same time, his access to Google and Yahoo is on in two other windows. This, in fact, does often happen. In such a case, by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even without the computers/modems provided by the appellant to Interglobe as is shown inter alia by the facts that: - the TA's business continued even after the 2 years when the computers were provided to Interglobe. - only 265 out of 800 TAs were provided computers by Interglobe. It is, therefore, submitted that: (i) there is no business connection under section 9(1)(i) of the Act. The case law cited by the appellant in the case of Cutler and Hammer has not been dealt with by the Department. (ii) in any event, there are no activities of the appellant inIndia, and, therefore, there is no tax liability inIndia. Finding as to existence of Business Connection 8. We have heard the parties at length. In our opinion, following questions arise for consideration: (1) Whether the assessee has any 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? If yes, to what extent it is taxable inIndia. (2) If the answer to Question No. 1 is in affirmative, whether, in terms of DTAA betweenIndiaandUSA, the appellant has any PE inIndia? (3) If answer to Question No. 1 is in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o what constitute business connection as the same is pot an exhaustive definition but is a definition which also include some of the activities to be termed as business connection. We shall, therefore, revert to some of the judicial pronouncements in this regard. Hon'ble Supreme Court in the case of CIT v. R.D. Agarwal Co. [1965] 56 ITR 20 held thus: "The expression 'business connection' undoubtedly means something more than business. A business connection in section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicated an element of continuity between the business of the non-resident and the activity in the taxable territories, a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms. It may include carrying on a part of the main business or activity incidental to the main business of the nonresident though an agent or it may merely be a relation between the business of the non-resident and the activity in the taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue. The appellant has developed a fully automatic reservation and distribution system known as Galileo system with ability to perform comprehensive information, communication, reservation, ticketing, distribution and related functions on a worldwide basis. Through this Galileo system, the appellant provides service to various participants, i.e., Airlines and hotels etc. whereby the subscribers who are enrolled through the efforts of NMC can perform the functions of reservations and ticketing etc. Thus the Galileo system or the CRS is capable not only processing the information of various Airlines for display at one place but also enables the subscribers to book tickets in a way which is a seamless system originating from the desk of the subscriber's computer which mayor may not be provided by the appellant but which in all cases are configured and connected to such an extent that such computers can 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 inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avel agents inIndiain accordance with the model Subscriber Agreement which forms an annexure to the said Agreement. (4) Assessee lays down targets and closely supervise and reviews the performance of GalileoIndiaon day-to-day basis in accordance with the Annual Plan and the service manual prescribed by it as per clause 14 of Distribution Agreement. (5) Assessee allots access code to the travel agents for using the CRS. (6) The assessee's business comprises of: (a) Maintenance and running of CRS; (b) Providing computer modem and software to the travel agents inIndiaso that they can use the CRS for making the bookings which generate charge on the airlines; (c) Assessee hires from SITA and maintains and operates telecommunication network inIndiaso that travel agents could make the bookings. All these activities are integral part of the core business carried on by the assessee and these are not auxiliary or preparatory in nature. The contention of Shri Vyas regarding reliance on the decision in the case of Fisher in this case is misplaced. Whether the contract for sale of ticket is completed inIndiaor outside is irrelevant for the purpose of present discussion as we are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal preference, special facility, etc. and that too on the basis of neutral display real time on line takes place outsideIndia. The computers at the desk of travel agent inIndiaare 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 inIndia. The major part of the work or to say a lion's share of such activity, are processed at the host computer inDenverinUSA. The activities inIndiaare only minuscule portion. The appellant's computer inGermanyis 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 inIndia, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering the income accruing inIndia, remuneration paid to the Indian agents consumes the entire income accruing or arising inIndia. It is also to be noted that the entire payment made by appellant to Interglobe has been allowed as expenses while computing total income of the appellant. In such a situation in view of Circular No. 23 of 23rd July, 1969 no income can be further charged to tax in India. As rightly contended by Shri Vyas the Circular equally applies to the sale of goods as well as rendering of services. The Hon'ble Supreme Court has taken judicial note of said Circular in the case of Morgan Stanley Co. Inc. 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. We, therefore, hold that in view of the above facts, no income is taxable inIndia. Whether a Permanent Establishment Exists 11. Shri Vyas submitted that without prejudice to the fact that the appellant is not subject to tax under the domestic law, the liability to tax inIndiahas also to be examined under the provisions of the Treaty. It was highli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before different classes of income may be taxed, and where such conditions are satisfied with reference to any class of income, by specifying the limitations subject to which, and the manner in which such income may be quantified, or the rate at which it may be taxed. In the context of business income, the conditions to be satisfied are set out in Article 7(1) of the Treaty, and include the requirement that a non-resident should have a permanent establishment, as defined in Article 5 of the Treaty. Where these conditions are satisfied, the further condition is that the income which may be taxed must be attributable to the permanent establishment and must be derived from the assets and activities of the permanent establishment. It should be noted that the conditions specified in Article 7(1), read with Article 5, and in Article 7(5) are intended to achieve the objective of the avoidance of double taxation. 11.1 In this background, the learned AR submitted that for good and cogent reasons, the dominant aim of the Treaty is the avoidance of double taxation and the provisions of the Treaty should be interpreted with that aim in mind. Therefore, any interpretation which is likely to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country." It was submitted that the appellant has nothing inIndiawhich satisfies the above tests of a "Permanent Establishment", as generally understood as above, at all, and hence is saved from Indian taxation. Without prejudice to the above, in order for a non-resident to have aFixed PlacePE inIndia: - He should have a fixed place of business inIndia; and - His business should be carried on through that fixed place. The learned AR submitted that the Supreme Court in the case of Visakhapatnam Port Trust (supra) and jurisdictional Tribunal in the case of Motorola Inc. and Western Union Financial Services Inc. v. Addl. DIT [2006] 101 TTJ (Delhi) 56 has interpreted the meaning of fixed place of business as a specific geographical point at the disposal of the non-resident through which a business is carried on. He submitted that the test of a Permanent Establishment and a Fixed place of business as laid down by the Special Bench of the Tribunal in the case of Motorola Inc. are as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be noted is that, even in the Indo-Australian Treaty, the need was felt to specifically incorporate a double deeming, firstly that 'substantial equipment' would be deemed to constitute a PE, and, secondly, that the enterprise concerned would be deemed to carryon business through that deemed PE. Had it been intended that the term 'fixed place of business' should include assets or equipment, a provision to that effect would have been expressly included in the Treaty. This proposition is observed by the Supreme Court in the case of Azadi Bachao Andolan at p. 747, as follows: "It is urged by learned counsel for the appellants, and rightly in our view, that if it was intended that a national of a third State should be precluded from the benefits of the DT AC, then a suitable term of limitation to that effect should have been incorporated therein." "The appellants rightly contend that in the absence of a limitation clause, such as the one contained in article 24 of the Indo-US Treaty, there are no disabling or disentitling conditions under the Indo-Mauritius Treaty prohibiting the resident of a third nation from deriving benefits thereunder." In summary, from the above judicial pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for PE. Furthermore it is a clear condition that there must be a connection between the place of business and the activity, i.e., that the activity has to be conducted 'through' the place of business." "It is common ground, for instance, that a warehouse owned by a foreign enterprise and at the entire disposal of a domestic enterprise (consignment stocks) does not constitute a PE for the foreign enterprise." at page 229 "The PE definition not only examines the physical connection of a taxpayer's business to a foreign territory and the duration of his right to use a fixed place of business, but also the activities carried out there. Tax treaties characterize a fixed place of business as a PE only if the enterprise undertakes a 'business' activity through the place of business. The basic rule requires the activity performed through the place of business to be 'the business of an enterprise: The definition of PE in the tax treaties thus presupposes the performance of a 'business activity' (As per OECD Commentary 1977 as Article 5)." at page 230 "To constitute a PE, the business activity must be performed 'through' the place of business. This is the 'business connection t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lines, it would lead to an absurd situation that both SITA and the appellant are carrying on their business operations through the Nodes/Telecommunication Lines. SITA, by providing the Nodes/Telecommunication Lines, is carrying on its own operations of providing telecommunication services to the appellant, which services the appellant is purchasing as a means or tool to conduct its business of providing CRS services. For example, if an independent car hire company is engaged by a foreign engineering consultant firm to transport its engineers whom it has sent toIndiato conduct a preparatory survey, the engineering firm cannot be regarded as carrying on its operations inIndiathrough the car hire company. The provision of transport is the car hire company's business operations inIndiaand not the business operations of the engineering firm, which is only using the services of the car hire company as a means or a tool to conduct its own business. 11.6 The learned AR clarified that the appellant does not have an Installation PE as defined in the Treaty, which speaks of Installation PEs only in relation to installation projects [Article 5(2)(k)] or to installations for the exploration o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the data centre i.e., the travel agencies. In consideration for such telecommunication services, it pays monthly connection charges to SITA in accordance with the telecommunication agreement with SITA. (ii) Nature of network expenses-SITA also provides network connections (routers) for processing of data, for which Galileo pays network charges to SITA. Network expenses also include manpower costs, software costs and maintenance costs for network identified equipment. Therefore, network expenses include the following costs: - Telecommunication expenses paid to SITA; - Telecommunication expenses paid to other telecommunication providers; - Manpower costs; - Software costs; and - Maintenance and depreciation costs for the network identified equipment. The SITA and other telecommunications providers' expenses are specifically allocated to the country identified on the bills from these providers. The remainder of the network expenses, manpower, software, maintenance and depreciation are allocated based on a formula. Specific cost centres are identified for the network costs to be allocated." Relevant clauses of the Distribution Agreement are listed below:- Claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e itself should own the network and nodes. Suffice it for our purpose if the assessee has based such equipment on a continuous and 'permanent' basis. (iv) 'Location' of the 'Equipment' (hardware supplied to a Subscriber) is 'fixed' in the premises of the Travel Agent. (v) All these assets inIndiataken together constitute a fixed market place inIndiafor flight reservation. (vi) A Travel Agent cannot relocate the computers without permission Ref. Clause 2.1 read with Clause 4 of the Model Agreement in terms of Clause 6.5 of the Model Distribution Agreement. The specimen Subscriber Agreement between GalileoIndiaand Bajaj Travels (Subscriber) contains similar terms. Clause 10.1 of the specimen Subscriber Agreement specifically provides that Galileo's representative can enter the subscribers office premises for "installing, inspecting and view the apparatus and its operation". (vii) It is contended by the assessee that (a) that equipment provided to the Travel Agents is relatively of little value and (b) a distinction has to be made between "substantial machinery and light portable equipment". This contention is misconceived. It is not the value or the size of the equipment whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permanent establishment to function." The assessee satisfies the following four conditions, which have come to signify the expression "fixed places of business" employed in Article 5(1) of the Treaty: - There must be a place of business inIndia- Place of business test; - The place of business should be at the disposal of the applicant - Disposition test; - The activities performed through the place of business must constitute a business activity of the applicant Business Activity Test - The place of business must be fixed and the activity should last for a certain period of time - Permanence test. The Nodes inIndiaand hired by the assessee is clearly fixed place of business so are the premises of the travel agents who use the computers and network provided by the assessee for making the bookings. The Network and Nodes are always at the disposal of the assessee from where assessee's business activities are carried out. Since these activities are continuous over past several years, it also satisfies the permanence test. Learned DR accordingly submitted that there is nexus of fixed place with assessee's business through network inIndia. He next submitted that the question a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommercial principle that remuneration should be commensurate with the services provided. Accordingly, the data processing fee payable to the Distributor had to be scaled down to reflect this position." The letter of appellant to Interglobe dated12-12-1995clearly establishes that even this statement is misleading. The documents produced by the assessee clearly show that the revision in price had no nexus with the fact that the assessee eventually had to pay for the maintenance of nodes and the regional network inIndia. However, even going by the second version it is clear that the assessee has not only hired the facilities of the telecommunication centre of SITA at Delhi/Mumbai, for uplinking and down linking the host computer in USA with the computer installed in the premises of the subscribers in India, but it also maintains the entire communication network within India enabling the travel agents to make booking on the CRS. Hence, the network inIndiatogether with the equipment and software provided to the travel agents inIndiaconstitute fixed place of assessee's own business inIndiawithout which it could not have carried on its business. 12.2 Learned DRfurther submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n's case, the conclusion is that the US Treaty did not envisage "plant" or "equipment" to constitute a PE. Even apart from Article 5.3 of the Indo-Australian Treaty, Article 5.2(j) of the Indo-Australian Treaty further makes it clear that the Indo-Australian Treaty, unlike the Indo-US Treaty, specifically indicates "plant" or "equipment" in the definition of a PE. "Article 5.2 (j): An installation or structure, or a plant or equipment used for the exploration or exploitation of natural resources." Therefore, it is clear that a plant or equipment cannot be a PE under the Indo-US Treaty. Therefore computers, nodes or lines, cannot be regarded as constituting a PE under the Indo-US Treaty at all. Further, the Indo-US Treaty in Article 5(2)(j) refers only to a specific and limited installations or structures e.g., those which are used for exploration or exploitation of natural resources but only if so used for a period of more than 120 days in any 12 months period. All other installations or structures are excluded. It is, therefore, clear that even if it is accepted (while denying) that SITA nodes and lines constitute installations, they would not come within the definition of a P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the agent of the other party (Clauses 16.1 and 16.2 of the Distribution Agreement). He referred that the agreement provided an option that the distribution of CRS services can be undertaken by Interglobe through a division or a subsidiary (GIPL) of Interglobe and if a subsidiary is established it can be added as a party to the Agreement. (Clause 2.2 of the Agreement) and the primary responsibility would be of Interglobe. He submitted that based on the Distribution Agreement, the appellant agreed to the following services: - Procure the provision, operation and maintenance of a communication network and associated equipment from the appellant's MCS to the Nodes inIndia. - Provide licences for software products developed by appellant which are necessary for use by the Subscribers in conjunction with the CRS services. - Share technological innovation, advancements and additions with Interglobe. He argued that the appellant does not have any Agency PE in the form of Interglobe because Interglobe carries on its own business in India and hence, it is not a person acting on behalf of the appellant in India within the meaning of Article 5(4) of the Treaty; and without prejudice t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imb of the definition of 'agent' when he were to act on behalf of a non-resident, and that too only if his actions fell within the categories specified in clauses (a) to (c) of Article 5(4). An agent falling only within the first limb of the definition would not constitute an Agency PE. Hence, any judgments or commentaries on what constitutes an agent under general law have to be read with great caution while interpreting Treaty, and a person who may be an agent under the Contract Act need not be an 'agent' under the Treaty. 14.2 The learned AR without prejudice to above, contended that Interglobe does not carry out any of the activities specified in clauses (a) to (c) of Article 5(4), so as to attract the provisions of Article 5(4) of the Treaty and the activities of the alleged agent are not 'income-earning' activities. The learned AR elaborated that under Article 5(4)(a) of the Treaty, only a person having, and habitually exercising, an authority to conclude contracts on behalf of aUSresident can lead to the creation of a PE for theUSresident. Thus, Article 5(4)(a) requires the existence of, inter alia, all the following components: (a) Existence of a non-resident principal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration flowing from the appellant to each TA, and vice versa; and the appellant should have the legal right to sue the TA to enforce contractual terms, and vice versa. He argued that the contention of the department that the appellant grants access to the TAs with whom Interglobe has contracts, indicates that there are binding contracts between the appellant and those TAs is inconsistent with the law of contract, which requires mutual agreement, mutual consideration and, above all, mutual enforceability, for a contract to exist between two parties. He pointed out that it is quite common for hotels, airlines, credit card companies, and other companies to tie up with each other or with other businessmen to provide benefits to each other's customers. Such granting of benefits does not result in a contract between the airlines, etc., and the customers, and no enforceable rights accrue to the customers. Thus the allegation of the Assessing Officer that the Distributor is concluding contracts on behalf of the appellant is plainly erroneous, and unsupported and in the absence of any authority to conclude contracts on behalf of the appellant, the relationship between the appellant and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the term "arm's length" refers to dealings between two unrelated parties and in the present case, it cannot be disputed that the appellant and Interglobe are unrelated parties, and hence the dealings between them, by definition, are arm's length dealings. For the said test for Arm's length, reliance was placed on meaning of "Arm's length" in Black's Law Dictionary, Seventh Edition. It was pointed out that the reference in Article 5(5) is to the conditions under which the transactions are made, and not to specific prices. He further submitted that the Department has not suggested why the payment of US $1 per segment was not made under arm's length conditions or why the amount of US $1 was inadequate. A commission of 33.3 per cent can never be treated as anything but reasonable and at arm's length. Further, the rate of 33.3 per cent was higher than the rates paid to distributors in other countries as was evident from the letter dated 27-1-2000 filed before the CIT(A) and appearing at page 285A of APB-I. The AR argued that the Department itself has separately alleged that the consideration is at more than an arm's length. It was pointed that there is a clear conceptual misunderstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph." He invited our attention to some of the relevant clauses of the Distribution Agreement are reproduced below: Clause 4.3 "Galileo International shall supply to Interglobe licences for all such software products developed by Galileo International as are commercially desirable of necessary for use by Subscribers in the Market Region in conjunction with Galileo Internationals CRS Services, to enable Interglobe to supply such software products to Galileo Subscribers in the Market Region provided always that nothing in this clause shall oblige Galileo International to supply any particular software product." Clause 4.5 "Galileo International and Interglobe shall e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 10A of the Act of Interglobe. This undertaking was subsequently taken over with effect from1-4-1997by Galileo India (P.) Ltd., exclusively for providing distribution and support services to Galileo International. Reference Clauses 2.1 and 2.2 of the Distribution Agreement (ii) Initially, Interglobe had undertaken the activities under the Distribution Agreement for one year not in the ordinary course of its business. Indeed, the undertaking was set up exclusively for assisting the Indian operations of the assessee. Interglobe was carrying on business of travel agency, tour operator etc. The business started by Interglobe under the Distribution Agreement is totally a different kind of business which cannot be said to have been undertaken in ordinary course of business hitherto carried on by Interglobe. The new business of providing support services to Galileo International is a distinct business requiring specialized skills for which the employees of the Indian company received specialized training from the assessee. (iii) Clause 2 of the Agreement makes it clear that Interglobe entered into a distinct and new business venture which had no nexus with its existing business. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement' concluded independently by GalileoIndiawith the subscribers has not only been honoured by the assessee, but it has also ensured that the vendors (Airlines etc.) are contractually committed to honour it. (d) The Distribution Agreement clearly states that Galileo India would be paid 'data processing fees' for processing data received from the subscribers inIndia. The assessee is, therefore, not factually correct when it says that the data inputs received directly from the subscribers is processed in the host computer inUSA. Indeed, it has been specifically contended by GalileoIndiathat as a matter of fact it processes the data inputted by the subscribers inIndiabefore its transmission to the host computer inUSA. GalileoIndiaalso undertakes the task of suitably modifying the configuration of the computers supplied to the subscribers in order to make them compatible to the host computer inUSA. (e) On termination of the Distribution Agreement, all Subscriber Agreement between GalileoIndiaand travel agents automatically vest in the assessee without cost. Relevant clause 9.12 reads as under:- "Article 9.12 of Distribution Agreement In the event of termination of these ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not admissible. In any case, it pertains to assessment year 1995-96 only and, therefore, has no relevance for other years under appeal. In these years, it was Galileo India (P.) Ltd., which was set up exclusively for providing support service inIndiato the assessee. Further, it has been explained that the undertaking of Interglobe providing various support services to the assessee is a separate section 10A undertaking independent of other business of that company. It is settled law that business of such an undertaking must not be confused with or identified with the other business of the company owning the undertaking. (c) The nature of work done by Galileo India for which 'data processing fees' was paid has been explained by the assessee in the remand proceedings, which has been reproduced by the CIT(A) in para 6.1 (ii) at page of his order dated 15-12-2004, which reads as under:- "Nature of data processing fees.-Marketing expenses are different from data processing fees. Data processing fees are paid to the Indian distributor, pursuant to the Distribution Agreement." These payments are made in consideration for the provision of the following services: - Provision of facil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilability and Response Times. This document recognizes that both of these categories are affected by Global. Regional and Market based influences and that measurement of these services can effectively be divided into host (H) network (N), and customer premises (P) components. Responsibility for the stability and performance of Core Host Service, and any part of the Network that exists at a Core Host site, rests with Galileo International. Further down the Service Delivery Chain is the Network component. Responsibility for stability and performance of this component shall rest with the Partner or Associate and/or the Network Provider in co-operation with Galileo International, as detailed in the Market Specific section. The combined availability of H, N and P forms the total System Availability as the End Subscriber would experience. Similarly the sum of the response time within each component forms the total Response Time as perceived by the End Subscriber. The goal is that Service Level Measurement and Reporting will be the combined function of all Service Providers in the Galileo International Delivery Chain. End to End measurement of standard Focalpoint sites will be catered for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stipulated in Schedule 3 of the Distribution Agreement. The assessee subsequently tried to explain before the CIT(A) that Galileo India refused to bear cost of networking in India, i.e., payments for leased lines from SITA Node to Travel Agents premises and the "fees agreed upon was revised accordingly". The assessee has not furnished any explanation as to how reduction of fees by 52 cents per segment (33 per cent) is justified as compared to the additional expenditure it had to incur on Indian network. The whole exercise is arbitrary and against principles of arm's length negotiations for revision of fees. Further, hiring of SITA's nodes inIndiais a part of worldwide contract between the assessee and SITA. Therefore, there could be no question of GalileoIndiaentering into a separate contract with SITA. (ii) Evidence on record clearly suggests that the parties to the Distribution Agreement never intended to implement Clause 3 of the Agreement read with Schedule 3. The subsequent version of the assessee submitted before the CIT(A) that the assessee reduced the fees payable to GalileoIndiafrom US$ 1.52 to US$ 1 per segment because GalileoIndiarefused to incur these costs is withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution is a 'fixed place' of assessee's business. (v) As per Schedule 5 of the Distribution Agreement, Galileo International also earns service fees from the Airlines for optional services booked by the travel agents and yet no commission is paid to the Galileo India on this account. 15.3 Learned DRwould submit that appellant has an agency PE in the form of Dependent Agent Interglobe in terms of article 5(4) of Treaty. (1) Clause 6.3 of the Distribution Agreement clearly authorises the Galileo India to conclude contracts with the Subscribers broadly in accordance with terms of that Agreement. A Model subscriber Agreement is also annexed to that Agreement. Some of the relevant clauses of the Distribution Agreement etc. below:- (i) Clause 2.4 "Notwithstanding clauses 2.1 and 2.3 and subject to clause 10, nothing in this agreement shall prevent Galileo International from distributing Galileo Internationals CRS Services to either: (a) a place of business, branch or office in the Market Region of a Multinational Subscriber, or (b) an Individual Subscriber in the Market Region who gains access to Galileo International's CRS Services directly or indirectly via a third party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Galileo International proposals with regard to the terms of such contracts. Schedule 5 contains Galileo International's Model Subscriber Agreement which Interglobe may use as a guideline in drafting its subscriber agreements." Article 3 Duties of Participant (B) Participant, at its own cost, shall provide Galileo International with data that are at least as complete, timely, accurate, and advantageous, and that are delivered in as favourable a manner, as those it provides to any other CRS, including Participant's CRS. Participant shall provide any such data in a format and through a supplier (if a supplier is used) that are acceptable to Galileo International. (D) Participant shall ensure that Participant's CRS offers services to all air carriers with an ownership interest in Galileo International to the same extent and on terms conditions that are at least as favourable as those on which Participant's CRS offers those services to other air carriers, including Participant. (F) Participant shall accept for transportation any passenger presenting a ticket that bears an "OK" status and that has been issued as a result of a booking made through the System, consistent with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny particular software product." Clause 4.5 "Galileo International and Interglobe shall enter into a service level agreement based upon the Model Services Level Agreement which forms Schedule 4 hereto. Galileo International and Interglobe shall use all reasonable endeavours to achieve the objectives set out in such service level agreement, which shall be reviewed at intervals of not less than one year." Clause 4.6 "Galileo International undertakes to ,share with and provide to Interglobe any such innovations, technological advancements, improvements and additions to its CRS. Services and related services and facilities as it deems commercially desirable or necessary for the Market Region. Galileo International will give due weight to any recommendation which Interglobe may make with respect to such innovation and its introduction in the Market Region. From time to time Galileo International may provide to Interglobe new releases of the software products, in order to provide enhancements or modifications of existing software products. Galileo International will provide to Interglobe as much advance notice as possible of the content of any new release. Galileo Internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection inIndia. (B) The assessee has a PE inIndiaon account of: (i) having 'fixed place of business' through which its business is carried on inIndiaas per article 5(1) of the Indo-US DTAA. (ii) It also has an agency PE in terms of the proviso to the first sentence of article 5(5). (iii) Without prejudice, it also has an agency PE in terms of second sentence of article 5(5). (iv) The activities of the assessee do not fall under any of the negative items mentioned in article 5(3). (v) The fees payable to the dependent Indian agent is not an arm's length price. (vi) Conditions laid down in articles 4(a), 4(b) 4(c) are also satisfied. (vii) The assessee is taxable both under the provisions of the Act as well as those of Indo-US DTAA. 16. As regards the exclusivity clause in the contract between Interglobe and the appellant, the learned AR replied that this does not mean that there is no principal-to-principal relationship nor does it mean that Interglobe is an agent of the appellant. There can be exclusive distributors acting on a principal-to-principal basis just as there can be agents acting on a non-exclusive basis. The learned AR submitted that the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Location and ensure that the installation and operation is safe and satisfactory - Interglobe is the owner or licensee of the Rented Equipment and the Software Products and does not warranty the accuracy or reliability of any schedule, fare quotation or any other information - Interglobe would charge specified fees for the equipment/services to TAs 16.1 The learned AR emphasised that the training cost incurred by the appellant shows that Interglobe is being given beneficial and preferential treatment rather than being discriminated against or dominated by the appellant and, hence, as per the Jurisdictional Tribunal decision in the case of Western Union, Financial Services Inc.'s case, this established that Interglobe was being remunerated at more than arm's length. He argued that the allegation of the Department that there is a control of the appellant over Interglobe as on termination of the Distribution Agreement, Interglobe's contracts will get assigned to the appellant is erroneous. This clause applies only upon termination of the Distributorship Agreement. It is a standard clause to protect a contracting party in the event of an agreement being terminated on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the above and in any event what is relevant to determine whether the payment to Interglobe is at arm's length is not why the processing fee was reduced from $ 1.52 to $ 1 but whether such processing fee after the reduction (i.e., US$1) was at arm's length. It was reiterated that even the reduced fee worked out to a 33 per cent rate of commission and was much higher than the commission of US $ 0.62 to 0.91 paid to other National Distributors as indicated in the appellant's letter to the CIT dated27-1-2000. Further, interest-free advances given by the appellant to Interglobe would be advantageous and not detrimental to the latter. It is only the latter which would make a payment not at arm's length. It was stressed that the comparable data of other National Vendors at page 285A of APB-I was given pursuant to a specific request of the CIT(A) and has not been controverted or questioned by the CIT(A) as being inadequate or insufficient. It cannot now be questioned on the allegation that it is "mere raw data". In any event and strictly without prejudice to the above this data regarding commission payable in other countries at rates of $ 0.62 to $ 0.90 at Page 285B speaks for itself. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st wholly dependent upon the' appellant. GIPL was dependent upon the Interglobe group alone. 3. There is no material whatsoever in support of the allegation that Interglobe is authorised by the appellant to store the computers. In fact both, the Distribution Agreement (Clauses 16.1 and 16.2) and roe Model Subscriber Agreement (Clause 20.3) specifically provide that Interglobe is not an agent of the appellant. Even the Subscriber Agreement filed by the Department in the Paper Book relied upon by it contains similar provisions in clauses 17.1 and 17.2 of DPB-I, Page 42 which are reproduced below: "17.1 The parties hereto are entering into this Agreement on a principal-to-principal basis." "17.2 Nothing to this Agreement will create, or be deemed to create a joint venture, partnership or the relationship of principal and agent between the parties." The burden of proving that these clauses have no effect and are to be treated as a dead-letter is entirely on the Department as it is now well-established that the burden of proving that the apparent is not the real, lies entirely and heavily on the person who makes such allegation. These specific contractual provisions cannot be di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certainly not the direct and immediate source of the appellant's income by way of booking fees. Hence, the appellant's income by way of the CRS booking fee cannot be taxed inIndiaby virtue of article 7(5) of the DTAA. 16.5 Learned AR further submitted that strictly without prejudice to what has been stated earlier, the amount of income which can be considered to be attributable toIndiais a negligible and minuscule proportion of the booking income. It was submitted that, if at all any bf the appellant's income is to be attributable to India under section 5 or 9 of the Act, or under Article 7(1), read with article 7(5), of the DTAA, it can only be a negligible or minuscule part of the appellant's income. The learned CIT(A) himself, at Page 15 of his appellate order for assessment year 1996-97, has observed: "I am in agreement with the ld. counsel that the profit which can be brought to tax is only that amount which can be said to have been derived from the assets located in the PEs inIndiaand the activities carried on by the appellant inIndia. Of course, these activities constitute display of information on the screen of the TAs located inIndia." He accordingly pleaded that sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted enterprises)]. (3) Notwithstanding the preceding provisions of this article, the term 'permanent establishment' shall be deemed not to include any one or more the following: (a) the use of facilities solely for the purpose of storage or display or occasional delivery 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 or occasional delivery; (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 other activities which have a preparatory or auxiliary character, for the enterprise. (4) Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 5 applies-is acting in aContractingStat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cility such as a premise 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 is dependent on the enterprise, conduct the business of the enterprises 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 they are 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 enterprise inIndia. 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 subscriber ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the enterprise may not have a fixed place of business. Thus there can be two forms of permanent establishment, (i) fixed place or (ii) through the dependent agent-An agent is a person employed to do any act for another or to represent another in dealing with third person. 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. In the present case the appellant avails the services of Interglobe to promote the use or CRS inIndiaand for that purpose to appoint subscribers inIndia. Interglobe is authorized to enter into contract with the subscribers in terms of authority generated under Distribution Agreement (DA). The appellant binds itself in respect of booking made by subscriber using the CRS. Thus what could have been done directly by appellant is achieved through the service of Interglobe. Hence, Interglobe is to be treated as agent of appellant inIndia. Even though in the agreement between appellant and Int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s responsible for effecting and contracting with subscribers in the Indian territory and is to use reasonable efforts to provide access to all the 'Galileo System' out of Indian territory. Though the appellant and even the participating airlines are not party to the agreement entered into by Interglobe with the subscribers, yet the appellant through the PCA has ensured that the subscribers were authorized to use 'Galileo System'. Under an authority granted to them, subscribers use such products. The reservations and ticketing done using the CRS product are being honoured by the participants and for which the remuneration will be payable by the participants to the appellant. Thus Interglobe 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 Interglobe. The subscribers agreement were entered into by Interglobe 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 Interglobe under an authority granted to it. The phrase "au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 inIndia. Since we have held that Interglobe is a dependent agent of appellant inIndia, we need not discuss para (5) of Article 5 of the treaty regarding independent agent form of PE. 17.5 The next question that arises is whether the appellant has PE inIndiawithin the meaning of clause (b) of paragraph 4 of Article 5 of the Treaty. Clause (b) of paragraph 4 of Article 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 deali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment. (2) Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arm's length with the enterprise of which it is a permanent establishment and other enterprise controlling, controlled by or subject to the same common control as that enterprise. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. The estimate adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities of the PE shall be treated as attributable to the permanent establishment. It is argued that the clause 'derived from' should have narrower meaning and only the immediate and direct nexus should be between earning of income and assets and activities of the PE which can be brought to tax. For this purpose, heavy reliance is placed on the decision of Hon'ble Supreme Court in the case of CIT v. Sterling Foods [1999] 237 ITR 579 and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278. While we broadly agree that the profits to be attributed to the PE as provided in Paragraph 1 (a) of Article 7 shall include only the profits derived from assets and activities of the PE, the reference to the judgment of Hon'ble Supreme Court in this regard is misplaced. The judgment rendered by Hon'ble Supreme Court while interpreting the clause 'profit derived from industrial undertaking' for the purpose of computing deduction under section 80HH/80-I cannot be applied in relation to computation of profits to be attributed to the PE. Hon'ble Supreme Court was not called upon to interpret the Indo-US Treaty or as to how the profit should be attributed to the PE. Thus, the judgment of Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 18.1 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 ITA Nos. 820 to 823/Delhi/2005 do not survive. The question of charging interest under sections 234A and 234B will also not survive. 19. In the Cross Objections, the revenue has contended that the assessment was completed after issue and service of notice under section 143(2). Thus, the ground raised by the appellant that the assessment was framed without issue of notice under section 143(2) is incorrect. In the cross objection, it is also submitted that the tax rate applied are as applicable to a foreign company and is in accordance with the tax rate payable by foreign companies. It does not amount to discrimination. Thus, the grounds raised by the assessee that the rate applicable to the assessee at higher rate is misconceived. At the time of hearing, learned counsel for the assessee has not pressed the ground regarding non-service of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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