TMI Blog2007 (11) TMI 330X X X X Extracts X X X X X X X X Extracts X X X X ..... sed from SITA are installed by the appellant through its agent. The computers so connected and configured which can perform the functions of reservation and ticketing is a part and parcel of the entire CRS. The computers so installed require further approval from AIPL who allows the use of such computers for reservation and ticketing. Without the authority of AIPL 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 para, this amounts to a fixed place of business for carrying on the business of the enterprise in India. But for the supply of computers, the configuration of computers and connectivity which are provided by the appellant either directly or through its agent AIPL will amount to operating part of its CRS system through such subscribers in accordingly PE in the nature of a fixed p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered in proper prospective will only be of the stock of goods dealt with by the assessee in regular course of its business. If the agent is to deliver the goods either the goods should be such in which the enterprise deals in or which are regularly hired out which may be considered as given on bailment from which the revenue is to be generated. But in the present case the computers supplied by AIPL to the subscribers are not dealt with by the assessee or which by themselves are the source of revenue. Thus cl. (b) of para 4 of art. 5 will not apply to consider the dependent agent as PE of the appellant in India. Attribution of Profits: Having considered that the appellant has a PE in India in two forms namely (1) fixed place PE under para 1 of art. 5 and (2) agency PE under d. (a) of para 4 of art. 5, we shall examine whether as to what is the profit attributable to the PE in terms of art. 7 of the DTAA between India and Spain. We shall also examine whether the income so computed would be absorbed by the expenses incurred to earn such income which will prima facie extinguish the assessment. Whether he is habitually exercising an authority to conclude contracts on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmon issues are involved in all these appeals, they were heard together and are disposed of by common order. Facts 2. The appellant, a tax resident of Spain has developed a fully automatic computer reservation and distribution system, with the ability to perform comprehensive information, communications, reservations, ticketing, distribution and related functions on a worldwide basis for the travel industry, particularly participating airlines, hotels, etc. (hereinafter referred to as 'CRS'). Various airlines all over the world have entered into 'Participating carriers agreements' ('the PCA') with the appellant for display of their informations/products, etc. through the CRS. The appellant receives payment from the airlines in the form of 'booking fee', which is computed on the basis of the 'net booking' made through the use of CRS. 2.1 The relevant clauses of the standard draft of the PCA are as under : Participating Carrier Agreement This agreement, executed this day of, by and between Amdaeus Marketing A.S., a Spanish entity having its registered offices at Salvador de Madariaga 28027, Madrid, Spain hereinafter referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Means any carrier that has entered into a Participating Carrier agreement with Amadeus. Art. 2 Responsibilities and rights of the Participant (A) Services provided 1. The Participant shall, at its own cost, co-ordinate its information and reservations services with Amadeus and shall take such other steps as may be required to provide all Amadeus subscribers. ATOs and CTOs with information and reservations services as advantageous as those provided to any subscriber of any other computerized reservation and ticketing system. Such services shall include, but will not be limited to, passenger information, schedule, space availability faces and fare information and procedures. 2. The Participant shall offer Amadeus subscribers, ATOs and CTOs any improvements, enhancements or additional functions to its systems information and reservation services, on non-discriminatory terms subject to technical feasibility. 3. The Participant will ensure that any CRS in its control provides to all its subscribers display and booking facilities for all services of Amadeus affiliates on a level equal to the level it provides to any other carrier, including affiliated carriers, subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le for inspection at the Amadeus principal office, Amadeus will accept for storage in its database a maximum of 60 single routings and 60 double routings per city pair which will all be eligible for display according to the abovementioned input parameters and editing rules. XXXX Art. 4 Charges 1. The Participant shall pay Amadeus a booking fee for each Participant Net Booking made through the Amadeus system, including booking made by ATOs and CTOs. 2. The Participant shall pay Amadeus the applicable fees for the value added products elected by the Participant and listed in attachment A to this agreement. XXXX Art. 5 Payments Amadeus shall submit a monthly invoice to the Participant for all charges and fees due to Amadeus under Attachment A to this agreement and incurred during the preceding month. The Participant will settle the invoice by paying the amounts due to Amadeus or any entity Amadeus may designate, within thirty (30) days. The Participant will make payment in one of the following methods to settle the Amadeus invoice each month : I. IATA Clearing House In case the Participant is a member of the IATA clearing house or the A.C.H. (Airlines Cleari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a worldwide basis ; Whereas, Amadeus India is willing to provide data processing and software development services together with related distribution of the Amadeus products to subscribers in India, on the terms and conditions set forth herein ; Now, therefore, in consideration of the mutual covenants set forth above and other good and valuable consideration, the parties hereby agree as follows : 1. Distribution of Amadeus Products Amadeus Marketing hereby authorizes Amaedus India to carry out the necessary acts to provide the subscribers with appropriate access to the Amadeus Products and to the computer database owned by Amadeus called Amadeus Global Core or to other computer databases offered by Amadeus under license from a third party for the period and upon the terms and conditions set forth in this agreement. 2. Definitions 2.1 Definitions. The following definitions shall apply to the terms used in this agreement unless the context otherwise requires : XXXX Amadeus Products means the Amadeus System and any product offered via the Amadeus System or by the Amadeus Group, including products offered under license from a third party. Amadeus Products ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avel agencies with headquarters in another NMC territory), at a level mutually agreed by the parties from time to time or under the terms and conditions established in Appendix A 6.2 Adjustments will be established annually, taking into account the development of e.g. exchange rates, inflation rates, consumer price indices, subject to the terms and conditions stated in Appendix A. 7. Agreements with subscribers 7.1 Amadeus India shall be responsible for affecting and contracting with subscribers in the Amadeus India territory and shall use reasonable efforts to provide access to all of the Amadeus products within the Amadeus India territory. 7.2 Amadeus India will ensure that its arrangements with subscribers conform to applicable laws, rules and regulations governing the operation of a distribution system. Amadeus Marketing may circulate lists of provisions required or prohibited by such regulations. Where Amadeus India is uncertain whether a particular rule or rules governing such operations applies to it, or whether a particular provision is in compliance with an applicable rule, Amadeus India may seek the advice of Amadeus Marketing. 7.3 If it appears to Amadeus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arketing 9.1. Amadeus Marketing shall provide the Amadeus products at a competitive level of quality and price for use by subscribers who have contracted with Amadeus India. These systems shall meet the targets for functionality, reliability and response time set from time to time by Amadeus Marketing. The targets in effect on the date of this agreement are set forth in Appendix B. 9.1.1 Amadeus Marketing shall provide Amadeus India the full corporate marketing and development resources of the Amadeus Group and the communication facilities of the Amadeus System and the full range of Amadeus products as they become available, in accordance with the terms of applicable licenses and subject to technical constraints. 9.1.2 Amadeus Marketing shall provide the Amadeus products to Amadeus India at the same level as they are provided NMCs, subject to the terms of applicable licenses and any technical limitations on Amadeus Marketing or Amadeus India. 9.1.3 Amadeus Marketing may provide on a case by case basis any Amadeus product that is available under a license from a third party in accordance with the service level and standards required by the license. 9.2 Amadeus Marketi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at its own cost and expense a demonstration and customer training facility with clear Amadeus identification to aid and to ensure efficient use of the Amadeus product. Materials used in demonstration and training shall reflect the Amadeus corporate identity. 10.3 Amadeus India shall maintain a training and support staff, consisting of persons fully trained in the use of the services provided by the Amadeus products and meeting any certificate of competence as may be introduced from time to time. To meet this obligation, Amadeus India shall participate in the training programs conducted by Amadeus Marketing as provided in ss. 9.2.1 and 9.3.3. The Amadeus India and Amadeus Marketing shall provide training for subscriber personnel that is necessary and appropriate to allocations shall be reasonable in the light of usage of the various Amadeus products. 10.4 If Amadeus India leases or provides equipment to its subscribers, Amadeus India shall be responsible for the maintenance of such equipment. Amadeus India shall establish and maintain communications with its subscribers. 10.5 Amadeus India may be requested by Amadeus Marketing to participate in conferences of Amadeus Natio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement shall survive such termination. XXXX Appendix A to the Amadeus India Distribution Agreement With reference to the Appendix A to which art. 6.1 of the Amadeus India Distribution Agreement (the agreement ) refers, signed as of the 9th of March 1994, by and between : Amadeus Marketing, S.A., a Spanish corporation with principal offices at Salvador de Madariaga, 28027, Madrid, Spain (hereinafter referred to as Amadeus Marketing ) And Amadeus India Pvt. Ltd., an Indian corporation with principal offices at E-9 Connaught House, Connaught Place, New Delhi 110001, India (hereinafter referred to as Amadeus India ) 1.1 Distribution fee (a) Amadeus Marketing will pay to Amadeus India a distribution fee of USD 0.84 (eighty four cents) for each net segment processed through the Amadeus System by a subscriber located in Amadeus India territory, subject to the provisions of art. 6.1. 1.2 Reimbursements by Amadeus Marketing to Amadeus India (a) All international travel costs incurred by Amadeus India management or staff, travelling on behalf of, and at the request of Amadeus Marketing outside the Amadeus India territory will be invoiced to Amadeus Marketin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... survey report for the location detailing the layout of all CRS terminals, cables and back room support equipment. 4.3 Subscriber shall at its sole cost and expense prepare, at each location, a space acceptable to Amadeus for each CRS terminal and item of equipment and conforming to the site survey recommendations, if any. Subscriber shall also, at its sole cost and expense, meet all electrical requirements set by Amadeus, by the manufacturer of the subscriber equipment, and/or by the common carrier furnishing the communications facilities. Subscriber shall also, at its sole cost and expense, be responsible for ensuring that all required system cables are placed in accordance with Amadeus's site survey specifications and that they comply with all building and electrical code requirements. 4.4 As long as the subscriber equipment is connected to the Amadeus System, subscriber will not relocate or remove the subscriber equipment from the specific location in which it was connected to the Amadeus System by Amadeus, without first obtaining the written consent of Amadeus. Any relocation or removal shall be accomplished by Amadeus or its designated agent at subscriber's sole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticular purpose of any data or CRS terminal or equipment provided under the agreement, regardless of the means used to provide the same to subscriber. XXXX 11.5. Amadeus disclaims and subscriber hereby waives any other warranties, guarantees of representation of any kind, express of implied, including but not limited to any warranty or merchant ability or fitness for intended use of the CRS terminal or equipment, data or services furnished hereunder or any liability in negligence or tort with respect to the CRS terminal or equipment, data or services furnished hereunder. Subscriber agrees that Amadeus shall not be liable to it for consequential damages under any circumstances, and that the remedies of subscriber specified in this agreement are its sole and exclusive remedies. XXXX 15. Obligations upon termination 15.1 All equipments, software training materials, proprietary marks provided by Amadeus and any other confidential information shall remain the sole property of Amadeus. Subscriber shall not remove any identifying marks from the leased CRS terminal equipment, software or training materials. 15.2 Upon the termination of this agreement, or upon the happenin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been replaced by the CRS. The old means of communication have been replaced by electronic means of communication. Instead of telephone/telex, we now have terminal of the subscriber/travel agent connected with the mainframe of the appellant with the help of the leased telephone lines. Instead of looking into the ABC books of the airlines, a travel agent, using his terminal which is connected to the appellant's mainframe, places a request with the mainframe of the appellant in Germany. The mainframe of the appellant, which is connected with the airlines' on-line inventory systems (the airlines host) located across the globe, processes the request and sends the result which is displayed at the terminal of the travel agent. From this information the travel agent, in consultation with the passenger, selects the flight and places a request for booking with the airlines host which is routed through the mainframe of the appellant. The airlines host, depending upon the availability of the seats, processes the request and sends the result to the travel agent which is once again routed through the mainframe of the appellant. The business of the airlines is promoted if the informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. AIPL has, in turn, entered into the SBAs with the subscribers/travel agents in India willing to use CRS. The appellant is not party to such SBAs, but the terms agreed upon by AIPL with subscribers bind the assessee as well as the participants. As per the provisions of the SBAs, AIPL trains the subscribers/travel agents regarding the use of the CRS. Further, AIPL also provides the subscribers/travel agents access/connectivity to the mainframe of the appellant located in Germany and the airline's inventory base. In India, connectivity is provided by SITA, using the DOT, MTNL or VSNL leased lines. The travel agents systems are connected to AIPL's computer and the request for information is channelized through AIPL's computer. AIPL identifies/authorizes the travel agent as a valid CRS user and processes the request for information into relevant segments. AIPL does not charge any money from the subscribers/travel agents either for providing the aforesaid training or access to the subscribers/ travel agents. The object of providing the aforesaid services free of cost is to encourage the use of CRS amongst the subscribers/travel agents in India and in turn m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various expenses incurred by the appellant in relation to generation of the revenues brought to tax in India. However, the expenses in form of payment made to AIPL were allowed. In respect of other expenses, 5 per cent of the head office expenses were allowed, as per s. 44C. 6.1 The appellant preferred appeal before the CIT(A) against the assessment framed by the AO for the asst. yrs. 1996-97. In the appeal before the CIT(A) for the assessment year under consideration, the appellant contended that no part of appellant's income can be said to accrue/arise or deemed to accrue/arise in India and challenged the findings of the AO that : (a) the appellant has a 'business connection' in India and AIPL is a PE of the appellant in India. (b) Computer hardware/software provided to the travel agent by the appellant constituted PE of the appellant in India. Without prejudice, the appellant also challenged the quantum of profits determined by the AO to be liable to tax in India in the hands of the appellant on the grounds that : (a) Only the profits that are attributable to business connection/PE in India are liable to tax in India. (b) While determining the quant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of bookings per location per month as against the actual expenditure incurred as claimed by the appellant before him), (b) 50 per cent of the actual data processing charges, and (c) equipment rental charges. However, the CIT(A) confirmed the order of the AO in : (a) disallowing deduction in respect of product development charges, (b) holding that 100 per cent of the profits in respect of segments booked from India through the CRS is liable to tax in India and (c) confirming the levy of interest under ss. 234A and 234B of the Act. The appellant is in appeal before the Tribunal (ITA No. 1022/Del/2005) against the aforesaid order of the CIT(A). 7. The appellant, for the asst. yrs. 1997-98 and 1998-99, filed return of income on 8th March, 1999 declaring 'Nil' income in response to the notices issued under s. 142(1) of the Act. However, the AO, vide assessment orders dt. 23rd March, 1999, completed that assessment under s. 143(3) of the Act for the asst. yrs. 1997-98 and 1998-99 at income of Rs. 24,38,17,157 and Rs. 36,27,23,010, respectively, holding that AIPL is the PE of the appellant in India. Alternatively, it was held by the AO that the computer hardware/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2000 and 2145/Del/2000) against the aforesaid orders of CIT(A) for the asst. yrs. 1997-98 and 1998-99 to the extent that it holds that : (a) Appellant has a PE in India and (b) Income accrued/arose to the appellant in India. 7.3 Subsequent to the direction given by the CIT(A), vide order dt. 23rd March, 2000, the AO recomputed the income of the appellant at Rs. 15,61,87,068 and Rs. 20,02,24,973, respectively, after making disallowance of, inter alia, (a) Product development charges, (b) International communication charges in excess of 4.5 per cent of booking fees (c) Data processing charges and (d) Equipment rental charges. Further, 100 per cent of the profits in respect of segments booked from India through the CRS developed by the appellant were held to be liable to tax in India. Interest under ss. 234A and 234B was also levied for late filing of return and for non-deposit of advance tax, respectively. 7.4 In appeal preferred by the appellant before the CIT(A) against the aforesaid orders for the assessment years under consideration of the AO, the CIT(A) partly allowed the appeal preferred by the appellant allowing deduction in respect of (a) intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation. Such activity has a preparatory and auxiliary character for the appellant. It is to be appreciated that the source of revenue of the appellant is the PCA entered into between the airlines and the appellant outside India. The revenues of the appellant are not generated from the passenger in India or the travel agent in India or the hardware with which the travel agent operates or the line through which the communication travels. The computers provided free to the travel agents by Amadeus are only a means of sending request and receiving display of information and communication with the participating carriers' host computer located at the airlines head offices through the Amadeus mainframe computer at Germany. The mainframe of the appellant, the Amadeus Data Center and the airline hosts are all located outside India. The bookings are concluded at the airlines host located outside India. Further, all the processing of data as per the requirements of the passenger takes place in the mainframe of the appellant located outside India. The fact that the payment to the appellant, for the services rendered to the airlines outside India, is expressed in terms of the resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduct manufacturer receives from those who receive the newsletters. In such a situation, the point for consideration would be whether the product selling company (in the present case the airline) and the information provider company (in this case the appellant) are rendering any service to anyone in India for which service charge is recovered in India. The product that is the services of the airline exists outside India. The information conveyed from the use of the CRS exists outside India. The travel agents are not the agents of the information provider. They are users of the information and customers of the airline. The role of the appellant is to display the information and also through the main server and the processor located in Germany to enable the airlines customers to access information and act on the same by way of placing an order for the service of the airline. In such circumstances as aforesaid, no income can be said to arise to the advertising agency, which may be subjected to tax in India. The newspaper, in this case the appellant, has no PE in India. It is acting through a distributor who is in the nature of an independent contractor and not an agent of the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant in Germany, the mainframe of the appellant and the computers on the desks of the travel agents become one at the time of booking, and therefore, the computers provided to the travel agents and the software providing access to the mainframe constitute the appellant's source of income in India. The booking made through the appellant's CRS is only a measure of remuneration paid by the airlines to the appellant and the ticket gets booked once the airlines inventory system, connected to the appellant's mainframe in Germany, accepts the booking and reduces the seat inventory. The actual activity of booking of the ticket takes place outside India though the contract between the airlines and the traveller is made in India when the ticket is issued by the travel agent to the traveller. The airlines contract with the appellant because of the enormous facility created outside India helps dissemination of information of the airlines. The activity resulting in income to the appellant is the processing of the information, as per the request sent by the travel agents, in the appellant's mainframe in Germany and dissemination of the result back to the travel agents. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant connectivity between the vendors and the subscribers electronically at the speed of light (without the use of internet). Whereas the vendors have to bear the entire cost of accessing and updating the information on the system, the subscribers in India get all necessary equipment and the use of telecommunications network at the cost of the assessee. Though the subscribers use the CRS at the cost of the assessee, they acquire the right to use the CRS not under a contract with the assessee but under a separate contract between the subscriber and Amadeus India, which the assessee has been consistently honouring and therefore, treating it as binding. The assessee has also claimed this expenditure on the ground that it has direct nexus with its main business in India, which expenditure has been allowed. The host computer of the CRS is said to be situated in Germany. It is owned and operated by Amadeus Data Processing GMBH, Germany, which is 100 per cent subsidiary of the assessee company. Telecommunication 'Nodes' (which are rented by the assessee) are continuously provided for by the assessee both to the vendors and the subscribers in India. The nodes are situated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, the fees/commission income from the vendors accrues in India. In other words, commission from the vendors springs forth the moment a booking is made in India. Hence, since this income has direct nexus with its business operations in India, the income in respect of such operations accrues in India and it is taxable under s. 5(2) of the Act. Reference was made to the following decisions : (i) Performing Rights Society vs. CIT (1976) 1976 CTR (SC) 429 : (1977) 106 ITR 11 (SC) (ii) Inshikawajama Harima vs. Dy. CIT (2007) 207 CTR (SC) 361 : (2007) 288 ITR 408 (SC) The assessee's core business is that of setting up and maintaining CRS, which comprises : (i) integration of central computer of airlines with host computer; (ii) maintenance of host computer; (iii) integration of subscriber computers with host computer; and (iv) integration of central computer of Amadeus India with subscriber computers and also with host computer. The assessee is not selling any product or the CRS. It is providing a platform on which a subscriber and a vendor can interact. The assessee's business is similar to that of a stock exchange like National Stock Exchange (NSE). Busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p in India, it is serviced by the host computer situated in Germany. Summing up, Shri Kapila submitted that the assessee is carrying on business of maintaining an 'exchange' or market place within India where travel agents buy air tickets etc. from the airlines and other vendors. For this purpose, it has set up and maintains necessary infrastructure in India in the form of local communication network within India which is integrated to gateways in India and also supply of configured equipment and software to the subscribers in India through its agent, Amadeus India (P) Ltd. 10. In reply, Shri Vohra submitted that the travel agents are not provided any software, other than standard Microsoft (MS) operating software and the software to configure computers of the travel agents, in line with the appellant's CRS systems in Germany and for display of the product items like fare, seat availability, etc., on the computer screen of the travel agents. It is true that the CRS provides facility of booking tickets. The facility of booking tickets using the CRS is limited to the following activities : placing of request for booking seat on an airline by travel agent di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of computers/leased telephone lines to the travel agents is only a facility provided by the appellant to incentivise the travel agents to subscribe to the CRS and the same cannot be said to constitute integral part of the CRS in India. The appellant is not in the business of providing computers or leased lines and is, in any case, not deriving any income from the travel agents for providing such facility. The provision of such facility to the travel agents is not the source of income of the appellant in India. Such facility has been provided as part of the appellant's internal operations in order that more and more travel agents make the bookings through the Amadeus CRS, which would help in maximizing revenues. The computers provided to the travel agents are not stocked by AIPL. The computers are purchased or hired by the appellant from German Travel Services (GTS)/through AIPL, depending upon the requirement of the travel agents. The appellant only picks up the cost of the computers purchased/hired by it. However, the same does not constitute income generating activity carried out by the appellant in India. With regard to the tickets printed in India, it may be per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el agents. Further, in respect of travel agents using his own computers, there would be no market place, though such travel agents can also make a booking through the appellant's CRS resulting in income to the appellant. The aforesaid theory of the learned Departmental Representative accordingly fails. In view of the aforesaid, no market place has been provided by the appellant in India and no income can be said to accrue or arise to the appellant in India in respect of payments made by the airlines for the booking made by the travel agents through the appellant's CRS. In view of the aforesaid no part of the business activity of the appellant can be said to be carried out in India and no income accrues or arises to the appellant in India. 11. Shri Vohra submitted that in the light of above factual situation, whether appellant has a business connection in India. He submitted that the word 'Business connection' is not defined but judicially interpreted. 11.1 In the case of CIT vs. R.D. Aggarwal (1965) 56 ITR 20 (SC), the assessee canvassed orders from the dealers in Amritsar for supply of goods and communicated them to certain non-resident exporters. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h as procuring raw materials, manufacture of finished goods, sale of goods or delivery of goods against price took place within the taxable territories : the assessees merely procured orders from merchants in Amritsar for purchase of goods from the non-resident companies. The orders were offers which the assessees had no authority to accept on behalf of the non-residents. Some commercial activity was undoubtedly carried on by the assessees in the matter of procuring orders which resulted in contracts for sale by the non-residents of goods to merchants at Amritsar. But, on this account no business connection of the assessees with the non-residents within the taxable territories resulted. The activity of the assessees in procuring orders was not as agents of the non-residents in the matter of sale of goods manufactured by the latter, nor of procuring raw materials in the taxable territories for their manufacturing process. Their activities led to the making of offers by merchants in the taxable territories to purchase goods manufactured by the non-residents which the latter were not obliged to accept. The expression 'business connection' postulates a real and intimate relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been obtained by the non-resident company by engaging direct labour. The assessee was, therefore, held not to be an agent under s. 163(l)(b) in the absence of 'business connection'. 11.4 Shri Vohra pointed out that the term 'business connection', appearing in s. 9(1) and s. 163, would have the same connotation for purposes of both the sections as held by Andhra Pradesh High Court in CIT vs. Dredging Corporation of India (1989) 75 CTR (AP) 104 : (1988) 174 ITR 682 (AP). In that view of the matter, the decision of the Delhi High Court (supra) would be equally relevant for determining the present controversy. 11.5 The Karnataka High Court in the case of VDO Tachometer Werke vs. CIT (1979) 117 ITR 804 (Kar), held that in order to be business connection in India, some operations must be carried out by non-resident in India and where the license fee was payable by an Indian company on certain percentage of the goods produced in India on the basis of technology supplied by non-resident to the Indian company outside India, no income can be deemed to accrue or arise in India, merely because the goods were manufactured in India with the technical know-how obtained f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute that entity a 'business connection' in India. If an activity is only preparatory or auxiliary with reference to the core/main activity of the non-resident enterprise or certain internal operations to facilitate the carrying out of the main activity outside India, are carried out in India, no business connection of the non-resident enterprise comes into being in India. Thus even if AIPL is said to conclude SBAs with the travel agents on behalf of the appellant, the SBAs being related to the internal operations of the appellant, would not result in AIPL being considered as 'business connection' of the appellant in India. Further, the job of AIPL is to canvass the use of CRS among the travel agents. This job could have been performed by the appellant itself or by any other company incorporated in India. Therefore, applying the ratio of the aforesaid decisions to the facts of the appellant's case, there exists no 'business connection' between the appellant and AIPL. 12. As regards existence of 'business connection' within meaning of s. 9(1)(i) of the Act, Shri Kapila submitted that as discussed by CIT(A) in paras 6.5 to 6.7 of the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subscriber in India. It is this 'activity' in India which constitutes the assessee's source of income being the source of the first degree. The subscribers are resident of India. They place the purchase order on the vendors within India and the sale of flight tickets also takes place within India. Payment to vendors is made by the subscribers in India in Indian rupees. Without the bookings by travel agents, there is no business and no revenue. All this would not be possible but for the fact that the assessee has ensured operation of the CRS all over India. It is for this reason that the assessee provides at its own cost communication network in India as also equipment to the travel agents so that they can make bookings on its system and generate income for the assessee by way of commission from the vendors. There is also no merit in the assessee's plea that such equipment is used by the subscribers for their own business and not for the business of the assessee. The assessee's core business is that of running an electronic flight reservation exchange through which the subscribers can make bookings on the vendors. The subscribers use equipment and the CRS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 57 ITR 29 (SC), the Hon'ble Supreme Court followed the oft quoted observation of Privy Council in CIT vs. Raja Bahadur Kamakhaya 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 also, the assessee's source of income is the booking made by a subscriber in India through the customised 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. In other words, it is the assets (including leased network) and activities in India, which have produced income in India. Enquiry must stop at this stage. In Per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bscribers with the object of integrating them into the CRS for enabling them to make the booking (p. 5 of the APB) : (c) Providing free of cost its proprietory software products (p. 2 of APB). These have been provided through the agency of Amadeus India who have also been granted license free of charge to distribute the soft ware to the travel agents. (d) Permitting Amadeus India to enter into subscriber agreements with the travel agents in India, which is binding on it. (e) Providing support services (including helpdesk and training) to Amadeus India on a continuous basis. (f) Honouring terms of subscriber agreement between Amadeus India and the subscribers. (g) Binding the airlines to honour the bookings made by the travel agents. The assessee pays fees to Amadeus India for supplementing the functions of the host computer by preparing and transmitting programmes to the latter for incorporation into portions or partitions in its mega computer at Erding, Germany, so as to enable travel agents in its marketing region to draw on the available information for their benefit (para 35, Tribunal decision in Asstt. CIT vs. Amadeus India (P) Ltd.(supra). In the absen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earning of income to the non-resident in India. AIPL's role is to canvass use of Amadeus CRS amongst the travel agents since the appellant's revenues are dependent upon the booking made through the appellant's CRS. Higher the number of travel agents subscribing to the appellant's CRS, greater would be the number of bookings being made through the appellant's CRS, resulting in higher booking fee to the appellant. Reference has been made by the learned Departmental Representative to the decision of the Delhi Bench of the Tribunal in the case of AIPL (supra) to contend that AIPL is supplementing the functions of the appellant's CRS by preparing and transmitting programmes for incorporation into partitions so as to enable the travel agents to draw the available information. The precise activity carried out by AIPL is explained herein below : All travel agents in India are connected to the computer system installed at the premises of AIPL which is in turn connected to appellant's CRS in Germany. The information flow is channelized through computer system of AIPL and the role of AIPL is to identify/authorize the travel agents accessing the appellant&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... airlines. Admittedly, AIPL has no such authority. The OECD commentary on art. 5 of the OECD Model Convention relating to PE wherein in para 33 it has been stated that the authority to conclude contracts must cover contracts relating to operations which constitute business of the enterprise. It is further stated that it would be irrelevant if the person had the authority to engage employees for the enterprise to assist that person's activity for the enterprise or if the persons were authorized to conclude in the name of the enterprise similar contracts relating to internal operations only. Thus, even if AIPL were to be held to have authority to conclude contracts with the travel agents on behalf of the appellant it does not result a business connection since the agreement with the travel agents is for internal purposes only and is not appellant's source of income. 13.2 In the case of CIT vs. R.D. Aggarwal (supra), the agent in India was procuring orders for the non-resident buyers but the activity in India was not attributed to the non-resident and the agent was not held not to constitute business connection of the non-residents in India. Similarly, in the case of Pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Star TV (supra) are not obtaining in the case of the appellant. It is to be appreciated that AIPL does not enter into any contracts in India with the airlines which is direct source of income of the appellant. The source of income of the appellant is PCA entered into between with the appellant and the airlines outside India. 13.4 The decision in the case of Western Union (supra), referred to by the learned Departmental Representative, is also not applicable since in that case the activity giving rise to the income of the appellant viz., receipt of money abroad and transfer of the same in India was completed through the medium of the agents of the non-resident in India and, therefore, the agents in India were held to constitute business connection in India of the non-resident. It is important to note that the assessee, Western Union was contacted by non-residents to transfer money to their relatives and friends in India. The service was completed when the physical activity of delivering the money to the specified relatives and friends in India was performed. The agents appointed by Western Union in India to carry out that essential limb of the services were held to constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s commission fully represents the value of the profit attributable to his services, it should prima facie extinguish the assessment. 14.2 In the present case (i) the activities of the appellant are wholly channeled through the agent, i.e., the NMC, (ii) the services or the product is sold by the CRS company to the airlines outside India and the payment is received by the CRS from the airlines outside India, and (iii) the sales of the product to the airlines are made on a principal-to-principal basis. There is no privity of contract between the appellant and the travel agents. The travel agents do not make any payment for the use of the product/service. Therefore, all the qualifications provided in cl. (c) aforesaid are fully satisfied. Since AIPL's remuneration fully represents the value of the profit attributable to AIPL's service, it prima facie extinguishes the assessment . It needs, therefore, to be held that no income chargeable to tax arises to the appellant in India as per the provisions of the Indian IT Act, as explained in Circular No. 23 of the CBDT dt. 23rd July, 1969. 14.3 The principle laid down in the aforesaid circular has been reiterated in Cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is too well-settled to admit of any elaboration. (Emphasis, italicised in print, supplied) Applying the principle laid down in the Board circulars referred to above, there can be no further income attributable to the alleged 'business connection' in India, to constitute income of the appellant liable to tax in India. The decision of the AAR on this issue has been confirmed by the Supreme Court (sic' Madhya Pradesh) in CIT vs. Gom Industries Ltd. (2006) 204 CTR (MP) 367 : (2007) 292 ITR 406 (MP). 15. Shri Kapila in this regard submitted as under : 15.1 Circular No. 23 dt. 23rd July, 1969 issued by the CBDT does not apply on the facts of the appellant's case since'(i) it relates to sale of goods and not in relation of rendering of service and (ii) all the activities of the appellant are not carried out through AIPL. Some of the activities like hiring of telecommunication lines for providing connectivity to the travel agents by AIPL to the appellant's CRS and providing free of charge its own equipment to AIPL for distribution to travel agents have been done directly by the appellant. 16. In response, the appellant (without prejudice) submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business connection in India within the meaning of s. 9(1)(i) of the Act. The scope of total income is described in s. 5 of the IT Act. As per s. 5(2), the total income of a person, who is a non-resident to the extent which is received or deemed to be received in India, or accrues or arises or deemed to accrue or arise in India is taxable in India. As per s. 9(1)(i) of the Act, all income accruing or arising whether directly or indirectly through or from any business connection in India shall be deemed to accrue or arise in India. As per cl. (a) of Expln. 1, in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be such part of the income as is reasonably attributable to the operations carried out in India. Thus, as per the conjoint reading of s. 5(2) and s. 9(1)(i) of the Act, only if the income is arising directly or indirectly through or from any business connection in India, can be taxed in India. The expression 'business connection' was earlier not defined in the Act. The Finance Act, 2003 w.e.f. 1st April, 2004 i.e. as applicable to asst. yr. 2004-05 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be remembered that by s. 42, income, profit or gain which accrues or arises to a non-resident outside the taxable territories is sought to be brought within the net of the IT law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by s. 4(1)(a) and (c) of the Act, whether the person earning is a resident or non-resident. If the agent of a non-resident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in s. 40(2). Income not taxable under s. 4 of the Act of a non-resident becomes taxable under s. 42(1) if there subsists a connection between the activity in the taxable territories. Hon'ble Bombay High Court in the case of Blue Star Engineering Co. (Bombay) (P) Ltd. vs. CIT (1969) 73 ITR 283 (Bom) at p. 291, after referring to the decision of R.D. Aggarwal Co. (supra) held as under : It would thus be seen that in order to constitute a 'business connectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, the income generates to the appellant. But for the booking no income accrues to the appellant. Time and again it is contended that the whole of the processing work is carried out at host computer situated at Erding in Germany and only the display of information is in India for the proposition that there is no business connection in India. We are unable to agree with such proposition. The CRS extends to Indian territory also in the form of connectivity in India. But for the request generated from the subscriber's computer's situate in India, the booking is not possible which is the source of revenue to the appellant. The assessee is not to receive the payment only for display of information but the income will accrue only when the booking is completed at the desk of the subscriber's computer. In such a situation, there is a continuous seamless process involved, at least part of which is in India and hence, there is a business connection in India. The computers at the subscriber's desk are not dumb or are in the nature of kiosk incapable of performing any function. The computers along with the configuration have been supplied either by the appellant or through its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uscule portion. The appellant's computer in Germany is also responsible for all other functions like keeping data of the booking made worldwide and also keeping track of all the airlines/hotels worldwide who have entered into PCA. Though no guidelines are available as to how much should be income reasonably attributable to the operations carried out in India, the same has to be determined on the factual situation prevailing in each case. However, broadly to determine such attribution one has to look into the factors like functions performed, assets used and risk undertaken. On the basis of such analysis of functions performed, assets used and risk shared in two different countries, the income can be attributed. In the present case, we have found that majority of the functions are performed outside India. Even the majority of the assets i.e. host computer which is having very large capacity which processes information of all the participants is situated outside India. The CRS as a whole is developed and maintained outside India. The risk in this regard entirely rests with the appellant and that is in Spain, outside India. However, it is equally important to note that but for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise 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 in India for asst. yr. 1996-97. Whether a Permanent Establishment exists : 20. Apart from applicability of 'Business connection', the next question to be decided for asst. yrs. 1997-98 and 1998-99 is whether appellant has a PE in India. Submissions on behalf of Revenue 20.1 Shri Kapila submitted that the assessee has a fixed place of business under art. 5(1) of the Indo-Spain treaty. Para 1 of art. 5 of the treaty with Spain reads as under : For the purposes of this convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 20.2 Shri Kapila submitted that : (i) Facilities of nodes are at a fixed place in the premises of telecommunication centres at Mumbai and Delhi in India. Leased lines/network hired by the assessee in India are also 'fixed place' within India. As observed in para 10 of OECD c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, the computer, which occupies the place and which is connected with mainframe computer, does answer to the description of fixed place R of business from which the appellant's business is wholly and partly carried on. The CIT(A) has rightly repelled the assessee's contention that communication, display and sifting of information on the computers at the subscribers premises is not very important to processing of information in the host computer. Indeed, communications infrastructure in India including configured computers installed in the office premises as explained in the preceding paras of the subscribers are essential parts of the core business of the assessee having a direct nexus with the bookings made by them. Reference was made to the decisions of AAR in P. No. 24 of 1996 ABC, In re (1999) 153 CTR (AAR) 259 : (1999) 237 ITR 798 (AAR) and Commentary on OECD Model. 20.3 Shri Kapila further submitted that there is nexus of 'fixed place' with assessee's business in the form of network in India. He submitted that without the network in India and the equipment installed in subscriber's office premises, which the assessee maintains at its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nduct of business, which by no stretch of imagination can be called advertisement. The assessee is essentially acting as an agent of both vendors and subscribers. In the case of CIT vs. Rai Bahadur Jairam Valji (1959) 35 ITR 148 (SC), the Supreme Court held at p. 161 of the report : It will be seen that the receipts, the chargeability of which was in question in the decisions cited for the respondent, were all payments made as compensation for the termination of agency contracts, whereas we are concerned with an amount paid as solatium for the cancellation of a contract entered into by a businessman in the ordinary course of his business, and that, in our judgment, makes all the difference in the character of the receipt. In an agency contract, the actual business consists in the dealings between the principal and his customers, and the work of the agent is only to bring about that business. In other words, what he does is not the business itself but something which is intimately and directly linked up with it. It is therefore possible to view the agency as the apparatus which leads to business rather than as the business itself on the analogy of the agreements in Van Den Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bradstreet, In re (2005) 193 CTR (AAR) 9 : (2005) 272 ITR 99 (AAR), after exhaustive consideration of the definitions of the term 'agent', the AAR noted : A close reading of the above extracts brings out the essence of the term 'agent'. 'An agent' works for another in accordance with his authority while dealing with third parties. In another ruling by AAR No. 542 of 2001, ABC, In re (2005) 193 CTR (AAR) 328 : (2005) 274 ITR 501 (AAR) the Authority has again considered the distinction between the 'agent' and the 'contractor' and has held that though the contractor is independent of any control of interference and is only bound to produce the specified result as per the contract, the agent has to exercise his authority in accordance with the lawful instruction given to him by his principal but he is also not subject in his exercise to the direct control or supervision of the principal. Now, in the present case, Amadeus India has been authorized by the assessee to conclude contracts with subscribers as per the authority granted under the distribution agreement along with its annexures. Hence Amadeus India is a dependent agent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal is payable by the Indian company. The Indian company is therefore holding and distributing the equipment as an agent only. This fact is further established by cl. 14.1.2 of the distribution agreement, which provides that on termination of the agreement, Amadeus India shall 'return to Amadeus Marketing all equipment supplied to Amadeus India by Amadeus Marketing for use in connection with the Amadeus System or other Amadeus products'. The word 'use' in the context is significant. It can only mean 'use' of the equipment by the subscribers for using the Amadeus System . (b) The assessee supplies/licenses its proprietory products free of charge to Amadeus India for distribution to the subscribers as per cl. 4 of the distribution agreement. (c) As per the distribution agreement, the assessee has authorised Amadeus India to conclude 'subscriber agreement' with the subscribers which allows the travel agents to use the CRS owned by it. The assessee has also ensured in its agreements with the vendors that the bookings made by the subscribers under the 'subscriber agreement' (to which the assessee is not a party) must be honoured by the vend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es originally fixed with the subscribers. There is no evidence on record to show that the assessee had permitted Amadeus India not to charge any rental from the subscribers. Needless to say, the 'Node' and 'Equipment' hired or owned by the assessee have been allowed by it to be used by travel agents in India (though there is no contract between them) only under the subscriber agreement concluded between subscribers and Amadeus India. Indeed, art. 1 of participation agreement states that Amadeus subscriber means any person other than an Amadeus affiliate or participating carrier, using under a contract or other arrangement the Amadeus System to obtain information, make reservations and issue documents involving travel related services The assessee has clearly allowed itself to be bound by the terms of the subscriber agreement between Amadeus India and travel agents in India. It is pertinent to repeat that the subscribers use the CRS at the cost of the assessee. However, they acquire this right to use the network and other equipment under the subscriber agreement to which assessee is not a party. Yet, the assessee not only honours the terms of the subscribers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er person in the State in which the enterprise is situated............ The question whether such a person has an authority to conclude contracts within the meaning of treaty law must be decided not only with reference to private law but must also take into consideration the actual behaviour of the contracting parties......................... 20.6 Shri Kapila further submitted that art. 5(4)(b) of the treaty also applies for the reason that the assessee is holding and maintaining in India stock of equipment, software and manuals owned by it with Amadeus India through whom it supplies these to the travel agents in India which is reflected in cls. 10.9 and 10.9.1 of distribution agreement and Appendix C. 20.7 Summing up on the arguments, Shri Kapila submitted as under : 1. The assessee's income is taxable in India in terms of s. 9 r/w s. 5 of the Act in view of the fact that it has assets in India, source of income in India as also business connection in India. The assessee is therefore taxable in respect of business operation in India under s. 5 r/w s. 9 of the Act for the asst. yrs. 1996-97 to asst. yr. 1998-99. 2. The assessee has a PE in India on account of : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccess to the travel agents to its CRS in Germany was an internal matter of the appellant and since appellant's remuneration was linked to the number of bookings made by the travel agents, it was in its business interest to provide telecommunication network and computer equipment in certain cases to the travel agents, as an incentive, to maximize its revenues. The computer and telecommunication network leased by the appellant cannot be treated as an integral part of the CRS since the travel agents to whom computers have not been provided can also access the appellant's CRS through their own computers. If the computers provided to the travel agents were to be an integral part of the appellant's CRS, then, by implication, the same should have been Amadeus proprietary or customized and should have been provided without exception to all the travel agents. The reference to the preamble of the PCA and definition of Amadeus Central System therein by the learned Departmental Representative is misplaced, as the functions of the CRS stated therein cannot be performed by the computers provided to the travel agents and nowhere the Amadeus Central System has been defined to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l agent's desk are not operated by the appellant and the business of the appellant is not conducted through the same, so as to constitute fixed place of business. According to the Departmental Representative, SITA nodes in India used by the appellant result in a PE, since the telecommunication network is at the disposal of the appellant. Reference was made to para 42.6 of the OECD Commentary and the German Pipeline case for the proposition that operating automatic equipment even without human intervention results in PE. The argument is fallacious for the following reasons : (a) SITA provides telecommunication service and operates its own set up to ensure uninterrupted telecommunication services to its subscribers. The SITA nodes and the telecommunication network of SITA in India, applying the ratio of the aforesaid commentary and the German Pipeline case (supra) may result in a PE of SITA in India since it operates the telecommunication lines and carries on its core business of transmission of voice/data through the telecommunication lines, but not for a foreign enterprise, like the appellant, using telecommunication service/facility provided by SITA. (b) Further in te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue were to construe a fixed place PE in the form of computers and telecommunication network, then, the expenses relatable thereto have to be allowed. The alternative argument, raised without prejudice to the main submission that the appellant has no PE in India cannot be used against the appellant, to hold that the appellant has PE in India, without anything more. The advance ruling in the case of Cargo Community India (P) Ltd. has been quoted out of context by the learned Departmental Representative since the issue therein related to the characterization and taxability of subscription fee paid by the cargo agent to a foreign on-line portal/server as royalty or fee for technical services. It was not an issue before the AAR whether the foreign company had any PE in India or not by virtue of the access available to the cargo agents to the foreign company's portal/server outside India. The observations regarding training and helpdesk made in the aforesaid ruling are also in the context of the consideration for the same being in the nature of royalty or fee for technical services. It was common ground of the parties before the AAR that the income of the non-resident appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the treaty are as under : AIPL is an independent service provider and not an agent of the appellant. Without prejudice, if AIPL is treated as an agent of the appellant (it is not disputed by the appellant that AIPL is economically dependent on the appellant), AIPL has no authority to conclude contracts on behalf of the appellant and the subscriber agreement is not entered into by AIPL on behalf of the appellant. Further, without prejudice, it is the appellant's argument that the authority to conclude contracts should be in relation to the contracts which give rise to income to the principal. Since no amount is being charged from the travel agents under the subscriber agreement and the PCA, which is the income generating contract for the appellant, is not entered into by AIPL, therefore, even if AIPL is treated as (an) dependent agent it does not have authority to conclude contracts (giving rise to income in the hands of the appellant) on behalf of the appellant, so as to constitute dependent agency PE . The fact that AIPL is dependent for its income on the appellant does not ipso facto make AIPL an agent of the appellant. An independent service provider dealing on pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r on perusal of para 7.2 of the distribution agreement, the terms of such agreement are to be drafted by AIPL so that they conform to the applicable laws in India and no standard format of subscriber agreement is provided by the appellant to AIPL as part of the distribution agreement as alleged by the Departmental Representative. The specification of the equipment to be provided by AIPL to the subscribers and the products required to be offered to the subscribers do not in any manner establish that AIPL is an agent of the appellant since in an independent service contract, too, the services to be provided, the standard of services etc., are specified by the service recipient. Further, continuous rendering of support to the service provider in order that the service provider is able to perform his services more efficiently does not again result in the service provider being considered as agent of the service recipient. That the equipment provided is as per the specifications of the appellant, or that the telecommunication infrastructure is contracted by the appellant or that no consideration is charged for the access to the CRS provided to the travel agent, or that AIPL can en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been provided by the AIPL as an independent service provider dealing on arm's length basis with the appellant. The reference to decision of AAR in TVM Ltd., In re (supra) regarding mass contracts negotiated by the agent, which are approved in routine by the principal, as resulting in dependent agency PE, is out of context since the subscriber contract is drafted by AIPL taking into consideration governing laws of India and no standard subscriber contracts are provided by the appellant to AIPL. Further, the subscriber contract is for the limited purpose of preventing misuse of the computers and the appellant's CRS by the travel agents and such agreement does not result in any income to the appellant. There is no privity of contract between the appellant and the travel agent by virtue of the subscriber agreement. This is also clear from perusal of para 7.3 of the distribution agreement, whereunder the appellant may direct AIPL to require the subscriber to stop the misuse of the appellant's system. This is because the appellant does not have any contract with the travel agent and does not have any access to him directly. AIPL could have been considered as an agent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t's case resulting in income to the appellant gets concluded when the travel agents gain access to the CRS and are able to make booking through the CRS. The provision of access to the travel agents leading to booking made by them is the last leg of the transaction which gets concluded in India. The agreement with the airlines, which is the source of income to the appellant is entered outside India and AIPL is not a party to the same. AIPL only carries out the concluding steps in the arrangement embodied in the PCA. PCA is concluded outside India and AIPL has no say over the same. By executing the last leg of the contract, viz., PCA, which has already been concluded outside India, by entering into subscriber agreement to provide access to the CRS of the appellant, AIPL is not concluding any contract for the appellant so as to be considered as a dependent agency PE under art. 5(4)(a) of the treaty. Another requirement in art. 5(4)(a) of the treaty is that the authority to conclude contracts should be habitually exercised by the agent. During the relevant years, no agreement with the travel agents was entered into by the AIML. Thus, AIML cannot be said to have habitually exerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the profit. He also submitted that even if AIPL is held to be PE of the appellant in India, since AIPL's remuneration fully represents the value of the profit attributable to AIPL's service, it prima facie extinguishes the assessment . Therefore, no income chargeable to tax arises to appellant in India. Reference is made in this regard to Circular No. 23 of CBDT dt. 23rd July, 1969, Circular No. 1/2004 dt. 2nd Jan., 2004, issued by CBDT and the ruling of the AAR in the case of Morgan Stanley Co. International Ltd. (supra) [confirmed on this issue by the Supreme Court in Morgan Stanley (supra)] Further, even if the appellant is held to have a PE in India only a small part of such profits could, if at all, be attributed to the alleged PE of the appellant in India can be brought to tax in India as substantial and substantive part of the appellant's activities are carried outside India. The principle of attribution has been upheld by the Supreme Court of India in the case of CIT vs. Ahmedbhai Umarbhai Co. (1950) 18 ITR 472 (SC). The Court observed that where a person is carrying on manufacture and sale, the profits received relate firstly to his business as man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus contended that the income arising in British India in the year of account did not exceed its income arising without British India and that therefore the assessee was non-resident in British India. This calculation of profits, @ 10 per cent, on British Indian sales did not make any allocation between manufacturing profits and merchanting profits and all the profits arising out of British Indian sales were shown in one lump sum. It was held on the aforesaid facts, that the income received in British India could not be said to wholly arise in British India and that there should be allocation of income between the various business operations of the assessee demarcating the income arising in the taxable territories in the particular year from the income arising without the taxable territories in that year. The Madras High Court in the case of Annamalais Timber Trust Co. vs. CIT (1961) 41 ITR 781 (Mad) held that the apportionment of profits under the above provisions should not be arbitrary but on a rational basis. Where the only operation within the taxable territory was the negotiation and conclusion of the contract, there was no justification for apportioning 50 per cent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lleged PE in India since all the activities resulting in generation of such profits are not performed in India. In fact, a major part of such activities is performed outside India. In the appellant's case, the appellant's server, mainframe, hardware or software is located outside India. It is to be appreciated that the Amadeus host, Amadeus data centre and the airline's hosts are all located outside India. The connectivity is provided by SITA telecommunications worldwide, using in India the DOT, MTNL or VSNL leased lines. The appellant is not engaged in any business in India. The revenues of the CRS are not generated from the passengers in India or the travel agents in India or the hardware with which the travel agent operates or the line through which the communication travels. The revenue is generated by the CRS providing to the airlines the facility of display of airlines data information on the CRS information system. The fact that the payment to the CRS for the services rendered to the airlines outside India is expressed in terms of the responses received by the airlines based on the use of the CRS display by the travel agents, wherever they might be, does not m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion or other place where agriculture forestry, plantation or related activities are carried on; (i) a premises used as a sales outlet; (j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than three months; (k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than six months in any twelve months period, or where such project or supervisory activity, being incidental to the sale of machinery or equipment continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment : Provided that, for the purpose of this para an enterprise shall be deemed to have a PE in a Contracting State and to carry on business through that PE if it provides services or facilities in connection with or supplies plant and machinery on hire used or to be used in the prospecting for, or extraction or prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered an agent of an independent status within the meaning of this para. 6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a PE or otherwise), shall not of itself constitute either company a PE of the other. Para 1 of the treaty gives a general definition of the term 'Permanent Establishment' which brings out its essential characteristic of a PE in the sense of convention i.e. a distinct site, a fixed place of business through which the business of an enterprises is wholly or partly carried on. Thus what is to be seen is whether there is existence of a place of business i.e. a facility such as a premises 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 dependent on the enterprise, conducts the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is irrelevant so long as he operates from the fixed place of business. The PE will nevertheless exist if the business of the enterprise is carried on mainly through automatic equipment and the activities of the personnel being restricted to setting up and operating such equipment. A PE will still exist if the enterprise which sets up machine also operates and maintains them for its own account and whether operated by itself or by a dependent agent. 23.1 In the present case it is seen that the CRS, which is the source of revenue is partially existent in the machines namely various computers installed at the premises of the subscribers. In some cases, the appellant itself has placed those computers and in all the cases the connectivity in the form of nodes leased from SITA are installed by the appellant through its agent. The computers so connected and configured which can perform the functions of reservation and ticketing is a part and parcel of the entire CRS. The computers so installed require further approval from AIPL who allows the use of such computers for reservation and ticketing. Without the authority of AIPL such computers are not capable of performing the reservation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficant part of the activity of the enterprise as a whole. Since part of the function is operated in India which directly contributes to the earning of revenue, the activities as narrated above carried out in India are in no way of 'preparatory or auxiliary' character. Thus the exception provided in para 3 of art. 5 will not apply and hence as stated above, the assessee shall be deemed to have a PE in India. 23.3 The next question arises is whether the assesses has a PE in India in the form of a dependent agent. It is commonly accepted principle that an enterprise should be treated as having a PE in a State if there is under it a person acting for it, even though the enterprise may not have a fixed place of business. Thus there can be two forms of PE, (i) fixed place or (ii) through the dependent agent. 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. However, all the persons other than agent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distribution agreement. What could have been done directly is now done indirectly through the offices of AIPL under an authority granted to it. The phrase 'authority to conclude contracts on behalf of the enterprise' does not confine to application of para 4 to an agent who enters into contract literally in the name of enterprise. The para applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of enterprise. Lack of activity involved by enterprise in the transactions may suggest of an authority being granted to the agent. It is contended that the agent to be called dependent agent should have an authority to conclude such contract which contributes to the income of appellant and no other ancillary contract. It is contended on behalf of the appellant that the contracts which generate revenue are the contracts with participating airlines and since the dependent agent has no authority to conclude contracts with such participants, AIPL cannot be branded as a dependent agent within the meaning of para 4 of art. 5 of the treaty. On the other hand, the learned Departmental Representative has subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant is not dealing in any goods, the question of delivery of such goods does not arise. The contention of learned Departmental Representative that AIPL maintains stock of computers which are delivered to the subscribers should be treated as delivery of goods. He also submitted that what is mentioned in treaty is that there should be delivery of goods which may not necessarily be sale of goods. We are unable to accept such contention of the learned Departmental Representative . The reference to stock of goods in cl. (b) of para 4 of art. 5 has to be understood in the sense the business proper carried on by the enterprise. The delivery should be from the stock of goods which if considered in proper prospective will only be of the stock of goods dealt with by the assessee in regular course of its business. If the agent is to deliver the goods either the goods should be such in which the enterprise deals in or which are regularly hired out which may be considered as given on bailment from which the revenue is to be generated. But in the present case the computers supplied by AIPL to the subscribers are not dealt with by the assessee or which by themselves are the source of revenue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he PE to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the PE. Likewise no account shall be taken, in the determination of the profits of a PE, for amounts charged (otherwise than towards reimbursement of actual expenses), by the PE to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices. Reading the above art. 7 of the treaty it is clear that the profit of an enterprise will be taxable only to the extent as is attributable to that PE. This is in pari materia with cl. (a) of Expln. 1 to s. 9(1)(i) of the IT Act. Thus where ..... X X X X Extracts X X X X X X X X Extracts X X X X
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