TMI Blog2016 (11) TMI 1676X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout 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 India and accordingly PE in the nature of a fixed place of business in India. Thus the appellant can be said to have established a PE within the meaning of para 1 of art. 5 of Indo-Spain treaty. Whether the exception provided in para 3 of art. 5 applies so as to hold that there is no PE in India? - The function of the PE in India is not only to advertise its products. The ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealing with the question as to what is such part of income as is reasonably attributable to the operations carried out in India, we have held that only 15 per cent of the revenue generated from the bookings made within India is taxable in India. Same proportion has to be adopted here while computing profit attributable to the PE. We have also held that since the payment to the agent in India is more than what is the income attributable to the PE in India, it extinguishes the assessment as no further income is taxable in India. It is to be noted that even in the first assessment framed by the AO, the entire expenses in the form of remuneration paid to AIPL were held as allowable deduction and were reduced while computing the income of appellant. If that be the case, the income attributable to PE in India being less than the remuneration paid to the dependent agent, it extinguishes the assessment and requires no further exercise for computation of income. We accordingly hold so and in view of the same the income of the appellant for asst. yrs. 1997-98 and 1998-99 will be nil . Allowability of project development expenses incurred/allocated to the Indian activity and levy of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computers of the travel agents and the mainframe of the appellant become one for all practical purposes, as the time and space collapses at the time of booking the tickets through the appellant's CRS. 2.4 That the CIT(A) erred on facts and in law in not appreciating that the activities of the appellant in India were of auxiliary and preparatory character and, therefore. the appellant cannot be said to have a PE in India, having regard to the provisions of Article 5(3)(e) of the DTAA between India and Spain. 2.5 That the CIT(A) erred on facts and in law in holding that the NMC is the dependent agent of the appellant for rendering services to the travel agents. 3. That without prejudice the C1T(A) erred on facts and in law in not holding that the substantial and substantive part of the appellant's activities are carried outside India and no revenues/income can, therefore, be said to arise/generate in India. 3.1 Without prejudice, even if it is assumed that NMC constitute PE of the appellant in India, the CIT(A) erred on facts and in law in not appreciating that the income derived from such PE would be completely consumed by distribution and other expenses relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of art. 5 of DTAA between India and Spain. Art. 5 of the treaty provides as under : Indo-Spain treaty Article 5 - Permanent Establishment 1. 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. 2. The term permanent establishment includes especially : (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a warehouse in relation to a person providing storage facilities for others; (h) a farm, plantation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se from which he regularly delivers goods or merchandise on behalf of the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a PE in the other Contracting State merely because it 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 itself or on behalf of that enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise, he will not 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 ess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess. It will be appropriate to presume that each part of the activities carried on contributes to the productivity of the whole. Thus even if some contribution is made in carrying on the business as a whole, even then it can be said that the business of an enterprises would partly be carried on from such place and accordingly a PE of such enterprise. Where the business of an enterprise is carried on mainly by the entrepreneurs or employees who receive instructions from the enterprise, the rights of such persons in its relationship with third parties are irrelevant. So far as para 1 of art. 5 is to apply whether or not, the dependent agent is authorized to conclude contracts 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a worldwide basis. The computers installed at the premises of the subscribers are connected to the global CRS owned and operated by the appellant. Using part of the CRS system, the subscribers are capable of reserving and booking a ticket. Thus it cannot be considered as solely for the purpose of advertising of such CRS system. Similarly it is not in the nature of preparatory or auxiliary character. It is difficult to distinguish between the activities which are preparatory or auxiliary character and those which are not. The decisive criteria is whether or not the activity of the fixed place of business in itself forms an essential and significant 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 accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e authorized to use Amadeus products . Under an authority granted to them, subscribers use such products. The reservations and ticketing done using the CRS products are being honoured by the participants and for which the remuneration will be payable by the participants to the appellant. Thus AIPL 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 AIPL. The subscribers agreements were entered into by AIPL 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent 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 in India. 23.5 The next question that arises is whether the appellant has PE in India within the meaning of cl. (b) of para 4 of art. 5 of the treaty. Clause (b) of para 4 of art. 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 dealing in any stock of goods. Since the appellant 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 car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate through a PE situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that PE; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that PE; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that PE. 2. Subject to the provisions of para 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a PE situated therein, there shall in each Contracting State be attributed to that PE the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. 3. In the determination of the profits of a PE, there shall be allowed as deductions expenses which are incurred for the purposes of the PE, including executive and general administrative expenses, research and development expenses, interest and other similar expenses so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm of remuneration paid to AIPL were held as allowable deduction and were reduced while computing the income of appellant. If that be the case, the income attributable to PE in India being less than the remuneration paid to the dependent agent, it extinguishes the assessment and requires no further exercise for computation of income. We accordingly hold so and in view of the same the income of the appellant for asst. yrs. 1997-98 and 1998-99 will be nil . 8. Respectfully following the above decision of Co-ordinate Bench supported by Hon ble jurisdictional High Court, we decide this issue in favour of the assessee. Accordingly, grounds Nos. 3 to 3.1 and 5 to 5.1 are allowed. 9. Ground No. 4 6 relate to allowability of project development expenses incurred/allocated to the Indian activity and levy of interest u/s. 234A and 234B of the Act. The issue regarding allowability of project development expenses was not adjudicated by the Hon ble Tribunal in appeals for the assessment years 1996-97 to 1998-99, on the ground that the same did not survive for consideration because payment of distribution fee to the Indian National Marketing Company by the assessee, which was allowed de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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