SC held that Question as to what proportion of Profit is attributable to India is question of fact

Director of Income-tax v. Travelport Inc. – [2023] 149 470 (SC)


The taxpayers are engaged in the business of providing electronic global distribution services to Airlines through “Computerized Reservation System” (CRS). The taxpayers maintain and operate a Master Computer System consisting of several main frame computers and servers located in other countries, including the US. The CRS is connected to airlines’ servers for continuous transmission of data on flight schedule, seat availability etc.

The taxpayers had appointed Indian entities as Distributors and entered into distribution agreements with them for marketing and distribution of CRS services. The taxpayers paid commission ranging from 33% to 60% of their total earning in India (USD/ EUR 3 per booking).

During the assessment proceedings, the Revenue concluded that the entire income earned in India (USD/ EUR 3 per booking) is taxable as the income was earned through the hardware installed in the premises of the travel agents. The CIT(A) confirmed the same.

ITAT and HC Decision

On appeal, ITAT held that the Assessee constituted fixed place PE as well as Dependent agent PE (DAPE). The ITAT observed that the ‘lion’s share of activity’ is processed in host computers in USA/Europe and therefore 15% of revenue earned in India could be attributed to such PEs that carrying out ‘minuscule activities’ based on FAR analysis. Since the payment made to distribution agents ranged from 33% to 60%, the ITAT held that no further income was attributable to India.

The Delhi HC dismissed the appeal filed by the Revenue by holding that ITAT had adopted a reasonable approach in respect of profit attribution. The Delhi HC held that no question of law arose in these matters.

SC Decision

The SC observed that “The question as to what proportion of profits arose or accrued in India is essentially one of facts. Therefore, we do not think that the concurrent orders of the Tribunal and the High Court call for any interference.”

The SC observed that ITAT arrived at the quantum of revenue accruing to Assessee in respect of bookings in India on the basis of FAR analysis and since commission paid to distribution agents is more than twice the amount of attribution, which is already been taxed, the SC held that ITAT has rightly concluded the issue in Assessees’ favour.

Referring to Explanation 1(a) to Section 9(1)(i), which provides that only income reasonably attributable to operations carried out in India can be considered as income deemed to accrue/arise in India, the SC held that what portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact, which was duly considered by ITAT taking into account relevant factors;.

As regards Revenue’s contention that such attribution is not in accordance with Article 7 of India-US DTAA, the SC observed out that as per the treaty the entire income derived by the Assessee would be taxable whereas Section 9(1)(i) confines taxability to income attributable to operations in India.

Accordingly, the SC held that no interference is called for in the impugned order and HC’s view on profit attribution is upheld.

Editorial Comments This is welcome decision as it restricts the scope of appeals before HC especially when the Tribunal has given proper finding of fact and same is not perverse.  The ruling will also be useful to defend TP cases post SC decision in SAP Labs.

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