Amadeus IT Group SA Vs Asstt. DIT (ITAT Delhi)
The AO has held that the income received by the assessee with respect to bookings arising from India is also taxable as royalty income. The AO observed that the assessee supplies/ licenses its proprietary products free of charge to Amadeus India for distribution to the Subscribers. As per the Distribution Agreement, the assessee has authorized Amadeus India to conclude “Subscriber Agreement” with the Subscribers which allows the Travel Agents to use the CRS Owned by it. The Assessing Officer has given a finding that the paying airlines have offices in India. The assessee has granted to Amadeus India the right to further grant the right to access and right to use its platforms/ software/ product offerings to Subscribers. Amadeus India has the exclusive rights to distribute the CRS in India.
20. The AO has held that a software is also type of equipment in the facts of the case. The system comprising of equipments is used by the subscribers to book tickets and the same is the source of income for the assessee. The AO held that the income of the assessee is taxable as royalty also as ‘use of process’.
21. The ld. DRP confirmed the order of the Assessing Officer.
22. In the assessment framed for assessment year 2006-07, the Assessing Officer had substantively brought to tax, the booking fee as business income and protectively held the same to royalty since in that year the tax worked out in treating the income as royalty was less than the tax worked out after attributing income to the alleged PE of the assessee.
23. The Delhi Tribunal in assessee’s own case for the assessment year 2006-07 has held that booking fee received by the assessee is taxable as business income and not under the head royalty. For the sake of ready reference and brevity, the relevant portion of the order of the ITAT in ITA No. 1494/Del/2011 is reproduced below:
“In the present case, too, as submitted hereinabove, the appellant uses sophisticated technology/software in the course of providing a service/facility but the appellant does not divulge any process involved in the technology/software to the user of the CRS. The appellant does not make available to the participating airlines any secret formula or process. Also, no equipment is provided by the appellant for use to the participating airlines. Further, no payment is made by the subscribers, viz., the travel agents to the appellant, unlike the aforesaid case.
In that view of the matter, the booking fee received by the appellant from the participating airlines does not answer the description of ‘royalty‘ and, thus, is not chargeable to tax in India.”
24. Since, the facts have not been disputed in the absence of any material changes, we hereby hold that the booking fee received is in the nature of business income.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeals have been filed by the assessee against the orders passed by the AO u/s 143(3)/144C(13) of the Income Tax Act, 1961 dated 04.10.2011, 30.10.2012, 29.01.2014, 25.11.2014 and 13.01.2016.
2. Since, the issues involved in all these appeals are similar, they were heard together and are being disposed off by the common order.
3. In ITA No. 4906/Del/2010, following grounds have been raised by the assessee:
“1. That the assessing officer erred on facts and in law in computing the income of the appellant for the relevant assessment year at Rs.381,32,77,751/- as against ‘Nil’ income returned by the appellant.
2. That the assessing officer erred on facts and in law in passing the impugned order without affording the appellant reasonable and adequate opportunity of being heard.
3. That the assessing officer erred on facts and in law in alleging that the appellant’s replies were evasive and the appellant purposely avoided replying to the queries raised/ did not furnish the specific information called for in the assessment.
Re: CRS income – Permanent establishment
4. That the assessing officer erred on facts and in law in holding the appellant to be liable to tax in India in respect of receipts from airlines, etc. relating to segments booked from India through the appellant’s computer reservation system, not appreciating that no income accrued or arose to the appellant in India.
5. That the assessing officer erred on facts and in law in holding that computers, electronic hardware, and the connectivity provided by the appellant to the travel agents through SITA nodes located in India, collectively, constituted PE of the appellant in India under Article 5 of the Indo-Spain DTAA (“the Treaty”) and the income arising to the appellant from the airlines, etc. was attributable to the activities of the alleged PE in India.
6. That the assessing officer erred on facts and in law in alleging that Amadeus India (P) Ltd. (AIPL) constituted dependent agent permanent establishment (PE) of the appellant in India and the income arising to the appellant from the airlines, etc., was attributable to the activities of the alleged PE in India.
6.1 That the assessing officer erred on facts and in law in alleging that the appellant was not making any payment to AIPL towards the activities of marketing the appellant’s CRS and providing the hardware support to the travel agent and therefore the distribution fee paid to AIPL was not at arm’s length and consequently AIPL constituted dependent agent PE of the appellant.
Without prejudice – Re: Attribution of Income
7. That the assessing officer erred on facts and in law in computing the profits attributable to the alleged PE of the appellant in India at Rs. 108,94,12,818/-.
8. That the assessing officer erred on facts and in law in not appreciating that even if it is assumed that AIPL or the computers, electronic hardware provided to the travel agents etc., constituted PE of the appellant in India, the income derived from such PE was completely consumed by distribution and other expenses attributable thereto and that no income survives for taxation.
9. That the assessing officer erred on facts and in law in not following the order of the Delhi Bench of the Tribunal in the appellant’s case for the assessment years 1996-97 to 1998-99, wherein the Tribunal had attributed 15% of the revenues relating to the bookings made from India as attributable to the appellant’s PE in India and held that no income is taxable as the payment made to dependent agent was more than the revenues so attributed, alleging that the facts before the Tribunal in the aforesaid assessment years were different than the facts obtaining in the assessment year 2007-08.
9.1 That the assessing officer erred on facts and law in misinterpreting the aforesaid order of the Tribunal and alleging that the Tribunal has attributed revenues to only the software development related services provided by AIPL, not appreciating that the Tribunal considered all the services required to be provided by AIPL under the Distribution Agreement and AIPL continued to provide the same services under the Distribution Agreement during the previous year under consideration, too.
10. That the assessing officer erred on facts and in law in alleging that no remuneration was paid by the appellant to AIPL for main activity of marketing the CRS and providing the hardware support to travel agents and, therefore, profits from such functions were required to be attributed to the appellant’s dependent agency PE in India.
11. Without prejudice, that the assessing officer erred on facts and in law in not allowing deduction on account of distribution fee paid to AIPL on the ground that in the invoices raised by AIPL on the appellant, the fee was described as “charges for export of processed data/software” and not distribution fee.
11.1 That the assessing officer erred on facts and in law alleging that AIPL was remunerated only for software development services and not CRS marketing support services, on the ground that AIPL had claimed deduction under section 80HHE of the Act in respect of the remuneration received by the appellant.
12. That the assessing officer erred on facts and in law in disallowing deduction of Euro 6,335,000/-incurred by the appellant under the head ‘Development Cost’, while computing the income attributable to the alleged PE.
12.1 That the assessing officer erred on facts and in law in not appreciating that the appellant was engaged in the business of providing CRS services and the expenses incurred in connection with product development function carried out outside India were required to be excluded while computing the income of the alleged PE of the appellant in India.
Re: CRS income – Royalty
13. That the assessing officer erred on facts and in law in alternatively holding that booking fee of Euro 59,867,000 received by the appellant was taxable in India as ‘royalty’ both under section 9(1)(vi) of the Act and Article 13(3) of the Treaty.
14. That without prejudice, the assessing officer erred on facts and in not appreciating that the booking fee received from non-resident airlines was not sourced in India in terms of Article 13(6) of the Treaty and was not liable to tax in India as ‘royalty’.
14.1 That the assessing officer erred on facts and in law in holding that source of income of the alleged royalty income was located in India alleging that the most of the airlines from whom booking fees was received were resident in India.
14.2 That the assessing officer erred on facts and in law in not bringing any evidence on record to establish that the non-resident airlines making payment to the appellant had permanent establishment in India and the booking fee paid by them to the appellant was borne by such permanent establishments.
15. Without prejudice, the assessing officer erred on facts and in law in levying tax @ 20% on the aforesaid alleged ‘royalty’ income, not appreciating that in terms of Article 13 of the Treaty read with paragraph (7) of the Protocol thereto, such income could be taxed only @ 10%.
Re: Altea system
16. That the assessing officer erred on facts and in law in holding that payments received by the appellant from British Airways in relation to the alleged use of Altea system and Article was taxable in India as ‘royalty’ both under section 9(1)(vi) of the Act 13(3) of the Treaty.
17. That the assessing officer erred on facts and in law in alleging that the appellant filed the agreement with British Airways in relation to use of Altea system at the fag end of the assessment and that the nature of Altea Reservation System was explained for the first time at the fag end of the assessment, vide reply dated 28.12.2009.
18. That without prejudice, the assessing officer erred on facts and in law in not appreciating that the payments received from British Airways in relation to the Altea System were not sourced in India in terms of Article 13(6) of the Treaty and were liable to tax in India as ‘royalty’.
18.1 That the assessing officer erred on facts and in law in not bringing any evidence on record to establish British Airways had permanent establishment in India and the payments made for the use of Altea system were borne by such permanent establishment.
19. Further without prejudice, the assessing officer erred on facts and in law in holding on adhoc basis a sum of Euro 6 million as the income of the appellant liable to tax in India as ‘royalty’ for the alleged use of Altea system by British Airways.
20. Without prejudice, the assessing officer erred on facts and in law in levying tax @ 20% on the aforesaid alleged ‘royalty’ income, not appreciating that in terms of Article 13 of the Treaty read with paragraph (7) of the Protocol thereto, such income could be taxed only @ 10%.
Re: Charge of interest
21. That the assessing officer erred on facts and in law in levying interest under section 234B of the Act.
Re: Credit for tax deducted at source
23. That the assessing officer erred on facts and in law in not allowing credit for tax deducted at source by various airlines making payment to the appellant, amounting to Rs.5,33,03,605/-.”
4. The issues have been clubbed and adjudicated together for all the years.
Permanent Establishment:
5. The AO has computed the income of assessee as PE at Rs.1,45,25,50,424/- in relation to the booking fee relatable to the segments booked from India through the CRS developed by the assessee. Then, the AO attributed 75% of the income as income of the assessee as PE in India.
6. At the outset, it was brought to our notice by the ld. AR that the Hon’ble High Court of Delhi in the assessee’s own case for the assessment years 1996-97 to 2006-07 has held that computers installed at the premises of the subscribers constitute a PE of the assessee in India in terms of Article 5(1) of Indo-Spain treaty. It was also held that since the Amadeus India is functionally dependent upon the assessee it do constitute an agency PE in India in terms of Article 5(iv) of the Indo-Spain treaty.
7. Since, the facts are undisputed and since the Hon’ble Jurisdictional High Court in assesee’s own case ITA Nos.191, 192, 193/2011 {( based on the judgment in the case of DIT Vs. Galileo International Inc. (224 CTR 251)} has held that the assessee constitutes an agency PE and as the matter pending before the Hon’ble Supreme Court, the issue do not call for any interference from our side. The order of the ld. DRP is being upheld on this ground.
Attribution of Profit:
8. Ground Nos. 7 to 12.1 pertains to attribution of profits.
9. The AO held that the assessee has earned a profit of Rs.1,452,550,424/- or Euro 2,50,90,000 from India. The ratio of attribution is to be worked out, by considering the importance & range of functions of AIPL especially in the new agreement dated 01.10.2004. The AO held that as the competition is growing in the market, the role of marketing functions in earning profit increases. Further, it was held that the number of assets of the assessee is growing in India and new facts relating to presence of assets in India have also been found out. Holding thus, the AO worked out the profit attributable to India @ 75% of the total profit. The AO held that the Profit attributable to Indian Permanent Establishments was Rs.1,08,94,12,818/- taxable at the rate of 40% plus surcharge & education cess i.e. 41.82%.
10. The ld. DRP confirmed the order of the Assessing Officer.
11. This issue has been adjudicated over a period of time for various years and the decision of the Tribunal has been affirmed by the Hon’ble Jurisdictional High Court. The Co-ordinate Bench of the Tribunal for the assessment years 1996-97 to 1998-99, after considering the extent of activities in India and abroad, the assets employed and risks assumed, held 15% of the revenues relating to the bookings made from India as attributable to the assessee’s PE in India.
12. The Co-ordinate Bench of ITAT, vide order dated 16.11.2016 passed for assessment years 1999-00 and 2000-01, following the order for the assessment years 1996-97 to 199899, held that 15% of the revenues earned by Amadeus from its activities in India shall be attributable to the PE. It is also pertinent to point out that the ITAT, vide order dated 24.04.2009, in MA Nos. 212 to 213/D/2008, filed by the Department against the order dated 30.11.2007 relating to AYs 1997-98 and 1998-99, categorically held that revenues of 15% attributed by it to the PE were in relation to activity of the PE as a whole, i.e., considering the agency and as well as fixed place of business functions.
13. The Hon’ble Delhi High Court following its decision in the case of DIT v. Galileo International 224 CTR 251, has affirmed the orders of the Tribunal passed for assessment years 1996-97 to 2006-07.
14. It was brought to our notice that the Assessing Officer had, in the assessment order for assessment year 2005-06, sought to distinguish the decision of the Tribunal in assessee’s own case for assessment years 1996-97 to 1998-99 on similar grounds. However, the ld. CIT(A), vide order dated 25.02.2010, allowed the appeal of the assessee holding that no more than 15% of the revenues generated from India could be attributed to the alleged PE of the assessee in India. The aforesaid order passed by the ld. CIT(A) for assessment year 2005-06 has been confirmed by the ITAT, vide order dated 29.10.2010 and the Hon’ble High Court vide order dated 31.05.2011 (Revenue appeal) and dated 13.08.2013 (Assessee appeal).
15. Since, the facts remained unaltered and since payment to the agent is already @33%, no further addition is warranted in the case of the assesse.
Disallowance of Expenses:
16. The Assessing Officer has disallowed the claim of the assessee on account of the distribution expenses. The ld. DRP upheld the addition on the grounds that no documents have been filed in support of the distribution activity.
17. We have gone through the history of such expenditure and find that the addition is being made owing to confusion in the description of the services as “export of processed data/software” or “distribution fee”
18. This expenditure has been allowed by the Co-ordinate Bench of the Tribunal from the assessment years 1996-97 to 2006-07. Since, the facts have not been disputed, in the absence of any material change, we hereby allow the claim of distribution expenses.
CRS Income – Royalty:
19. The AO has held that the income received by the assessee with respect to bookings arising from India is also taxable as royalty income. The AO observed that the assessee supplies/ licenses its proprietary products free of charge to Amadeus India for distribution to the Subscribers. As per the Distribution Agreement, the assessee has authorized Amadeus India to conclude “Subscriber Agreement” with the Subscribers which allows the Travel Agents to use the CRS Owned by it. The Assessing Officer has given a finding that the paying airlines have offices in India. The assessee has granted to Amadeus India the right to further grant the right to access and right to use its platforms/ software/ product offerings to Subscribers. Amadeus India has the exclusive rights to distribute the CRS in India.
20. The AO has held that a software is also type of equipment in the facts of the case. The system comprising of equipments is used by the subscribers to book tickets and the same is the source of income for the assessee. The AO held that the income of the assessee is taxable as royalty also as ‘use of process’.
21. The ld. DRP confirmed the order of the Assessing Officer.
22. In the assessment framed for assessment year 2006-07, the Assessing Officer had substantively brought to tax, the booking fee as business income and protectively held the same to royalty since in that year the tax worked out in treating the income as royalty was less than the tax worked out after attributing income to the alleged PE of the assessee.
23. The Delhi Tribunal in assessee’s own case for the assessment year 2006-07 has held that booking fee received by the assessee is taxable as business income and not under the head royalty. For the sake of ready reference and brevity, the relevant portion of the order of the ITAT in ITA No. 1494/Del/2011 is reproduced below:
“In the present case, too, as submitted hereinabove, the appellant uses sophisticated technology/software in the course of providing a service/facility but the appellant does not divulge any process involved in the technology/software to the user of the CRS. The appellant does not make available to the participating airlines any secret formula or process. Also, no equipment is provided by the appellant for use to the participating airlines. Further, no payment is made by the subscribers, viz., the travel agents to the appellant, unlike the aforesaid case.
In that view of the matter, the booking fee received by the appellant from the participating airlines does not answer the description of ‘royalty‘ and, thus, is not chargeable to tax in India.”
24. Since, the facts have not been disputed in the absence of any material changes, we hereby hold that the booking fee received is in the nature of business income.
Altea Reservation System:
25. The AO held that in relation to the bookings arising from India, the payment for Altea Reservation System (ARS) is made by the British Airways for the use of system for the purpose of business in India and for the purpose of earning income from India. On the travel agents, offices of British Airways use this system as a right provided by the British Airways. The AO held that the ARS has been specifically and exclusively used by British Airways. Hence, taxed this amount under the head “income from royalty” and tax @ 20%.
26. The ld. DRP has upheld the action of the Assessing Officer on the grounds that the functionality on the business module facts of ARS suggests that the revenue charging on this account may be linked to the number of reservations/bookings done through this system.
27. It was canvassed before us, the ARS system is installed at the Airports and is accessed only by the Airlines and not by the agents of the assessee. It was argued that the system was available only to British Airways for the purpose of accepting payment and travelled documentation only at the Airport counters. It was argued that the payment made by British Airways to the assessee in relation to the ARS is for services rendered by the Amadeus and not for use of any process. It was argued that since the inventory hosting takes place outside India and payment is made by non-resident Airlines to another non-resident outside India, in terms of Article 13(6) of the treaty, the payments deemed to have been not sourced in India. We find that the revenue has brought out information which proclaim that the assessee with British Airways developed Altea Reservation System for distribution through British Airways Sales Outlets, the products namely Altea Inventory for Global Inventory Management and Altea Departure Control for passenger checking and flight departure management. The British Airways uses ARS on its website and for revenue management system. We also heard the argument of the assessee that the ARS has no relation to the PE of the assessee in India. The source of revenue received by the assessee in connection with ARS is not situated in India. We find that ARS is essentially an inventory hosting and management system developed by the assessee which some airlines outsourced to Amadeus, with British Airways as a launch customer. The payment for the ARS is made by the British Airways for the use of the system for the business in India at the Indian Airport is an undisputable fact. While the contention of the assessee is that the software was not available outside the Indian Airport or to any of the agents of the assessee in India, the revenue contended that the ARS also provides key operational services to British Airways like accepting payment and issuance of travel documents and manage customer checking. It was also submitted by the assessee that the arguments taken up with regard to CRS activity as royalty may also be considered while dealing with ARS issue.
28. The Article 7 reads as under:
ARTICLE 7
BUSINESS PROFITS
1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment 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 that permanent establishment.
2. Subject to the provisions of paragraph 3, where an enterprise of one of the States carries on business in the other State through a permanent establishment situated therein, there shall in each State be attributed to that permanent establishment 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 permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on the basis of an apportionment of the total profits of the enterprise to its various parts, provided, however, that the result shall be in accordance with the principles contained in this Article.
3. (a) In determining the profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. Provided that where the law of the State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention between that State and a third State which enters into force after the date of entry into force of this Convention, the competent authority of that State shall notify the competent authority of the other State of the terms of the corresponding paragraph in the Convention with that third State immediately after the entry into force of that Convention and, if the competent authority of the other State or requests, the provisions of this sub-paragraph shall be amended by protocol to reflect such terms.
(b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment 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 or other rights, or by way of commission, 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 permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment 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 or other rights, or by way of commission 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.
4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
5. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
6. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.”
29. Article 13 reads as under:
ARTICLE 13
ROYALTIES AND FEES FOR TECHNICAL SERVICES
1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services the tax so charged shall not exceed :
