Amadeus IT Group SA Vaish Associates Vs ACIT (ITAT Delhi)
ITAT Delhi held that the booking fee received by the assessee from non-resident airlines is taxable as ‘business income’ and not as ‘royalty’ u/s. 9(1)(vi) of the Income Tax Act and Article 13(3) of Indo-Spain DTAA.
Facts- Assessee is a tax resident of Spain. The assessee along with its affiliated companies has developed a fully automated computer information system, which enables display and dissemination of information supplied by various airlines, which in turn facilitates, inter alia, reservations, communications, ticketing and related functions on a worldwide basis (‘CRS’) for the travel industry. The CRS is for the facility of both travel agencies and airline offices worldwide. The assessee has entered into agreements with various airlines by providing interconnectivity between the host computer of the individual airline and the Amadeus CRS created by the assessee at Erding, Germany. Amadeus also provides connectivity to its CRS to the travel agents.
In order to ensure that the customers’ needs in each national market/country are met, the assessee has entered into distribution agreements with various National Marketing Companies (“NMCs”), incorporated in the respective national markets/countries for distribution/marketing of the aforesaid CRS. The NMCs are required to seek subscribers (normally travel agents) and enter into agreements with them whereby the NMCs provide the subscribers with appropriate access to the CRS host. The assessee has a distribution agreement with its NMC in India viz., Amadeus India Private Ltd. (‘AIPL’) and ResBird Technologies Pvt. Ltd. (‘ResBird’). The travel agents in India, who intend to use the aforesaid CRS have entered into subscriber’s agreement with the AIPL and ResBird.
AO assessed total income of the assessee at Rs. 758,13,93,137/- and inter alia concluded that the profit attributable to PE is to be taxed at normal rate and the income from royalty is to be taxed at 10% as per provisions of Article 13 of India-Spain DTAA and interest under section 234A, 234B and 234C to be charged as per this final order. Being aggrieved, the present appeal is filed.
Conclusion- Held that recently the Hon’ble Supreme Court vide order dated 19.04.2023 has decided the issue of attribution of profit to the alleged PE of the assessee in India upholding the order of the Delhi High Court confirming that 15% of the revenue earned by the assessee is taxable in India. Since the issue on attribution has attained finality, the ground of existence of PE of the assessee in India has become academic in nature.
Held that the issue is squarely covered by the decision of the Hon’ble Delhi High Court in assessee’s favour wherein it has been held that the booking fee received by the assessee is taxable as ‘business income’ and not as ‘royalty’.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal filed by the assessee is directed against the order dated 30.05.2023 passed by the Ld. Asstt. Commissioner of Income Tax, Circle Int. Tax-1(1)(1), Delhi (“AO”) under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the “Act”) pertaining to Assessment Year (“AY”) 2020-21.
2. The assessee has raised the following grounds of appeal:
“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. 758,13,93,137 as against ‘Nil’ income returned by the appellant.
2. That the assessing officer erred on facts and in law in alleging that the appellant avoided furnishing specific information called for in the assessment, particularly the various agreements with the airlines.
Re: CRS income-Permanent establishment
3. That the Dispute Resolution Panel (DRP) 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 following the orders of earlier years, not appreciating that no income accrued or arose to the appellant in India.
4. That the DRP/ assessing officer erred on facts and in law in holding that computers, electronic hardware/software, and the connectivity provided by the appellant to the travel agents through SITA/ third party 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.
4.1. That the DRP/ assessing officer erred on facts and in law in holding that as the website of the appellant shows that it has various offices in India for performing functions like training, product development, technical support, etc., such office premises constitute fixed place PE of the appellant in India.
5. That the DRP/ 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.
5.1. That the DRP/ 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.
5.2. That the DRP/ assessing officer erred on facts and in law in alleging that the appellant exercised control over the subscribers/ travel agents through AIPL.
5.3. That the DRP/ assessing officer erred on facts and in law in holding that AIPL constituted PE of the appellant under Article 5(4) of the Treaty on the ground that AIPL was carrying out negotiations with the subscribers/ travel agents without appreciating that in terms of the said Article, PE is constituted only when such enterprise has and habitually exercises authority to conclude contracts on behalf of the foreign enterprise.
6. That the DRP/ assessing officer erred on facts and in law in holding that the offices of AIPL constitute PE of the appellant in India without even specifying under which paragraph of Article 5 of the Treaty such offices of Amadeus constitute PE of the appellant.
Re: Attribution of Income
Without prejudice
7. That the DRP/ assessing officer erred on facts and in law in computing the profits attributable to the alleged PE of the appellant in India at Rs. 394,97,47,919/-
8. That the DRP/ 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 DRP/ assessing officer erred on facts and in law in not following the order of the Supreme Court for assessment years 1996-97 to 2005-06 wherein the Supreme Court 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, and in following the rate of attribution of 75% adopted in the order for assessment years 2007- 08 to 2019-20.
10. That the DRP/ assessing officer erred on facts and in law in following the order for assessment year 2007-08 to allege 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. That the DRP/ assessing officer erred on facts and in law in disallowing expenditure of Euro 45,917,375/- incurred by the appellant under the head ‘Distribution fee’, while computing the income attributable to the alleged PE, following the assessment order for assessment year 2007-08.
11.1. That the DRP/ 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.
12. That the DRP/ assessing officer erred on facts and in law in disallowing expenditure of Euro 17,757,948/- incurred by the appellant under the head Development fees’, while computing the income attributable to the alleged PE, following the assessment order for assessment year 2007-08.
13. That the DRP/ assessing officer erred on facts and in law in disallowing expenditure of Euro 13,459.711/- incurred by the appellant under the heads Marketing cost and ‘Central operating cost’, while computing the income attributable to the alleged PE, on the ground that the appellant has not been able to establish that the aforesaid expenditure has been incurred specifically for the Indian distribution activity and the justification of incurring such expenditure.
13.1. That the DRP/ assessing officer erred on facts and in law in holding that allocation of cost, particularly marketing costs, on the basis of number of bookings generated will always result in over allocation of cost to a fully grown up market like India and consequently, erred in not accepting the cost allocation method adopted by the appellant.
13.2 That the DRP/ assessing officer erred on facts and in law in not appreciating that the aforesaid costs have a direct nexus with the booking fees received from bookings made from India and, therefore, the same were required to be taken into consideration while computing the income attributable to the alleged PE.
13.3 That the DRP/ assessing officer erred on facts and in law in, alternatively, disallowing the aforesaid expenses by invoking provisions of section 40(a)(i) of the Act.
13.4 That the DRP/ assessing officer erred on facts and in law in holding that part of the allocated expenses has already been included in the expenses incurred in India resulting in duplication of deduction.
13.5 That the DRP/ assessing officer erred on facts and in law in alleging that the aforesaid expenses were in the nature of ‘head office’ expenses and allowed deduction @5% of adjusted income under section 44C of the Act.
14. That without prejudice the DRP/ assessing officer erred in facts and in law in erroneously computing the income of the alleged PE of the appellant.
Re: CRS income- Royalty
15. That the DRP/ assessing officer erred on facts and in law in, alternatively, holding that booking fee of Euro 102,026,836/- 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.
16. That without prejudice, the DRP/ 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’.
16.1 That the DRP/ assessing officer erred on facts and in law in holding that source of income accruing to the appellant was located in India by alleging that the most of the airlines from which revenues were received were resident in India, which is factually incorrect.
17. Without prejudice, that the DRP/ assessing officer, having held the appellant to have permanent establishment in India, erred on facts and in law in bringing to tax the alleged “royalty’ income on gross basis, without appreciating that in terms of section 44DA of the Act and Article 13(5) of the Treaty, royalty income effectively connected with the PE of the nonresident is required to be taxed as business income on net basis.
Re: Altea system
18. That the DRP/ assessing officer erred on facts and in law in holding that payments received by the appellant from various airlines in relation to the alleged use of Altea system was taxable in India as ‘royalty’ both under section 9(1)(vi) of the Act and Article 13(3) of the Treaty.
19. That without prejudice, the DRP/ assessing officer erred on facts and in law in not appreciating that the payments received from various airlines in relation to the Altea System were not sourced in India in terms of Article 13(6) of the Treaty, therefore, were not liable to tax in India as ‘royalty’.
20. Further without prejudice, the DRP/ assessing officer erred on facts and in law in holding on adhoc basis a sum of Euro 43.88 million as the income of the appellant liable to tax in India as ‘royalty’ for the alleged use of Altea system by various airlines, without affording an opportunity of being heard to the appellant, in gross violation of the principles of natural justice.
Re: Charge of interest
21. That the DRP/ assessing officer erred on facts and in law in levying interest under section 234A and section 234B of the Act.”
3. Briefly stated, assessee is a tax resident of Spain. The assessee along with its affiliated companies has developed a fully automated computer information system, which enables display and dissemination of information supplied by various airlines, which in turn facilitates, inter alia, reservations, communications, ticketing and related functions on a worldwide basis (hereinafter referred to as ‘CRS’) for the travel industry. The CRS is for the facility of both travel agencies and airline offices worldwide. The assessee has entered into agreements with various airlines (‘Participating Carrier Agreement’) by providing interconnectivity between the host computer of the individual airline and the Amadeus CRS created by the assessee at Erding, Germany. Amadeus also provides connectivity to its CRS to the travel agents. The Participating Carrier Agreement, inter alia, provides that the participating airline shall pay to the assessee the charges for display of airline information through Amadeus CRS, in the form of booking fee for each participant net booking made through the Amadeus system.
3.1 In order to ensure that the customers’ needs in each national market/country are met, the assessee has entered into distribution agreements with various National Marketing Companies (“NMCs”), incorporated in the respective national markets/countries for distribution/marketing of the aforesaid CRS. The NMCs are required to seek subscribers (normally travel agents) and enter into agreements with them whereby the NMCs provide the subscribers with appropriate access to the CRS host. The assessee has a distribution agreement with its NMC in India viz., Amadeus India Private Ltd. (‘AIPL’) and ResBird Technologies Pvt. Ltd. (‘ResBird’). The travel agents in India, who intend to use the aforesaid CRS have entered into subscriber’s agreement with the AIPL and ResBird.
3.2 The Airlines provide the information which they would like to be displayed in a neutral form on the CRS host terminal from where the information is disseminated worldwide to the travel agents who ask for being connected to the CRS host terminal. The business of the Airlines is promoted if the travel agent is facilitated to obtain the information easily and promptly, which facility is provided for the Airlines by the CRS.
4. Given the above business model, following issues arise in the case for consideration during the AY under consideration and accordingly, assessee was asked to furnish its explanation on each issue:-
(i) Whether the assessee has a PE in India?
(ii) If so, how much profits are attributable to the PE?
(iii) Whether the booking fee received by the assessee from CRS is in the nature of royalty income taxable in India?
(iv) Whether the receipts from Altea Reservation System are in the nature of royalty/FTS taxable in India?
5. For AY 2020-21, the assessee filed its return of income on 10.01.2021 declaring ‘nil’ income and claiming refund of Rs. 88,64,94,000/-. The assessee’s case was selected for scrutiny and statutory notices along with detailed questionnaire were issued to the assessee from time to time electronically through ITBA in response to which the assessee filed reply/submissions electronically which were duly analysed by the Ld. AO. The Ld. Dispute Resolution Panel (“DRP”) vide its order dated 05.04.2023 upheld the findings of the Ld. AO in respect of all the four issues mentioned in para 4 above. Consequent to the directions of the Ld. DRP, the Ld. AO passed the final assessment order on 30.5.2023 under section 143(3) r.w.s. 144C(13) computing the total income of the assessee as under:-
Computation of Income:
