Amadeus Global Travel Distribution Sa ... vs Dy. Commissioner Of Income-Tax on 30 November, 2007

[Cites 54, Cited by 21]

Income Tax Appellate Tribunal - Delhi

Amadeus Global Travel Distribution Sa ... vs Dy. Commissioner Of Income-Tax on 30 November, 2007

Equivalent citations: (2008)113TTJ(DELHI)767

ORDER

Deepak R. Shah, A.M.

1. Appeals No. 2143, 2144 & 2145/Del/2000 are directed against the common order of the learned Commissioner of Income-tax (Appeals)-XXIX, New Delhi, dated 23.3.2000 in an appeal against assessment framed under Section 143(3) of the Income-tax Act, 1961 (the Act).

1.2. Appeals No. 1022, 1023 & 1024/Del/2005 are directed against the common order of the learned Commissioner of Income-tax (Appeals)-XXIX, New Delhi, dated 28.12.2005 in an appeal against assessment framed under Section 143(3) read with Section 250 of the Act.

1.3. Since common 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 information/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 use of CRS.

2.1 The relevant clauses of the standard draft of the PCA are as under:

PARTICIPA TING 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 to as "AMADEUS".

And Corporation, with principal offices at__________ hereinafter referred to as ''PARTICIPANT"

WITNESSETH:

WHEREAS the AMADEUS group of companies is developing a fully automated reservations and distribution system known as AMADEUS Global Travel Distribution System (the "AMADEUS System"), with the ability to perform comprehensive information, communication, reservations, ticketing, distribution and related functions on a world wide basis, for and on behalf of its Founding Airlines and Partners (the 'AMADEUS Affiliates") and participating Carriers, and, WHEREAS the PARTICIPANT wishes to participate in the AMADEUS System as a Participating Carrier under the conditions set forth hereinafter, and WHEREAS AMADEUS and PARTICIPANT believe that the implementation of this Agreement will facilitate the dissemination of information supplied by AMADEUS Affiliates and Participating Carriers, including the PARTICIPANT and the promotion of their products and services, NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, and other good and valuable considerations, the parties hereby agree as follows:

Article 1 Definitions:

xx xx "AMADEUS Information Systems"

Means a static display contained in the AMADEUS System and used to communicate to the AMADEUS Subscribers certain information pertaining to Participant including but not limited to instructions for pricing support, marketing information, special request procedures and briefings.

"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.

XX XX "Booking"

Means a passenger segment created in the itinerary portion of the passenger name record ("PNR "). For example, a passenger on a direct flight shall be counted as one booking; a passenger on two connecting flights shall be counted as two Bookings. Multiple passengers with the same passenger record Segment constitute multiple Bookings.

XX XX "AMADEUS Central Systems"

Means the central computer facility to which the Systems of the AMADEUS Affiliates, other providers AMADEUS subscribers, and other AMADEUS System end-users are connected.

xx xx "Participating Carrier"

Means any carrier that has entered into a Participating Carrier Agreement with AMADEUS.

XX XX Article 2 RESPONSIBILITIES AND RIGHTS OF THE PARTICIPANT A) Services provided

1. The PARTICIPANT shall, at its own cost, co-ordinate it 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 technical feasibility. The PARTICIPANT will also make its best efforts to ensure that any CRS with which it is affiliated provides this level of display and Booking facilities in respect of AMADEUS Affiliates, subject to technical feasibility. The PARTICIPANT'S obligations under this Agreement will automatically apply to any entity that becomes an AMADEUS affiliate.

4. The PARTICIPANT will provide AMADEUS, as rapidly as possible, with all revisions to its information services provided to passengers, including but not limited to interim schedule change date, fare and fare quotations.

XX XX F.) Reservations policy

1. The PARTICIPANT will accept for transportation any passenger holding a ticket bearing an "OK" status issued from a PARTICIPANT Segment as a result of a Booking made by an AMADEUS Subscribe, A TO or CTO even though no record of this reservation may exist in the PARTICIPANTS reservations system,and even though over Booking may result therefrom and denied boarding compensation may be required.

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4. The PARTICIPANT will establish a special reject queue in its teletype inbound system in which reservations made through the AMADEUS System that are not automatically processed by the PARTICIPANT system for any reason will be handled on a priority basis. The PARTICIPANT will review rejected messages and will investigate and implement new measures to reduce such rejects where volume so justifies.

xx xx Article 3 RESPONSIBILITIES AND RIGHTS OF AMADEUS A) Non-discriminatory services

1. AMADEUS will company with all applicable regulations concerning display of information.

2. AMADEUS will offer neutral display to all AMADEUS Subscribers. The AMADEUS Display will conform to the EEC-Code of Conduct. A number of display options will be available to meet the requests of customers.

3. In the neutral display provided to AMADEUS Subscribers, referred to in Article 3.A) above subject to AMADEUS Subscriber's input parameters AMADEUS shall display the PARTICIPANT direct and connecting flights in a non-discriminatory manner on the same level as the direct non-stop, other direct and connecting flights or other transpiration services, respectively, of any other Participating carrier.

4. In the neutral display provided to AMADEUS Subscribers, referred to in Article 3.A) 2 above subject to the editing rules, which are available 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 above mentioned input parameters and editing rules.

xx xx Article 4 CHARGES

1. The PARTICIPANT shall pay AMADEUS a Booking fee for each PARTICIANT Net Booking made through the AMADEUS System, including Booking made by ATO 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.

xx xx Article 5 PA YMENTS 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 Clearing House), invoices will be automatically settled though the IATA Clearing House or the A.C.H. The settlement of such invoices shall be in accordance with IATA (or A.C.H.) Clearing House Regulations.

II. Direct Payment In case the PARTICIPANT is not a member of the IATA Clearing House or the A.C.H., payment will be made by direct bank transfer to such bank account specified by AMADEUS, in the currency specified by AMADEUS, within thirty (30) days of invoice date. PARTICIPANT will pay AMADEUS the full amount invoiced, and thereby assumes all banking and other financial costs.

In any sum payable under the Agreement is not paid by the due date, then AMADEUS shall be entitled to charge the PARTICIPANT interest on such sum, at the rate of two percentage points above the three month ECU LIBOR rate effective on that value date. Such interest shall be charged from and including the first value date until the date of payment of the amount due on a 360 day basis.

xx xx Article 18 INDEPENDENT CONTRACTORS Nothing in this Agreement is intended or shall be construed to crate or establish an agency, a partnership or a joint venture relationship between the parties to this Agreement, or as constituting either Party as the agent or representative of the other for any purpose in any manner whatsoever.

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3. In order to promote the use of CRS in various countries, the appellant has entered into 'Distribution Agreement' ('the DA') with a National Marketing Company (NMCs) incorporated in India, viz., Amadeus India Pvt. Limited, (AIPL), for distribution/marketing of the CRS in India.

The relevant clauses of the DA are as under:

AMADEUS Distribution Agreement PARTIES The parties to the agreement are:

AMADEUS MARKETING, S.A., a Spanish Corporation with principal office as Salvador de Madariaga, 1, 28027 Madrid, Spain (hereinafter referred to as ''AMADEUS Marketing") AMADEUS INDIA PVT. LTD, an India corporation with principal offices at E-9 Connaught House, Connaught Place, New Delhi 110001, India (hereinafter referred to as 'Amadeus India") Whereas, the AMADEUS Group has developed a fully automated reservations and distribution system known as the Amadeus Global Travel Distribution System, with the ability to perform comprehensive information, communications, reservations, ticketing and related functions on 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 data base owned by AMADEUS called "AMADEUS Global Core " or to other computer data bases 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:

xx xx "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 may be further described in one or more Supplemental Agreements to this Agreement executed from time to time by the Parties.

"Amadeus System" means the reliable, flexible, neutral, and unbiased computerized and travel related information, sales and distribution hardware and software system being developed, operated, and distributed by the AMADEUS Group.

XX XX "Local Network" means the communication lines paid for by AMADEUS Marketing and provided by it under contract from a third party (e.g. SITA or local PTT's) used to transmit messages to and receive messages from the AMADEUS Global Core and other computer centers and databases used to provide communicate AMADEUS Products to Subscribers.

"National Marketing Company" or "NMC" means a company that has entered into a contract similar to this Agreement with AMADEUS Marketing whereby it provides the Subscribers with appropriate access to the AMADEUS Products and to the computer data base owned by AMADEUS, among other things, in a defined territory.

xx xx "Subscriber" means any travel agency or branch thereof or corporate account or other entity who contracts to receive access to a Distribution System. xx xx

4. PROPRIETARY MARKS 4.1 AMADEUS Marketing grants AMADEUS INDIA the right to use certain Proprietary Marks connected with the AMADEUS Products as long as this Agreement remains in force. The Proprietary Marks include, but are not limited to, those registered or which may become registered with the International Trademark Office, the Spanish Trademark authorities or other National Trademark offices.

xx xx 4.7 Amadeus India shall promptly report to Amadeus marketing any unauthorized use of the Proprietary Marks that comes to its affection in any manner whatsoever. Upon request of Amadeus Marketing, Amadeus India agrees to cooperate with Amadeus Marketing to prevent unauthorized use of the Proprietary cooperate with Amadeus Marketing to prevent unauthorized use of the Proprietary Marks, or any confusingly similar mark, at the sole expense of Amadeus Marketing.

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6. Fees payable by Amadeus Marketing 6.1 AMADEUS marketing shall pay to AMADEUS INDIA based on each segment processed through the AMADEUS Global Core originated by a booking made by Subscribers located in the AMADEUS INDIA territory (including Branches located in the AMADEUS INDIA Territory of a chain of travel 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 Marketing that a Subscriber is abusing the Amadeus Products, either by excessive use in relation to the number of Bookings generated by the Subscriber or otherwise, AMADEUS Marketing and AMADEUS INDIA shall consult on the matter, and AMADEUS Marketing may direct AMADEUS INDIA either to require the Subscriber to stop such misuse or to exercise its right to terminate the Subscriber on account of such abuse, provided, however, that if such abuse consists of excessive use in relation to the number of Bookings generated or of such Other abuse as can reasonably be ameliorated by payment of financial compensation, AMADEUS INDIA may offer to pay AMADEUS Marketing a subsidy sufficient to compensate the Amadeus Group and any licenser for such use.

7.4. Amadeus India may, with the agreement of Amadeus Marketing, accept the assignment of a contract previously entered into by another Amadeus National Marketing Company or a third party. In such a case, AMADEUS INDIA will honor the commitments made in such contract and will provide at least the level of technical and other support required by the assigned contract.

8. PRODUCT DEFINITION AND CONTROL 8.1 AMADEUS Marketing will define for Amadeus India the following:

(a) Amadeus Products required and permitted to be offered to Subscribers;

(b) Specifications for equipment used by AMADEUS India and equipment offered to Subscribers for use in connection with the AMADEUS Products;

(c) Reasonable standards of service to be provided to Subscribers, including training, training materials, equipment servicing, operation of Customer Service/ Help Desks, order to install times and similar matters;

(d) Guidelines for system hardware maintenance (including levels of service staff and average time required for problem solving);

(e) Average response times for AMADEUS INDIA 's "Help facilities;

(f) Global marketing strategies and objectives;

(g) Amadeus corporate logos and marks.

8.1.1 AMADEUS India may use and offer only such equipment as has been certified by AMADEUS Marketing to conform to the specifications provided pursuant to Section 8.(b) AMADEUS India may propose additional equipment for certification by AMADEUS Marketing, which shall promptly perform any necessary tests, shall respond to such proposal promptly and shall not unreasonably withhold such approval.

9. OBLIGATION OF AMADEUS MARKETING 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 communications 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 NMC's, 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 Marketing shall provide, at its own cost and expense, the following services to facilitate the introduction of the AMADEUS products.

9.2.1 AMADEUS Marketing shall conduct a training program for AMADEUS INDIA personal covering the use of the AMADEUS Products. The training program shall be conducted at such location and time as AMADEUS Marketing may designate and shall be provided at no charge to AMADEUS INDIA for a number of person to be mutually agreed by AMADEUS Marketing and AMADEUS INDIA. All expenses to travel, lodging meals and other reasonable living expenses incurred by AMADEUS INDIA 's personnel in attending the program shall be borne and paid for by AMADEUS Marketing, if the program is not conducted at AMADEUS INDIA premises in India.

9.2.2 AMADEUS Marketing shall make available to AMADEUS INDIA initial training materials, including but not limited to computer software and data and materials for on-site training. Such materials shall at all times remain the property of AMADEUS Marketing.

9.3 AMADEUS Marketing shall provide the following continuing services for the benefit of AMADEUS INDIA:

XX XX 9.3.4 Amadeus Marketing shall provide, at its expense the communications links between the ANADEUS Global Core, other sales and information databases provided to the AMADEUS Group under license, and the Subscribers contracted by AMADEUS INDIA in India. In this respect, AMADEUS Marketing shall contract at its expense for the provision of a local network supplier in India.

9.3.5 AMADEUS Marketing shall provide, at its expense, the communication links between the offices of AMADEUS INDIA and the AMADEUS Global Core for provision of access to data base of administrative and support systems including INFOM, E-Mail, PROFS, Order Entry and Configuration Management Systems as may be generally available 9.3.6 AMADEUS Marketing shall provide, at its expense a central customer service/help desk to supplement the AMADEUS INDIA customer service/help desk;

xx xx

10. OBLIGATIONS OF AMADEUS INDIA 10.1 AMADEUS INDIA shall be responsible for providing access to the Subscribers of the AMADEUS Products within the AMADEUS INDIA Territory and will use reasonable efforts to promote and install the AMADEUS Products as widely within the AMADEUS INDIA TERRITORY as possible, subject to technical and commercial constraints.

10.2 AMADEUS INDIA shall set up 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 train gin 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 Sections 9. 2. 1 and 9.3.3. The between AMADEUS INDIA AMADEUS Marketing. AMADEUS INDIA shall provide training for Subscriber personnel that is necessary and appropriate to allocations shall be reasonable in 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 National Marketing Companies, Subscribers and other users, and in other similar initiatives organized by AMADEUS Marketing for the coordination of marketing, business development, advertising, quality control and consumer services activities of AMADEUS Marketing and the National Marketing Companies. All expenses of travel, lodging, meals and other reasonable living expenses incurred AMADEUS INDIA personnel in offending these conferences shall be borne and paid for by AMADEUS Marketing, if the conference is not held at AMADEUS INDIA premises in India, xx xx 10.9 AMADEUS INDIA shall provide access to all Amadeus products determined by Amadeus Marketing, including licensed databases and travel agency products, as listed in Appendix C to this Agreement.

xx xx

14. OBLIGATION UPON TERMINATION 14.1 Upon the termination of this Agreement by Amadeus Marketing pursuant to Section 13.1 and 13.3 of the Agreement, Amadeus India shall cease to provide the Amadeus Products, and Amadeus India shall;

14.1.1 Promptly settle accounts with AMADEUS Marketing. Termination of this Agreement under any circumstances shall not relieve AMADEUS INDIA of any debt, obligation, or liability to AMADEUS Marketing which may have accrued under this Agreement, and all accrued obligations of AMADEUS INDIA which expressly or by implication are to be performed after the termination of this Agreement shall survive such termination.

14.1.2 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.

14.1.3 Maintain the confidentiality and not disclose to any person any of the confidential business or trade secrets furnished to Amadeus India by AMADEUS Marketing under this Agreement or in connection with the business operated hereunder 14.2 Upon termination of this Agreement by AMADEUS INDIA, pursuant to Section 13.2 or 13.3 of this Agreement, AMADEUS Marketing shall;

14.2.1 Promptly pay to Amadeus India all sums owing from AMADEUS Marketing to Amadeus India. Termination of this Agreement under any circumstances shall not relieve AMADEUS Marketing of nay debt, obligation, or liability to Amadeus India which may have accrued under this Agreement and all accrued obligations of Amadeus Marketing which expressly or by implication are to be performed after the termination of this Agreement shall survive such termination.

xx xx APPENDIX A TO THE AMADEUS INDIA DISTRIBUTION AGREEMENT With reference to the Appendix A to which Article 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 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 Article 6.1.

1.2 Reimbursements by Amadeus Marketing to Amadeus India a) All international travel costs incurred by Amadeus India management or staff, traveling on behalf of, and at the request of AMADEUS marketing outside the AMADEUS India Territory will be invoiced to AMADEUS Marketing quarterly at costs basis provided that prior written approval of such costs has been given by Amadeus Marketing.

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4. As per the DA, AIPL is required to seek subscribers to the CRS (normally travel agents) and enter into 'Subscribers Agreement' ('the SBA') with them. The relevant clauses of the SBA are as under:

RECITALS WHEREAS the AMADEUS System is an advanced computer reservations system service that provides information regarding schedules, fares, and availability of air transport and other travel-related services, in addition to facilities for making reservations and issuing tickets on such services;

WHEREAS, AMADEUS provides full service products for use by its subscribers, allowing for the development of new business opportunities through enhanced customer services, in addition to efficient office management.

WHEREAS, AMADEUS is authorized to provide subscribers with access to the AMADEUS System;

and WHEREAS, AMADEUS has requested AMADEUS, and AMADEUS HAS AGREED TO PROVIDE Subscriber with access to certain functions of the CRS Service through such CRS Terminals and Equipment, and to provide reservations training and other services to support effective usage of the CRS Service.

NOW, THEREFORE, in consideration of the promises and the mutual obligations hereinafter set forth, AMADEUS and Subscriber hereby agree as follows:

I. DEFINITIONS The terms below have the following definitions for the purpose of this agreement:

(a) The 'AMADEUS System " shall mean AMADEUS"s computerized travel information and distribution system, which contains information about schedules, availability, fares and related services, and through which reservations can be made and/or tickets issued, and the AMADEUS provided functions made available in the CRS Terminal.

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4. LOCATION 4.1 Subscriber shall designate and Location for installation of the Subscriber Equipment, subject to AMADEUS's approval. Subscriber warrants and represents that each Location is owned by or controlled by Subscriber, and that it has authority to enter into this Agreement on behalf of each Location.

4.2 Each Location may be reviewed by AMADEUS to determine what, if any, physical modifications will be required to support the CRS Terminals and Equipment at that Location. Upon completion of the site review, AMADEUS may issue a site 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 Terminals and item of Equipment and conforming to the site survey recommendations, if any. Subscriber shall also, at is 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 cost and expenses, and any risk of loss or damage to the CRS Terminal or Equipment shall be borne by Subscriber.

XX XX 5.7 So long as the Subscriber Equipment is connected to the AMADEUS System, AMADEUS and/or a service organization or vendor designated by AMADEUS shall have the right to enter upon Subscriber's premises from time to time during Subscriber's business hours to inspect the Subscriber Equipment, to inspect Subscriber's record pertaining to the CRS Terminals and Equipment, and to monitor Subscriber's operation thereof.

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6. TRAINING 6.1 AMADEUS shall provide, at a mutually agreeable time, and at a location to be designated by AMADEUS, training, a trainer, and instructional materials for the proper operation of the Equipment and the functions of the CRS Terminal and the CRS Service for a number of Subscriber employees to be mutually agreed upon for each CRS Terminal connected to the AMADEUS System.

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8. CHARGES 8.1 Subscriber agrees to pay the charges listed in the attached Schedules for use of all standard functions and services, for interconnection to the AMADEUS System, and for any optional functions, chosen by Subscriber at each Location, within ten days following receipt of AMADEUS's quarterly invoice. All charges are payable in USD or equivalent INR at the AMADEUS office in New Delhi.

8.2. Subscriber shall pay to AMADEUS quarterly, CRS Terminal, Equipment and any other non-variable charges due pursuant to this Agreement and any Schedule which is part hereof. Billing for non-variable charges shall commence upon the Installation Date of the CRS Terminal and Equipment set forth in Schedule B. Optional, variable and or non-recurring charges will be billed to Subscriber after they have been incurred.

xx xx 9 USE OF THE AMADEUS SYSTEM BY SUBSCRIBER 9.1 So long as it is connected to the AMADEUS System, the Subscriber Equipment will be used by Subscriber solely for the purposes and functions permitted by this Agreement, and in strict accordance with operating procedures and rules issued from time to time by AMADEUS and/or the manufacturer of the Subscriber Equipment.

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11. LIABILITY OF AMADEUS AND SUBSCRIBER XX XX 11.2 Subscriber acknowledges that neither AMADEUS nor the other suppliers of date provided under the Agreement warrants the accuracy, merchant ability or the fitness particular purpose of any data or CRS terminal or Equipment provided under the Agreement, regardless of the means used to provide the same to subscriber.

XX XX 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, date or services furnished hereunder or any liability in negligence or tort with respect to the CRS Terminal or Equipment, date 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.

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15. OBLIGATIONS UPON TERMINATION 15.1 All Equipment, 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 happening of any of the events of default described in Article 14 of this Agreement AMADEUS shall have the right to retake possession of Equipment, software, training materials, proprietary marks, and other confidential information, and to enter upon subscriber's premises if AMADEUS deems it necessary, to remove such items therefrom. All such items recovered shall be in the same condition as when delivered to subscriber except for reasonable wear and tear. Subscriber agrees to release all such items to AMADEUS and to pay all deinstallation costs.

15.3 Subscriber agrees to cease use of any AMADEUS proprietary marks.

15.4. Subscriber agrees to maintain the confidentiality of anyproprietary information provided by AMADEUS.

15.5 (a) In the event of any termination of this Agreement, Subscriber will be liable to AMADEUS for any charges which accrued prior to the date of termination, including, but not limited to any previously unreimbursed costs incurred by AMADEUS in training Subscriber's employees and installing deinstalling or modifying CFS Terminals or Equipment hereunder:

(b) reimburse AMADEUS for costs remaining after rumination, including but not limited to the communication line costs whichcannot be cancelled by AMADEUS.

xx xx 4.1 It is made clear by assessee that no charges have been recovered from subscriber by the assessee or its agent namely AIPL for allowing use of CRS or in terms of Clause 15.5 of SBA.

5. The business model is summarized thus: Traditionally, a passenger intending to undertake a travel would approach a travel agent for booking of ticket on a particular Airline. The travel agent would consult the ABC books of the various airlines to find out the Airline which would suit the passenger. Once the flight on a particular Airline was finalized, the travel agent would contact the Airline through telephone or telex to obtain information about the availability of seat on the flight. If the seat is available the travel agent would book the ticket. On booking of ticket a contract would come into existence between the Airline and the passenger. The travel agent would get commission from the Airline for booking of ticket with that Airline. The Airline would earn revenue in the form of air fare. What CRS has done is made this whole process simpler, less time consuming and cost effective. The ABC books of the Airlines have 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 information regarding the Airlines is easily and promptly available to the people including travel agents. Therefore, various Airlines all over the world have entered into PCA with the appellant for display of their information/products, etc. through the CRS. The responsibilities of the appellant and participant Airlines are stated in Articles 2 & 3 of the PCA. Article 4 of the PCA provides that the appellant would receive payment for display of Airline information through CRS, in the form of 'booking fee' which would be computed on the basis of the net booking made using the CRS. Therefore, the appellant, in order to augment its revenues, is required to advertise and promote the use of CRS through which information about the Airlines is disseminated. In order to promote the use of CRS in various countries, the appellant has entered the DAs with various National Marketing Companies (NMCs) incorporated in the respective countries for distribution/marketing of the CRS. As per the DA, the NMCs are required to seek subscribers to the CRS (normally travel agents) and enter into SBA with them. As per the provisions of the SBAs, the NMCs configures the computers, etc. installed at the premises of the travel agents and carries out certain programming/modification and other activities in order to provide connectivity/access to the travel agents to the CRS. The NMCs also trains the travel agents regarding the use of the CRS. The appellant pays the NMCs 'distribution fees' for the aforesaid services rendered by the NMC. The 'distribution fee' is computed on the basis of the segments booked through the CRS by the subscribers/travel agents. The connectivity between the Amadeus mainframe computer and the PC's of the travel agents is provided by Societe International Telecommunication Aeronautica (SITA) worldwide. The expenses in relation to such connectivity are borne by the appellant.

5.1 AIPL is the NMC in India with which the appellant has entered into the DA. The appellant does not have any financial interest or shareholding in AIPL. The job of AIPL is to canvass the use of CRS in India and enter into contract with the subscribers/ travel agents willing to use CRS for which it receives 'distribution fee' from the appellant. The 'distribution fees' is computed on the basis of the segments booked using the CRS by the subscribers/travel agents 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 binds 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 maximize its own revenues in the form of 'distribution fee' receivable from the appellant for each confirmed booking, which in turn also enhanced the revenue of appellant.

6. The appellant, for the assessment year 1996-97, filed return of income declaring 'Nil' income on 08.03.1999 in response to the notice issued under Section 142(1) of the Act. The assessing officer, however, vide order dated 23.03.1999, completed that assessment under Section 143(3) of the Act at income of Rs. 13,00,83,258 for the assessment year under consideration holding that:

(a) The appellant has a business connection in India and AIPL is the Permanent Establishment (PE) of the appellant in India.

(b) computer hardware/software provided by the appellant to travel agents also constitutes PE of the appellant in India.

In holding so the assessing officer observed as under:

The source of income of the appellant is the software and hardware installed at the desk of the travel agent in India. Airlines make payment to the appellant on behalf of the Travel agents in India. The passenger is in India, the travel agent is in India, the hardware through which travel agents is operating is in India, the line through which communication is traveling and the activity, by issue of ticket, is completed in India. Further, the travel agent is operating the CRS and making booking on his computer in India. By virtue of the software and communication links the computer at the desk of the travel agent becomes the interface of the mainframe of the appellant in Germany and the computer at the desk of the travel agent and the mainframe of the appellant are one. AIPL is dependent agent of the appellant as AIPL is economically dependent on and wholly devoted for the appellant. AIPL has authority to conclude contract on behalf of the appellant and enters into contract with the travel agents in India on behalf of the appellant. The appellant has himself claimed deduction for certain expenses and therefore, the appellant cannot claim that income earned by the appellant relatable to the aforesaid expenses is not liable to tax in India.

On the basis of the aforesaid, the assessing officer brought to tax the entire revenue received by the appellant from the airlines for the segments booked from India through the CRS developed by the appellant. Further, the assessing officer did not allow deduction for 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% of the Head Office expenses were allowed, as per Section 44C.

6.1 The appellant preferred appeal before the CIT(A) against the assessment framed by the assessing officer for the assessment years 1996- 97. In the appeal before the CIT(A) for the assessment year under consideration, the appellant contended that no part of appellants income can be said to accrue/arise or deemed to accrue/arise in India and challenged the findings of the assessing officer 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 assessing officer 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 quantum of profits attributable to PE liable to tax in India deduction for expenses incurred to earn such profits should be allowed.

(c) AIPL's remuneration fully represents the value of the profit attributable to AIPL's service and therefore, it "prima facie extinguishes the assessment" as explained in Circular No. 23 of the CBDT dated 23rd July, 1969.

6.2 The CIT(A), vide order dated 23.03.2000, confirmed the finding of the assessing officer in holding that the appellant has a PE in India. It was further held by the CIT(A) that income is deemed to accrue/arise in India as the appellant has a 'business connection' in India and assets of the appellant through which display is made are located in India. However, the CIT(A) observed that only that amount of profits which can be said to have been derived from the assets located in India and the activities carried on in India can be brought to tax in India and directed the assessing officer to peruse the audited accounts and recompute the income liable to tax in the hands of the appellant in India after allowing deduction for expenses incurred to earn such income.

The appellant is in appeal before the Tribunal (ITA No. 2143 /Del/2000) against the aforesaid order of CIT(A) for the assessment years 1996-97 to the extent that it holds that:

(a) appellant has a business connection and/or PE in India and

(b) income accrues/arises or can be deemed to accrue/arise in India.

6.3 Subsequent to the direction given by the CIT(A), vide order dated 23.03.2000, the assessing officer recomputed the income of the appellant at Rs. 11,30,62,307 after making disallowance of, inter alia,

(a) Product development charges,

(b) International communication charges in excess of 4.5% of booking fees

(d) Equipment rental charges.

Further, 100% 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 Section 234A and 234B was also levied for late filing of return and for non-deposit of advance tax, respectively.

6.4 In appeal preferred by the appellant before the CIT(A) against the aforesaid appeal effect order passed by the assessing officer, the CIT(A) partly allowed the appeal preferred by the appellant allowing deduction in respect of, (a) international communication cost (on the basis of average number of bookings per location per month as against the actual expenditure incurred as claimed by the appellant before him), (b) 50% of the actual data processing charges, and (c) equipment rental charges. However, the CIT(A) confirmed the order of the assessing officer in:

(a) disallowing deduction in respect of product development charges,

(b) holding that 100% of the profits in respect of segments booked from India through the CRS are liable to tax in India and

(c) confirming the levy of interest under Section 234A and 234B of the Act.

The appellant is in appeal before the Tribunal (ITA No. 1022/Del/05) against the aforesaid order of the CIT(A).

7. The appellant, for the assessment year 1997-98 and 1998-99, filed return of income on 08.03.1999 declaring 'Nil' income in response to the notices issued under Section 142(1) of the Act. However, the assessing officer, vide assessment orders dated 23.03.1999, completed that assessment under Section 143(3) of the Act for the assessment year 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 assessing officer that the computer hardware/software provided by the appellant to travel agents also constitutes PE of the appellant in India. Further, the assessing officer held that the income of the appellant is to be deemed to accrue/arise in India.

On the basis of the aforesaid, the assessing officer brought to tax the entire revenue received by the appellant from the airlines for the segments booked from India through the CRS developed by the appellant. Further, the assessing officer did not allow deduction for various expenses incurred by the appellant in relation to generation of the revenues brought to tax in India.

7.1 The appellant preferred appeal before the CIT(A) against the assessment framed by the assessing officer for the assessment years 1997-98 and 1998-99. In the appeal before the CIT(A) for the assessment years under consideration, the appellant contended that no part of appellants income can be said to accrue/arise or deemed to accrue/arise in India and challenged the finding of the assessing officer that

(a) AIPL is a PE of the appellant in India and

(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 assessing officer to be liable to tax in India in the hands of the appellant for the assessment year 1997-98 and 1998-99 on the grounds that:

(a) only the profits that are attributable to Indian operations are liable to tax in India

(b) While determining the quantum of profits of the PE liable to tax in India deduction for expenses incurred to earn such profits should be allowed.

(c) AIPL's remuneration fully represents the value of the profit attributable to AIPL's service and therefore, it "prima facie extinguishes the assessment" as explained in Circular No. 23 of the CBDT dated 23rd July, 1969.

7.2 The CIT(A), vide order dated 23.03.2000, disposed of the appeals filed by the appellant for the assessment year 1997-98 and 1998-99 and confirmed the findings of the assessing officer in holding that:

(a) the appellant has a PE in India

(b) income accrued or arose to the appellant in India However, as regards the quantum of income liable to tax in India, the CIT(A) gave directions to the assessing officer to recompute the income derived from the assets of the PE and the activities of the PE in India after considering the audited accounts.

The appellant is in appeal before the Tribunal (ITA Nos. 2414/Del/2000 and 2145/Del/2000) against the aforesaid orders of CIT(A) for the assessment years 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 dated 23.03.2000, the assessing officer 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% of booking fees

(d) Equipment rental charges.

7.4 In appeal preferred by the appellant before the CIT(A) against the aforesaid orders for the assessment years under consideration of the assessing officer, the CIT(A) partly allowed the appeal preferred by the appellant allowing deduction in respect of (a) international communication cost (on the basis of average number of bookings per location per month as against the actual expenditure incurred as claimed by the appellant before him), (b) 50% of the actual data processing charges, and (c) equipment rental charges.

However, the CIT(A) confirmed the order of the assessing officer for the assessment years under consideration in:

(a) disallowing deduction in respect of product development charges,

(b) holding that 100% of the profits in respect of segments booked from India through the CRS are liable to tax in India and

(c) confirming the levy of penal interest under Section 234A and 234B of the Act.

The appellant is in appeal before the Tribunal (ITA Nos. 1023/Del/2005 and 1024/Del/2005) against the aforesaid orders of the CIT(A) for the assessment year 1997-98 and 1998-99.

SUBMISSIONS ON BEHALF OF APPELLANT

8. Shri Ajay Vohra, learned Counsel for appellant submitted that the first question to be decided is whether Appellant's income accrues/arises or can be deemed to accrue/arise in India.

In this regard Shri Vohra submitted as under:

8.1 The appellant is not engaged in any business in India. The appellant receives charges from the Airlines in the form of 'booking fee' for dissemination of information about such Airline which results in a confirmed booking. The charges for the services of the appellant could be provided by the Airlines in any other form like a lump sum payment or fixed periodical charges outside India. However, the Airlines have evolved a clever fee structure, which makes it impliedly necessary for the appellant to canvass the use of CRS amongst the travel agents. As per Article 4 of the PCA, the quantum of 'booking fee' to be received by the appellant for dissemination of information about the Airlines is directly proportional to the number of confirmed bookings made through the CRS.

The main function of AIPL vis a vis the appellant is to canvass with travel agents about the use of the system, assist/train them for using CRS, provide incentives to the travel agents by way of providing computers and connectivity/access to the mainframe in Germany, identify/authorize the travel agent, without any charge whatsoever. The activity of the appellant in India is restricted to the aforesaid. The aforesaid activities are of the nature of advertising and of supplying information. 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 responses received by the Airlines based on the use of the CRS display by the travel agents, wherever they might be, does not mean that the services are rendered by the CRS in the respective countries. Therefore, the services are rendered by the appellant to the Airlines outside India.

The Appellant receives 'booking fee' from the Airlines for providing the facility of display of the Airlines data information on the CRS. Though the amount of 'booking fee' depends upon the number of confirmed booking made using the CRS, the same is for the functions/services performed outside India. The appellant, therefore, does not earn revenue for any work done in India, though linked to the bookings made in India.

The CRS, in simple words, has replaced the need to consult the ABC books on Airlines flight schedules etc and the bookings through telex or telephone and obtaining of confirmations through telex/telephones. Merely because the old method of communication and processing of transaction have been replaced by the electronic ones, does not change the substance of the transaction.

The OECD in its publication Taxation and Electronic Commerce has suggested that the same principles that the Governments apply to taxation of conventional commerce should equally apply to e-commerce and that the taxation should seek to be neutral and equitable between forms of e-commerce and between conventional and e-commerce, so avoiding double taxation or unintentional non-taxation.

The nature of the transaction undertaken by the Appellant may be better appreciated through the following example without bringing in the complications of electronic devices.

An advertiser advertises his products in a newspaper or through a newsletter. While advertising in the newspaper, the terms with the newspaper owners is that the payment for the advertisement in the newspaper will be based on the number of responses received from the readers. The newspaper is published outside India but there is circulation of the same in India. Can the newspaper be subjected to tax in India on the advertising revenue of the newspaper outside India? In another case, the product company engages the services of a person to distribute its newsletters among the prospective customers. The services of the newsletter distributor are to be compensated based on the number of supply orders that the product 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) is rendering any service to anyone in India for which services a 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 permanent establishment in India. It is acting through a distributor who is in the nature of an independent contractor and not an agent of the appellant. The distributing company in India, viz., AIPL has no occasion or authority to bind the appellant vis a vis the subscribers who are customers of the Airlines. Just because the fee for the services rendered by the display agency, that is, Amadeus CRS, is measured in terms of the responses from India by various travel agents, the same could not be considered as income arising to the appellant from any services rendered in India. The entire activity of the CRS, which generates the income, is outside India. The fact that the appellant enables the travel agents in India through its distributor company to learn to use the information cannot make AIPL a permanent establishment of the appellant or render the appellant's income as arising in India.

To put it differently, the bookings made in India are only a measure of the remuneration payable by the Airlines to the appellant and not the cause of such remuneration. The services proposed by the mainframe of the appellant located at Germany is the direct and proximate cause and contributes directly to the earning of income by the appellant.

The revenues received by the appellant from the Airlines thus do not accrue or arise in India, though due only on confirmed bookings made from India, which, as stated earlier, only determines the point of time when income becomes payable for the services rendered outside India and with the printing of a confirmed ticket at the end of the travel agent.

8.2 The next question that arises is whether the computers provided to the travel agents constitute source of income of an appellant in India: In reply to which Shri Vohra submitted as under:

The appellant provided computers to the travel agents in some cases as an incentive to subscribe to the appellant's CRS. The computes provided to the travel agents are standard IBM compatible computers and are dumb terminals which can only to be used for sending information and receiving information. The said computers are not capable of processing any information, in so far as the Amadeus CRS is concerned. The travel agents computers were configured by AIPL and access was provided through the medium of software and communication link to the appellant's main frame in Germany. It is the Revenue's contention that since the booking is made through the computers on the desks of the travel agents, who have access to the main frame of the appellant in Germany, the main frame 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 main frame constitutes 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 systems, 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 traveler is made in India when the ticket is issued by the travel agent to the traveler.

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 main frame in Germany and dissemination of the result back to the travel agents. What is visible on the computer of travel agents is only the net result of the processing which is done by the main frame at Germany at huge investment. The investment in computers in India is inconsequential as compared to the huge set up the appellant has in Germany.

Computers at the desks of the travel agents cannot be said to be extension of appellant's main frame in Germany and the two do not become one at the time of booking of the ticket. If that were to be the case, then, all the transactions carried out on the internet would be considered as having being done or completed in India and would become liable to tax in India. Further, the country of location of server, which is considered as a piece of equipment having physical location and such location constitutes fixed place of business and, therefore, permanent establishment in terms of the OECD commentary on Article 5 of the Treaty, would become meaningless since, irrespective of the physical location of server, the person owning the server would be considered as having fixed place of business in the country from where the user may access the server. Thus, there would be as many fixed places of business as the number of users accessing the server and in as many countries as where the users are located. This would lead to absurd results not intended by law.

Submissions of the Respondent Revenue

9. Shri Kapila, learned Special Counsel arguing for revenue made detailed submission. Shri Kapila invited our attention to various clauses of PCA, DA and subscriber agreement. His submissions were as under:

9.1 The vendors who sell tickets and the subscribers who buy ticket on behalf of passengers, are integrated into a holistic and unified seamless system called CRS. Without integration of either in the CRS, the System would not be complete and no income would accrue to the assessee. It is so because its income by way of commission from the vendors is totally dependent on the bookings made by the Subscribers.

The CRS therefore comprises two equally vital components:

(a) On-line upgrading of the flight schedules & seat availability on the CRS by the vendors through their own centralized reservation system and processing of booking by the subscribers through the computers installed in their office premises

(b) An integrated world-wide telecommunication network (including regional network) providing two- way instant 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% subsidiary of the assessee company. Telecommunication 'Nodes' (which are rented by the assessee) are continuously provided for by the assessee both to the Vendors & the subscribers in India. The Nodes are situated in the premises of the Telecommunications centre of SITA in Mumbai and Delhi. The connectivity of the host computer with subscribers in India is maintained through these Nodes and also leased telephone-lines in India. The expenditure on the provision of Nodes and the entire telecommunication network, both within and without India is borne by the assessee. This expenditure has been claimed against Indian PE income and it has been allowed.

The entire equipment (both hardware and software) is supplied to the subscribers at the assessee's cost through the agency of Amadeus India. The Subscriber operates CRS in his office and makes the booking by giving necessary commands on his computer and thereby processes information displayed on his screen. Under the Participation Agreement, the Vendors are contractually bound to honour a booking made by a subscriber. Booking is essentially a contract between a Subscriber and the vendor, resulting in a confirmed travel ticket - either E-ticket or printed ticket, which is produced on the subscriber's computer/printer. Binding nature of this contract emanates from the terms of the Participation Agreement between the assessee and the vendors though subscribers are not party to it. In other words, the subscriber has right to use CRS not under an agreement with the assessee but under the Rental & Subscriber Agreement with its agent Amadeus India and the vendors are also bound to honour the booking made by a subscriber not under any contract between the vendor and the subscriber but under Participation Agreement between the assessee and the vendor.

Purchase order is made by the Subscriber in India - booking is made in India-sale of the ticket by Vendors is made in India - Subscriber makes the payment in rupees to the Branch office of the Vendors in India. The ticket which is the contract between the passenger and the Air lines is made and delivered in India.

Income accrues to the assessee as soon as the contract between the subscriber and the vendor is executed in India.

9.2 As regards nature of assessee's business, Shri Kapila submitted that over the years, the assessee has been engaged in an organized, systematic activity in India, which holistically constitutes its business in India. It is immaterial if the receipts from the vendors take place outside India. The moment a booking is made in India, 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 Section 5(2) of the Act. Reference was made to the following decisions:

(i) Performing Rights Society 106 1TR 11 SC

(ii) Inshikawajama Harima 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 in similar to that of a stock exchange like National Stock Exchange (NSE). Business of a stock exchange is that of providing an 'Exchange' or a 'platform', which is only another word for 'market place'. The system installed say, by NSE is accessed by brokers etc. through specially secured computers. The moment access is allowed by the Exchange's system, the computer of the broker is integrated with the main system and the broker can carry out any permissible transaction of purchase or sale of securities. In other words, whereas earlier the broker had to go to the trading floor, he now conducts the same business on his computer. Then, what is the business of the Exchange? It is clearly that of running an integrated market place for which it receives fees/ commission for every transaction put through its system. In other words, the Exchange brings the buyer and the seller together electronically on a common inter-active platform.

Clause 14.1.2 of the Distribution Agreement makes it clear that the equipment is supplied to the subscribers "for use in connection with the Amadeus system and other Amadeus Products". The assessee brings together the subscriber (buyer) and the Airline (seller) electronically on its system (CRS) with in India and thereby enabling it to make booking of segmental flight reservation. Booking is automatically generated on the CRS seamlessly, which is binding on the vendors. Admittedly, the subscriber has entered into a contract with Amadeus India and not with the assessee; yet, not only does the assessee stand by it, but it also ensures that the Airlines honour it as per the terms of the participation agreement. Generation of booking/reservation takes place because of sifting of information by the subscriber which is displayed on the computer installed in a fixed place in his premises and the necessary commands punched by him on the computer. Neither the vendors nor the Subscriber are concerned with the location of the server or as to how the data is processed by it. What really is of vital importance to the business of the assessee is that there should be a continuous running of the CRS so that 'market place' is maintained in India round the clock and throughout the year. The assessee's business is not that of selling goods or 'product', but that of setting up market and thereby integrating Indian Subscribers into the market. Though a domestic market place is set up 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 Pvt. 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, inline with the appellant's CRS systems in Germany and for display of the products 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 • display of the outcome of such request at the computer of travel agent • physical printing of the ticket by the travel agent, in case the request is accepted.

In fact, CRS has to offer such facility of making booking using the CRS, since the appellant's remuneration is measured in terms of completed bookings made through the CRS. The booking fee paid by the Airlines to the appellant, though measured in terms of number of bookings through CRS, is paid for display and dissemination of their information about the Airlines. The booking made is only a measure of the remuneration of the appellant for the aforesaid services, and not the services itself. The physical printing of ticket is the endorsement of the request sent by the travel agent processed at the airlines host (located outside India) in conjunction with the appellant mainframe (outside India). The same happens subsequent to and independent of the services rendered by the appellant outside India.

The Delhi Bench of Tribunal in the case of ACIT v. Amadeus India (P) Ltd 79 ITD 407, has appreciated the aforesaid facts in paragraph 34 of the order and has noted that the travel agent with computer merely accesses or utilizes the relevant information, which appears on the data base of the computer. It has been further noted that the travel agent merely makes use of, adds to, or alter information on the data base, but does not deal with the process by which such information is brought on to the computer.

The travel agents cannot make any changes in the Airlines data. The Airline data gets automatically updated on-line in real time, as soon as the booking crystallizes in the Airlines inventory.

The fact that the Airlines are bound to honor the tickets generated through the appellant's CRS is of no consequence in so far as the issue of taxation of the appellant in India is concerned, as such clause is necessary in order to inspire confidence amongst the travel agents to subscribe to the system and ensure that the appellant's CRS has wide acceptance and credibility.

As the agreement with the Airlines is executed outside India and activity giving rise to the income viz., the display and dissemination of information takes place outside India in the appellant's CRS, the source of appellant's income, it is emphasized, is outside India.

The provision 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 pertinent to point out that the booking gets concluded at the host of the Airlines situated outside India and only the physical printing of the ticket happens in India, which is enabled by the feature of the Amadeus CRS in Germany. As stated earlier, the role of the appellant ends earlier and the travel agent on receiving the necessary authorization from the airlines host (located outside India) through the Amadeus mainframe (also located outside India) prints the ticket. Therefore, no income relating to the booking of tickets arises to the appellant in India.

The comparison of the business of the appellant with that of a stock market by the Ld. DR is not apposite. A market is a place where various buyers and sellers converge and transact business. Computers on the desk of travel agents cannot be compared to a market place since the computers on the desks of one travel agent are not connected to the computers on the desk of other travel agent. The computers on the desk of the travel agents are used to send information which is processed and sent by Amadeus CRS in Germany to the various Airlines hosts and each Airlines depending upon the request sought, provides information online which is processed by the Amadeus CRS and sent to the travel agents who requested for the information.

In the case of Stock Exchange, the shares on sale are already available/committed to the Stock Exchange and the transaction fructifies if the bid of the purchaser matches the seller's bid. In the case of Amadeus CRS the seat inventory is not maintained at Amadeus CRS system. The Airlines host maintains the seat inventory and the Amadeus CRS only channels the request for information and sends back the information as received from the Airlines host, which may or may not culminate in a booking. Assuming that the Airlines inventory were to reside in Amadeus CRS system in Germany, it may be possible to draw a parallel with the market place. However such market place would exist in the Amadeus host in Germany, i.e., outside India, as the travel agents could converge on the appellant's host in Germany and not on computer system of each other.

If the computers on the travel agents desk are held to be market place, this would lead to an absurd situation, as there would be as many market places as the number of computers on the desk of the travel 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 Ld. DR 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 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 v. R.D. Aggarwal: 56 ITR 20, the assessee canvassed orders from the dealers in Amritsar for supply of goods and communicated them to certain non-resident exporters. The assessee did not have authority to accept the order on behalf of the non-resident. The orders were accepted by the non-resident, price was received by them and delivery was also given by them outside the taxable territories. It was held by the Supreme Court that there was no 'business connection' within the meaning of Section 42(1) of the Indian Income-tax act, 1922, of the assessee with the non-resident, and the assessee could not be treated as the agent of the nonresidents for the purpose of taxing the profits that accrued to them from their export business.

The relevant observations of the Court are reproduced as under:

The expression " business " is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression " business connection " and its precise connotation is vague and indefinite. The expression "business connection" undoubtedly means something more than "business". A business connection in Section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case....

xx xx Turning to the facts of the present case, as found by the revenue authorities, contracts for the sale of goods took place outside the taxable territories, price was received by the non-residents outside the taxable territories, and delivery was also given outside the taxable territories. No operation such as procuring raw materials, manufacture of finished goods, sale of goods or delivery of goods against price took place within the taxable territories: the assessee 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 nonresidents which the latter were not obliged to accept. The expression business connection" postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. In this case such a relation is absent.

11.2 Similarly in the case of CIT v. T.I. and M. Sales Ltd. 166 ITR 93 it was held by the Supreme Court that since the Indian company canvassing for orders for a non-resident company did not have authority to accept offers on behalf of the non-resident, there was no 'business connection' between the Indian company and the non-resident when the contract was made outside India, price was received outside India and delivery of the goods was received outside India.

11.3 In the case of Prem Nath Diesels Grainvaying Division v. CIT : 159 ITR 575, the assessee a non-resident company carried on the operation in India of unloading grain from large tonnage vessels to smaller ships along the Indian coastline and providing suitable grainvayors. Under an agreement with the non-resident company, the assessee, an India firm, was to provide necessary supervisory and other staff for maintenance and operation of such grainvayors, and the assessee was to be paid direct expenses in and towards the actual cost of labor and supervisory staff plus additional provision for gratuity and provident fund for labor and certain office and miscellaneous expenses. There was no profit sharing between non resident company and the assessee and no amount was paid by the assessee to the non-resident firm.

The issue before the Delhi High Court was whether there was a real and intimate connection between the assessee and the non-resident company and whether the assessee could be held an agent having 'business connection' with the non-resident company in terms of Section 163(1)(b) of the Income-tax Act, 1961.

The Delhi High Court, applying the test of real and intimate connection laid down by the Supreme Court in the case CIT v. R. D. Aggarwal (supra) answered the question in the negative and held that there was no real and intimate connection between the assessee and non resident company as the services performed by the assessee could have been rendered by any other labor contractor or could have been obtained by the non resident company by engaging direct labor. The assessee was, therefore, held not to be an agent under Section 163(1 )(b) in the absence of 'business connection'.

11.4 Shri Vohra pointed out that the term 'business connection', appearing in Section 9(1) and Section 163, would have the same connotation for purposes of both the sections as held by Andhra Pradesh High Court in CIT v. Dredging Corporation of India: 174 ITR 682.

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 v. CIT: 117 ITR 804, 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 from the non-resident company. It was held that the non-resident cannot be said to be carrying on business operation in India.

11.6 The Appellant has entered into the DA with AIPL on a principal to principal basis. AIPL is only canvassing the use of the CRS among the travel agents in India and has no authority to conclude contracts on behalf of the appellant. AIPL has entered into SBAs with the subscribers/ travel agents in India. However, appellant is not party to such SBAs. Even if AIPL could be said to have authority to conclude contracts on behalf of the appellant, in relation to the SBAs, the same would not result in AIPL being considered as 'business connection', as referred to in Section 9(1)(i) of the Act, since the contracts entered into by AIPL only facilitate the discharging of the obligation of the appellant principal or rendering of service and does not result in earning of revenues in India, which, it is reiterated, is for services rendered outside India. The appellant, it is pertinent to point out does not derive any revenues from the travel agents under the SBAs or AIPL for that matter.

11.7 Shri Vohra made reference to the OECD Model commentary on Article 5(5) of the OECD Model Convention relating to dependent agent PE. He submitted that the commentary clarifies that the authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise. It would thus be irrelevant, as per the commentary, if the person had authority to engage employees for the enterprise to assist that person's activity for the enterprise or if the person were authorized to conclude, in the name of the enterprise, similar contracts relating to internal operations only.

The facts of the decisions referred to above, need to be appreciated in light of the above. In all the said cases, the agent only rendered services in India (which could be rendered by any other person), not leading to the accruing of income. The services rendered in India, being in the nature of internal operations of the non-resident assessees, no part of the income was held liable to accrue or arise in India through or from 'business connection'.

The principle emerging out of the above case is that some part of the revenue generating activity should be carried out in India through an entity in India in order to constitute 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 SB As 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 their company incorporated in India. Therefore, applying the ratio of the aforesaid decisions to the fact 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 Section 9(1)(i) of the Act, Shri Kapila submitted that as discussed by CIT (A) in para 6.5 to 6.7 of the order that the assessee has ''business connection' in terms of Section 9(1)(i) of the Act for the reason that the assessee had made all arrangements in India and had real and intimate business relationship with Amadeus India. The assessee is in the business of setting up and maintaining a flight reservation exchange in India where the subscribers interact with the Vendors and make bookings and derives income by way of fees from the Vendors for using such a market place.

It may also be clarified that 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.

The Airlines pay commission for the "use" of the CRS. But, the relevant question is: use of the CRS by whom? As explained earlier, CRS is 'used' by the Subscribers in India when they make the booking which is essentially an offer by the subscriber and acceptance by the Vendors. In absence of such a facility for making of a contract between the subscriber and the Vendor (booking), the CRS cannot produce income. Activity of updating of information relating to flight schedules, latest position of availability of seats reservation etc. is carried out not by the assessee, but by a Vendor at its own cost from its own internal CRS and posted electronically into the assessee's CRS [Article 2(A) (1) & 2 (A) (4) of Participation Agreement vide page 69 of APB]. But, it will all come to naught if there is no facility for making instant booking by a travel agent. It is the act of providing of this facility in India which constitutes the assessee's main business. This facility is provided in India on a continuous and systematic manner. Therefore, this business of running a market place is actually carried on in India from which the assessee derives income. It cannot be said that this activity is preparatory or auxiliary activity.

No booking is possible but for the telecommunication network, equipment and software provided and paid for by the assessee to the Subscribers. The activity which creates the charge of fees from the Vendors is the booking made by 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 & the CRS provided to them to make the bookings. The very fact that the assessee has distributed free of cost and maintains regional network at its own cost clearly indicates that this act is dictated not by any altruism but by pure business need of the assessee. As explained earlier, the assessee would not be able to earn any income from the CRS without integrating subscribers into it. While allowing this expenditure the CIT (A) in the quantum order accepted the assessee's explanation that it was business expenditure of the PE in the following words :-

It was explained that international communication expenses represent the cost relating to the connection established between SITA 's node in India and the node located in Erding, Germany, where the mainframe of the CBS is situated. It was further explained that the aforesaid expenses are charged on the basis of a formula that multiplies the average cost per location by the number of locations in India at the end of every month.

It is contended by the assessee that since the host computer is located in Germany and the contracts with the Vendors are made outside India, the income also accrues outside India. This contention is misconceived. Place where the Participation Agreement is made is not determinative of the place of accrual of income. Accrual of commission income takes place where the subscriber-vendor contract is executed, i.e., place where the booking is made. Neither the data processing in Germany nor the contract with the Vendors can be said to be the 'source of income' of the first degree. Processing of the data by the host computers is secondary to the booking made by the subscriber in India. It is merely one among many of business operations from which income has accrued. The 'source of income' of the assessee, if looked at from practical and commercial point of view, is the market place/exchange created in India where the reservation (booking) is made by the Subscriber India. It is the 'use' of the CRS by the Subscriber in India, which is the assessee's 'source of income'. It is so because, the booking made by a subscriber is the very basis of earning commission from vendors Just as a stock exchange earns fee from a transaction put through its system. No income will arise without such use by the subscribers.

In CIT v. Kunwar Trivikarm Narain Singh (57 ITR 29) the Hon'ble Supreme Court followed the oft quoted observation of privy Council in Commissioner of Income tax v. Raja Bahadur Kamakhaya Narayan Singh (2), which construed the word 'derived' as follows:

The word' derived' is not a term ofArticle 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 Performing Right Society 106 ITR 11, the Supreme Court has held that "the question as to the source of the income is not relevant for the purpose of ascertaining whether income accrues or arise in India, because Section 5(2) provides that all income 'from whatever source derived' is to be included in the total income of the non-resident assessee if the income accrues or arises in India." In that case also it was argued that since the contract was made in UK and payment was also made outside India, the income was not taxable. This was negatived at P. 22 of the Report.

The assessee contends that it has not carried out any activity in India which could be said to contribute to the booking made by a Subscriber. This is not correct. The assessee's contention is based on a wrong assumption that the 'Host Computer' alone constitutes the CRS. The server in Germany is not by itself the system called Central Reservation System. CRS is a 'system' which includes not only the Host computer in Germany, but also telecommunication network in India (regional Network) as also the hardware & software installed on the premises of the subscriber. All the three services, namely Host, Network and Customer services are provided by the assessee. These three vital components of the CRS are clearly identifiable.

It is also not correct to say that a subscriber uses the computer provided to him for his own business and not for the assessee's business. This computer is an essential and integral part of the Central Reservation System without which no income will accrue to the assessee.

The assessee has, either on its own, or through the agency of Amadeus India, carried out following business operations in India on a continuous basis at its own cost:

a) i) Maintenance and operation of the telecommunication 'Node' at Mumbai/ Delhi owned by SITA and hired by the assessee. ii) Telecommunication Lines between the Node and the premises of the Subscribers leased and paid for by the Assessee ii) The entire regional telecommunications network is maintained by the assessee at its own cost. There regional networks together with gateways to international network are essential parts of the CRS, the maintenance of which is the core business of the assessee.

b) Providing free-of-charge its own equipment to Amadeus India for distribution is the subscribers with the object of integrating them into the CRS for enabling them to make the booking (page 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. h) 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, ITAT decision in Amadeus India Pvt. Ltd. 79 ITD 407 Del.).

In the absence of the above mentioned activities in India, no booking could be made in India which would be honoured by the vendors and no income would accrue to the assessee. It would therefore be wrong to say that commission earned by the assessee from the vendors is only a measure. Bookings made by the subscribers have a direct nexus with the accrual of income. Further, the CRS is a fully automated system, a part of which is maintained and operated in India. It is not necessary that the assessee should deploy its own personnel in India as opined in para 42.6 of OECD Commentary. It is to be noted that CRS is not an internet based website or portal.

In view of the submission made above and the terms of Distribution Agreement and participation Agreement and the Tribunal's findings in the case of Amadeus India (supra), it is submitted that the CIT(A) was correct in holding that there is a 'business connection' in term of Section 9(1 )(i) of the Act.

12.1 Shri Kapila also submitted that for the Assessment Year 1996-97, the taxability will have to be decided in accordance with the provisions of the Act only. The assessee is admittedly tax resident of Spain. The convention for Avoidance of Double taxation with Spain (treaty) came into force with effect from 12th January 1995. However, Article 30(2) of the Treaty (P. 152/APB) provides that the provisions of the treaty shall have effect in India in respect of income arising in any Financial Year beginning on or after 1st April of the calendar year next following that in which the convention enters into force. Since the treaty came into force in the calendar year 1995, the calendar year next following 1995 is the calendar year 1996. The provisions of the treaty would therefore apply for the first time to income arising during the Financial Year 1996-97 relevant to Assessment Year 1997-98. Hence, in respect of income assessable for the Assessment 1996-97, the appellant cannot seek the protection of the treaty and its taxability will have to adjudicated under the provisions of the Income tax Act only. Reference was made to following judgments:

1) Norasia Lines (Malta) Ltd. v. DCIT 279 ITR 268 (Ker.).2) Performing Rights Society v. CIT 106 ITR 11 (SC).

13. In reply the appellant submitted as under:

13.1 The activity which is considered as business connection must contribute directly or indirectly to the 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 Ld. DR 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's CRS, in order to avoid unlawful access, as also the misuse of the appellant's CRS. Once access is granted by AIPL, then, depending upon the information requested by the travel agents, the request is channelized to the relevant portion of the Amadeus CRS which processes the request. This activity of AIPL has been held to be export of software programme and eligible for deduction under Section 80HHE of the Act.

The aforesaid activity, only helps the travel agents to gain access to the appellant's CRS. The aforesaid is only part of internal operation of the appellant in order that the request for information is received in the desired format for processing by the mainframe and onward transmission thereof to the Airlines host. The airlines do not make the payment to the appellant for the operation that the appellant may have to internally undertake so as to forward the request to the airlines host. In fact, the appellant's CRS functions begin after the request for information is received from the travel agents routed through AIPL. Thereafter, the processing is done by the appellant's CRS and the information of the Airlines products is made available on the computers of the travel agents. The aforesaid decision of the Tribunal, therefore, has to be understood in context.

The provisions of computers and leased lines to the travel agents through the medium of AIPL does not result in income in India (as no income is received from the travel agents for providing the aforesaid facility). The same, as stated earlier, is only part of internal operations of the appellant to maximize its revenues which are dependent upon the number of bookings made. The activity giving rise to the income, viz., the processing of Airlines information and the display and dissemination of the same happens through the appellant's CRS outside India and the source of appellant's income is, therefore, outside India.

AIPL has no authority to conclude contracts on behalf of the appellant and the travel agents who were provided computers and leased line connections did not have any privity of contract with the appellant. In any case, the appellant could have been considered as having a business connection in India only if AIPL had the authority to conclude contracts in respect of agreements which are the source of the appellant's income, like the agreement with the Airlines. Admittedly, AIPL has no such authority.

The OECD commentary on Article 5 of the OECD model convention relating to permanent establishment wherein in paragraph 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 v. R.D. Aggarwal: 56 ITR 20 CIT v. R.D. Aggarwal: 56 ITR 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 Prem Nath Diesels: 159 ITR 575, the part of the activity viz., transportation of goods from bigger vehicle to smaller vehicle by engaging manual labour, was carried out in India by the non-resident through an independent contractor. However, such activity in India, though contributing to the generation of the income to the non-resident was not held to constitute business connection in India. The aforesaid decisions squarely apply to the appellant's case and have been wrongly distinguished by the DR on the ground that they pertained to purchase and sale of goods, and therefore, were not applicable to the facts of the appellant's case. The ratio of the aforesaid decisions squarely apply to the situation of rendering services.

13.3 The decision of Star TV: 99 TTJ 1025 referred to by the DR is distinguishable on facts. In that case the non-resident assessee was considered as selling airtime through its agents in India on television channels broadcasting content to viewers in India.

The Tribunal in that case came to the finding of fact that:

(1) The channel companies were having business connection with India; and were having continuous business operations in India and that the relationship between the assessee company and the channel companies was not that of principal to principal.

(2) The assessee company, the channel companies and other players in the field, other than the cable operators in India were 100% subsidiaries of a mother holding company, the players were not strangers to each other.

(3) The "Ad Airtime" conceived in the agreements entered into between the assessee and the channel companies is born and instantly exhausted in India. The situs of the sale, delivery, purchase and consumption of the subject matter of "Ad Airtime" is in India.

(4) It was not possible to hold that the entire activities of the assessee were carried out abroad since the "Ad Airtime" is not detachable from the flow of the total telecast time used by the channel companies for Indian viewers(Please refer paras 98/99 to 101 of the judgement) Since the sale of airtime was a direct source of income to the non-resident assessee, it was held that the non-resident assessee had business connection in India. The facts found by the Tribunal in the case 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 decisions in the case of Western Union (supra), referred to by the Ld. DR, 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 nonresident 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 constitute business connection and rightly so. Income could be said to arise to Western Union only when the necessary and integral activity of delivering money in India was performed and the service to the non-residents remitters, thus completed.

In the case of the appellant the activity of processing Airlines information and dissemination of Airlines products does not happen through the medium of AIPL so as to constitute business connection of the appellant in India.

In view of the aforesaid, no part of the revenues received by the appellant from the airlines can be said to accrue or arise or be deemed to accrue or arise in India.

14. Shri Vohra submitted that even if it is to be held that there is business connection in India, the question still remains is whether any income remains taxable in the hands of the appellant in India?

14.1 The submissions of the appellant in this regard are as under:

Without prejudice to the aforesaid, even if AIPL is held to be an agent of the appellant, no income would be chargeable to tax in India in the hands of the appellant as:

(a) The income of the appellant arising from Indian operations would be limited to the amount of profits attributable to the services of the agent.

(b) The income so computed would be completely absorbed by the expenses incurred to earn such income.

Reference is made in this regard to Clause (c) of Paragraph 6 of Circular No. 23(F.No. 7A/38/69-IT(A-II) dated 23.07.1969, which provides as follows:

Extract from CBDT circular No. 23 of 23.07.1969:

Sales by a non-resident to Indian customers either directly or through agents:

a) Where-------------------------------------

b) Where ------------------------------------

c) Where a non-resident's sales to Indian customers are secured through the services of an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit which is attributable to the agent's services, provided that:

(iv) the non-resident principal's business activities in India are wholly channeled through his agent:

(v) the contracts to sell are made outside India, and

(vi) the sales are made on a principal-to-principal basis. In the assessment of the amount of profits, allowance will be made for the expenses incurred, including the agent" s commission, in making the sales. If the agent'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 Clause (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 Income-tax, as explained in Circular No. 23 of the CBDT dated 23rd July, 1969.

14.3 The principle laid down in the aforesaid Circular, has been reiterated in Circular No. 1/2004, dated 02.01.2004, issued by CBDT dealing with taxation of Business Process Outsourcing Units. Relevant extracts of the said Circular are reproduced below:

3. The manner and extent of such attribution of profits will evidently depend on the facts of each case and the nature of services rendered by the BPO unit, and the same has to be determined in accordance with the provisions of the treaty applicable and the domestic law. The Board is, however, of the view that in a case where a non-resident, carrying on manufacture and sale of goods or merchandise or provision of services outside India, outsources some of its incidental activities viz, conclusion of contracts and procurement of orders (which enable the core activities to be carried on abroad) to an IT-enabled entity in India, which constitutes a permanent establishment of the non-resident principal, then the insignificant profit which is difficult to determine and attributable to the conclusion of such contracts or procurement of such orders can be considered to be embedded in the income of the permanent establishment taxable in India, if the price charged in respect of the above services by the permanent establishment is an arm's length/fair market price. In such a situation, therefore, no income shall separately accrue or arise or be deemed to accrue or arise to the non-resident principal in India.

The Authority for Advance Ruling (AAR) in the case of Morgan Stanley & Co. International Ltd(In Re ): 284 ITR 260, has approved the principle laid down in Circular No. 23 of 1969. In that case one of the issues before the AAR was whether even in the event that MSAS (an affiliate company of the Applicant in India) constituted PE of the Applicant in India, as long as MSAS was remunerated for its services at arm's length, any further income could be attributed to the PE of the Applicant.

The AAR answered the question in negative and observed as under:

...However, in Annexure-III to the application, it is stated that as long as MSAS is remunerated for its services at arm's length price, there should be no additional profits attributable to the applicant or MSAS in India. Circular No. 23 of 1969 dated 23rd July, 1969 and Circular No. 5 of 2004 dated 25th September, 2004 are quoted to show that the amount taxable in India would be only that much as is attributable to operations of MSAS. This is too well settled to admit of any elaboration.

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 in 292 ITR 406.

15. Shri Kapila in this regard submitted as under:

15.1 Circular No. 23 dated 23.7.1969 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 has been done directly by the appellant.

16. In response, the appellant (without prejudice) submitted that though it is true that the aforesaid Circular was rendered in the context of sale of goods. However, the ratio of the aforesaid circular equally applies for rendering of services. The said Circular has been applied by the Authority for Advance Ruling in the case of Morgan Stanley in connection with matter involving rendering of services: 284 ITR 260.

The activity of canvassing the use of the appellant's CRS, providing computers to the travel agents wherever required, providing training to the travel agents, providing connectivity to the travel agents, etc., is carried out through AIPL.

The telecommunication link is provided by SITA, a foreign entity, which provides telecommunication link from its gateway in India to Amadeus CRS in Germany, through its own telecommunication lines and between travel agents and its gateway in India through local telecommunication companies like MTNL, etc. The appellant does not have any contract with local telecommunication companies. The appellant only picks up the telecommunication costs.

The aforesaid Circular squarely applies to the appellant's case and since the remuneration paid by the appellant to AIPL, is at arm's length, the same fully represents the value of profit attributable to the activities of the appellant in India and there is no further income liable to tax in India in the hands of the appellant.

Findings:

17. We have heard the parties at length. In our opinion, following questions arise for consideration:

(1) Whether the assessee has any income chargeable to tax in India Under Section 5(2) of the Act and whether the assessee has any business connection in India as per Section 9(1)(i) of the Act? If yes, to what extent it is taxable in India.

(2) If the answer to Question No. 1 is in affirmative, whether, in terms of DTAA between India and Spain, the appellant has any PE in India?

(3) If answer to Question No. 1 is in affirmative what is the extent of income earned in India and whether the same can be held as paid by the appellant to AIPL and no further income is attributable to the PE in India?

(4) If the answer to Question No. 3 above is in negative, to what extent the income arises in India which can be charged to tax in India.

(5) Whether interest Under Section 234A and 234B is chargeable?

17.1 The first question before us is whether there is any business connection in India within the meaning of Section 9(1)(i) of the Act. The scope of total income is described in Section 5 of the Income-tax Act. As per Section 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 accrue or arise or deemed to accrue or arise in India is taxable in India. As per Section 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 Clause (a) of Explanation 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 Section 5(2) and Section 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 Asstt. Year 2004-05 and onwards has inserted two new Explanations to Clause (i) of Section 9(1) clarifying that expression 'business connection' will include a person acting on behalf of non resident and who carried on certain activities. However, for the purpose of our present discussion, the amended provision has no relevance as the same are w.e.f. Asstt. Year 2004-05 onwards. Since these appeals are for the years prior thereto, we shall discuss only the un-amended provisions. The expression 'business connection' has a wide though uncertain meaning. It admits of no precise definition and the solution to the question must depend upon the particular facts of each case. Even the amended definition will not determine as to what constitute business connection as the same is not an exhaustive definition but is a definition which also include some of the activities to be termed as business connection. We shall, therefore, revert to some of the judicial pronouncements in this regard. Hon'ble Supreme Court in the case of CIT v. R.D. Agarwal & Co., 56 ITR 20 held thus:

The expression business connection undoubtedly means something more than business. A business connection in Section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicated an element of continuity between the business of the non-resident and the activity in the taxable territories, a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms. It may include carrying on a part of the main business or activity incidental to the main business of the non-resident though an agent or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case, the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case.

A relation to be a business connection must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. But it must in all cases be remembered that by Section 42, income, profit or gain which accrues or arises to a nonresident outside the taxable territories is sought to be brought within the net of the income-tax 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 Section 4(1)(a) and (c) of the Act, whether the person earning is a resident or non-resident. If the agent of a nonresident 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 Section 40(2). Income not taxable under Section 4 of the Act of a non-resident becomes taxable Under Section 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. v. CIT 73 ITR 283 at page 291, after referring to the decision of R.D. Aggarwal and Co(supra) held as under:

It would thus be seen that in order to constitute a "business connection" as contemplated by Section 42, there must be an activity of the non-resident and contributing to the earning of profits by the non-resident in his business. The business connection must undoubtedly be a commercial connection but all commercial connections will not necessarily constitute business connection within the meaning of the concept unless the commercial connection is really and intimately connected with the business activity of the non-resident in the taxable territories and is contributory to the earning of profits in the said trading activity.

17.2 In light of the above provisions in the Income-tax Act and the judicial pronouncements, we may appreciate the facts and deal with the issue. The appellant has developed a fully automatic reservation and distribution system known as AMADEUS system with ability to perform comprehensive information, communication, reservation, ticketing, distribution and related functions on a worldwide basis. Through this Amadeus system, the appellant provides service to various participants i.e. Airlines and hotels etc. whereby the subscribers who are enrolled through the efforts of NMC can perform the functions of reservations and ticketing etc. Thus the Amadeus system or the CRS is capable not only processing the information of various Airlines for display at one place but also enables the subscribers to book tickets in a way which is a seamless system originating from the desk of the subscriber's computer which may or may not be provided by the appellant but which in all cases are configured and connected to such an extent that such computers can initiate or generate a request for reservation and also receive the information in this regard so as to enable the subscriber to book the Airlines seat or hotel room. The request which originated from the subscriber's computer ended at the subscriber's computer and on the basis of information made available to the subscriber, reservations were also possible. It is to be noted that all the subscribers in respect of which income is held taxable are situated in India. The equipment i.e. computer in some cases and the connectivity as well as configuration of the computer in all the cases are provided by the appellant. The booking takes place in India on the basis of the presence of such seamless CRS system. On the basis of booking made by the travel agent in India, 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 has been supplied either by the appellant or through its agent AIPL and the connectivity being provided by the appellant enables the subscribers to access the CRS and perform the ticketing and booking functions. Thus there is a direct business connection established in India and hence in terms of Section 9(1)(i) the income in respect of the booking which takes place from the equipment in India can be deemed to accrue or arise in India and hence taxable in India.

18. The next question therefore, arises is whether having held that there is business connection in India, how much income is chargeable to tax in India. As per Section 9(1)(i) of the Act, income accruing or arising whether directly or indirectly through or from any business connection in India shall be deemed to accrue or arises in India. As per Clause (a) of Explanation 1 to Section 9(1)(i) 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 only such part of the income as is reasonably attributable to the operations carried out in India. Thus in a given case if all the operations are not carried out in India, the income has to be apportioned between the income accruing in India and income accruing outside India. In the present case, we find that only part of CRS system operates or functions in India. The extent of work in India is only to the extent of generating request and receiving end result of the process in India. The major functions like collecting the database of various airlines and hotels, which have entered into PCA with the appellant takes place outside India. The computer at Erding in Germany processes various data like schedule of flights, timings, pricing, the availability, connection, meal preference, special facility, etc. and that too on the basis of neutral display real time on line takes place outside India. The computers at the desk of travel agent in India are merely connected or configured to the extent that it can perform a booking function but are not capable of processing the data of all the airlines together at one place. Such function requires huge investment and huge capacity, which is not available to the computers installed at the desk of subscriber in India. The major part of the work or to say a lion's share of such activity, are processed at the host computer in Erding in Germany. The activities in India are only minuscule 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 presence of the assessee in India and the configuration and connectivity being provided in India, the income would not have generated. Thus the initial cause of generation of income is in India also. On the basis of above facts we can reasonably attribute 15% of the revenue accruing to the assessee in respect of bookings made in India as income accruing or arising in India and chargeable under Section 5(2) read with Section 9(1)(i) of the Act.

19. Next question to be decided is if it is found that the income accruing in India is consumed by the payment made to the agents in India, whether any income still is left to be taxed in India. The activities of the appellant in India are entirely routed through the efforts of NMC namely Amadeus India Pvt. Ltd(AIPL). AIPL is responsible for monitoring the activities of the subscribers enrolled in India. The request originated from the computers at the desk of travel agent is once again routed through the facility of processing such information at AIPL. If AIPL finds that the subscriber accessing the CRS is authorized to do so, the request is further forwarded. AIPL is also responsible for establishing connectivity of the computers of the subscribers and maintaining them. AIPL is also responsible for training of the subscribers in respect of use of CRS. For all these services rendered by AIPL to the appellant, it is being paid remuneration in terms of distribution agreement. Broadly the assessee receives three 'Euros' as fees per 'net booking' i.e. gross booking minus cancellation. The assessee passed 0.84 dollars to AIPL for each net booking processed through Amadeus system by subscriber. Thus in respect of the activities carried out in India and considering the income accruing in India, remuneration paid to the Indian agents consumes the entire income accruing or arising in India. It is also to be noted that the entire payment made by appellant to AIPL has been allowed as expenses while computing total income of the appellant. In such a situation in view of Circular No. 23 of 23rd July 1969 no income can be further charged to tax in India. As rightly contended by Shri Vohra the Circular equally applies to the sale of goods as well as rendering of services. The Hon'ble Supreme Court has taken judicial note of said Circular in the case of Morgan Stanley & Co(292 ITR 406) and have held that once associated enterprise which is considered as PE of the non-resident assessee is remunerated at arms-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 assessment year 1996-97.

Whether a Permanent Establishment Exists:

20. Apart from applicability of "Business connection', the next question to be decided for A.Y. 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 have a fixed place of business under Art 5(1) of the Indo-Spain treaty?

Paragraph 1 of Article 5 of the treaty with Spain reads as under: Para 1. of Article 5 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 Centre 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 commentary "a permanent establishment may nevertheless exist if the business of the enterprise is carried on mainly through automatic equipment...." It is also clear that the provision of Node and communication network within India is not for any preparatory or auxiliary activity. It is an integral and essential part of the CRS without which the core business of the assessee would come to stand-still. It is also not necessary that the telecommunication equipments should be owned by the assessee. It would suffice if such equipment in India taken on hire continuously for a number of years.

ii) 'Location' of the 'Equipment' (hardware supplied to a Subscriber) is 'fixed' in a specific place in the premises of the Travel Agent.

iii) A Subscriber cannot relocate the computers without permission.

iv) Clause 5.1 & 5.2 of the Subscribers Agreement clearly provide that the equipment given to the subscriber can be serviced or repaired by the Amadeus. Further, C1. 5.7 clearly provides that Amadeus has right to enter subscriber's premises for inspecting the equipment. It needs to be repeated that the equipment belongs to the assessee and Amadeus India derives authority to rent out the equipment to the subscribers from the Distribution Agreement.

v) It is contended by the assessee that equipment provided to the Subscribers is light and therefore a distinction has to be made between "substantial machinery and light portable equipment". It is submitted that this contention is misconceived. It is not the size of the equipment which is relevant but it is its operational and economic significance to the enterprise which is the deciding factor. Without the use of computers installed in the premises of the subscribers, the CRS, would be at stand-still. Regarding portability of equipment, the facts noted in (ii) and (iii) and (iv) (supra) make it clear that the equipment provided to the subscribers cannot be moved around, but remain fixed at one place within the specified place in the subscriber's premises.

vi) The following observations of the CIT(A) in paragraph 7.4 of his order are apt:

The customers and the Subscribers know with certain amount of certainty that the vendors information is displayed on the computers placed in Subscriber's premises and it can be used for getting the information and booking the tickets with minimal effort. Therefore, the computer, which occupies the place and which is connected with mainframe computer, does answer to the description of fixed place of business form which the appellant 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 infra structure in India including configured computers installed in the office premises as explained in the preceding paragraphs, 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 A.A.R. in P. No. 24 of 1996 In re. (1999) 237 ITR 798 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 net work 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 own cost, no income would accrue to it. The network is therefore an essential ingredient of the CRS.

Computers belonging to the assessee or hired by it are supplied to the travel agents through Amadeus India. The assessee has claimed hiring charges or, as the case may be, depreciation on such equipment for use in its business in India. In other words, it is an admitted position that these equipments are used in the assessee's own business. CIT (A) has also rightly repelled the assessee's contention that information is displayed on the host computer (which hosts application software) and the display on computer at the subscriber's computer is merely a pale reflection. The host computer is essentially a server and there is no display on it. Assuming that the host computer 'displays' information, neither the vendors and nor the subscriber see it. They see and use the 'display' of information on computers set up in their offices.

The assessee is maintaining CRS of which is situated in India, which is its fixed place of business in India. As considered earlier, the assessee maintains an 'exchange' or a 'market place' in India by placing computers in fixed places and also by hiring fixed nodes and leased lines.

Para 2 of Article 5 lists items, which are included in the term "permanent establishment". CIT(A) has held that the computers installed in the subscribers' premises falls within item(k).

Para 3 of Art 5 lists items, which are excluded from the definition of the term 'permanent establishment'. Assessee has contended that assuming there is a 'fixed place of business', it is for the purpose of advertising and for activities which have a preparatory or auxiliary character, for the enterprise. This contention of the assessee is misconceived. It has been demonstrated in foregoing submissions that the assessee's network in India including the hardware/software installed in the subscribers' premises is integral part of the core business of the assessee. Further, it is to be noted that providing subscribers' access to the assessee's system and thereby making booking is not auxiliary activity. It is in fact the core business activity of the enterprise". So far as advertisement is concerned, the display of flight schedules etc. on the subscriber's screen is for the purpose of conduct 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 v. Rai Bahadur Jairam Valji , 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 Berghs Ltd. v. Clark (5). Considered in this light the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency, and any receipt on account of such a contract can only be a trading receipt.

20.4 Shri Kapila also submitted that Amadeus India is assessee's 'dependent agent' in India under Art 5(5) of the DTAA.

The Relevant paras 4 & 5 ofArticle 5 of the treaty are quoted below.

Paragraph 5 of Article 5 reads as under: An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State though 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 paragraph.

Paragraph 4 of Article 5 reads as under:

Notwithstanding the provisions of paragraphs 1 and 2, where a person- other than an agent of an independent status to whom paragraph 5 applies- is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have permanent establishment in the first-mentioned State, if

a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of good or merchandise for the enterprise;

b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise.

That Amadeus India is assessee's agent in India is not disputed. A halfhearted attempt is made in saying that the Distribution Agreement is on principal to principal basis but it is belied by the admission that 'the activities of the appellant are wholly channeled through the agent i.e. the NMC In Dun & Bradstreet, in re (272 ITR 99), 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 A. A. R. No. 542 of 2001, In re 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 the assessee for the following reasons.

i). Amadeus India has not undertaken the activities under the Distribution Agreement 'in the ordinary course of its business'. The business started by Amadeus India under the Distribution Agreement is totally a new business. The business of providing support services to the assessee is a unique business requiring specialized skills for which the assessee's employees received specialized training from the assessee. During the relevant years, the Indian company has no other business.

Amadeus India was set up and incorporated as a joint venture Company for starting and carrying on the business under the Distribution Agreement. It has been treated as a unique and separate undertaking and relief Under Sections 10A & 80 HHE have been claimed and allowed on the profits derived from this undertaking. Hence, it cannot be said that the business which came its way was obtained by it in the 'course of the business', which it had been carrying on.

Thus, right from the start, the activities of Amadeus India (Pvt.) Ltd. are wholly and exclusively devoted to providing services to the assessee. Therefore, a company which started such an exclusive business cannot be said to have obtained this agency "in the ordinary course of its business". The expression "course of business" axiomatically assumes a preexisting business in the course of which the new business is undertaken. Hence, proviso to the first sentence ofArticle 5 (5) applies and Amadeus India is not an independent agent.

ii) Amadeus India is not an independent agent for another reason. As per the second sentence ofArticle 5(5) also, its activities are devoted wholly on behalf of the assessee and constitutes only source of its business income and it is economically dependent on the assessee.

iii). The Distribution Agreement between the assessee and Amadeus India is essentially an agency contract for three reasons:

a) Under the Distribution Agreement the assessee has supplied huge quantities of equipment to Amadeus India but not by way of sale. The assessee continues to be the owner of the equipment and the Amadeus India merely holds and supplies the equipment to the subscribers on behalf of the assessee. The Indian company has neither purchased this equipment and nor has it hired or leased it from the assessee. No consideration of any kind or rental 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 C. 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 C1. 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 Vendors. In other words, 'Subscriber Agreement' concluded by Amadeus India makes the assessee accountable both to the subscribers and the vendors and vendors accountable to the subscribers, though they too are not party to the Subscribers Agreement. The assessee's contention that the 'Subscriber Agreement' between the Amadeus India & the Subscribers is not on behalf of the assessee is not correct for the reasons already discussed. Further, Appendix A of the Agreement clearly brings out the rental charges, though the Indian company is free to waive it. The point however to be noted is that the Indian company is also not required to pay any charges for the equipment & the network.

d) Amadeus India is economically wholly dependent on the assessee. Its main source of income is from the assessee and as held by the Tribunal in its own case it occupies a place between the host computer and the subscribers in India and actively modifies the programme in the host computer by creating 'partitions' and thus segmenting the orders of the subscribers. The assessee earns fees from the vendors on the basis of segment - wise bookings made by the subscribers.

20.5 Shri Kapila also submitted that Article 5(4) of the Treaty applies for the following reasons:

i) As perArticle 1 of the Distribution Agreement, 'subscriber' is an entity who contracts to receive access to a Amadeus System Clause 7.1 of the Agreement also provides that Amadeus India shall contract with subscribers in India "to provide access to all of the Amadeus Products", which of course includes CRS.

In other words, Subscriber gets a right to 'use' the CRS owned by the assessee by virtue of contract entered into with its agent, namely Amadeus India. Amadeus India is therefore clearly permitted to conclude contracts with subscribers, for using business assets owned by it. The assessee's conduct clearly establishes that subscriber contracts independently concluded by Amadeus India are honoured by it consistently.

ii) Whereas the Amadeus India is authorised to conclude contracts which involve the assessee's equipment and software as also network and the system for booking orders by the Subscribers, it is independent to fix its own financial charges. As per Clauses 6, 9& 10 of the Distribution Agreement. Amadeus India has unilaterally waived any charges 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, Article 1 of Participation Agreement states that Amadeus Subscriber "Mean 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 Agreement, it clearly binds the Vendors also to honour the bookings made under the Subscriber Agreement to which they too are not party. This clearly establishes that Amadeus India has been habitually concluding contracts with subscribers in India on assessee's behalf and the assessee has not only been abiding by the terms of the Subscribers Agreement, but has also enforced it with the vendors.

It also cannot be denied the activities mentioned in the Subscriber Agreement are intimately interwoven with and form integral part of the business operations of the Assessee and these are clearly not in the nature of preparatory or auxiliary activities. Further, Amadeus India has been habitually entering into Subscriber Agreement with Travel Agent etc., which in substance tantamounts to securing of orders for the assessee's CRS.

It is clear that Amadeus India has been habitually concluding contracts with Subscribers in India on behalf of and with the consent of the Assessee. The assessee on its part has also been habitually honouring such contracts. However, Amadeus India is free to fix any terms/ consideration in its contracts with the subscribers. In the case of TVM Ltd. v. CIT [237 ITR 230], the Authority for Advance Ruling has quoted Klaus Vogel & commentary of the OECD Model of Double tax Convention, which reads:

Also, the phrase "authority to conclude contracts in the name of the enterprise" does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprise ; the paragraph 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 the enterprise....

The authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise. The provisions of Art 5(4)(a) are therefore attracted....

Moreover the authority has to be habitually exercised in the other State; whether or not this is the case should be determined on the basis of the commercial realities of the situation. A person who is authorised to negotiate all elements and details of a contract in a way binding on the enterprise can be said to exercise this authority "in that State", even if the contract is signed by another 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 Article 5(4)(b) of the treaty also apply 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 Clause 10.9 & 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 Section 9 read with Section 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 Section 5 read with Section 9 of the Act for the Asstt. Years 1996-97 to AY 1998-99.

2. The assessee has a PE in India on account of:

(i) Having 'fixed place of business' through which its business is carried on in India as perArticle 5(1) of the DTAA between India & Spain.

(ii) It also has an agency PE in terms of the proviso to the first sentence of Article 5(5).

(iii) Without prejudice, it also has an agency PE in terms of second sentence of Article 5(5).

(iv) The activities of the assessee do not fall under any of the negative items mentioned inArticle 5(3).

(v) Conditions laid down in Art 5(4) (a) & (5 (4) (b) are also satisfied.

(vi) Amadeus India is a dependent agent in terms of India -Spain treaty and it therefore constitutes the assessee's PE in India.

The assessee's therefore taxable even under the provisions Indo-Spain treaty for the Assessment Years 1997-98 & 1998-99.

Submissions by Appellant:

21. The submissions of the appellant in regard to Existence of P.E. are as under:

21.1 The computers provided to the travel agents were not Amadeus proprietary and were standard IBM compatible computers. The same were not certified by the appellant as such and only certain standard technical characteristics of the computers provided to the travel agents were intimated to AIPL in order that the computers that they buy and provide to the travel agents were compatible with the appellant's CRS. The said computers were not customized and only configured in order to be compatible with the appellant's CRS.

Due to high cost of computers in the relevant years not many travel agents could afford them. As an incentive to subscribe to the appellant's CRS, computers were provided to some of the travel agents only on need basis. There were many travel agents who were using their own computers, which were configured in order to be compatible with the appellant's CRS.

Similarly, the telecommunication network leased by the appellant from SITA was also an incentive provided to the travel agents and to facilitate access to the appellant's CRS. The appellant was under no obligation in terms of the PCA to provide the computers or telecommunication equipment to the travel agents. The appellant's obligation was to display the information of the Airlines, which would facilitate the travel agent to make the booking and for the purpose, the appellant had created huge facility/mainframe/host computer at Erding in Germany. How the appellant provided access 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 Ld. DR 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 include the computers provided to the travel agents. "Amadeus Central System" has, in fact, been defined to mean central computer facility (which is in Germany) to which the travel agents are connected. It does not mean that the computers of the travel agents are part of the Amadeus central system.

As regards the contention of the Ld. DR that the mainframe/server in Germany does not display anything and the information is displayed only on the computers of the travel agents, it is submitted that the information is first received and displayed on the mainframe in Germany and a mirror image of the same is displayed on the computers of the travel agents. The activity resulting in display of information to the travel agents and the subsequent booking of the ticket is carried out in the appellant's mainframe only and the travel agents is communicated the result of the activity performed. It cannot be said that the appellant earns income by virtue of installation of computers and providing telecommunication network to the travel agents since no amount is received from the travel agents for providing the computers and telecom network. The appellant receives income from the Airlines based on net booking irrespective of whether the booking(s) is/are generated on computers owned by the travel agents themselves or on the computers provided to the travel agents by the appellant.

As regards the contention of the Ld. DR regarding the location of the computers being fixed, it is submitted, that the location of the computers can be changed with the permission of AIPL and since installation and reinstallation entails cost for AIPL and the appellant, the aforesaid clause is to restrain the travel agents from relocating computers unnecessarily.

Paragraph 42.4 of the OECD Commentary has been quoted out of context by the Ld. DR. The said paragraph is part of the heading 'Electronic Commerce' and cannot be read in isolation. As per paras 42.1 to 42.10, a server may, in certain situations, constitute PE where the server is capable of independently performing the main/core business of the enterprise. The appellant's server is located in Germany and not in India. If at all, the server in Germany may constitute PE of the appellant in that country. Further, the computers at the travel 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 DR, 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 paragraph 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 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 terms of paragraph 42.6 of the OECD Commentary, the computer equipment should be operated by the enterprise, which owns or hires the computer equipment. The appellant does not operate either the computers or SITA Nodes in India.

(c) The reference to the decision of the Supreme Court in the case of Shaan Finance: 231 ITR 308, by the DR, to contend that SITA nodes leased to the appellant are at its disposal and constitute fixed place PE of the appellant, is totally out of context. What is relevant to consider is whether the leased equipment has been used for carrying out the core business of the lessee or not to constitute fixed place PE and the mere leasing of equipment is not sufficient to constitute PE.

(d) The German Pipeline case related to net wealth tax, where the main business of the assessee, viz., transportation of oil, was carried through remotely operated pipelines and such pipelines were considered as permanent establishment.

Amadeus is not in the business of transmission of voice or data through leased lines and that decision has no relevance to the facts of the appellant's case.

(e) It is accepted that even automated equipment used for carrying on the core business of the enterprise without human intervention may result in PE. In the present case, the computers are operated not by the appellant but by the travel agents and SITA's telecommunication network is operated by SITA and not the appellant. Further, the appellant is not in the business of data communication and the appellant's business cannot be said to be carried on through such computers and the telecommunication network leased by the appellant.

It is not the appellant's case that the equipment has to be substantial in order to constitute PE. What is relevant is whether, (i) the main business of the appellant is carried out through the equipment, (ii) the equipment is fixed, and (iii) the equipment is operated by the appellant. The answer being in the negative in the case of the appellant, the telecommunication network and computers cannot constitute fixed place PE.

As regards the claim of depreciation, hire charges of computers and telecommunication expenses, it is to be appreciated that the said claim was made without prejudice to the main submission that the appellant has no PE and in case the 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 Pvt. Ltd. has been quoted out of context by the Ld. DR since the issue therein related to the characterization and taxability of subscription fee paid by the Cargo agent to a foreign online 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 observation 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 applicant was not in the nature of business profits. The finding regarding PE in India was not, therefore, relevant for determination of the questions before the AAR and hence not decided by the Authority. The said decision has, therefore, no application to the facts of the case where the income of the appellant is admittedly in the nature of business profits. Further, in appellant's case no training or helpdesk is provided by the appellant in India. The training and helpdesk is, in fact, provided by AIPL.

In view of the aforesaid, the computers and telecommunication network provided to the travel agents do not form an integral part of the appellant's CRS and it cannot be said that by virtue of the aforesaid computers and telecommunication network a part of the appellant's CRS is in India, which constitutes fixed place through which the appellant carries out his business and, therefore, the appellant has a fixed place PE in India.

21.2 The submissions of the appellant in regard to installation of P.E. under Article 5(2)(k) are as under:

The CIT(A) has stated that the appellant is installing computers at the premises of travel agents and, therefore, it has an installation project PE in terms of Article 5(2)(k) of the Treaty.

The appellant is not in the business of installing computers and has not taken any computer installation contract and the aforesaid provision has been wrongly invoked by the CIT(A) to hold that the appellant has PE in India. The Ld. DR has not relied upon the aforesaid provision to contend that the appellant has PE in India.

21.3 The submission of appellant as to exception under Article 5(3) of the Treaty are as under:

The core activity of the appellant is carried out in the main frame or the host computer which is in Germany and the provision of computers and telecommunication network, as an incentive to a travel agent is only incidental to and not the main business of the appellant. Further, the computer owned by the travel agents could be used for gaining access to the appellant's CRS.

The provision of computers and telecom network was an activity preparatory to the core activity of display of Airlines information through the appellant CRS, for facilitating the booking by the travel agents.

21.4 The submissions of the appellant in regard to agency P.E. under Article 5(4) and 5(5) 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 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 principal to principal basis does not become an agent of the service recipient merely because the services are not being rendered to another person, or that the service provider is dealing exclusively with one entity. The substance of the contract/agreement needs to be seen whether an element of agency can be inferred.

The reference to the contracts with subscribers and provision of access to the subscribers in the PCA, and honoring of tickets booked by them through Amadeus CRS by the Airlines does not create privity of contract between the appellant and the travel agents in terms of the subscriber agreement entered into between AIPL and the travel agents. The aforesaid terms in the PCA only conveys that provision of access to the appellant's CRS to the travel agents is contemplated. Further, the Airlines are under an obligation to honor the ticket booked through appellant's CRS by the travel agent since otherwise no one would subscribe to the appellant's CRS and no revenues would be received by the appellant, if no tickets are booked through the CRS.

The Distribution Agreement clearly states that the appellant and AIPL are dealing vis-a-vis each other on principal to principal basis. Although the same is not conclusive, the said clause reflects the intention of the parties, in the absence of anything to the contrary in the terms of the agreement.

In order that travel agents can access Amadeus CRS, it is necessary to authorize/permit AIPL to carry out the activity relating to providing computers, telecommunication link, etc. to the travel agents in order that AIPL can discharge its obligation under the Distribution Agreement efficiently. Such authority does not, however, result in altering the nature of an independent service contract to a contract of agency. The definition of "subscriber" in the Distribution Agreement only states that the person contracting AIPL to receive access to the appellant's CRS would be a subscriber. The said definition cannot be read to mean as if any authority is being granted by Amadeus to AIPL to conclude contracts with the travel agents. The subscriber agreement entered into by the NMC with the travel agents is primarily with the purpose to protect the misuse of computer equipments, unauthorized access, etc. by the travel agent, and not for earning any income therefrom.

Further, as would be clear on perusal of paragraph 7.2 of the distribution agreement, the terms of such agreement are to be drafted by AIPL so that they confirm 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 DR.

The specification of the equipment to be provided by AIPL to the subscribers and the products required to be offered to the subscribers does 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 enter travel agent's premises etc. does not mean that the agreement between the appellant and AIPL is not on principal to principal basis. The decision of Supreme Court in the case of Bhopal Sugar Industries Ltd. v. STO (40 STC 42) is referred to in this regard wherein a dealer was held not to be an agent merely because certain restrictions and obligations were placed upon him, such as

(i) maintaining sale, service and other records and providing statement of sale, financial matters to the company;

(ii) selling the goods at the price fixed by the company;

(iii) selling goods in a particular territory only fixed by the company;

(iv) payment of commission and allowance to the dealer by the company at its sole discretion;

(v) furnishing security for performance as per the stipulation in the contract.

It was held by the apex Court that the aforesaid restrictions were necessary in order for the company to keep itself fully informed of the conduct of the business by the dealer in order to maintain its goodwill and would not make the dealer an agent of the company.

The fact that AIPL has no property in the computers provided to the travel agents does not result in AIPL being considered as an agent of the appellant. AIPL only provides service to the appellant in the form of purchasing and supplying computers to the travel agents, assisting in providing telecommunication link to the travel agents, providing training to the travel agents, etc., for which it is remunerated at arm's length by the appellant. AIPL acts as a 'bailee' in respect of the computers purchased by it and provided to the travel agents. Section 148 of the Indian Contract Act defines "Bailment" as, "delivery of goods by one person to another for some purpose, upon a contract that they shall when the purpose is accomplished, be returned or otherwise disposed off according to the direction of the person delivering them". Such an arrangement cannot be construed as relating to agency.

In essence, the appellant has engaged AIPL for providing certain services to AIPL which includes data processing, provision of computers to the travel agents, training to the travel agents, assisting the travel agents in installing of telecommunication link, etc. Rendering of such services do not result in AIPL being considered as an agent of the appellant. Such services have 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's case (237 ITR230) 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, where under 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 the appellant had it had the necessary authority from the appellant to conclude contract with the Airlines, resulting in revenues to the appellant, as the appellant's CRS has been developed to display the information of the Airlines.

Entering into subscriber agreement by the NMC, it will be appreciated, is part of NMCs internal operation and the authority to enter into such contract is not relevant for purposes of Article 5(4)(a) of the Treaty. Paragraph 33 of the OECD Commentary is referred in this regard, wherein, it has been clarified that the authority to conclude contracts must cover contracts relating to operations, which constitute the business proper of the enterprise and the authority to conclude contracts relating to internal operations only would not be relevant for the purpose of the aforesaid Article. The aforesaid paragraph of the Commentary has been referred to and relied upon by the AAR in TVM's case in 237 ITR 230 (Supra).

The authority to conclude contracts in respect of transactions which may have some nexus with the business operations of the principal, as submitted by the DR is not sufficient since the authority to conclude contracts must relate to operations, which constitutes the business proper of the appellant and not in respect of any business operations.

The aforesaid proposition is supported by the decision of the ITAT Delhi Bench in Western Union's case, which squarely applies to the facts of the appellant's case. The subscriber's agreement entered into by AIPL with the travel agents, whereunder access is provided to appellant's CRS is in relation to the last leg of appellant's obligation to the Airlines and the subscriber agreement does not result in any authority being exercised by AIPL to conclude contracts on behalf of the appellant in conduct of the business proper of the appellant.

The Ld. DR agrees that there is no provision of software in the appellant's case, and even if it were to be so, as held in that case, software cannot constitute PE of an enterprise, as held in the case of Western Union (supra).

It has not been appreciated that in terms of the PCA, the provision of access to the travel agents, who arc agents of the Airlines was contemplated in the PCA itself. As in Western Union's case (supra) the transaction in appellant'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 Article 5(4)(a) of the Treaty.

Another requirement in Article 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 exercised such authority to conclude contracts and Article 5(4)(a) of the Treaty does not apply. This is without prejudice to the contention that the AIML does not have any authority to conclude contracts on behalf of the appellant.

It is not the appellant's case that if it is held as an agent, it is an agent of independent status or that the activities carried out by AIPL are in its ordinary course of business. Therefore, the arguments of the Ld. DR in relation to Article 5(5) of the Treaty are of no relevance.

To sum up, it is the appellant's case that

(i) it is not an agent of the appellant;

(ii) if it is held to be an agent, it does not have authority to conclude contracts on behalf of the appellant, and (iii) even if it were to have such authority, such authority has not been habitually exercised by AIPL; and therefore, AIPL is not a dependent agent PE of the appellant under Article 5(4)(a) of the Treaty.

21.5 As regards agency P.E. under Article 5(4)(b) of the Treaty, Shri Vohra submitted as under:

It is denied that AIPL stocks computers for the appellant. AIPL, on need basis purchases computers in India, provides the same to the travel agents as and when required and invoices the appellant or its affiliates.

Without prejudice, even if AIPL were to stock computers, which are delivered to the travel agents on behalf of the appellant, the provisions of Article 5(4)(b) of the Treaty do not apply since the appellant does not deal in computers and in any case the delivery of such computers does not result in any source of income to the appellant. The provisions of Article 5(4)(b) have to be read in context. The stocking and delivery of goods by the agent, which are not dealt in by the principal and which do not give rise to any income to the appellant cannot be said to faLl under Article 5(4)(b), as the whole purpose to constitute a PE is to tax income arising therefrom and where an act is known not to result in any income, little purpose would be served in constituting a PE by virtue of such act.

In view of the aforesaid, AIPL cannot be considered as dependent agency PE of the appellant either under Article 5(4)(a) or Article 5(4)(b) of the Treaty.

22. Shri Vohra contended that even if it is held that there is PE in India, only so much of the profit is attributable to the functions performed by PE is taxable in India and not whole of 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 dated 23.7.1969, Circular No. 1/2004 dated 2.1.2004, issued by CBDT and the ruling of the AAR in the case of Morgan Stanley & Co. International Ltd.: 284 ITR 260(Confirmed on this issue by the Supreme Court in 292 ITR 406) 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 v. Ahmedbhai Umarbhai & Co. 18 ITR 472. The Court observed that where a person is carrying on manufacture and sale, the profits received relate firstly to his business as manufacturer and secondly, to his trading operations. Profit or loss has to be apportioned in a business-like manner and according to well established principles of accountancy. In such cases, the Court held that it will be doing no violence to the meaning of the words 'accrue or arise' if the profits attributable to the manufacturing business are said to arise or accrue at the place where the manufacture is being done and the profits which arise by reason of sale are said to arise at the place where the sales are made.

The aforesaid view was reiterated by the Supreme Court in the case of The Anglo-French Textile Co Ltd. v. CIT:25 ITR 27. It was observed in the aforesaid case that though profits may not be realized until the manufactured article is sold, profits are not wholly made by the act of sale and do not necessarily accrue at the place of sale. It was further observed that to the extent profits are attributable to the manufacturing operations, profits accrue at the place where the business operations are carried on. The question whether a particular part of income, profit or gain arose or accrued within the taxable territories or without the taxable territories would have to be decided having regard to the general principles as to where the income, profit or gain could be said to arose or accrue, the Court held.

In the aforesaid case, the assessee company incorporated in the United Kingdom and having its registered office in London manufactured yarn and cloth in their mill at Pondicherry. The assessee had appointed a company in Madras at their agents. The manufactured goods were sold mostly in British India and partly outside British India. All the contracts in respect of the sales in British India were entered into in British India and deliveries were made and payments were received in British India. In regard to sales outside British India also, payments in respect of such sales were received in Madras through the agents.

The assessee had shown the total world income for the year ended 30.12.1941 at Rs. 10,23,807. Profit at 10 per cent, on British Indian sales which aggregated to Rs.57,07,431 was shown at Rs.5,70,743 and after deduction of the proportionate expenses relating to sales in British India and sundry charges was put down at the net figure of Rs.4,58,026 which was shown as the British Indian income. It was, thus 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, at the rate of 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 and Co. v. CIT 41 ITR 781 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% of the profits to the operation carried out within the taxable territory. The Court held that there was justification only for apportioning 10% of the assessee's share of the profits to the trading operations carried out in the taxable territory.

The decision of the Calcutta High Court in the case of CIT v. Bertrams Scotts Ltd. 31 Taxman 444 where the Court upheld the order of the Tribunal is directly to the point under consideration. In that case the Tribunal had noted that a large number of services were to be performed outside India as compared to the comparatively fewer services rendered in India. The Court upheld the estimated 10% of the net profits as income accruing or arising in India.

Reliance is also placed on the decision of the Special Bench of the Tribunal in the case of Nokia Networks: 95 1TD 269, regarding the manner in which the profit attributable to the PE are to be computed.

In that case, the assessee engaged in the business of telecom equipment supply and erection, was held to have a PE in India, through which the activities relating to telecom network planning, negotiations relating to sale of equipment and signing of supply and installation contracts with Indian customers, were carried out in India. The issue before the Special Bench was, as to what was the income attributable to the PE of the assessee in India. The Special Bench found that the assessee made global net profit of 10.8%. The aforesaid percentage was applied to the sales made to the Indian customer, and the resultant figure was held to be net profit arising in respect of the Indian sale. Having regard to the activities of the PE in India, 20% of the net profit in respect of the Indian sale was held to be income attributable to the PE in India.

Applying the ratio of the aforesaid decision to the facts of the appellant's case, it will be appreciated that the net result of the period as per the audited profitability analysis for the India distribution activity, only represents the net profit relatable to the bookings made from India, i.e., the Indian sales.

The same is not, however, the income attributable to the alleged PE of the appellant in India. Only a part of the aforesaid net profit, can be attributed to the alleged PE in India since ail 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 center and the airline hosts are all located outside India. The connectivity is provided by SIA 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 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 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 mean that the services are rendered by the CRS in the respective countries.

The activity done in India by the appellant is minuscule as compared to the activities done outside India and the computers installed with the frame agents in India are not capable of performing the activities which are done the mainframe of the appellant located outside India. In view of the aforesaid facts and circumstances, it is further submitted, without prejudice, that the assessing officer erred on facts and in law in attributing 100% of the profits relating to the Indian distribution activity as computed by the assessing officer, to the alleged PE of the appellant in India, in the assessment framed for the said assessment year without appreciating that since substantial and substantive part of the appellant activities is carried outside India, only a small part of such profits could be attributed to the alleged PE of the appellant in India.

To sum up, (i) the appellant does not carry on any activities in India, resulting in business profits arising to the appellant in India; (ii) the appellant does not have either a fixed place PE or dependent agency PE in India and therefore, the appellant cannot be subjected to tax in India, even if it were to be assumed that any part of the business profits arise in India; (iii) even if PE in India were to be assumed, there is no further income attributable to the alleged PE. liable to tax in India, in view of AIPL having suffered tax on the booking fee received from the appellant.

Finding as regards Existence of Permanent Establishment:

23. The next question to be decided is whether the appellant has any permanent establishment in India within the meaning of Article 5 of DTAA between India and Spain. Article 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, projects or activities, if any) continue for a period of more than six months in any twelve month 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 paragraph an enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment 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 production of mineral oils in the State if the activities continue for a period of more than thirty days in any twelve-month period.

3. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:

(a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods and merchandise, or of collecting information for the enterprise;

(e) the maintenance of a fixed place of business solely for the purpose of advertising, for supply of information, for scientific research or for similar activities which have a preparatory auxiliary character, for the enterprise.

4. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 5 applies- is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have permanent establishment in the first-mentioned State, if

(a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of good or merchandise for the enterprise;

(b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise 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 permanent establishment in the other Contracting State merely because it carries on business in that other State though 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 of the same common control, as that enterprise, he will not be considered and agent of an independent status within the meaning of this paragraph.

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 a carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

Paragraph 1 of the Treaty gives a general definition of the term "Permanent establishment" which brings ut its essential characteristic of a permanent establishment in the sense of convention i.e. distinct sites, a fixed place of business through which the business of an enterprise 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. 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 is dependent on the enterprise, conduct the business of the enterprises in which such fixed place is situated. The term place of business covers any premises, facility or installation used for carrying on the business of the enterprise, whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented or are otherwise at the disposal of the enterprise. A place of business may thus be constituted by a pitch in a market place or by a certain permanently used area. The place of business can be situated in the business vicinity of another enterprise. What is to be seen is that on fact an enterprise has a certain amount of space at its disposal, which is used for business activities and then it is sufficient to constitute a place of business. No formal legal right to use that place is visualized or required. A PE could exist even where an enterprise unauthorizingly or illegally occupies certain locations where it carried on its business. For a place of business to constitute a PE, the enterprise using it must be carrying on its business wholly or partly through it. It is not necessary that whole of the business should be carried on through such PE or fixed place. Time and again it is being contended on behalf of appellant that for application of paragraph 1 of Article 5 of the Treaty to apply, it must have a productive character i.e. contribution to the profits of the enterprise. However, considering paragraph 1 of Article 5 of the Treaty, it is not so mentioned within the framework of established business. 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 enterprise 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 entrepreneur or employees who receive instructions from the enterprise, the rights of such persons in its relationship with third parties are irrelevant.

So far as paragraph 1 of Article 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 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 function of reservation and ticketing is a part and parcel of the entire CRS. The computers so installed requires 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 computers so installed cannot be shifted from one place to another even within the premises of the subscriber, leave apart the shifting of such computers from one person to another. Thus the appellant exercises computer control over the computes installed at the premises of the subscribers. In view of our discussion in the immediately preceding paragraph, 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 computes and connectivity which are provided by the appellant either directly or through its agent AIPL will amount to operating part if 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 paragraph 1 of Article 5 of Indo-Spain Treaty.

23.2 The next question to be considered is if there is a permanent establishment, whether the exception provided in paragraph 3 of Article 5 applies so as to hold that there is no permanent establishment in India. The case for the appellant is that the existence of such computers are merely for the purpose of advertising and the activities are preparatory or auxiliary in character an hence there is no fixed place PE in India in view of the Explanation provided in paragraph 3 of Article 5. We are unable to accept such a contention. The function of the PE in INdia is not only to advertise its products. The activity of the appellant is developing and maintaining a fully automatic reservation and distribution system with the ability to perform comprehensive information, communication, reservation, ticketing, distribution and related function 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 ut in India is in no way of 'preparatory or auxiliary' character. Thus the exception provided in Paragraph 3 of 5 will not apply and hence as stated above, the assessee shall be deemed to have permanent establishment in India.

23.3 The next question arises is whether the assessee has a PE in India in the form of a dependent agent. It is a 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 permanent establishment, (1) 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 an independent status cannot be deemed to be a PE of the enterprise. The agents can be considered as PE only and only if when a person other than agent of an independent status, (i) has and habitually exercise in that state an authority or conclude counteract or (ii) though he has no such authority nut habitually maintains stock of goods from which he regularly delivers goods on behalf of the enterprise. Thus the first question to be decided is whether the agent is for a dependent status or of an independent status. In the present case we find that AIPL is totally dependent on the appellant. The entire business of AIPL is to provide data processing and software development services together with relative distribution of Amadeus products' to the subscribers in India. AIPL has also an authority to entry into agreements with the subscribers. AIPL installs the computers, configures the computers for accessing the CRS and also provides connectivity through SITA notes. Thus functionally as well as financially it is dependent entirely on the appellant. It can therefore, be said that AIPL is a dependent agent of the appellant.

23.4 The next question t to the decided is whether he is habitually exercising an authority to conclude contracts on behalf of the appellant. Under the distribution agreement entered into by the appellant with AIPL, AIPL is responsible for effecting and contracting with subscribers in the Indian territory and is to use reasonable efforts to provide access to all the 'Amadeus Products' out of Indian territory. Though the appellant and even the participating airlines are not party to the agreement entered into by AIPL with the subscribers, yet the appellant through the PCA has ensured that the subscribers were authorized to use 'Amadeus Products'. Under an authority granted to them subscribers use such products. The reservations and ticketing done using the CRS product are being honored by the participants and for which the remuneration will be payable but the participants to the appellant. Thus AIPL can be said to have and having exercised an authority to conclude contacts 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 agreement 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 paragraph 4 to an agent who enters into contract literally in the name of enterprise. The paragraph 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 generates revenue area 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 paragraph 4 of Article 5 of the Treaty. On the other hand, the learned DR ha submitted that on the plain reading of Treaty, these is no such provision that the the contacts to be habitually concluded should contribute to the revenue. In our opinion, what is relevant is that such contract shall have a nexus with the business operations as such and not merely contracts for hiring employees, premises etc. What is taxable in the contracting state is the income accruing to such enterprise and the activities are carried on either through the PE namely fixed place or through a pendent agent. The dependent agent is not to be considered as PE unless he has authority to conclude contract on behalf of such enterprise. The authority to conclude contacts must be in respect of contracts relating to operations, which constitute the business proper of the enterprise. The appellant in the present case in order to enhance its business operations has appointed AIPL as its agent who promote the 'Amadeus Products' in India. AIPL in its turn has appointed various subscribers for use of 'Amadeus Products'. Though the revenue flows only from participants who have entered into PCA with the appellant, yet the revenue could not have been generated but for the subscribers using the 'Amadeus Products;. In a way the revenue is generated from the participants but only on the basis of use of CRS by the subscribers. But for such use no revenue would accrue t the appellant. Thus the agreement entered into by the AIPL with the subscribers under an authority granted to it, are contracts relating to operations which constitute business proper and not merely in the nature of internal operations. Such contracts are habitually exercised and there is nothing on record to suggest that such authority was cancelled at any point of time. We, therefore, hold that AIPL is dependent agent of the appellant who ha 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 Clause (b) of paragraph 4 of Article 5 of the Treaty. Clause

(b) of paragraph 4 of Article 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 DR 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 DR. The reference to " stock of goods" in Clause (b) of paragraph 4 of Article 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 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 is by itself is to the subscribers are into dealt with by the assessee or which is by itself is the source of revenue. Thus Clause (b) of paragraph 4 of Article 5 will not apply to consider the dependent agent as PE of the appellant in India.

Attribution of Profits:

24. Having considered that the the appellant has a PE in india in two forms namely (1) fixed place (PE) under paragraph 1 of Article 5 and (2) Agency PE under Clause (a) of paragraph 4 of Article 5, we shall examine whether as to what is the profit attributable to the PE in terms of Article 7 of the DTA 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.

Paragraph 1 to 3 of the Article 7 of the DTA are extracted hereunder:

Article 7 BUSINESS PROFITS

1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting 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 them as s attributable to (a) that permanent establishment; (b) sales in that other State of goods or merchandise of the same or similar kind a those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through the permanent establishment.

2. Subject to the provision of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to mae 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 permanent establishment.

3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purpose of the permanent establishment, including executive and general administrative expenses, research and development expenses, interest and other similar 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. 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, 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 permanent establishment. Likewise no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charges(otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other officers, 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 intersect on moneys lent to the head office of the enterprise or any of its other officers.

Reading the above Article 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 permanent establishment. This is in pari materia with Clause (a) of Explanation 1 to Section 9(1 )(i) of the Income-tax Act. Thus where the entire activity of an enterprise are not carried out in a contracting state where the PE is situated, than only so much of the profit as is attributable to the functions carried through the PE can be taxable in such source state. While dealing 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% of the revenue generated from the bookings made within India is taxable in India. The 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 extinguish the assessment as no further income is taxable in India. It is to be noted that even in the first assessment framed by the Assessing Officer, the entire expenses in the form of remuneration paid to AIPL was held as allowable deduction and was 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 A.Y. 1997-98 and 1998-99 will be 'Nil'.

24.1 Since we have held that the remuneration paid to the dependent agent is exceeding the income attributable to the PE in India, the question of allowability of various expenses as are in appeal in ITA Nos. 1022, 1023 & 1024 do not survive. The question of charging interest under Section 234A & 234B will also not survive.

25. Various case laws have been cited during the course of hearing. We have considered the same to the extent, in our opinion, are applicable to the facts of the case. Other case laws not being decisive of the issue in the present appeals are not considered.

26. In the result, appeals in I.T.A. Nos. 2143, 2144 & 2145/Del/2000 are partly allowed and appeals in I.T.A.Nos. 1022, 1023 & 1024/Del/2005 have become infructuous on the ground that the computation of income is a mere academic exercise and hence not considered. Thus these appeals will be treated as partly allowed.

Pronounced in the open court on 30th November 2007

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Income Tax Appellate Tribunal - Delhi

Amadeus Global Travel Distribution Sa ... vs Dy. Commissioner Of Income-Tax on 30 November, 2007

Equivalent citations: (2008)113TTJ(DELHI)767