Question of What Proportion of Profits Arose or Accrued in India is a Question of Fact: Apex Court

Case Details: Director of Income-tax v. Travelport Inc. - [2023] 149 taxmann.com 470 (SC)

Judiciary and Counsel Details

• • V. Ramasubramanian & Pankaj Mithal, JJ.

Facts of the Case

Assessee was in the business of providing electronic global distribution services to Airlines through what is known as a “Computerized Reservation System” (CRS). For this purpose, it maintains and operates a Master Computer System, which consists of several mainframe computers and servers in other countries, including the USA. This Master Computer System is connected to airline servers, to and from which data is continuously sent and obtained regarding flight schedules, seat availability, etc.

To market and distribute the CRS services to travel agents in India, the respondents have appointed Indian entities and have entered into distribution agreements with them. Assessee earns an amount of USD 3/EURO 3 per booking made in India. Out of said earnings, it pays various amounts to the Indian entities, which range from USD/EURO 1 to USD/EURO 1.8.

The Assessing Officer (AO) held that the entire income earned out of India is taxable because income was earned through the hardware installed by the assessee in the premises of the travel agents. The CIT(A) also upheld the order of AO.

On further appeal, based on the functions performed, assets used, and risks undertaken (FAR), the Tribunal held that 15% of the total revenue was the income accruing or arising in India. The High Court dismissed the appeal filed by AO. Aggrieved-AO filed the instant appeal before the Supreme Court.

Supreme Court Held

The Supreme Court held that it is seen from the orders of the Tribunal that the Tribunal arrived at the quantum of revenue accruing to assessee in respect of bookings in India which can be attributed to activities carried out in India, based on FAR analysis (Functions performed, assets used and risks undertaken).

The Commission paid to the distribution agents by the respondents was more than twice the amount of attribution, which has already been taxed. Therefore, the Tribunal rightly concluded that the same extinguished the assessment. The question of what proportion of profits arose or accrued in India is essentially one of the facts.

Under Explanation 1(a) to section 9(1)(i), what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India.

What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact. On this question of fact, the Tribunal has considered relevant factors.