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Tax Publishers Amadeus IT Group SA v. Asstt. DIT [ITA No. 4906/Del/2010, ITA No. 5150/Del/2011, ITA No. 60/Del/2013, ITA No. 1824/Del/2014, ITA No. 1204/Del/2015, ITA No. 1626/Del/2016, dt. 26-10-2020] : 2020 TaxPub(DT) 4452 (Del-Trib) Computerized reservation system in aviation sector -- PE-attribution of income -- DAPE *Facts:* 1. Assessee a non-resident Spanish Company in the domain of CRS for airlines was held to be having a place PE by virtue of the remote computers and a Dependent Agency PE (DAPE) by virtue of its Indian subsidiary AIPL (Amadeus India Pvt. Ltd.) performing certain marketing functions. The same was also upheld by the Del HC in assessee's own case of ITA Nos. 191, 192, 193/2011 applying DIT v. Galileo International Inc. (2009) 224 CTR 251 (Del) : 2009 TaxPub(DT) 1488 (Del-HC). Accordingly the percentage of attribution was confirmed at 15%. The assessee was remunerating 33% to the Indian arm for its activities. It was the case of the assessing officer that since the degree of control and scope of the entity has got changed in its ambit the attribution be done of 75% of the income from India which was at Rs. 1,452 million thus the attributed income was held to be Rs. 1,089 million. Assessee's counter was since the percentage of attribution was already decided by the high court @ 15% no disturbance of it be done especially when there was no change of events/circumstances and since the payment to the DAPE was 33% there cannot be any taxable income attributable in their hands any further. A further reasoning of revenue was that the CRS fee was also taxable as royalty. This was the moot point of the appeal before the ITAT. 2. A specific type of reservation software of assessee was used exclusively by British Airways and it was the departmental plea that the same be taxed as royalty given the amended definition under the act. On higher appeal -- Held in favour of the assessee that once their attribution based on their functional risk analysis was fixed @ 15% no further attribution is called for. Since the agency commission/marketing fee to the Indian arm AIPL (DAPE) was @ 33% there can be no further attribution possible as no income remained in the hands of the non-resident out of the attributed Indian income. The decision of the assessee's own case was relied upon and affirmed. As for the British Airways Reservation Software, it was held that the treaty definition cannot be super imposed with a unilateral amendment in the Income Tax Act and thus the same cannot be taxed as royalty. *Editorial Note:* Reference be made to Sabre Asia Pacific Pte. Ltd. v. DCIT/A.Y. 2013-14/ITA No. 4968/Mum/2017/Favour of the assessee/dated 8-7-2020 especially the editorial comments on the same which is appended as under. The attribution of income arrived is gross income against which genuine expenditure should be allowed is a golden rule which is what has been applied in this case. However in this case the attribution was applying rule 10 @ 10% and in earlier years @ 15%. A claim by department to remand to assessing officer to examine attribution on (FAR) Functional and risk analysis basis was negated by the ITAT in earlier years. It sounds odd to have attribution of income @ 10% with commission payout being @ 25%. The resultant will always be a loss as the decision shows unless volumes/yields make up for the gap. Either the attribution percentage was incorrect or there was no need for the attribution. If revenue were to do such attributions it is not unusual of assessee's to adopt such smart tax planning tactics. A calculation of additional tax on attributable income vs. the tax outflow of service tax/GST on the commission and marketing fee payouts (which also should be normally tax neutral due to availability of set off of input credit with only timing impact besides working capital cost) less lower tax in hands of NMC subsidiary saved due to these expenses should have been the logical arithmetic for assessee to come to such a conclusion with the resultant benefit being more than the cost. The 25% commission and marketing fee virtually made the income attribution/TP addition virtually impotent. Even if TP disallowance was made in hands of the NMC for the commission or marketing fee being excessive the case appears tax neutral as the existence of PE in India would enable the PE to reduce that much expense from its books so only the differential rate of tax between resident to non-resident becomes gain to revenue. Then there are other issues like the 25% does not look unusual in CRS or in travel industry. Perhaps the 25% was taken into account certain volumes which did not crystallize as well. The ITAT decisions referred for earlier years of the assessee are in appeal before high court pending adjudication.

Tax Publishers

Amadeus IT Group SA v. Asstt. DIT [ITA No. 4906/Del/2010, ITA No. 5150/Del/2011, ITA No. 60/Del/2013, ITA No. 1824/Del/2014, ITA No. 1204/Del/2015, ITA No. 1626/Del/2016, dt. 26-10-2020] : 2020 TaxPub(DT) 4452 (Del-Trib)

Computerized reservation system in aviation sector -- PE-attribution of income -- DAPE

Facts:

1. Assessee a non-resident Spanish Company in the domain of CRS for airlines was held to be having a place PE by virtue of the remote computers and a Dependent Agency PE (DAPE) by virtue of its Indian subsidiary AIPL (Amadeus India Pvt. Ltd.) performing certain marketing functions. The same was also upheld by the Del HC in assessee's own case of ITA Nos. 191, 192, 193/2011 applying DIT v. Galileo International Inc. (2009) 224 CTR 251 (Del) : 2009 TaxPub(DT) 1488 (Del-HC). Accordingly the percentage of attribution was confirmed at 15%. The assessee was remunerating 33% to the Indian arm for its activities. It was the case of the assessing officer that since the degree of control and scope of the entity has got changed in its ambit the attribution be done of 75% of the income from India which was at Rs. 1,452 million thus the attributed income was held to be Rs. 1,089 million. Assessee's counter was since the percentage of attribution was already decided by the high court @ 15% no disturbance of it be done especially when there was no change of events/circumstances and since the payment to the DAPE was 33% there cannot be any taxable income attributable in their hands any further. A further reasoning of revenue was that the CRS fee was also taxable as royalty. This was the moot point of the appeal before the ITAT.

2. A specific type of reservation software of assessee was used exclusively by British Airways and it was the departmental plea that the same be taxed as royalty given the amended definition under the act. On higher appeal --

Held in favour of the assessee that once their attribution based on their functional risk analysis was fixed @ 15% no further attribution is called for. Since the agency commission/marketing fee to the Indian arm AIPL (DAPE) was @ 33% there can be no further attribution possible as no income remained in the hands of the non-resident out of the attributed Indian income. The decision of the assessee's own case was relied upon and affirmed.

As for the British Airways Reservation Software, it was held that the treaty definition cannot be super imposed with a unilateral amendment in the Income Tax Act and thus the same cannot be taxed as royalty.

Editorial Note: Reference be made to Sabre Asia Pacific Pte. Ltd. v. DCIT/A.Y. 2013-14/ITA No. 4968/Mum/2017/Favour of the assessee/dated 8-7-2020 especially the editorial comments on the same which is appended as under.

The attribution of income arrived is gross income against which genuine expenditure should be allowed is a golden rule which is what has been applied in this case. However in this case the attribution was applying rule 10 @ 10% and in earlier years @ 15%. A claim by department to remand to assessing officer to examine attribution on (FAR) Functional and risk analysis basis was negated by the ITAT in earlier years. It sounds odd to have attribution of income @ 10% with commission payout being @ 25%. The resultant will always be a loss as the decision shows unless volumes/yields make up for the gap. Either the attribution percentage was incorrect or there was no need for the attribution. If revenue were to do such attributions it is not unusual of assessee's to adopt such smart tax planning tactics.

A calculation of additional tax on attributable income vs. the tax outflow of service tax/GST on the commission and marketing fee payouts (which also should be normally tax neutral due to availability of set off of input credit with only timing impact besides working capital cost) less lower tax in hands of NMC subsidiary saved due to these expenses should have been the logical arithmetic for assessee to come to such a conclusion with the resultant benefit being more than the cost.

The 25% commission and marketing fee virtually made the income attribution/TP addition virtually impotent. Even if TP disallowance was made in hands of the NMC for the commission or marketing fee being excessive the case appears tax neutral as the existence of PE in India would enable the PE to reduce that much expense from its books so only the differential rate of tax between resident to non-resident becomes gain to revenue. Then there are other issues like the 25% does not look unusual in CRS or in travel industry. Perhaps the 25% was taken into account certain volumes which did not crystallize as well. The ITAT decisions referred for earlier years of the assessee are in appeal before high court pending adjudication.