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[2009] 116 ITD 1 (Delhi)/[2008] 19 SOT 257 (Delhi)/[2008] 114 TTJ 289 (Delhi)

[2008] 19 SOT 257 (Delhi)

IN THE ITAT DELHI BENCH 'B'
Galileo International Inc.
v.
Deputy Commissioner of Income-tax, Non-Resident Circle, New Delhi*
D.R. SINGH, JUDICIAL MEMBER
AND DEEPAK R. SHAH, ACCOUNTANT MEMBER
IT APPEAL NOS. 2473 TO 2475 (DELHI) OF 2000,
1733 (DELHI) OF 2001 AND 820 TO 823 (DELHI) OF 2005
C.O. NOS. 47 TO 54 (DELHI) OF 2006
[ASSESSMENT YEARS 1995-96 TO 1998-99]
NOVEMBER 30, 2007

Section 9 , read with section 5 , of the Income-tax Act, 1961 - Income - Deemed to accrue
or arise in India - Assessment years 1995-96 to 1998-99 - Assessee, a US company,
developed a global computerised reservation system (CRS) through which subscriber
travel agents could check availability of seats/rooms in participant airlines, hotels, cab
operators, etc. and book them - Assessee had to maintain master computer system in US,
which was connected to servers of participant hotels and airlines - Assessee engaged an
Indian company as distribution agent in India - Indian agent entered in subscriber's
agreement with travel agents to provide them computer, connectivity, access code and
support service - Assessee paid all expenses for installation of computer at premises of
travel agents - Assessee's CRS was capable of processing information of various airlines
for display at one place and enabled subscriber travel agents to book tickets - It was a
system originating from desk of Indian subscribers' computers, and ending at their
computers too - Only when booking was completed at desks of computers of subscriber
travel agents in India, income generated to assessee - Thus, a continuous seamless
process was involved, at least part of which was in India - Assessee received income
from airlines outside India, and not from subscriber travel agents in India - Assessee's
case was that it had neither any operation in India nor had any Permanent Establishment
(PE) in India and hence, no part of its income would be taxable in India - Whether since
computers at subscribers' desks were not dumb or in nature of kiosk incapable of
performing any function and computers being supplied either by assessee or through its
agent and connectivity by assessee enabling subscribers to perform ticketing and
booking functions, there was a direct business connection established in India - Held,
yes - Whether, therefore, in terms of section 9(1)(i) income in respect of booking which
took place from equipment in India, could be deemed to accrue or arise in India and,
hence, taxable in India - Held, yes - Whether since work in India through CRS involved
generation of request and receipt of end result of booking only, and major functions like
collecting data and maintaining data base as well as track records of hotels, airlines, etc.,
worldwide was kept continuously at assessee's host computer in US, 15 per cent of
revenue accruing to assessee in respect of booking made in India could, in absence of
any guideline, be reasonably attributed as income accruing or arising in India - Held, yes -
Whether, however, since remuneration paid to Indian agent consumed entire income
accruing or arising in India, in view of Circular No. 23, dated 23-7-1969, no income would
be available to be charged to tax in India - Held, yes
Section 90 of the Income-tax Act, 1961, read with articles 5 and 7 of the DTAA between
India and USA - Double taxation relief - Where agreement exists - Assessment years
1995-96 to 1998-99 - Whether for a place of business to constitute a PE, enterprise using
it must be carrying on its business wholly or partly through it, it is not necessary that
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whole of business should be carried on through such PE or fixed place - Held, yes -
Whether a PE will nevertheless exist if business of an enterprise is carried on mainly
through automatic equipment and activities of personnel being restricted to setting up
and operating such equipment; a PE will still exist if enterprise which sets up machine
also operates and maintains them for its own account irrespective of fact as to whether
machines are operated by itself or by a dependent agent - Held, yes - As described under
heading 'Income - Deemed to accrue or arise in India', under global Computerised
Reservation System for reservation and ticketing, computers were supplied to
subscribers, in some cases, by assessee-US company itself - In all cases, connectivity
were installed by assessee through its Indian agent - Without authority of assessee such
computers were not capable of performing reservation and ticketing - Computers could
not be shifted from one place to another, even within premises of subscribers and thus,
assessee exercised complete control over computers installed at premises of
subscribers - Whether premises of subscribers would amount to a fixed place of
business for carrying on business of enterprise in India and assessee could be said to
have established a PE within meaning of article 5(1) and exception provided in article 5(3)
would not apply - Held, yes - Whether since (i) business of Indian company appointed as
agent of assessee in India, was to provide data processing and software development
services together with relative distribution of CRS to subscribers in India and (ii) Indian
Company had an authority to enter into agreements with subscribers and it installed and
configured computers for accessing CRS and also provided connectivity, functionally as
well as financially Indian agent was dependent entirely on assessee and it could,
therefore, be said that assessee's agent was a dependent agent of assessee, who had
habitually exercised authority to conclude contracts on behalf of assessee and to that
extent assessee had a PE in India - Held, yes - Whether since computers supplied by
assessee's distribution agent in India to travel agents were not dealt with by assessee or
which was by itself source of revenue, clause (b) of article 5(4) would not apply to
consider dependent agent as PE of assessee in India as said article would apply only
where dependent agent habitually maintains stock of goods from which he regularly
delivers goods on behalf of enterprise - Held, yes
FACTS

The assessee-company, a resident of USA, was engaged in the business of maintaining and operating the
system for providing electronic global distribution services to airlines, hotels, tour and cab operators by
connecting to Travel Agents (TAs) utilising a Computerized Reservation System (CRS). The said system
would receive, process, store and disseminate data about flight schedules, room availability, fare
information and provision for booking capabilities, etc. The assessee entered into a Participating Carrier
Agreement (PCA) with various participating airlines for providing them with said CRS services. For the
said purpose, it maintained and operated a huge Master Computer System (MCS) in USA, which was
connected, inter alia, to airlines' servers to/from which relevant data regarding flight schedules, seat
availability, fare structures, flight connections, availability of facilities, etc., on a real-time basis was
continuously sent and obtained. To market and distribute the CRS services to the travel agents (TAs) in
India, the assessee entered into a Distribution Agreement (DA) with an Indian company 'I'. 'I', in turn,
entered into a subscribers agreement with various TAs to provide them with access codes, equipment,
communications link and support services. Further, the master computer system of the assessee in USA
was connected to TAs in India through a communication network arranged by a separate organization
('SITA'). The assessee at its own cost, had obtained connectivity services from its Data Centre in USA to
the nodes of SITA in India. The assessee paid remuneration to 'I' for acting as distributor, and also paid
SITA for the communication services which it provided. The assessee was remunerated outside India by
the airlines and it did not receive any remuneration from the travel agents. For the assessment years 1995-
96 to 1998-99, the assessee filed its return declaring nil income on the ground that no income accrued or
arose to it in India nor could any such income be deemed to accrue or arise in India as it had no operations
in India which gave rise to taxable income under section 5(2) or section 9(1)(i). The assessee further
contended that it did not have any Permanent Establishment (PE) in India within the meaning of article 5
of the DTAA between India and USA and, therefore, the booking fees received by it from the airlines
outside India, being business profits, were not liable to tax in India under article 7(1) of said DTAA. The
Assessing Officer, however, held that all the activities in respect of bookings made by the TAs in India
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were completed in India through the hardware installed by assessee at travel agents premises; that on that
basis income accrued or arose in India under section 5; that even under the DTAA, the assessee had a PE
in India under article 5 and so the income was taxable as business income under article 7; that the assessee
earned income on each segment booked through the computers installed in India and, therefore, the same
constituted a PE. The Assessing Officer further held that 'I' was a PE of the assessee within the meaning of
article 5(4) because it was economically dependent on the assessee for its source of business and its
activities were devoted wholly and exclusively for the assessee, and further, it entered into and concluded
contracts on the assessee's behalf. On appeal, the Commissioner (Appeals) upheld the impugned findings.
He, however, accepted that under article 7(5) only that portion of the assessee's income which could be
regarded as derived from the assessee's assets and activities in India, could be taxed in India.
On second appeal :
HELD

ISSUE OF TAXABILITY OF INCOME

The scope of total income is described in section 5. 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 ), 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 ), only if the income is arising
directly or indirectly through or from any business connection in India, it can be taxed in India. 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 includes some of the activities to be termed as business
connection. [Para 8.1]
The assessee had developed a fully automatic reservation and distribution system with ability to perform
comprehensive information, communica-tion, reservation ticketing, distribution and related functions on a
world- wide basis. Through that system, the assessee provided service to various participants i.e., Airlines
and hotels, etc., whereby the subscribers who were enrolled through the efforts of NMC could perform the
functions of reservations and ticketing, etc. Thus, the said system was capable of not only processing the
information of various Airlines for display at one place but it also enabled the subscribers to book tickets
in a way which was a seamless system originating from the desk of the subscriber's computer which might
or might not be provided by the assessee but which in all cases were configured and connected to such an
extent that such computers could initiate or generate a request for reservation and also receive the
information in that 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 was to be noted
that all the subscribers in respect of which income was held taxable were 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 were provided by the assessee. The booking would take place in India on the basis of the
presence of such seamless CRS. On the basis of booking made by the TAs in India, the income generated
to the assessee. But for the booking, no income accrued to the assessee. The contention of the assessee
that the whole of the processing work was carried out at host computer situated in USA and only the
display of information was in India for the proposition that there was no business connection in India,
could not be accepted. The CRS extended to Indian territory also in the form of connectivity in India. But
for the request generated from the subscriber's computers situated in India, the booking was not possible
which was the source of revenue to the assessee. The assessee was not to receive the payment only for
display of information but the income would accrue only when the booking was completed at the desk of
the subscriber's computer. In such a situation, there was a continuous seamless process involved, at least
part of which was in India and, hence, there was a business connection in India. The computers at the
subscriber's desk were not dumb or in the nature of kiosk incapable of performing any function. The
computers along with the configuration had been supplied either by the assessee or through its agent 'I'
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and the connectivity being provided by the assessee enabled the subscribers to access the CRS and
perform the ticketing and booking functions. The existence of business connection could be summarised
thus :

(1) The assessee hired an independent agency (SITA) nodes in most major cities in India together
with 800 landlines for maintaining telecommunication network in India.
(2) The assessee secured the provision of the operation of the communication network from SITA
node to travel agent.
(3) By the Distribution Agreement, the assessee specifically authorised its Indian agent to conclude
agreements with the travel agents in India in accordance with the model Subscriber Agreement.
(4) The assessee laid down targets and closely supervised and reviewed the performance of its
Indian agent on day-to-day basis in accordance with the Annual Plan and the service manual.
(5) The assessee allotted access code to the travel agents for using the CRS.
(6) The assessee's business comprised of :
(a) Maintenance and running of CRS;
(b) Providing computer modem and software to the travel agents in India so that they
could use the CRS for making the bookings which generate charge on the airlines;
(c) Assessee hired from SITA and maintained and operated telecommunication network in
India so that travel agents could make the bookings.
All these activities are integral part of the core business carried on by the assessee and these are not
auxiliary or preparatory in nature.
Whether the contract for sale of ticket was completed in India or outside was irrelevant for the purpose of
present discussion as it was not necessary to determine the taxability of income of various airlines
accruing as a result of sale of tickets through the CRS in India. Thus, whether the availability of the tickets
displayed through the CRS at the desk of travel agents in India was offer for sale or an invitation to an
offer was not a deciding factor. What one finds is that part of the CRS system existed in India in the form
of configuration and connectivity of such system through which booking activities could be performed in
India.
In the instant case, the assessee operates the CRS system which was the source of revenue and part of
such system existed in India.
Thus, there was a direct business connection established in India and, hence, in terms of section 9(1)(i),
the income in respect of the booking which took place from the equipment in India could be deemed to
accrue or arise in India and, hence, taxable in India. [Para 8.2]
ISSUE OF QUANTUM OF TAXABLE INCOME
As per section 9(1)(i ), 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 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 instant case, only part of CRS operated or functioned in
India. The extent of work in India was 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
had entered into PCA with the assessee took place outside India. The computer in USA processed various
data like schedule of flights, timings, pricing, availability, connection, meal preference, special facility,
etc., and that too on the basis of neutral display real time on line took place outside India. The computers
at the desk of TA in India were merely connected or configured to the extent that it could perform a
booking function but were not capable of processing the data of all the airlines together at one place.
Such function required huge investment and huge capacity, which was not available to the computers
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installed at the desk of subscriber in India. The major part of the work was processed at the host computer
in USA. The activities in India were only minuscule portion. The assessee's computer in Germany (sic)
was also responsible for all other functions like keeping data of the booking made worldwide and also
keeping track of all the Airlines and hotels worldwide that had entered into PCA. Though no guidelines
were available as to how much should be income reasonably attributable to the operations carried out in
India, the same had 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 instant case, the majority of the functions were
performed outside India. Even the majority of the assets, i.e., host computer which was having very large
capacity which processed information of all the participants was situated outside India. The CRS as a
whole was developed and maintained outside India. The risk in that regard entirely rested with the
assessee and that was in USA outside India. However, it was 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 was in India also. On
the basis of said facts, 15 per cent of the revenue accruing to the assessee in respect of bookings made in
India, could be reasonably attributed as income accruing or arising in India and chargeable under
section 5(2) read with section 9(1)(i ). [Para 9]
ISSUE OF TAXABLE INCOME AFTER CONSUMPTION
The activities of the assessee in India were entirely routed through the efforts of its Indian agent 'I'. 'I' was
responsible for monitoring the activities of the subscribers enrolled in India. The request originated from
the computers at the desk of TA was once again routed through the facility of processing such information
at 'I'. If 'I' would find that the subscriber accessing the CRS was authorised to do so, the request was
further forwarded. 'I' was also responsible for establishing connectivity of the computers of the
subscribers and maintaining them and for training of the subscribers in respect of use of CRS. For all
those services rendered by 'I' to the assessee, it was being paid remuneration in terms of distribution
agreement. Broadly the assessee received three 'Euros' as fees per 'net booking', i.e., gross booking minus
cancellation. The assessee passed one dollar to 'I' for each net booking processed through CRS 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 consumed the entire income accruing or arising in India. It
was also to be noted that the entire payment made by assessee to 'I' had been allowed as expenses while
computing its total income. In such a situation in view of Circular No. 23 dated 23-7-1969, no income
could be further charged to tax in India. Therefore, in view of the said facts, no income was taxable in
India. [Para 10]
ISSUE OF EXISTENCE OF PERMANENT ESTABLISHMENT
Article 5(1) gives a general definition of the term 'Permanent Establishment' (PE) which brings out
essential characteristic of a PE in the sense of convention, i.e, a distinct site, 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., it 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
dependent on the enterprise, conducts 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 in 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 can 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
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be carried on through such PE or fixed place. The assessee contended that for 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 article 5(1), it was not so mentioned within the framework of established business.
It would 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,
it can be said that the business of an enterprise would partly be carried on from such place and,
accordingly, it is 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 article 5(1) 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 — whether operated by itself or by a dependent agent. [Para 17]
In the instant case, it was seen that the CRS, which was the source of revenue was partially existent in the
machines, namely, various computers installed at the premises of the subscribers. In some cases, the
assessee itself had placed those computers and in all the cases the connectivity in the form of nodes leased
from SITA were installed by the assessee through its agent. The computers so connected and configured
which could perform the function of reservation and ticketing was a part and parcel of the entire CRS. The
computers so installed required further approval from the assessee, 'I' who allowed the use of such
computers for reservation and ticketing. Without the authority of the assessee such computers were not
capable of performing the reservation and ticketing part of the CRS. The computer so installed could not
be shifted from one place to another even within the premises of the subscriber, leave apart the shifting of
such computer from one person to another. Thus, the assessee exercised complete control over the
computers installed at the premises of the subscribers, which would amount 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 computers and connectivity which were provided by the assessee or its agent 'I' would amount to
operating part of its CRS through such subscribers in India and, accordingly, PE in the nature of a fixed
place of business in India. Thus, the assessee could be said to have established a PE within the meaning
of article 5(1). [Para 17.1]
ISSUE OF EXCEPTION PROVIDED IN ARTICLE 5(3) OF DTAA
The case of the assessee was that the existence of such computers were merely for the purpose of
advertising and the activities were preparatory or auxiliary in character and, hence, there was no fixed
place PE in India in view of the exception provided in article 5(3). The said contention could not be
accepted. The function of PE in India was not to advertise its products. The activity of the assessee was
developing and maintaining a fully automatic reservation and distribution system with the ability to
perform comprehensive information, communication, reservation, ticketing, distri- bution and related
function on a worldwide basis. The computers installed at the premises of the subscribers were connected
to the global CRS owned and operated by the assessee. Using part of the CRS, the subscribers were
capable of reserving and booking a ticket. Thus, it could not be considered as 'solely for the purpose of
advertising' of such CRS. Similarly it was 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 criterion 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
booking function was operated in India which directly contributed to the earning of revenue, the activities
carried out by the assessee in India were in no way of 'preparatory or auxiliary' character. Thus, the
exception provided in article 5(3) would not apply and the assessee would be deemed to have a PE in
India. [Para 17.2]
ISSUE OF PE IN FORM OF DEPENDENT AGENT
It is 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 PE, (i) fixed place or (ii) through the dependent agent. An agent is a person
employed to do any act for another or to represent another in dealing with third person. What an
enterprise can do directly but if not so done directly but 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 is
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carrying on the business through the efforts of such agent and, hence, can be said to have established a
PE. In the instant case, the assessee availed the service of 'I' to promote the use or CRS in India and for
that purpose to appoint subscribers in India, 'I', was authorised to enter into contract with the subscribers
in terms of authority generated under DA. The assessee bound itself in respect of booking made by the
subscriber using the CRS. Thus, what could have been done directly by the assessee was achieved through
the service of 'I'. Hence, 'I' was to be treated as agent of the assessee in India. Even though in the
agreement between the assessee and 'I', the existence of agency was denied, yet that would not be
conclusive if on facts it was found to be agency. That would be relevant only for the limited purpose of
agreement between those two parties but not relevant for third parties if on facts the existence of agency
was found. 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 exercises in that State an authority to conclude contract or
(ii) though he has no such authority but 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 of
a dependent status or of an independent status. In the instant case, 'I' was totally dependent on the
assessee in respect of rendering services to subscribers in India. Thus, that part of activities of 'I' which
earned its revenue by rendering services to the subscribers was carried on solely for the assessee. Though
'I' might be carrying on any other activities, like a full fledged travel agency business, yet the activity
relating to installing CRS of the assessee at subscribers' computers providing connectivity, configuring the
computers to enable it to access CRS, train the subscribers, etc., was only and only for the assessee. Such
type of activities were not carried on for any other person. Hence, the assessee and 'I' were interdependent
in that regard. The business of 'I' was to provide data processing and software development services
together with relative distribution of the CRS to the subscribers in India. 'I' had also an authority to enter
into agreements with the subscribers. 'I' installed the computers, configured the computers for accessing
the CRS and also provided connectivity through SITA nodes. Thus, functionally as well as financially it
was dependent entirely on the assessee. It could, therefore, be said that 'I' was a dependent agent of the
assessee. [Para 17.3]
ISSUE OF EXERCISING AUTHORITY HABITUALLY BY INDIAN AGENT TO CONCLUDE
CONTRACT
Under the distribution agency agreement entered into by the assessee with 'I', it was responsible for
effecting and contracting with subscribers in the Indian territory and was to use reasonable efforts to
provide access to all, the CRS out of Indian territory. Though the assessee and even the participating
airlines were not party to the agreement entered into by 'I' with the subscribers, yet the assessee through
the PCA had ensured that the subscribers were authorised to use the CRS. Under an authority granted to
them, subscribers used such products. The reservations and ticketing done using the CRS product were
being honoured by the participants and for which the remuneration was payable by the participants to the
assessee. Thus, 'I' could be said to have and having exercised an authority to conclude contracts on behalf
of the assessee. What the assessee could have done directly by entering into an agreement with the
subscribers, was done through 'I'. The subscribers agreement were entered into by 'I' under an authority
available to it in view of the DA. What could have been done directly was done indirectly through the
offices of 'I' 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. 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 dependent 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 contracts must be in respect of
contracts relating to operations, which constitute the business proper of the enterprise. The assessee in the
instant case in order to enhance its business operations had appointed 'I' as its agent who promoted the
CRS in India. 'I' in its turn had appointed various subscribers for use of the CRS. Though the revenue
flowed only from participants who had entered into PCA with the assessee yet the revenue could not have
been generated but for the subscribers using the CRS. In a way, the revenue was generated from the
participants but only on the basis of use of CRS by the subscribers. But for such use no revenue would
accrue to the assessee. Thus, the agreements entered into by 'I' with the subscribers under an authority

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granted to it, were contracts relating to operations which constituted business proper and were not merely
in the nature of internal operations. Such contracts were habitually exercised and there was nothing on
record to suggest that such authority was cancelled at any point of time. Therefore, it was to be held that
'I' was dependent agent of the assessee who had habitually exercised the authority to conclude contracts
on behalf of the assessee. To that extent the assessee had a PE in India. [Para 17.4]
ISSUE OF PE WITHIN MEANING OF ARTICLE 5(4)( b) OF DTAA
Clause (b ) of said article would apply only where the dependent agent habitually maintains stock of
goods from which he regularly delivers goods on behalf of the enterprise. In the instant case, the assessee
was not dealing in any stock of goods. Since the assessee was not dealing in any goods, the question of
delivery of such goods did not arise. The contention of the revenue that 'I' maintained stock of computers
which were delivered to the subscribers should be treated as delivery of goods, could not be accepted. The
reference to 'stock of goods' in said clause 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 may be considered as given on bailment from which the revenue is to be
generated. But in the instant case the computers supplied by 'I' to the TAs were not dealt with by the
assessee or which was by itself the source of revenue. Thus, said clause would not apply to consider the
dependent agent as PE of the assessee in India. [Para 17.5]
ATTRIBUTION OF PROFITS
Having considered that the assessee had 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, the profit
attributable to the PE in terms of article 7 of the DTAA between India and USA was to be examined.
Further, it was to be examined whether the income so computed would be absorbed by the expenses
incurred to earn such income which would prima facie extinguish the assessment. It is clear from article 7
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). Article 7(5)
prescribes as to how the profits to be attributed to the PE is to be arrived at. It provides that only the
profits derived from assets and activities of the PE shall be treated as attributable to the permanent
establishment. The wordings in the treaty are not to be interpreted like a provision of the statute. In a way
there should be some rational connection between existence of PE and the profits from the asset and
activities of the PE which can be brought to tax and no further artificial meaning should be given to the
clause 'derived from'. In all circumstances only that much of the profit as are arising due to the assets and
activities of the PE can be brought to tax and if whole of the activities of the business are not carried out
in India, the profit should be apportioned between that arising in India and that arising outside India.
Thus, where the entire activity of an enterprise is not carried out in a contracting State where the PE is
situated, then 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 was such part of income as was
reasonably attributable to the operations carried out in India, it had been held that only 15 per cent of the
revenue generated from the booking made within India was taxable in India. The same proportion had to
be adopted while computing profit attributable to the PE. It had also been held that since the payment to
the agent in India was more than what was the income attributable to the PE in India, it extinguished the
assessment as no further income was taxable in India. Further, even in the first assessment framed by the
Assessing Officer, the entire expenses in the form of remuneration paid to 'I' was held as allowable
deduction and was reduced while computing the income of the assessee. If that be the case, the income
attributable to PE in India being less than the remuneration paid to the dependent agent, it extinguished
the assessment and required no further exercise for computation of income. Accordingly, the income of the
assessee would be NIL. [Para 18]
In the result, the appeals were to be partly allowed.
CASES REFERRED TO

Wipro Ltd. v. ITO [2005] 94 ITD 9 (Bang.) (para 5.1), Fisher v. Bell [1961] 1 Q.B.D. 394 (QB) (para 5.2),
Ishikawajma-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 / 158 Taxman 259 (SC) (para 5.2),
ITO v. Sriram Bearings Ltd. [1997] 224 ITR 724 (SC) (para 5.2), CIT v. Ahmedbhai Umarbhai & Co.
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