Travelport Inc. provides electronic global distribution services to airlines via a computerised reservation system (CRS). This system is connected to airline servers, with data continuously sent and obtained regarding flight schedules, seat availability, and so on. Travelport earns USD/EUR 3 for each booking made in India for providing CRS services. Travelport entered into a distribution agreement with an Indian entity to market and distribute those CRS services to travel agents in India. For this service, Travelport paid an amount ranging from 33.33% to 60% of its total earnings to the Indian entity.
Following an audit, the tax authorities concluded that the income earned by Travelport Inc. from the CRS services was earned through the hardware installed at the travel agents’ premises in India, and that Travelport Inc. was liable for tax on the total income of USD/EUR 3 in India.
However, Travelport Inc. filed complaints, and the Tribunal ruled that, once the revenue had been apportioned, no further income was taxable in India as the remuneration paid to the agent in India exceeded the apportioned revenues. Regarding the attribution to the permanent establishment (PE) in India, 15% of the total revenue was assessed as income accruing or arising in India, based on the functions performed, assets used, and risks undertaken.
The tax authorities filed an appeal with the Delhi High Court, which was dismissed on the grounds that there was no legal issue and, with regard to attribution, the Tribunal had adopted a ‘reasonable approach’.
The tax authorities then filed an appeal with the Supreme Court.
Judgment of the Supreme Court
The Supreme Court dismissed the appeal.
Excerpts
“14. We do not think that we need to go into the second contention of the learned Additional Solicitor General, for the simple reason that the approach of the Tribunal and the High Court on the question of attribution appears to be fair and reasonable.
15. It is seen from the orders of the Tribunal that the Tribunal arrived at the quantum of revenue accruing to the respondent in respect of bookings in India which can be attributed to activities carried out in India, on the basis of 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 and this has already been taxed. Therefore, the Tribunal rightly concluded that the same extinguished the assessment.
16. The question as to what proportion of profits arose or accrued in India is essentially one of facts. Therefore, we do not think that the concurrent orders of the Tribunal and the High Court call for any interference.”
…
“18. Under Explanation 1(a), 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 taken into account relevant factors.”
…
“20. The above Article may not really go to the rescue of the Revenue for the reason that in the contracting state, the entire income derived by the respondents, namely, USD/EURO 3 will be taxable. This is why Section 9(1) confines the taxable income to that proportion which is attributable to the operations carried out in India.
21. Therefore, we are of the view that the impugned order(s) of the High Court do not call for interference. Insofar as the second issue, namely, the question of permanent establishment is concerned, we are not going into the same, as we have concurred with the High Court on the first issue.”
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