Facts of the Case

  • The respondent/assessee, Sahara Airlines Ltd., entered into operational arrangements with two foreign entities: M/s. Amadeus Marketing (a Spanish company) and M/s. Galileo International (an American company).
  • The assessee utilized proprietary reservation software provided by these foreign companies for booking/reservation of flight tickets and made subsequent payments for using the software through the said companies.
  • The Assessing Officer (AO) held that the payments made to these non-resident entities constituted a "Royalty".
  • Consequently, the AO asserted that tax was chargeable @ 25% under Article 13(2)(ii) of the DTAA for M/s. Amadeus Marketing, and @ 15% for M/s. Galileo International, making TDS mandatory under Section 195(2) of the Income Tax Act.

Issues Involved

  • Whether payments made by an Indian airline to foreign companies for utilizing ticket reservation software qualify as "Royalty" or "Business Income" under the Income Tax Act and respective DTAAs?
  • Whether the assessee was liable to deduct Tax at Source (TDS) under Section 195(2) of the Income Tax Act, 1961, given that the foreign entities had no operations or permanent establishment within India.

Petitioner’s (Revenue's) Arguments

  • The Revenue (Commissioner of Income Tax) supported the view of the Assessing Officer, arguing that the payments made for ticket reservation software fell strictly under the definition of "Royalty".
  • It was argued that the assessee was under an absolute statutory obligation to deduct TDS under Section 195(2) at the prescribed DTAA rates (25% and 15% respectively) prior to remitting funds abroad.

Respondent’s (Assessee's) Arguments

  • The assessee contended that the technical and software reservation services were rendered entirely outside the territory of India.
  • It was submitted that neither M/s. Amadeus Marketing nor M/s. Galileo International had any active business operations within India, meaning no income accrued or arose in India.
  • The assessee relied on the findings of the lower appellate authorities, asserting that the remittances were business profits/income in the hands of the foreign entities and, in the absence of a Permanent Establishment (PE), were not liable for TDS.

Court Order / Findings

  • Condonation of Delay: The High Court initially accepted the miscellaneous applications and condoned the delay associated with filing the appeals.
  • Merits of the Case: The High Court took note of the findings by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT), which held that the payment was not a royalty but business income, and that no TDS was deductible.
  • Conclusion: The High Court affirmed that these conclusions constituted pure findings of facts. As no substantial question of law arose for consideration, all the appeals preferred by the Revenue were dismissed.

Important Clarification

  • Payments made by domestic commercial ventures to non-resident service providers for standardized software access (such as global distribution systems or reservation modules) are treated as Business Income of the foreign recipient rather than "Royalty," provided the infrastructure operations are stationed outside India and do not transfer a right of ownership over the core software.

Sections Involved

  • Section 195(2) of the Income Tax Act, 1961 (Tax Deduction at Source / TDS on payments to non-residents).
  • Article 13(2)(ii) of the Double Taxation Avoidance Agreement (DTAA).

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:8838-DB/AKS21122009ITA11942009_160953.pdf

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