Facts of the Case

The respondent-assessee, M/s. Sahara Airlines Ltd., entered into operational agreements with two foreign business entities: M/s. Amadeus Marketing (a Spanish company) and M/s. Galileo International (an American company). Under these business arrangements, the assessee utilized dedicated software provided by these foreign enterprises to facilitate the reservation of airline tickets and made corresponding monetary payments for the usage of this software through the respective companies.

The Assessing Officer (AO) formed an opinion that the payments made by Sahara Airlines to these entities constituted "Royalty". Consequently, the AO held that the payments made to M/s. Amadeus Marketing were taxable @ 25% under Article 13(2)(ii) of the India-Spain Double Taxation Avoidance Agreement (DTAA), and the payments made to M/s. Galileo International were taxable @ 15% under Article 12(2) of the India-USA DTAA. On this basis, the AO invoked the provisions of Section 195(2) of the Income Tax Act, 1961, holding the assessee liable for Tax Deducted at Source (TDS).

Issues Involved

  • Whether the payments made by the assessee to foreign computer reservation systems (CRS) companies (M/s. Amadeus Marketing and M/s. Galileo International) for utilizing ticket reservation software fall under the definition of "Royalty" or constitute "Business Income".
  • Whether the assessee was liable to deduct tax at source (TDS) under Section 195(2) of the Income Tax Act, 1961, when the services were rendered outside India without any business operations by the foreign companies within India.
  • Whether any substantial question of law arises from the factual findings given by the Income Tax Appellate Tribunal (ITAT).

Petitioner’s (Revenue's) Arguments

The Appellant (Commissioner of Income Tax), represented by counsel, supported the position of the Assessing Officer. The primary contention was that the payments made by the assessee for accessing and using the ticket reservation software were fundamentally in the nature of "Royalty" for the use of scientific/commercial equipment or software rights. Therefore, the Revenue argued that the assessee was under a statutory obligation to deduct withholding tax under Section 195(2) of the Act in accordance with the tax rates specified in the respective DTAAs with Spain and the USA.

Respondent’s (Assessee's) Arguments

The Respondent (Sahara Airlines Ltd.), represented by senior counsel, argued that the services provided by the foreign companies were fully executed and rendered outside the territory of India. It was strongly contended that neither M/s. Amadeus Marketing nor M/s. Galileo International carried out any business operations within India. As the business operations were situated entirely outside India, the resulting income accrued and arose outside India. Thus, the respondent asserted that the income was not taxable in India, completely absolving the assessee from the requirement of deducting TDS under Section 195.

Court Order / Findings

The High Court of Delhi, bench comprising Hon'ble Mr. Justice A.K. Sikri and Hon'ble Mr. Justice Siddharth Mridul, reviewed the prior appellate history of the matter. The Commissioner of Income Tax (Appeals) had previously ruled that the payments did not amount to "Royalty" but were "Business Income" in the hands of the two foreign companies. This stance was further upheld by the Income Tax Appellate Tribunal (ITAT), which accepted the assessee’s plea that no TDS was deductible since the income did not accrue in India.

The High Court affirmed that these conclusions are pure "findings of facts". Since the factual finding established that no operations took place in India and the income accrued outside India, the High Court determined that no substantial question of law arose for its consideration. Accordingly, after condoning the initial filing delays, the High Court dismissed all the cross-appeals along with the accompanying applications.

Important Clarification

The case reinforces the principle that where payments are made to non-resident entities for software/CRS services executed entirely outside India with no domestic operations, the income does not accrue or arise in India. If the appellate authorities (CIT(A) and ITAT) conclude based on facts that such payments constitute business income accruing outside India rather than royalties, such determinations are classified as findings of fact. Higher courts will not disrupt these findings under Section 260A unless they are proven to be perverse, as no valid substantial question of law arises.

Sections Involved

  • Section 195(2) of the Income Tax Act, 1961 (Withholding tax/TDS on payments to non-residents).
  • Article 13(2)(ii) of the India-Spain Double Taxation Avoidance Agreement (DTAA).
  • Article 12(2) of the India-USA Double Taxation Avoidance Agreement (DTAA).

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:8726-DB/AKS21122009ITA11772009_152348.pdf

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