Facts of the Case

Galileo International Inc., a company incorporated in the United States and a tax resident of the USA, operated a Computerized Reservation System (CRS) providing electronic global distribution services to airlines, hotels, tour operators and cab operators. The system facilitated travel agents in accessing information relating to flight schedules, room availability, fares and booking facilities.

In India, Galileo conducted its business through Interglobe Enterprises Limited under a Distribution Agreement dated 25.04.1995. Interglobe provided connectivity and distribution support to travel agents using the CRS. For every booking made through the system, Galileo received approximately Euro 3 from participating airlines and paid Euro 1 as commission to Interglobe.

The Assessing Officer and the Commissioner of Income Tax (Appeals) held that a portion of Galileo’s income arose in India and was taxable in India. However, the Income Tax Appellate Tribunal partly accepted Galileo’s appeal and held that although income was attributable to India, no taxable profits ultimately remained after considering the commission paid to Interglobe.

The Revenue challenged the Tribunal’s decision before the Delhi High Court.

Issues Involved

  1. Whether Galileo International Inc. had income chargeable to tax in India under Section 5(2) of the Income-tax Act.
  2. Whether Galileo had a business connection in India under Section 9(1)(i) of the Income-tax Act.
  3. Whether Galileo had a Permanent Establishment (PE) in India under the India-USA DTAA.
  4. To what extent income or profits could be attributed to operations carried out in India.
  5. Whether any further taxable income remained in India after considering commission paid to Interglobe.
  6. Whether interest under Sections 234A and 234B was chargeable.

Petitioner’s Arguments (Revenue Department)

  • The Revenue contended that the Tribunal committed an error by attributing only 15% of the revenue generated from Indian bookings to Indian operations.
  • It was argued that the applicable principles under the DTAA and CBDT Circular No. 23 required attribution of profits and not merely revenue.
  • The Revenue further submitted that the conditions prescribed in paragraph 6(c) of CBDT Circular No. 23 were not satisfied because Galileo’s business activities in India were not wholly channelled through its Indian agent.
  • According to the Revenue, the Tribunal incorrectly reduced the taxable income by separately allowing commission paid to Interglobe.

Respondent’s Arguments (Galileo International Inc.)

  • Galileo submitted that the substantial operations of the CRS system were carried out outside India through the host computer located in Denver, USA.
  • The Indian operations were limited to facilitating bookings through connected terminals and travel agents.
  • It was argued that even if a portion of income was attributable to India, the commission paid to Interglobe fully represented the profits attributable to Indian activities.
  • Therefore, no further profits remained taxable in India.
  • Galileo also maintained that Interglobe was its sole agent in India and all relevant commission payments had already been allowed as business expenditure.

Court Findings

The Delhi High Court upheld the findings of the Income Tax Appellate Tribunal and observed as follows:

Existence of Business Connection

The Court agreed that Galileo had a business connection in India under Section 9(1)(i) and that income arising from Indian operations was capable of being taxed under Section 5(2) of the Act.

Permanent Establishment in India

The Court accepted the Tribunal’s finding that Galileo had a Permanent Establishment in India. The CRS infrastructure installed at subscriber locations in India, together with connectivity and configuration controlled by Galileo and its Indian agent, constituted a fixed place of business.

Attribution of Income

The Court noted that major functions of the CRS system, including maintenance of databases, processing of information, flight schedules, pricing, availability and reservation functions, were carried out outside India through the host computer in Denver, USA.

The activities performed in India constituted only a small portion of the overall operations. Considering the functions performed, assets used and risks assumed, the Tribunal reasonably attributed only 15% of the revenue from Indian bookings to Indian operations.

Attribution of Profits

The Court clarified that the Tribunal had not merely attributed revenue; it had undertaken a profit attribution exercise in accordance with accepted principles.

The Tribunal first determined the portion of revenue attributable to India and thereafter examined whether any profits remained taxable after accounting for commission paid to Interglobe.

Since 15% of Euro 3 per booking amounted to only Euro 0.45, while Interglobe received Euro 1 per booking as commission, the commission exceeded the profits attributable to Indian activities.

Applicability of CBDT Circular No. 23

The Court held that the Tribunal correctly applied CBDT Circular No. 23 dated 23.07.1969. Once the commission paid to the Indian agent adequately represented the profits attributable to Indian operations, no further income could be assessed in India.

Reliance on Judicial Precedents

The Court relied upon:

  • Morgan Stanley & Co. (292 ITR 406) (Supreme Court)
  • Hukam Chand Mills Ltd. v. Commissioner of Income Tax (103 ITR 548) (Supreme Court)

The Court reiterated that attribution of profits is largely a question of fact and involves a reasonable approximation based on relevant material.

Court Order

The Delhi High Court held that:

  • Galileo International Inc. had a business connection and Permanent Establishment in India.
  • Only 15% of the booking revenue could reasonably be attributed to Indian operations.
  • The commission paid to Interglobe fully exhausted the profits attributable to Indian activities.
  • No further income remained taxable in India.
  • No substantial question of law arose from the Tribunal’s order.

Accordingly, all appeals filed by the Revenue were dismissed.

Important Clarifications

  1. Existence of a Permanent Establishment does not automatically result in taxable profits in India.
  2. Profit attribution must be based on functions performed, assets employed and risks assumed.
  3. Where an Indian agent receives adequate arm’s length remuneration representing attributable profits, no further profits may remain taxable in India.
  4. CBDT Circular No. 23 and the principles laid down in Morgan Stanley continue to guide profit attribution analysis in cross-border taxation matters.
  5. Determination of attributable profits is primarily a factual exercise and reasonable estimation by the Tribunal should not ordinarily be disturbed when supported by evidence.

Sections Involved

  • Section 5(2) of the Income-tax Act, 1961
  • Section 9(1)(i) of the Income-tax Act, 1961
  • Section 234A of the Income-tax Act, 1961
  • Section 234B of the Income-tax Act, 1961
  • Article 5 (Permanent Establishment) of the India-USA Double Taxation Avoidance Agreement (DTAA)
  • CBDT Circular No. 23 dated 23.07.1969

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:9721-DB/AKS25022009ITA8562008_163808.pdf

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