Facts of the Case

Galileo International Inc., incorporated in the United States, operated a global Computerized Reservation System (CRS) that enabled travel agents to access flight schedules, fares, seat availability, hotel bookings and related travel services.

The company entered into Participating Carrier Agreements with airlines and Distribution Agreements with InterGlobe Enterprises Ltd. in India. Through the CRS network, bookings were generated in India by travel agents using computer terminals connected to Galileo's system.

For every booking made through the system, Galileo earned approximately Euro 3 from participating airlines and paid Euro 1 as commission to InterGlobe for services rendered in India.

The Assessing Officer and the Commissioner of Income Tax (Appeals) held that a portion of the income was generated in India and was taxable in India. The Income Tax Appellate Tribunal (ITAT) partly accepted the Revenue's position by holding that business income arose in India but concluded that after attribution and allowance of commission paid to InterGlobe, no further taxable income remained in India.

Aggrieved by the Tribunal's decision, the Revenue filed appeals before the Delhi High Court.

 

Issues Involved

  1. Whether Galileo International Inc. had income chargeable to tax in India under Section 5(2) read with Section 9(1)(i) of the Income-tax Act, 1961.
  2. Whether Galileo International Inc. had a business connection in India.
  3. Whether Galileo International Inc. had a Permanent Establishment (PE) in India under the India-USA DTAA.
  4. What portion of the income arising from bookings made in India could be attributed to operations carried out in India.
  5. Whether any further taxable profit remained in India after payment of commission to InterGlobe.
  6. Whether interest under Sections 234A and 234B was chargeable.

 

Petitioner’s Arguments (Revenue)

  • The Tribunal erred in attributing 15% of the booking revenue to Indian operations.
  • The principles under the DTAA and CBDT Circular No. 23 required attribution of profits and not merely attribution of revenue.
  • The Tribunal incorrectly deducted the commission paid to InterGlobe after attributing revenue to India.
  • The conditions specified in Paragraph 6(c) of CBDT Circular No. 23 were not fully satisfied.
  • Certain activities were allegedly carried out directly by Galileo and were not wholly channelled through the Indian agent, making the Circular inapplicable.

 

Respondent’s Arguments (Galileo International Inc.)

  • The major functions, assets and risks relating to the CRS business were located outside India.
  • The host computer, data processing infrastructure and core reservation system operated from Denver, USA.
  • Activities performed in India were limited and constituted only a minor component of the overall business process.
  • The commission paid to InterGlobe adequately compensated the Indian operations.
  • Once such commission was allowed as an expense, no additional profits remained attributable to India.
  • The Tribunal correctly applied CBDT Circular No. 23 and the principles laid down by the Supreme Court in Morgan Stanley.

 

Court Findings

Business Connection in India

The Court agreed with the Tribunal that Galileo had a business connection in India under Section 9(1)(i) and that income was chargeable under Section 5(2) of the Income-tax Act.

Permanent Establishment (PE)

The Court upheld the Tribunal's finding that Galileo had a Permanent Establishment in India.

The CRS system functioned partly through computers installed at subscribers' premises in India. These computers were configured and controlled by Galileo through its Indian agent. The Court accepted the Tribunal's finding that such infrastructure constituted a fixed place of business and therefore amounted to a Permanent Establishment in India.

Attribution of Income

The Court noted that the Tribunal had undertaken a detailed functional analysis considering:

  • Functions performed;
  • Assets employed; and
  • Risks assumed.

The Tribunal found that:

  • The host computer and core CRS infrastructure were situated outside India.
  • Major processing and reservation functions were performed in the USA.
  • Activities carried out in India constituted only a small portion of the overall operations.

Accordingly, attribution of 15% of booking revenue to Indian operations was held to be reasonable.

Commission Paid to InterGlobe

The Court observed that the Tribunal first determined the proportion of income attributable to India and then separately considered whether any profits remained taxable after payment of commission.

Since:

  • Revenue attributable to India amounted to only Euro 0.45 per booking (15% of Euro 3); and
  • Commission paid to InterGlobe was Euro 1 per booking,

the commission exceeded the attributable income.

Therefore, no further profits remained taxable in India.

CBDT Circular No. 23

The Court held that the Tribunal had correctly applied CBDT Circular No. 23 dated 23.07.1969.

The Circular recognizes that where an Indian agent is adequately remunerated and the commission fully represents the value of services rendered, no further profits need be assessed in India.

Reliance on Supreme Court Precedents

The Court relied upon:

  • Morgan Stanley & Co. (292 ITR 416)
  • Hukam Chand Mills Ltd. v. Commissioner of Income Tax (103 ITR 548)

The Court reiterated that attribution of profits is essentially a question of fact and reasonable estimation based upon functions, assets and risks.

 

Court Order

The Delhi High Court held that:

  • Galileo International Inc. had a business connection and Permanent Establishment in India.
  • Attribution of 15% of booking revenue to Indian operations was reasonable.
  • Commission paid to InterGlobe fully absorbed the profits attributable to India.
  • No further taxable income remained chargeable in India.
  • No substantial question of law arose from the Tribunal's findings.

Accordingly, all appeals filed by the Revenue were dismissed.

 

Important Clarification

The judgment clarifies that even where a foreign enterprise has a business connection and Permanent Establishment in India, additional taxation may not arise if:

  1. The profits attributable to Indian operations are properly determined; and
  2. The Indian agent has already been remunerated at arm's length or adequately compensated for the activities carried out in India.

The decision reinforces the principle that attribution must focus on profits arising from functions, assets and risks located in India rather than on gross revenue alone.

Sections Involved

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

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:9700-DB/AKS25022009ITA8532008_163247.pdf

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