Case Studies

Determining Profit Attribution in India Requires Examination of Facts: Supreme Court

In the recent case of Director of Income-Tax v. Travelport Inc, the Supreme Court held that the attribution of profits for a foreign company with a permanent establishment in India is contingent on the factual details of the case.

Facts:

Travelport is a limited partnership registered in the state of Delaware and is a tax resident in the United States. The company operates a computerized reservation system (CRS) that provides electronic global distribution services to airlines, using a master computer system consisting of mainframe computers and servers located in various countries.

In India, Travelport appointed local distributors (considered as Permanent Establishments of the Company in India) and entered into distribution agreements with them for marketing and distribution of CRS Services and agreed to pay them a commission ranging from 33% to 60% of their total earnings in India. The Indian Revenue authorities assessed that the entire income earned in India was taxable, as it was earned via hardware installed on the premises of travel agents.

Ruling:

  • The Revenue argued that the entire booking fees/revenue generated in India should be taxable in India, as they believed substantial business activities of the Company were carried out through the permanent establishments in India.
  • The Income Tax Appellate Tribunal (ITAT) however, determined that the majority of activity associated with Travelport's operations occurred on host computers located in the US and Europe. As a result, only 15% of the revenue earned in India could be attributed to the permanent establishment conducting minor activities. Subsequently, the Delhi High Court upheld the ITAT's verdict, holding that a reasonable approach was adopted in respect of the profit attribution that required no further interference. The decision was then challenged before the Supreme Court.
  • The Supreme Court analyzed Section 9(1)(i) of the Income Tax Act, 1961, which concerns income deemed to accrue or arise in India and referred to Explanation 1 (a) within the section, which states that only income that is reasonably attributable to operations conducted in India can be deemed as income accruing or arising in India. The Court stated that determining the portion of income attributed to operations in India is a factual matter, which the ITAT properly considered by taking into account relevant factors. Hence, the Court upheld the decision of the ITAT and Delhi High Court without the need for interference.