6. AAR RULINGS AND VIEWS OF REVENUE DEPARTMENT

The view of the revenue department in Computer Reservation Services (CRS) and two rulings of Authority for Advance Rulings (AAR) may be relevant in the context of E-Commerce and are briefly dealt with.

6.1          CRS SYSTEM

In the Computer Reservation Services, the Indian tax authorities have taken the view that part of the income earned by the Company providing this services (i.e. CRS Company) is taxable in India even if there is no remittance from India.

The operation of CRS system can be briefly explained as under.

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The CRS Co. uses a CRS host system which is located in a country other than India. The travel agents are connected to the 'system' through a equipment provided by a local company which markets the services of the CRS Co. (I Ltd.)  I Ltd. is connected to the 'system' through leased lines and router owned by CRS Co and provided to I Ltd. The CRS Co and the airlines may be located in one country or different country. I Ltd. and CRS Companies are independent parties and not related to each other.

A passenger booking tickets on i.e. Singapore Airlines makes payment to travel agent in India. The agent accesses the equipment, and through the router the CRS system and books the tickets. The agent after deducting his fees remits the fund to the airlines. There is no payment by agent towards use of equipment/router or CRS system. The airlines pays the fees to CRS Co. outside India and CRS Co. makes payment to I Ltd. for the services rendered.

The CRS companies enter into agreements with the participating airlines in order to facilitates global reservation of air tickets by travel agents. It receives booking fees from the airlines in pursuance of the said agreement outside India. The tax authority is of the opinion that to the extent the fees are attributable to the bookings done in India, the same is taxable in India. While arriving at the above opinion, The revenue authorities have argued that

(i)                  since all the activities i.e. initiation of inquiry, confirmation and issue of tickets were concluded in India, income resulting from the activities accrues in India and

(ii)                the router owned by CRS Companies is not a ancillary equipment and  constitute PE of CRS Co. in India. The CRS Co. carries on business in India through the said equipment and hence income attributable to such PE is liable to be taxed in India.

6.2            P NO.22 OF 1996 IN RE (238 ITR 99)

'A' is a Swedish Company and has a wholly owned subsidiary "B" incorporated in USA.

'C' is a Company incorporated in USA and has a wholly owned subsidiary 'CM' in Mauritius.

'IC' is a company incorporated in India in which CM holds 51% of equity capital.

'B' acquired from 'A' sometimes back right in the trademark owned by 'A'. 'C' paid royalty to 'B' outside India for the use of the said trademark in India.

'B' was having a Shareholding in 'IC'. 'C' also paid to 'B' for transfer of its Shareholding in 'IC' to 'CM'.

The question posed before AAR was whether 'B' was liable to Indian Income Tax in respect of royalty paid by 'C' to it.

After considering the provisions of section 90(2), 9(1)(vi)© of the Income tax Act, 1961 and also the provisions of para 12(7) (b) of Indo-US DTC, the AAR held that royalty is liable to be taxed in India.

6.3           P NO 30 OF 1999 IN RE (238 ITR 296)

The applicant 'Y' is company formed and incorporated in the USA and belongs to the "ABC" group of companies, which operate in the world - wide credit card and travel business.

'XT' is an Indian Company engaged in the business of data management, information analysis. It customers consists of various 'ABC' group companies located in different countries. 'XT' is a wholly owned subsidiary of 'Z' of USA which itself is a wholly owned Subsidiary of `Y'.

'Y' owned worldwide Information processing Telecommunication center (WIPT) at USA. 'Y' allows access to and use its Central Processing Unit (CPU) at USA against payment. The CPU at USA can be accessed through a consolidated Data Net Work (CDN) at Hong Kong.

`XT' was linked to CDN at Hong Kong through VSNL and was using WIPT at USA. The applicant 'Y' charges 'XT' for use of its WIPT at USA and computer set up at Hong Kong at the agreed rates.

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 The question raised before the AAR were

(i)                  Whether payment due to the applicant by XT is liable to be taxed in India?

(ii)                If the answer to the above question is in affirmative, whether the payment is covered by article 12(3) (a) or 12(3)(b) of the DTC between India and USA.

The applicant argued that the payment constitutes its business income and since it does not have any permanent establishment in India, the same is not liable to be taxed in India.

The AAR came to the conclusion that payment by `XT' to `Y' for access to CDN and use of WIPT is for use of software developed and protected by 'Y' and is covered as a royalties under article 12(3)(a) of the Indo US DTAA.                                 

Author: Mr.Rajiv Shah              e-mail:rajivshah@indiaitlaw.com