May 5 2023

Indian Supreme Court Rules Profit Attribution is Essentially ‘Question of Fact’

Source: IBFD Tax Research Platform News

On 19 April 2023, the Indian Supreme Court, in the case of Director of Income Tax vs. Travelport Inc. (Civil Appeal No. 6511-6518 of 2010), ruled that determination of the quantum of income/profits attributable to Indian operations is essentially a "question of fact". Accordingly, the Supreme Court refrained from interfering with the order pronounced by the Tribunal that no income is taxable in India.

The taxpayer provided electronic global distribution services to airlines through a Computerized Reservation System (CRS). CRS services were marketed in India through Indian distribution agents. The taxpayer earned USD/EUR 3.00 per booking made in India and paid USD/EUR 1.00–1.80 as commission to Indian agents.

The Income Tax Appellate Tribunal (the Tribunal) held that the taxpayer constituted a permanent establishment (PE) in India as fixed place PE and dependent agent PE (DAPE). Further, since only a miniscule portion of the taxpayer's activity was performed in India, the Tribunal held that only 15% of total revenue (0.45 cents) was attributable to India. However, as payment to agents far exceeded such income, no income should be taxed in India.

Revenue appealed before the Supreme Court for taxation of the entire income of the taxpayer in India. However, the Supreme Court ruled in favour of the taxpayer and held as follows:

  • the Tribunal arrived at the quantum of revenue accruing to the taxpayer in respect of bookings in India which can be attributed to activities carried out in India, on the basis of FAR analysis (functions performed, assets used and risks undertaken). The commission paid to the distribution agents was more than twice the amount of income attribution and this was already taxed. Therefore, the Tribunal rightly concluded that the same extinguished the assessment;
  • the question as to what portion of the income can be reasonably attributed to the operations carried out in India is a question of fact, on which the Tribunal has taken into account relevant factors; and
  • Section 9(1) of the Income tax Act, 1961 confines the taxable income to that proportion which is attributable to the operations carried out in India and accordingly, rejected Revenue's reliance placed on article 7 of the India-United States Income Tax Treaty (1989).

The full text of the decision pronounced by the Indian Supreme Court is available here.