DEEPAK R. SHAH, A.M.: ORDER ITA Nos. 1 733/Del/200 1 , 2473/Del/2000, 2474/Del/2000 and 2475/ Del/2000 pertaining to asst. yrs. 1 995-96 to 1 998-99 respectively are directed against orders of learned CIT(A)-XIX, New Delhi dt. 5th March, 200 1 and 7th March, 2000 in appeal against assessment framed under s. 1 43(3) r/w s. 1 47 of IT Act, 1 96 1 ( Act ). 1 . 1 ITA Nos. 820 to 823/Del/2005 are directed against common order of learned CIT(A)-XXIX, New Delhi dt. 1 5th Dec., 2004 in appeal against assessment framed under s. 1 43(3) r/w s. 250 of Act. 1 .2 Cross-objection Nos. 47, 48, 49 and 50/Del/2006 by Revenue are in respect of ITA Nos. 1 733, 2473 to 2475/Del/2000. C.O. Nos. 5 1 to 54 of 2006 by Revenue are in respect of ITA Nos. 820 to 823 of 2005. Since common issues are involved in all these appeals and cross-objections were heard together and are being disposed of by this common order. 2 . Galileo International Inc. ( appellant ), resident of USA, is in business of maintaining and operating system for providing electronic global distribution services to airlines, hotels, tour and cab operators by connecting to travel agents ( TAs ) utilising Computerised Reservation System ( CRS ), which may, inter alia, include system which receives, processes, stores and disseminates data about flight schedules, seat/room availability, fare information and provision for booking capabilities etc. As CRS service provider to airlines, appellant performs following : It receives all relevant information from various participant airlines, processes this information and stores it on its database in standard format, and has processes in place for receiving updates to this information on continuous basis It receives from TAs requests for information contained in database, booking requests, enables booking and requests for changes in bookings It forwards booking initiation or update requests from TAs to airlines servers, receives responses thereto from airlines server and forwards responses to TAs It provides reports to airlines about bookings made through its CRS in various forms and using various parameters. appellant has entered into agreement with various participants (hereinafter referred as participating carrier agreement or PCA ). sample copy of such agreement has been filed at assessee s paper book (APB) at pp. 1 -97. Relevant clauses of said agreement are extracted herein : "Introduction : Whereas, Galileo International provides computerized reservations and ticketing and other services. Whereas, participant wishes to purchase services from Galileo International, and Galileo International is willing to allow participant to do so under terms and conditions of this agreement. Now therefore, in consideration of premises and mutual obligations set forth below, Galileo International Partnership, Galileo Co., and participant hereby agree to abide by terms and conditions of this agreement. 1 . Definitions : CRS means computerised reservation system or computerized reservation system, as applicable, except that term CRS shall not refer to system to extent that it is used solely as internal reservations system. Galileo International Software means software used in or with system that is owned or licensed, in whole or in part, directly or indirectly by Galileo International or its predecessors for use by participant in conjunction with system, including any such software modified by participant with consent of Galileo International or its predecessors. Galileo International Subscriber means any person that is authorised to use system. Input means any entry by Galileo International subscriber in system whereby direct flight segment is added in new or existing booking file, or whereby status code is changed in existing booking file counted on per passenger, per direct flight basis, except that it shall not include cancel. Net Passenger Segment means all active confirmed segments, passive segments and other segments less any cancels. Numeric AVS Message means AVSW message that indicates actual number of seats available for sale. Participating Carrier means any airline that has entered into Global Airline Distribution Agreement with Galileo International. System means any CRS operated by Galileo International, not including Apollo by Gemini CRS. 2. Duties of Galileo International : Galileo International shall maintain and operate system and shall provide to participant various standard services at charges set out in Sch. 2, as it may be amended by Galileo International from time to time. Depending on options selected by participant under Sch. 1 , these services may include, among other things, display of schedules and fares, building of connections, display of flight availability status, and provision of booking capability. scope o f standard services provided shall be determined, and may be amended from time to time, by Galileo International. Such standard services shall not include optional services listed in Sch. 4. Where participant uses computer to computer communications link between system and participant s system, Galileo International shall offer certain point(s) of entry into system communications network and will specify connectivity parameters that must be used in order that participant s system can send and receive Type and/or unsecured Type B messages. Subject to arts. 3F and 3G below Galileo International will pay all costs of communication between participant s point of entry, as specified by Galileo International, and system. Upon receipt of documented evidence from participant of speculative booking or other abusive practices by Galileo International subscriber involving sale of participant s air transportation services, Galileo International shall assist efforts by participant to initiate appropriate, timely and reasonable remedial measures against such Galileo International subscriber. 3. Duties of participant : Participant shall indicate all appropriate choices, and shall provide any requested information on applicable schedules below, including at minimum Schs. 1 and 4. Participant, at its own cost, shall provide Galileo International with data that are at least as complete, timely, accurate, and advantageous and that are delivered in as favourable manner, as those it provides to any other CRS, including participant s CRS. Participant shall provide any such data in format and through supplier (if supplier is used) that are acceptable to Galileo International. Participant shall participate in every CRS in which Galileo International has direct or indirect ownership interest in every country in which services of such CRS are offered, to extent that (i) display of services does not discriminate against participant and (ii) any charges to participant are not discriminatory. Participant shall not reject booking that has been made through system where participant s system has not responded to system within twelve ( 1 2) hours of message origination, even though overbooking may result therefrom and denied boarding compensation may be required. Participant shall not reject booking for passenger that has been made in system where that booking has been made via optional service described in Sch. 6, 7, 11 or 1 2. Participant shall accept for transportation any passenger presenting ticket that bears OK status and that has been issued as result of booking made through system consistent with data in system and otherwise in accordance with this agreement, even though no record of that booking may exist in participant s system, overbooking may result therefrom, and denied boarding compensation may be required. Participant shall accept ticket for transportation at fare shown on that ticket provided that ticket w s automatically issued by Galileo International and Galileo International subscriber shall have no liability to participant (and participant hereby waives any rights and remedies against Galileo International and Galileo International subscribers) for any inaccuracies in fares data shown on such ticket. Participant hereby grants ticketing authority to issue participant s transportation documents through system to Galileo International and all Galileo International subscribers that hold validation approval to issue transportation documents on participant s behalf in each territory in which participant is, at subject time, member of any authorized ticketing arrangement and in which system is authorized to operate in capacity of system provider or in another comparable capacity. Participant expressly agrees to execute promptly all agreements and other authorisations specified by local settlement plan or any other operator of authorised ticketing arrangement that Galileo International reasonably believes are necessary to implement such authority for system. 4. Charges : Participant shall pay to Galileo International (or such other person as Galileo International shall direct) on monthly basis charges, for use of system and other services rendered under this agreement, as specified in schedules. Sch. 2 : Charges for standard services : This schedule describes charges for certain basic standard services and for segments created through use of certain optional services provided t o participant and forms part of Galileo International Global Airline Distribution Agreement. Type of Direct Charge* Flight Segment Per Territory 1 Per Input Cancel Cancel Active confirmed USD USD 1 . 1 50 segment .2625 USD Passive segment USD .9975 .2625 USD Other segment USD .5250 .2625 Territory 2 Per Net Passenger Segment Net passenger ECU 2.0800 (prior to 1 - segment 1 - 1 994) ECU 2. 1 840 (effective 1 - 1 - 1 994) Credit card Per authorisation authorization Territory 2 ECU . 1 300 *For purposes of this Schedule, Territory 1 and Territory 2 refer to location of Galileo International Subscriber that performs activity that generates charge. Territory 1 charges are stated in US Dollars (USD). Territory 2 charges are stated in European Currency Units (ECU). Sch. 7 : Last seat availability This Schedule describes last seat availability service offered in Sch. 4 and forms part of Galileo International Global Airline Distribution Agreement. Available only in Territory 2; may be extended to Territory 1 at later date. 2. Responsibilities of Galileo International : (iii) system will automatically display to Galileo International Subscribers in primary availability display numeric value equal to Quotasale authorised by participant as stated in cl. 3 of Sch. 1 , or such lower value as may be stored in system availability status tables as result of Numeric AVS messages received from participant s system. B. Flight Specific Availability Procedure : (v) Where direct flight segment is made in Territory 2 without reference to availability display and participant has not selected one of optional booking services described in Sch. 11 or 1 2, system will interrogate participant s system and, subject to seats being available, will send "LK" or other applicable message to participant s system as if sell had been made with reference to overlaid availability display. Sch. 1: Inside Availability : This schedule describes inside availability service offered in Sch. 4 and forms part of Galileo International Global Airline Distribution Agreement. 1 . General : Inside availability refers to functionality whereby, via computer to computer capability between system and participant s system, Galileo International enables participant to display real time flight availability information directly from participant s system within primary availability display of system according to journey requested by Galileo International Subscriber. 2. Responsibilities of Galileo International : B. system will send to participant s system information to facilitate identification of each Galileo International Subscriber seeking availability that involves one or more of participant s flights together with city pair requested by Galileo International Subscriber. system will display availability data returned from participant s system in preference to data stored in system availability status tables, provided that participant returns this information to system within agreed period of time from point at which initial interrogation request leaves system. Sch. 25 : Ticketing Facility : This schedule describes ticketing facility service offered in Sch. 4 and forms part of Galileo International Global Airline Distribution Agreement. Available only for Territory 2; may be extended to Territory 1 later. 1 . General : Ticketing facility refers to functionality whereby Galileo International enables Galileo International Subscriber, (via computer to computer communications capability between system and participant s system) to retrieve PNR created in participant s system and transmit data in that PNR to system, so that booking file is created and ticket for PNR can be issued through system." For this purpose, it maintains and operates huge Master Computer System ( MCS ) consisting of 1 8 mainframe computers and servers in Denver, in State of Colorado, USA. This master computer system is connected inter alia to airline servers to/from which data is continuously sent and obtained, inter alia, regarding flight schedules, seat availability, fare structures, flight connections, meal preferences, availability of special facilities, e.g., infant/senior citizen requirements, etc. on real time basis. All input processing and output is managed, processed and stored by appellant through MCS in USA. appellant in turn appoints distributors to market and distribute CRS services to TAs. In India, appellant has entered into Distribution Agreement (DA) dt. 24th Feb., 1 995 with Interglobe Enterprises (P) Ltd. ( Interglobe ), unrelated company to market and distribute CRS services to TAs in India. Relevant clauses of DA are extracted herein : "This agreement is made 24th day of Feb., 1 995. Between Galileo International Partnership (trading as Galileo International ), Delaware general partnership whose principal place of business is located at 9700 West Higgins Road, Rosemont, Illinois 600 1 8, USA, And Interglobe Enterprises (P) Ltd. (a company constituted under laws of India) its successor, nominees and assignees whose registered office is at 66, Janpath, New Delhi - 111 , India. Recitals A. Whereas Galileo International has developed and/or owns and is entitled to commercially exploit and distribute globally, and particularly in India, software, hardware, Intellectual property rights and other properties relating to Galileo System, CRS services and connected services/facilities forming subject-matter of this agreement. B. And whereas Galileo International and Interglobe have agreed to latter distributing said services and facilities in market region on mutually agreed terms set out hereinafter. Now therefore it is agreed as follows : 1 . Definitions 1 . Definitions 1 . 1 As used in this agreement, following terms will have meaning provided for each : Booking means in relation to air vendor, booking made in Galileo System in respect of passenger segment and, in relation to non-air vendor, unit of measurement used by Galileo International for charging purposes; Computerised Reservation System or CRS means automated system which processes booking data and other data to provide any or all of following functions : (a) ability to display flight schedules and seat availability; (b) ability to display and/or quote airline fares; (c) ability to make airline seat reservations; (d) ability to issue airline tickets; and (e) ability to perform any or all of functions similar to above functions in respect of hotel, car and other travel related services other than air services CRS Services means services of types described in definition of CRS which are provided by CRS directly or indirectly to subscribers; Data Processing Fees means fees payable by Galileo International to Interglobe as set forth in Sch. 3 r/w cl. 8; Galileo System means systems of computer hardware and software operated by or for Galileo International for provision of CRS Services. Indian NDC means entity which Interglobe will establish and control and which will act as Galileo International s distributor in India. Market Region means Republic of India; Node means SITA telecommunications centre at Bombay or Delhi, as appropriate; Subscriber means travel agent or other person in market region who is actual or potential user of distribution facilities of CRS in capacity other than that of vendor and more particularly : Individual Subscriber means subscriber who is not travel agent, and Multinational Subscriber means subscriber which is travel agent which has places of business, branches or offices in more than one country and to which Galileo International provides its CRS Services directly; and Vendor means person who sells or may wish to sell its products and/or services through CRS, and more particularly : Air Vendor means vendor which is airline, whether scheduled, charter, domestic or international; International Vendor means vendor who sells or may wish to sell its products and/or services in more than one country and shall include any air vendor. 2. Appointment of Interglobe and Establishment of NDC : 2. 1 Except as provided herein, Galileo International hereby appoints Interglobe as sole and exclusive distributor of Galileo International s CRS Services in market region and Interglobe hereby agrees to act in that capacity, subject to terms and conditions of this agreement. 2.2 Interglobe shall establish Indian NDC, name of which shall be Galileo India . Galileo India shall be, at Interglobe s discretion, either division or subsidiary of Interglobe. In event that Indian NDC is established as or is converted into subsidiary of Interglobe, it shall by amendment to this agreement be added as party to this agreement. Notwithstanding any such amendment, Interglobe shall at all times ensure that Indian NDC has sufficient share capital and/or funding (as appropriate) to enable it to acquire necessary resources and personnel in order for it to fulfil its obligations under this agreement. 2.3 During term of this agreement and of any extensions or renewals of this agreement Galileo International shall not : (a) appoint any other person as its distributor or agent for provision of its CRS Services in market region, or (b) supply its CRS Services to any other person in market region for use by or provision to subscriber. 2.8 Notwithstanding cl. 2.3 : (a) Interglobe undertakes to Galileo International that it is and will continue to be prepared to accept Air India or Indian Airlines as participant, associate or shareholder in Indian NDC on reasonable terms, and (b) Interglobe undertakes to Galileo International that, in event that either party identifies potentially interested and commercially viable participant, associates or shareholder in Indian NDC, Interglobe will negotiate in good faith with such party with view to accepting such party as participant, associate or shareholder in Indian NDC upon reasonable terms : Provided that induction of such participant, associate or shareholder shall not in any way affect shareholding pattern, control, management or functioning of Interglobe. 2.9 During term of this agreement Interglobe shall not : (a) either directly or indirectly provide or be concerned with any CRS Services in market region other than Galileo International s CRS Services. (b) solicit customers for any CRS Services in any country which is outside market region; or (c) sell or provide Galileo International s CRS Services to any customer or for use in any country which is outside market region. 3. Establishment and operation networks and routers : 3. Establishment and operation networks and routers : 3. 1 Galileo International shall at its own cost procure provision, operation and maintenance of communication network and associated equipment for distribution of its CRS Services from Galileo International s C R S Services from note or router to subscribers in market region. Interglobe may request Galileo International to arrange for such provision and operation of communication network services through Galileo International s contractual relationships with SITA or other such network provider. Such services shall be provided in accordance with then current Galileo International contract terms and conditions including cost with such network provider save that Interglobe shall pay for such services in Indian currency, insofar as it is possible to do so and subject always to Interglobe being at liberty to renegotiate cost of such service with network provider. 4. Provision of Galileo International s CRS services : 4. 1 Galileo International shall at its own cost and responsibility provide such of its own cost and responsibility provide such of its CRS Services shall at its own cost and responsibility provide such of its CRS Services to note or router as appear to both parties to be commercially desirable or necessary for market region and whilst Galileo International will use all reasonable efforts to provide continuous CRS Services, both parties acknowledge that it is impossible for Galileo International to guarantee provision of uninterrupted or error free CRS Services. 4.2 Interglobe shall at its own cost and responsibility provide Galileo International s CRS Services without alteration, except as may be mutually agreed, from node or router to subscribers in market region and shall either provide equipment to subscriber or facilitate connection of equipment to access Galileo International s CRS Services. Galileo International shall provide to Interglobe details of hardware and software specifications approved from time to time by Galileo International for use in conjunction with Galileo International s CRS Services and including, but not limited to, operating, performance or other parameter. Interglobe shall use its best endeavours to ensure that all hardwares and softwares used to access Galileo International s CRS Services in market region comply with such specifications and including, but not limited to any operating, performance or other parameter imposed by Galileo International . 4.3 Galileo International shall apply to Interglobe licences for all such software products developed by Galileo International as are commercially desirable or necessary for use by subscribers in market region in conjunction with Galileo International s CRS Services, to enable Interglobe to supply such software products to Galileo Subscribers in market region provided always that nothing in this clause shall oblige Galileo International to supply any particular software product. 4.5 Galileo International and Interglobe shall enter into service level agreement based upon model services level agreement which forms Sch. 4 hereto. Galileo International and Interglobe shall use all reasonable endeavours to achieve objectives set out in such service level agreement, which shall be reviewed at intervals of not less than one year. 6. Marketing to Subscribers : 6. 1 Subject to cl. 6.2, Interglobe shall have exclusive responsibility for marketing Galileo International s CRS Services to subscribers in market region. 6.2 Interglobe shall at all times use all reasonable endeavours to promote use of Galileo International s CRS Services in market region. In carrying out its marketing activities, Interglobe shall give reasonable consideration to all recommendations of Galileo International. 6.3 Interglobe shall be responsible for entering into contracts with subscribers who wish to use Galileo International s CRS Services in market region. Such contracts shall be consistent with terms of this agreement and consistent with local laws of relevant jurisdiction and shall provide that Interglobe is acting as principal and not as agent for Galileo. Interglobe shall give reasonable consideration to Galileo International proposal with regard to terms of such contracts. Schedule 5 contains Galileo International s model subscriber agreement which Interglobe may use as guideline in drafting its subscriber agreements. 6.4 Interglobe will engage staff with appropriate experience and expertise and at all times during this agreement will retain such staff in sufficient numbers to perform its obligations hereunder efficiently. 6.5 All computer hardwares for use by subscribers in market region which are required by Interglobe during first two years hereof in order for subscribers to use Galileo System shall be provided by Galileo International at no cost to Interglobe. For avoidance of doubt, it is intention of parties that costs herein borne by Galileo International are cost of hardware and costs associated with delivery to Interglobe in India inclusive of freight and duty (duty to be initially paid by Interglobe and reimbursed by Galileo International) and that all costs incurred after delivery including but not limited to installation, testing, maintenance and post-customs warehousing shall be responsibility of Interglobe. Galileo International will retain title to all computer hardware supplied to Interglobe as contemplated in this cl. 6.5. 9. 1 2 In event of termination of these agreements under cl. 9.4 or 9.5, parts (b) through (f), upon expiry of notice period as specified hereunder : (a) all subscriber agreements concluded by Galileo India shall be automatically assigned to Galileo International at no cost to Galileo International and Galileo India shall physically deliver to Galileo International its signed originals of all such subscriber agreements within thirty (30) days of such termination taking effect, and (b) Galileo International, at its sole discretion, may purchase all or part of subscriber hardwares, title to which at time of termination is vested in Interglobe at lower of net book value or market value in Indian market where net book value is defined to be original purchase price inclusive of freight and duty only and no other costs, depreciated on straightline basis from date of delivery to Interglobe, using 6 (six) years useful life or existing market value in Indian market thereof at that point in time, whichever is lower. 1 2. Intellectual Property Rights : 1 2. 1 Subject to conditions contained in this clause, Galileo International hereby authorises Interglobe to use Galileo International s trademark in market region for limited purpose of exercising its rights and performing its obligations under this agreement. 1 4.3 Interglobe shall provide to Galileo International on regular basis, but no less frequently than quarterly, such information as Galileo International reasonably requires relating to activities of Interglobe under this agreement. categories of information which may be required include, but are not limited to : (a) sales projections for forthcoming year; (b) list of subscriber contracts entered into or renewed; (c) list of subscriber contracts terminated or due to expire in forthcoming year; (d) staff training activities; (e) customer support activities; (f) competitor activities; (g) operational service levels; and (h) standard terms of any subscriber contracts, including amount and terms of any payment. 1 4.4 After consultation with Galileo, Interglobe shall produce annual marketing plan covering its objectives for forthcoming year and setting reasonable performance targets. Prior to Interglobe producing its marketing plan, Galileo International shall provide to Interglobe details of its current marketing plans insofar as they relate to market region. Interglobe shall use all reasonable endeavours to meet performance targets set out in its marketing plan. 1 5.3 Interglobe shall ensure that terms of its contracts with its subscribers are consistent with provisions of this agreement and in particular it shall include provision whereby subscriber indemnifies Galileo International against any claim in respect of inaccurate data supplied by subscriber." Interglobe in turn enters into subscribers agreements with various TAs to provide TAs with access codes, equipment, communications link and support services. TAs may choose to obtain access to appellant s CRS through access code provided by Interglobe or they may choose to independently access CRS of appellant s competitor. model subscriber agreement is prescribed as part of DA; As in cl. 6.3 is DA, Interglobe enters into subscriber agreement with subscribers. Relevant clauses of said agreement are extracted herein : "Agreed : 1 . Introduction 1 . 1 Galileo produces and/or obtains and distributes products and services to subscribers for display of information on air carrier schedules, fares, seat availability and other travel related products and provides subscribers with ability to make reservations and/or tickets and/or provide other related services. 1 .2 Subscriber wishes to have access to and use of products and services provided by Galileo. Communication Link means telecommunications lines and associated equipment which link Galileo System to equipment at location. Computer Reservation System or CRS means computerised system containing or providing information about schedules, fares, seat availability and other services of air carriers and about services of other travel related companies, through which reservations can be made. Galileo System means CRS operated or accessed by or for Galileo. Location means those premises at address or addresses specified in appendices, where equipment and/or software products are installed under terms of this agreement. 4. Location 4. 1 Galileo will, at no cost to subscriber, liaise with and provide information to subscriber in relation to preparation of location and installation operation of apparatus. 4.4 Relocation of any installed equipment or any part of communications link (including any relocation at same premises) may only be undertaken by Galileo or its agent for this purpose, at subscriber s expense, unless Galileo s prior written consent (which will not be unreasonably withheld or delayed) is obtained. 6.5 Subscriber will not remove or obscure any identifying marks from rented equipment, communications links, software products or media or subject any of them to any lien or encumbrance. 9. Supply and use of reservation service : 9. 1 Galileo hereby grants to subscriber, in accordance with terms and conditions hereof, non-exclusive licence to use that part of reservation service which relates to equipment and/or software products provided under this agreement, solely for performance of specific business functions designed in manuals. 9.4 Subscriber agrees that it will only seek access to Galileo System and use reservation service : (a) In strict accordance with any operating instruction given from time to time by Galileo. (b) Solely for performance of specific business functions designated in manuals; and (c) Solely in conjunction with equipment. 1 . Operation of Apparatus : 1 . 1 Subscriber shall allow representative of Galileo to enter location during normal business hours of subscriber for purposes of installing, inspecting and viewing apparatus and its operation. 1 .6 Where subscriber has obtained necessary equipment and/or software products, Galileo will facilitate automatic issuance of tickets for those scheduled airlines which participate in Galileo System." Within DA, appellant has also entered into agreement with Interglobe called Service Level Agreement . intent for such agreement is to outline level of service each commits to deliver to end subscriber, i.e., TAs appointed by Interglobe who are to use CRS System for booking air tickets/hotel room etc. In preamble of said agreement it is provided : "This agreement shall be valid for 1 2 months from date of signing between Galileo International and....... as national distribution company. It outlines level of service each commits to deliver to TA. Its purpose is to establish responsibilities of each party involved and to clarify and establish expectations on all sides. It forms foundation of Galileo International Service Plan that aims to deliver stable, acceptable service to end subscribers and provides basis for improved communication between service providers." Other relevant clauses of said agreement are extracted herein : "3. Service Plan 3. 1 Concept : There are two key areas of measurement when considering services to e n d subscriber. These are system availability and response times. This document recognizes that both of these categories are affected by Global. Regional and market based influences and that measurement of these services can effectively be divided into Host (H) Network (N), and Customer Premises (P) components. goal is that service level measurement and reporting will be combined function of all service providers in Galileo International delivery chain. End to end measurement of standard focal point sites will be catered for b y Galileo International. Where non-focal point installations exist it will become even more critical that partner or associate, and other network provider that forms part of delivery chain, contributes with measurement of service within their control. 5. Service Controls 5. 1 Availability : goal is for continuous system availability throughout with requirement that emphasis be placed on prime times. 5. 1 . 1 Global regional and market : Host and Network functions are classified as being global, regional or market based indicating their impact to user community should these systems or functions incur outage. Global functions will be available on 24-hour basis. These are typically Host based systems or functions that affect or potentially affect entire user community. Regional functions, those systems or functions serving broad regional user community will receive maximum service possible during scope of region s prime times. These are typically Host based system or functions that affect or potentially affect regional based user community, however may also be network based such as Galileo International Backbone Network. Market functions, those systems or functions serving specific Galileo market, will receive maximum service possible during that market s prime time. goal is for maximum protection to be afforded to each system or function by virtue of above category of service (refer to Category of Service section in this document). This will be achieved through maximising up time by minimising scheduled maintenance and initiating rigid recovery sequence when appropriate. 5. 1 .2 Host Network and Premises : Host availability represents percentage of time Galileo Host complexes were available for end subscriber. This component shall be measured and reported by Galileo International. Network availability is combined availability of all relevant up line and down line components in network for market represented by this agreement. This component shall be measured and reported by network provider/s in accordance with joint requirements of all parties. Any network components residing at Host site will be monitored by Galileo International. customer premises component availability shall be deemd 1per cent except where NDC has facilities in place to measure terminal hours available for market. In this case, responsibility for measurement and reporting of premises availability shall rest with NDC. 6. Service management Problem Management : Refer to Galileo International s Problem Management Procedures for complete documentation on Problem Management System (PMS). 6. Host, Network and Premises 6. 1 Problem Management : Refer to Galileo International s Problem Management Procedures for complete documentation on Problem Management System (PMS). 6. 1 . 1 Host, Network and Premises : For problems to be recognized and addressed they must be logged into Galileo International PMS. Typically problems are recognized as originating at Galileo International PMS. Typically problems are recognized as originating at either Host, Network or Customer Premises components. Currently all problems identified by end subscriber, NDC, partner or associate, n d subsequently logged and escalated via PMS, are assigned business impact value based on nature of problem as defined below : Critical : Critical impact on business. Severe loss of revenue. No work arounds or alternatives. (This value should be assigned with due regard to nature of problem). High : High impact on business. Complex work around required. Serious user dissatisfaction. Medium : Medium impact on business. User dissatisfaction but tolerable work around available. Low : Limited impact. No anticipated effect on revenue. Inconvenience caused to user. One off problems. 6. 1 .2 Escalation and Resolution : Service providers in product delivery chain shall allocate resources in order to resolve problems based on business impact to global or regional community. central problem log will be maintained by Galileo International with problem status assigned responsibility for resolution, estimated completion date and impact/dependency assessment. End user subscribers will initially report all faults to their NDC Help Desk. It will be responsibility of that local NDC to escalate local problems that cannot be solved to Galileo International, partner or 3rd party supplier on subscriber s behalf. Service impacting problems will be discussed via service management meetings held quarterly or as agreed by parties to this document. 6.4. 1 Component Reporting : Each participant (or service provider) in Galileo International Product Delivery Chain must report on availability and response times on monthly basis and provide year to date analysis of overall performance. It will then be possible to assess each component in product delivery chain against Targets set." MCS is connected to TAs in India through communications network arranged by Societe Internationale de Telecommunications Aeronautiques ( SITA ) under agreement between appellant and SITA. SITA is unrelated to appellant and is independent service provider SITA has nodes in India which it owns and appellant s CRS is connected to those nodes through communication links. appellant at its own cost, has obtained connectivity services from its Data Centre in USA to, inter alia nodes of SITA in India. SITA does not own local communication lines within India and, therefore, contracts with local telephone companies for appropriate circuits. 2. 1 There are therefore six players in this business, namely passenger or traveller, TA, Interglobe, SITA, appellant and airlines. TAs are remunerated by airlines. appellant is also remunerated outside India only by airlines and does not receive any remuneration from TAs. appellant pays fees to Interglobe for acting as distributor. appellant also pays SITA for communication services which it provide. Interglobe was entitled to charge fees from TAs for providing support services, equipment etc. but is stated not to have charged same. 2.2 appellant filed its return of income on 28th Jan., 1 999 pursuant to notice under s. 1 42( 1 ) of IT Act, 1 96 1 (the Act ) for asst. yrs. 1 996- 97, 1 997-98 and 1 998-99 and under s. 1 48 for asst. yr. 1 995-96 with nil income contending that it does not have any income liable to be taxed in India under Act, as : 1 . No income accrued or arose to it in India nor could any such income be deemed to accrue or arise in India; 2. In any event, it had no operations in India which gave rise to taxable income under s. 5(2) or s. 9( 1 )(i) of Act; Without prejudice to its non-taxability under Act, it contended that it did not have any Permanent Establishment ( PE ) in India within meaning of art. 5 of Double Taxation Avoidance Agreement between India and USA ( Treaty ) and therefore booking fees received by appellant from airline companies outside India, being business profits were not liable to tax in India under art. 7( 1 ) of treaty. 3 . AO held that all activities in respect of bookings made by TAs in India were completed in India through hardware installed in and from TAs in India. On this basis, he held that income accrued or arose in India under s. 5 of Act. AO held that even under treaty, appellant had PE in India under art. 5 and so income was held taxable as business income under art. 7 of treaty. AO held that computers are PE in India. AO observed that computers installed in India and mainframe situated outside India are connected through leased lines provided by appellant and thus became extension of mainframe computer of appellant when booking is done through computer and booking is completed. According to AO, appellant earns profit on each segment booked through computers installed and therefore, computers constitute PE. On p. 5 of his order, AO observed as follows : "If no computer is installed and if this facility is not provided to subscribers, i.e., TAs, there will be no income for CRS companies even though they have installed mainframe and have displayed various informations of airlines. Their income is directly related to booking done, and since that is completed in India through hardwares installed in India, income is taxable in India." AO also stated that Interglobe is PE of appellant within meaning of art. 5(4) of appellant as, according to him, Interglobe was economically dependent on appellant for its source of business and its activities were devoted wholly and exclusively for appellant and as, according to AO, it enters into and concludes contracts on behalf of appellant. On p. 11 of his order, he observed as follows : "In view of above, it is clear that Galileo India Ltd. (another name of Interglobe) is nothing but dependent agent PE of Galileo International, and therefore, income of Galileo International is taxable in India as per art. 7 r/w art. 5 of Double Taxation Avoidance Agreement between India and USA." In addition to above, AO observed that Interglobe was agent covered under art. 5(5) of treaty as transactions between two were not at arm s length as : there was close business connection hardware and software were provided by appellant training and help desk were provided by appellant. 4 . Commissioner of Income-tax (Appeals) [ CIT(A) ] in his order held that appellant had business connection in India from which income accrued or arose in India as : information was carried to TAs in India by providing connectivity and computers through Interglobe; operations in regard to booking were initiated and completed in India. He even held that income was deemed to accrue or arise in India from property owned by appellant and situated in India. He observed that appellant : has invested substantial money in computers which were given to TAs without receiving any charges; provides continuous display of information through leased lines. He further held that activities of PE constitute display of information on screen of TAs. On p. 1 5 of his order, CIT(A) observed as follows : "I am in agreement with learned counsel that profit which can be brought to tax is only that amount which can be said to have been derived from assets located in PEs in India and activities carried on by the assets located in PEs in India and activities carried on by appellant in India. Of course, these activities constitute display of information on screen of TAs located in India." CIT(A) held that appellant had PE in India under art. 5( 1 ) of treaty as computers are fixed places of business through which business is wholly or partly carried on by appellant. CIT(A) observed that computer occupies place and is connected with mainframe computer. According to CIT(A), computers of TA and CRS are integrated and, therefore, appellant s CRS is brought in within premises of TAs. He even held that computers installed in India at TA s premises for display o f information constitutes "installation" PE under art. 5(2)(k) of treaty. CIT(A) sought comparative information regarding fees paid by appellant to its other distributors to ascertain whether fees paid to Interglobe were paid at arm s length but did not give any findings on agency PE. CIT(A) however accepted that under art. 7(5) of treaty, only that portion of appellant s income which could be regarded as derived from appellant s assets and activities in India could be taxed in India and restored this issue to AO for quantification of appellant s income in accordance with conditions prescribed under art. 7(5) of treaty. Arguments on behalf of appellant : 5. Learned senior counsel for appellant, Shri Dinesh Vyas ( Authorised Representative ) argued at length. It was in this background, learned Authorised Representative submitted that appellant is in business of CRS services. He further submitted that appellant being tax resident of USA is taxable outside India, airlines are taxable in India subject to treaty benefit, Interglobe and TAs are taxable in India. learned Authorised Representative submitted that based on participation agreement between appellant and airlines, appellant will offer various standard and optional services inter alia, display of schedules and fares, building of connections, display of flight availability status and provision of booking capability to participating airlines. He referred to cl. 2 of participant agreement and schedules attached thereto and drew our attention to fact that appellant receives booking fees from airlines for vide range of services, inter alia, for : Enabling airlines to determine geographical locations where its tickets may be sold; Making available to airlines point of sale table, to enable airlines to establish series of rules by which availability status of its tickets can be controlled; Enabling TAs to access airlines s system for purpose of creating and/or amending ground arrangement requests, such as stop-overs and mini- stays; Making available to airlines access to data stored in CRS relating to travel itinerary involving multiple airlines; Making available airlines information pages in CRS system for use of TAs; Provision of data for transactions relating to direct flight segments on monthly basis; Supplying Billing Information Data Transfer ( BIDT ) or Marketing Information Data Transfer ( MIDT ) by magnetic tapes or other method as may be agreed upon by parties on monthly basis. 5. 1 Shri Vyas contended that database relating to seat availability, etc. is on appellant s MCS, which is located outside taxable territories and therefore, Authorised Representative argued, appellant s services were rendered outside India and its income accrued outside India, relying upon following observations from decision of Hon ble Tribunal in case of Wipro Ltd. vs. ITO (2005) 92 TTJ (Bang) 796 : (2005) 278 ITR 57 (Bang)(AT) at p. 69. "The data server is indisputably located outside India. Consequently, provision of services of offering database to its customers is event outside taxable territories of India." He pointed out that under participation agreement, it was airlines responsibility to provide complete, timely and accurate data and that data would be delivered to appellant, in as favourable manner as it provides to any other CRS. (Refer cl. 3 of participation agreement). He emphasised that services under agreement are rendered outside India as also agreement i s executed outside India and is governed by internal laws of State of Illinois, USA. He also pointed out that agreement itself conveys that agreement is on principal to principal basis and does not establish agency among two (cl. 22 of agreement). 5 . 2 learned Authorised Representative then referred to DA between appellant and Interglobe. He emphasised that Interglobe is completely independent Indian company having number of activities and appellant does not have any financial or economic interest in Interglobe (cls. 6.3 and 6.4 of DA). He clarified that cl. 2.2 of DA clearly preserves Interglobe s fundamental obligation under DA notwithstanding formation of Galileo India (P) Ltd. which is dependent on Interglobe alone. He further referred that in agreement both parties have agreed that Interglobe will exclusively markets appellant s CRS services to TAs in India and will engage its own staff with appropriate experience and expertise. Interglobe will provide, at its own cost, support services relating to hardware and software installation, hardware maintenance, training and help desk services to subscribers (cl. 7.2 of DA). He emphasised that to facilitate work of Interglobe, appellant agreed to provide computer hardware for first 2 years out of initial term of 1years (cl. 6.5 of DA). He clarified that agreement was for initial period of 1years and computers were provided only in June, 1 995 i.e., asst. yr. 1 996-97 and only for 2 years, facility which was only by way of financial assistance to Interglobe. On p. 8 of submissions filed by appellant, it is mentioned that : (i) "the computers provided were of value of only USD 495,7 1 2 and not U S D 3,000,000, as wrongly alleged in order of CIT(A) and in submissions made by Revenue (the latter figure is contrary to record" (see p. 285 of PBI)); (ii) said computers have been provided by appellant to Interglobe only in asst. yr. 1 996-97 (see p. 283 of PBI) and not in earlier or subsequent appeal years; (iii) computers were rendered obsolete within 2 years; (iv) these computers were provided to Interglobe whose responsibility was to provide computers to TAs, to assist in market penetration; (v) computers have no role in earning of appellant s income as is shown by fact that after asst. yr. 1 996-97 (after which no computers were provided), appellant s income from CRS not only continued but actually increased, as is shown below : Gross revenue in assessment years from 1 996-97 Total revenues Assessment Year (In USD) 1 996-97 2,662,5 1 9 1 997-98 7,339,024 1 998-99 9,04 1 ,702 1 999-2000 1 2, 11 2,000 2000-0 1 1 6,784,000 200 1 -02 23,973,000 2002-03 23,663,000 (vi) computers so provided to TAs do not process any data, and their role is merely that of "dumb terminal"; (vii) TA is free to use computer in any manner he chooses and is not restricted to using it only to access CRS. learned Authorised Representative drew our attention to financial arrangements between appellant and Interglobe. He pointed out that Interglobe had sole discretion in determining its charges to TAs and was entitled to receive all fees received from them. However, appellant was allowed to charge Interglobe for use of its systems and communication link by TAs. (Refer cls. 8. 1 and 8.2 of DA). He submitted that while fee to Interglobe was called data processing fees (cl. 8.3 of DA), agreement does not refer to data processing nor does it envisage Interglobe processing any data. He argued that Department s allegation of booking being made in India, and that income accrues in India, is based upon incorrect understanding of t h e booking/reservation process. learned Authorised Representative referred to pp. 2 and 3 of assessment order for asst. yr. 1 996-97 and submitted that this is contrary to AO s own description of appellant s business as reproduced below : "It is to be clearly understood how income accrues to each party. Once customer goes to travel agent and requests for booking in particular class on particular date on particular airline, travel agent, with help of certain commands, gets information on his screen whether any seat is available on that date or not, and makes fare calculation, prepares itinerary, gets details of connecting flights and tells it to customer. Once customer gives clearance, travel agent, with help of certain other commands, books ticket for that particular passenger. This whole process starts from computer of travel agent, goes to modem of travel agent which is provided by SITA, and from there through lease lines it goes to SITA node, from there, through lease lines it goes to VSNL office where interface is installed and from there it goes to SITA international office. From there it goes to Galileo s mainframe and from there it is distributed to airline concerned. Through same route communication comes back. All this process takes few seconds and once travel agent receives back communication, he issues ticket." He submitted that display on TA s screen is only invitation to offer. TA, by punching in seat requests, only makes offer. booking is concluded and appellant s fee accrues, not when TA clicks on his computer screen in India, but when TA s request is accepted on airline server through appellant s CRS. He referred to cl. 2B(i) and (ii) on pp. 46 and 49 of APBI "Upon request from Galileo International Subscriber, system will interrogate participant s system in order that Galileo International Subscriber may view certain information stored in participant s system." "Upon request by Galileo International Subscriber through secondary follow up input, system will interrogate participant s system with flight specific availability inquiry". (Emphasis added) He submitted that acceptance is not made in India and therefore contract is not made in India. TA in India, in response to invitation to offer displayed on his screen, makes offer which is accepted by airline server abroad through appellant s CRS. delivery of ticket is mere physical evidence of contract between airline and passenger which has already been concluded abroad. Thus, TA s click does not generate charge. acceptance of TA s click on server abroad generates charge. He further submitted that Schs. 7 and 1clearly show that : (a) acceptance is on airline server; (b) TA makes request by clicking his computer screen display; (c) it is only after airline server is interrogated that booking is completed. learned Authorised Representative also relied on decision of Queen s Bench Division in case of Fisher vs. Bell ( 1 96 1 ) 1 QBD 394 where it was held that display did not amount to "offer for sale" but was mere "invitation to treat" or invitation to offer. learned Authorised Representative, therefore summarised that in appellant s case, display of seat availability on TA s terminal is not offer for sale of ticket, but only invitation to offer. booking is concluded and appellant s fee accrues, not when TA clicks on his computer screen in India, but when TA s request is accepted on airline server through appellant s CRS. He further argued that existence of link between TAs and airline through appellant CRS does not mean that CRS has activities or operations in India or that its income accrues in India. Even in Wipro Ltd. s case (supra) there was link between server abroad and user in India but yet Hon ble Tribunal gave due recognition to fact that server was located outside India. appellant s CRS was connected to TAs through nodes owned by SITA and communication network hired by SITA in India. SITA, unrelated third party, provides these services to appellant as independent service provider/contractor on principal to principal basis. SITA does not own local communication lines within India and therefore contracts with local telephone companies for appropriate circuits. appellant at its own cost, obtained connectivity services from its data centre in USA to, inter alia nodes of SITA in India. learned Authorised Representative clarified that appellant is not paying lease rent to SITA, but service charges. He further submitted that whether activity adds value is irrelevant for determining accrual of income. If such value is added by appellant s act of purchasing services of independent contractor/service provider, it does not lead to appellant s income accruing in India as SITA s activities are not appellant s activities or operations at all but are merely services purchased by appellant. He further submitted that argument similar to Department s argument viz. that but for SITA, appellant would not have been able to earn its revenue, was rejected by Supreme Court in case of Ishikawajma Harima Heavy Industries Ltd. vs. Director of IT (2007) 207 CTR (SC) 36 1 : (2007) 288 ITR 408 (SC), where Revenue had urged that but for offshore services, onshore services (which were admittedly taxable) could not have been performed and therefore even offshore component was taxable. Hon ble Supreme Court, in this case, inter alia on pp. 420 and 42 1 of case, held that even if contract was lump sum, firm, fixed price, time certain, and indivisible turnkey contract, yet no Indian tax could be imposed in respect of activities outside India, rejecting Department s stand that entire contract should be viewed as one composite whole. On p. 429, Supreme Court observed that even for purpose of taxability different components of contract have to be considered independently. Reliance was also placed, in this regard, upon case of ITO vs. Sriram Bearings Ltd. ( 1 997) 1 38 CTR (SC) 1 69 : ( 1 997) 224 ITR 724 (SC) wherein Hon ble Supreme Court observed at p. 726 : "The agreement is in two parts. It is true that two parts are inter- dependent but yet consideration for sale of trade secrets and consideration of technical assistance is separately provided for and mentioned under separate sections. So far as consideration for technical assistance is concerned, its taxability is not in doubt. only controversy is with respect to taxability of 1 ,65,000 US dollars which is stipulated as consideration for sale of trade secrets. agreement specifically says that said sale is effected in Japan. We are unable to see on what basis it can be said that any part of said amount has been earned in India." Thus, in above cases, even though assessees were themselves carrying on activities in India, Supreme Court held that activities carried on outside India, though under very same contract and though they were inseparable and integral part of activities carried out in India, were to be sequestered and segregated for levying Indian tax. He further submitted that fallacy of Department s argument that without SITA connectivity appellant would not be able to earn its revenue is shown by absurd consequences which would flow from its acceptance. Its acceptance would mean that foreign supplier of equipment who is asked to deliver equipment to particular site would be regarded as carrying on business in India merely because he engages specialised service provider to unload equipment from ship, unpack it and transport it to site where it is to be erected, on argument that but for such unloading, unpacking and transport, foreign supplier would not have been able to earn its revenue. supplier would not have been able to earn its revenue. Therefore, it would be contrary to above principles laid down by Supreme Court to argue that appellant was providing platform or composite or integrated service . Also, when Supreme Court has held that assessee s own activities carried on in India have to be separated from his activities outside India, there is even less of basis for linking appellant s activities outside India with activities of unrelated entities in India. Thus, telecommunication connectivity provided by SITA/local vendors in India and computers provided by Interglobe in India cannot be "merged" with appellant s CRS as : (i) telecommunication nodes and lines in India are provided to appellant as service by independent contractor/service provider (SITA) who is remunerated on arm s length basis by appellant. These are not assets or activities or operations of appellant, as contended in written synopsis submitted by learned Departmental Representative. (ii) computers provided to TAs are not in any way essential part of appellant s earning apparatus as is shown by fact that even after computers supplied by appellant were no longer used, appellant s CRS earnings actually increased. learned Authorised Representative contended that appellant s booking fee accrues when booking request is accepted through appellant s MCS in USA. He emphasised that appellant has no operations of its own in India and therefore, no income can be regarded as accruing or arising to it in India. He referred to principles laid down by Supreme Court in CIT vs. Ahmedbhai Umarbhai & Co. ( 1 950) 1 8 ITR 472 (SC) and Anglo-French Textile Co. Ltd. vs. CIT ( 1 954) 25 ITR 27 (SC). He argued that no business income can be said to accrue in India unless non-resident has his own business operations in India. In case of CIT vs. Toshoku Ltd. ( 1 980) 1 9 CTR (SC) 1 92 : ( 1 980) 1 25 ITR 525 (SC), Supreme Court held that no business income can accrue in India to non-resident unless he has any business operations in India, even if he has business connection in India. This decision was given in context of Expln. 1 (a) to s. 9( 1 )(i) of IT Act, 1 96 1 [similar to s. 42(3) of Indian IT Act, 1 922]. It has been held by Supreme Court in case of Ahmedbhai Umarbhai & Co. (supra) that unless non-resident has his own operations in India, he cannot be taxed in India on account of accrual or arising of income. Supreme Court observed as follows : "This apportionment of profits between number of businesses which are carried on by same person at different places determines also place of accrual of profits." In case of Anglo-French Textile Co. Ltd. vs. CIT (supra), Supreme Court held that principles set out in s. 42(3) of 1 922 Act are inherent in words accrue or arise and therefore apply not only to "deemed accrual" under s. 9( 1 )(i) but also to accrual under s. 5. After referring to passage in Ahmedbhai Umarbhai & Co. s case (supra) judgment ending with above sentence, Court observed as follows : "The above passage is also sufficient in our opinion to establish that apportionment of income, profits and gains between those arising from business operations carried on in taxable territories and those arising from business operations carried on without taxable territories is based not on applicability of s. 42(3) of Act but on general principles of apportionment of income, profits and gains." decision of Supreme Court in case of Toshoku Ltd. (supra) would therefore apply not only to deemed accrual under s. 9( 1 )(i), but also to accrual under s. 5. As such, in absence of its own business operations in India, income of appellant cannot be said to accrue in India. Thus, there have to be operations in India for income to accrue under s. 5 o f Act (and not merely for deemed accrual under s. 9 of Act). operations of unrelated parties, viz. Interglobe and SITA cannot be considered as operations of appellant. appellant s income by way of booking fees also cannot be deemed to accrue or arise in India under s. 9 of Act because its income as pointed out above, does not accrue or arise through or from : (i) any asset in India; (ii) any source of income in India. learned Authorised Representative clarified that computer at TAs desk does not process information, it only displays information viz. seat availability, booking confirmation, generates request. He further submitted that no business connection can exist, in law, if agent/person has no authority to bind principal by concluding contracts and relied on tests laid down by Supreme Court in case of CIT vs. R.D. Aggarwal & Co. ( 1 965) 56 ITR 20 (SC) inter alia, because : ( 1 ) appellant s commercial connection, if any, with India, is far weaker than that of assessee in case of R.D. Aggarwal (supra), where Hon ble Supreme Court nevertheless held that no business connection existed, in spite of acknowledging that there was undoubtedly commercial activity within India; (2) it is specifically provided in agreement between appellant and Interglobe that Interglobe is not agent of appellant and that agreement between appellant and Interglobe is on principal to principal basis; and (3) no evidence has been produced to show that Interglobe has in fact concluded contracts on behalf of appellant. He also relied on decision rendered in case of IAC vs. Cutler Hammer Europa Ltd. ( 1 986) 1 6 ITD 280 (Bang) wherein Tribunal observed that no business connection could exist if agent/person has no authority to conclude contracts. Based on above tests, Authorised Representative submitted that appellant has no agent in India so as to constitute business connection. He contended that without prejudice to fact that appellant has no business connection in India, no income accrues or arises to appellant through or from such alleged business connection as none of activities of Interglobe is income-earning activity, i.e., TAs whom Interglobe contacts may choose never to utilise appellant s system. TAs might prefer system of one of competitors of appellant instead. It should also be noted that TAs are not customers of appellant; they neither buy goods or services from appellant, nor pay appellant for any goods or services. 5.3 learned Authorised Representative argued that without prejudice to above, even if person falls within scope of s. 9( 1 )(i), unless he has operations in India, he would not be taxable in India as held by Supreme Court in CIT vs. Toshoku Ltd. (supra). Even in case of Ishikawajma (supra) it was held that "mere existence of business connection may not result in income of non-resident assessee from transaction with such business connection accruing or arising in India". Even in case of Carborandum Co. vs. CIT 1 977 CTR (SC) 209 : ( 1 977) 1 8 ITR 335 (SC) it was held that even assuming that there is business connection, to tax income under s. 9( 1 ), non-resident should have operations of its own in India. In cases of Citizen Watch Co. Ltd. vs. IAC ( 1 984) 1 48 ITR 774 (Kar) and CIT vs. Dunlop Ltd. (U.K.) ( 1 993) 20 1 ITR 534 (Cal) it was observed that there exists no business connection as assessee has not rendered any services on its own. 5.4 It was further contended by learned Authorised Representative that without prejudice to appellant s submission that no income accrues or arises or is deemed to accrue or arise in India and that appellant has no operations in India, in any event, even if it is assumed, while denying, that any income can at all be regarded as accruing, really or fictionally to appellant in India, such income is completely offset and exhausted, inter alia, by arm s length payments made by appellant as supported by test/principle laid down by Supreme Court in case of Director of IT (International Taxation) vs. Morgan Stanley & Co. Inc. (2007) 2 1CTR (SC) 4 1 9 : (2007) 292 ITR 4 1 6 (SC) as under : "As regards attribution of further profits to PE of MSCs where transactions between two are held to be at arm s length, we hold that ruling is correct in principle provided that associated enterprise (that also constitutes PE) is remunerated on arm s length basis taking into account all risk-taking functions of multinational enterprise. In such case nothing further would be left to attribute to PE." Arguments on behalf of Revenue : 6 . Learned special counsel for Revenue Shri Kapila submitted that business model of appellant needs to be understood. He submitted that assessee is U.S. resident company. It is engaged in business of providing services to participating airlines, hotels, tour and cab operators (vendors) in order to enable them to sell their products directly to subscribers in India through platform provided by assessee. Both vendors and subscribers are integrated into unified system, namely, Galileo CRS. Without integration of either in CRS, system would be of no business use and no income would accrue to assessee as its income from airlines etc. is generated from bookings made by subscribers. Whereas vendors bear entire cost of accessing and updating of information real-time on system, subscriber gets all necessary equipment free which is supplied to Galileo India for distribution to subscribers. Though subscribers use CRS at cost of assessee, they acquire right access and use CRS not under contract with assessee but under separate contract between subscriber and Galileo India. host computer of CRS is situated in Denver Colorado, USA. It cannot be used by subscribers without provision of electronic telecommunications between vendors and subscribers. It is for this reason that assessee has entered into agreement with SITA (a French company) for assured use of its telecommunication facilities outside India as also within India on continuous basis. SITA s nodes situated in India provide gateways to and from India both to airlines and subscribers. nodes are situated in premises of telecommunications centres of SITA in Mumbai and Delhi. expenditure on leasing nodes and leasing of regional communications network within India, is borne by assessee. subscribers use CRS through computers installed in their premises. telecommunications infrastructure right upto subscribers premises is set up by assessee at its own cost. As result, instant connectivity with mainframe assessee at its own cost. As result, instant connectivity with mainframe is available to subscribers for booking reservations on basis of real-time information displayed on his screen. Under participation agreement, vendor is contractually bound to honour booking made by subscriber. booking by subscriber results in confirmed travel ticket either E-ticket or printed ticket, which is produced by computer/printer, being part of equipment supplied to subscriber by assessee. Purchase order is made by subscriber in India booking is made in India sale of ticket by airlines is made in India. contract (booking) between subscriber and airlines is concluded in India. Subscriber makes payment in rupees to branch office of international airlines in India or to domestic airlines. Income accrues to assessee in India from bookings because of assets provided to subscribers in India and telecommunications infrastructure set up by assessee in India at its own cost as also from operations of Galileo India. 6. 1 Shri Kapila submitted that true nature of assessee s business in such scenario can be compared with that of stock exchange like National Stock Exchange (NSE), which provides platform for trading. system installed by NSE is accessed by brokers etc. from specially secured computers. moment access is allowed by exchange s system, computer of broker is integrated with main computer and broker can carry out any permissible transaction of purchase or sale of securities. In other words, whereas earlier broker had to go to trading floor, he now conducts business on his computer. broker s computer becomes integral part of exchange s electronic platform (market place) and his bid is matched with counter-bid of another broker and contract is automatically generated. What is business of exchange in such scenario ? It is clearly that of running integrated market place for which it receives fees/commission for every transaction put through market, namely, Galileo System. To take another example, say London Stock Exchange (LSE) receives permission to operate in India and with view to carry on business in India, it provides computers to traders and brokers and provides connectivity by leasing telecommunication network, can it be said that it has no fixed place in India through which its business is carried on. assessee also brings together subscriber and airlines on computer to computer basis and booking is automatically generated seamlessly on CRS. Therefore, it is absolutely imperative for assessee s business that there is continuous and instant two-way communications between vendors and subscribers. booking is binding on airlines (cls. 3-I and 3J/P, 1 4- 1 5-APB) and also subscribers unless he cancels it in accordance with standard terms (the assessee earns fees on cancellations also). This is so not because of any contract between vendor and subscriber, but because of contract between assessee and vendor. On other hand, assessee has also not directly entered into agreement with subscriber in India, but always honours and abides by terms of contract between Galileo India and Indian subscriber. Indeed it has prescribed standard subscriber agreement for use by Galileo India. Thus, three contracts have to be read together in order to understand exact legal obligations of five parties; namely, assessee, vendor, Galileo India, SITA and Indian subscriber. None of four contracts could become operational without implementation of other two contracts. making of booking and generations of tickets take place because of sifting of information by subscriber on computer installed in his premises and necessary commands punched by him on computer. moment subscriber accesses host computer, its computer gets integrated with host computer. Neither airlines nor subscribers are concerned with location of host computer or how it processes data. From practical and commercial point of view of airlines and subscribers, what is material is that online information supplied by airlines is displayed on computer screen of subscribers for their decision making so that they can make bookings on their computers. assessee is clearly in business of running technologically complex and state of art electronic platform, which acts as flight reservation exchange or market place in India. communication network in India, displayed on subscriber s screen and accessibility to CRS f o r user by subscribers are integral components of commercial operations of CRS. business of assessee can also be compared with that of commission agent. Its business, as stated above, is to enable travel agent to make contract of reservation of passenger flight with airlines. In other words, Galileo System leads to business between TAs and airlines. As observed by Supreme Court in case of CIT vs. Rai Bahadur Jairam Valji ( 1 959) 35 ITR 1 48 (SC) at p. 1 6 1 . "It will be seen that receipts, chargeability of which was in question in decisions cited for respondent, were all payments made as compensation for termination of agency contracts, whereas we are concerned with amount paid as solatium for cancellation of contract entered into by businessman in ordinary course of his business, and that, in our judgment, makes all difference in character of receipt. In agency contract, actual business consists in dealings between principal and his customers, and work of agent is only to bring about that business. In other words, what he does is not business itself but something which is intimately and directly linked up with it. It is therefore possible to view agency as apparatus which leads to business rather than as business itself on analogy of agreements in Van Den Berghs Ltd. vs. Clark. Considered in this light agency right can be held to be of nature of capital asset invested in business. But this cannot be said of contract entered into in ordinary course of business. Such contract is part of business itself, not anything outside it as is agency, and any receipt on account of such contract can only be trading receipt. (emphasis supplied) That there is distinction between agency agreement and contract made in usual course of business will further be clear, if we have regard to o n e of reasons on which conclusion that compensation paid for cancellation of agency rights is capital receipt is sometimes rested. It is that, in substance, agent assigns agreement to principal and compensation is price paid therefor." assessee therefore facilitates conclusion of contract between airlines etc. and subscriber in India for which it earns service fees from airlines. 6 . 2 Shri Kapila submitted that next question which needs to be addressed is : Does assessee either wholly or partly carry on any business in India ? Put in other words, does assessee have any business operations through asset owned or leased by it in India ? following operations are carried on in India on continuous basis by assessee on its own or hired by it at its own cost is providing for : (i) Provision of telecommunication nodes situated at Mumbai/Delhi owned by SITA. (ii) Provision of telecommunication lines between node and premises of subscribers. (iii) entire regional telecommunications network is maintained by assessee at its own cost. regional networks together with gateways to international network are essential parts of inter-active worldwide CRS. (iv) Without provision for telecommunication network, host computer would not have any business value. fact that assessee may have entered into worldwide contract with SITA (a French company) outside India is immaterial. As observed by Hon ble Supreme Court in case of Ishikawajma Harima Heavy Industries Ltd. (supra), it is not situs of making of contract which is relevant but it is situs where services are rendered which is relevant. assessee has rendered services to vendors within India by way of maintaining communication network right upto subscriber s premises. SITA provides domestic connectivity to various TAs all over India with gateways (nodes at Mumbai/Delhi) for connectivity with host computer in USA. Likewise, dedicated telephone lines for subscribers have been leased by assessees in India. Provision of elaborate telecommunication network is integral and essential part of CRS. As explained in para 3(v) infra assessee itself has recognized its business activities in three identifiable segments : (i) Host computer (H in USA); (ii) Network (N) which includes both international and regional telecommunication network; and (iii) Customer Premises (P) which means provision of dedicated lease lines to keep response time to minimum and also provision of dedicated hardware and software owned by assessee but distributed through its agent, namely, Galileo India. Provision of telecommunication network is service rendered to airlines etc. from which it earns fees. This service is rendered within India. Without network , vendors cannot receive purchase orders from subscribers. 6.3 Shri Kapila, therefore, submitted that in view of facts, assessee s income accrues or arises in India in terms of s. 5(2) of Act for reasons that (i) airlines pay fees not for setting up or maintenance of CRS, but for use of CRS by TAs in India. As explained earlier, CRS is used only when subscriber makes booking. Without provision of active facilities in India for making of bookings, CRS will not generate any income for assessee. Activity of real-time updating of all information relating to flight schedules, latest position of availability of seats reservation etc. is carried out by airlines at its own cost through its own internal reservation system into assessee s CRS (pp. 1 4 and 1 5, cls. 3B, 3C, 3E, 3F and 3G). But it will all come to naught if there is no facility for making booking by subscriber. (ii) Schedule 2 (p. 34/APB) gives charges for certain basic standard services and Schs. 4- 11 (at pp. 38-57/APB). India falls in Territory 2. In all cases it is made clear that for purposes of all these schedules, "Territory 1 and Territory 2 refer to location of Galileo International subscriber that performs activity that creates charge". It needs to be emphasized that subscriber could not have made booking but for node and domestic network hired/leased by assessee and hardware and software provided to subscribers. activity which creates charge of fees from airlines is booking made by subscriber in India. Therefore source of income of assessee is bookings made by subscriber. (iii) subscribers are resident of India. assessee provides them with computers and connectivity for making bookings. They place purchase order on airlines in India and sale also takes place in India. Payment to airlines is made by subscribers in India in Indian rupees. Without bookings by TAs, there is no business and no revenue. It is for this reason that assessee provides at its own cost communication network in India as also equipment to TAs so that they can make bookings on its system and generate income for assessee by way of commission from airlines. There is no merit in assessee s plea that such equipment is used by subscribers for their own business and not for business of assessee. very fact that assessee has distributed computers etc. free of cost and maintains regional network at its own cost clearly establishes that this act is dictated by pure business need of assessee. assessee earns income from airlines etc. integrating subscribers into CRS. (iv) It is contended by assessee that since host computer is located in USA and contracts with airlines are made outside India, income also accrues outside India. This contention is misconceived. It is simplistic and it does not take into account business model of assessee. Neither data processing in USA nor contract with airlines can be said to be source of income of first degree. host computer would not by itself generate any income for assessee. source of income of assessee, if looked at from practical and commercial point of view, is reservation (booking) made by subscriber in India. It is for this reason that assessee at its own cost maintains communication network and supplies hardware and software to Galileo India for distribution to subscribers. It is use of CRS by subscriber in India, which is source of income . As regards contention of learned counsel for assessee that assessee is remunerated outside India by airlines under contracts entered outside India, attention has invited to inference by Supreme Court in Performing Right Society Ltd. vs. CIT 1 976 CTR (SC) 429 : ( 1 977) 1 6 ITR 11 (SC) for proposition that these factors are immaterial in case where income accrues in India. It is use of CRS by subscribers in India which is real source of income. In CIT vs. Kunwar Trivikram Narain Singh ( 1 965) 57 ITR 29 (SC) Hon ble Supreme Court followed of quoted observation of Privy Council in CIT vs. Raja Bahadur Kamakhaya Narayan Singh ( 1 948) 1 6 ITR 325 (PC) (pp. 1 -6 of DPB), which construed word derived as follows : "The word derived is not term of art. Its use in definition indeed demands enquiry into genealogy of product. But enquiry should stop as soon as effective source is discovered. In genealogical tree of interest land indeed appears in second degree, but immediate and effective source is rent, which has suffered accident of non-payment. And rent is not land within meaning of definition." In present case assessee s source of income is booking made b y travel agent in India on computer provided by assessee. booking is made by subscriber on basis of display of information on computer and necessary sifting of informations and commands made through computer installed at his premises. Looked at from another angle, it is business of maintaining CRS, part of which (telecommunications network, computers and modem etc. and other activities through agent in India) has produced income in India. Enquiry must stop at this stage. (v) assessee has explained its business in its letter dt. 26th Jan., 1 999 addressed to AO [p. 26 of Department s Paper Book (DPB)] in following words : "The CRS consists of software owned by assessee. software is accessed by travel agent (the subscriber) by means of modem for purpose o f undertaking flight bookings for participant. software enables subscriber to access information such as display of schedules and fares, building of connections, display of fight availability status and provision of booking capability. Therefore, booking fees paid by participant to assessee constitute consideration for accessing and using software of assessee and/or consideration for providing electronic services to participant/subscriber." That CRS is holistic system is brought out in service agreement between assessee and Galileo India (pp. 1 42-206 of APB), which has been entered into with twin objects of providing maximum availability of system to subscriber and minimum response time for booking ticket. Clause 3 of agreement (p. 1 47 of APB) states : "There are two key areas of measurement when considering services to end subscriber. These are system availability and response times. This document recognizes that both of these categories are affected by global, regional and market based influences and that measurement of these services can effectively be divided into Host (H), Network (N), and Customer Premises (P)." From above it is clear that two of three components constituting CRS (N and P) are situated in India. (vi) assessee contends that it has not carried out any activity in India which could be said to contribute to booking made by subscriber. This is not correct. assessee s contention is based on wrong assumption that Host computer alone constitutes CRS. CRS is system which includes not only Host computer in USA, but also telecommunication network in India (regional network) as also hardware and software installed on premises of subscriber. All three services, namely Host, Network and Customer services are provided by assessee. In fact, assessee has clearly identified these three vital components of CRS as H, N & C in service agreement (pp. 1 42- 1 74 of APB), which is part of DA. 6.4 Shri Kapila, therefore, submitted that assessee has, either on its own, or through agency of Galileo India, carried out following activities in India on continuous basis : (i) (a) telecommunication nodes at Mumbai/Delhi hired by assessee from SITA at its own cost. (b) Telecommunication lines between node and premises of subscriber for which lease rent/service charges etc. are paid for by assessee. (ii) Providing free of charge its own equipment to subscribers for integrating them into CRS : (i) Two computers (ii) Printer (subscriber agreement p. 46/DPB) (iii) Pad Micro card (Modem) It is admitted fact that hardware costing USD .5 million was provided by assessee free of cost in first two years. economic life of hardware has been fairly estimated by assessee to be six years (para 6.5 of DA/p. 11r/w para 9. 1 2(b)/p. 11 5 of APB). assessee has claimed and it has been allowed depreciation on this hardware for all assessment years under appeal (including asst. yr. 1 998-99). Therefore, its statement before CIT(A) that all computers supplied to Interglobe during financial year 1 995-96 were junked within two years is patently wrong as no material has been produced to establish that equipment was scrapped. On other hand, assessee itself has been claiming depreciation thereon in all of subsequent years. (iii) Providing free of cost its proprietary software products (p. 46/DPB and cl. 4.3/p- 1 7 of APB). These have been provided to subscribers through agency of Galileo India for installation on their computers. It is abovementioned activities in India which form part of its business of running CRS. Indeed, assessee itself has claimed in remand proceedings expenses under following heads as allowable business expenditure incurred for earning income from Indian operations : ( 1 ) Marketing expenses [para 5. 1 of CIT(A) order dt. 1 5th Dec., 2004] (2) Development expenses [para 8. 1 of CIT(A) order dt. 1 5th Dec., 2004] (3) Network expenses [para 9 of CIT(A) order dt. 1 5th Dec., 2004] 6.5 Shri Kapila, therefore, submitted that assessee has business connection resulting in deemed income under s. 9 r/w s. 5(2) of Act. facts narrated above clearly establish that there is real, intimate and continuous connection between assessee s business outside India and activities within India, which have produced income. Apart from clauses of DA between assessee and Galileo India dt. 24th Feb., 1 995 referred to in assessment order, various clauses of DA read with relevant schedules bring out clearly continuous, real and intimate connection of assessee with its own activity and assets in India as well as business activity of Galileo India. Apart from various clauses of DA between assessee and Galileo India various clauses of participation agreement between assessee and airlines are also relevant. These clauses clearly establish that there is continuous, real and intimate connection between assessee s business outside India and its activities as well as those of Amadeus India within India : In view of relevant clauses of distribution and participation agreements and extent of assessee s activities in India, it is submitted that assessee has business connection source of income and also assets in India from which income is chargeable to tax in terms of s. 9( 1 )(i) r/w s. 5(2) of Act. 7 . Replying to contention of learned Departmental Representative that appellant has business connection in India, Shri Vyas submitted that at outset it is false to allege that it is "admitted fact" that hardware costing US $ 3 million was provided free of cost in first two years. (refer to appellant s grounds of appeal No. 7(c) for asst. yrs. 1 996-97, 1 997-98 and 1 998-99). Hardware of value of only US $ 4,95,7 1 2 was provided to Interglobe, and that too, only in asst. yr. 1 996-97. No computers were provided in first asst. yr. 1 995-96 and therefore there was no depreciation claimed in asst. yr. 1 995- 96. computers were imported between June and October, 1 995 relevant to asst. yr. 1 996-97. Two years from June, 1 995 expired in June, 1 997 relevant to asst. yr. 1 998-99. Therefore depreciation was claimed in three asst. yrs. 1 996-97 to 1 998-99 as two year period got over in asst. yr. 1 998-99. Further, no depreciation was claimed on these computers from asst. yr. 1 999-2000, consistent with scrapping of these computers after two years and is supported by fact that scrapping of computers was specifically averred to before CIT(A) by letter dt. 27th Jan., 2000 (p. 285A of APB-I) and this was recorded by CIT(A) in para 6.2 (p. 1 ) of his order but was not in any way controverted by him. economic life of 6 years was adopted only for limited purpose of calculating depreciated value at which appellant was entitled to purchase computers from Interglobe, but it was recognised that market value could be lower (as it did, in fact, turn out to be nil, due to obsolescence, which is evidenced by letter dt. 27th Jan., 2000 at p. 285A of APB-I). Even otherwise, fact that these computers (which were 486 models as evidenced from letter) were rendered obsolete is shown by fact that in 1 998 Interglobe was supplying to TAs, Pentium computers as stated in subscriber agreement between Interglobe and TAs submitted by Department in its paper book. economic and technical insignificance and irrelevance of computers supplied by appellant is shown inter alia by facts that TAs activities continued even when no computers were provided by appellant to Interglobe. 7. 1 learned Authorised Representative replied that cls. 3 I, J, K, L and M of participation agreement are in nature of indemnity clauses and provide for exceptional situation. They nowhere show that booking is completed when TA clicks but in fact confirm that TA, by clicking, merely sends request to CRS which then interrogates airline server before booking is concluded. He argued that click by TA, on his computer screen displays, does not result in concluded contract. display, through CRS, on TA s screen, is not offer, because airline is not bound by TA s click on his screen. display on TA s screen is merely invitation to offer, pursuant to which TA, by clicking screen makes offer. It is only when this offer of TA is accepted by airline server through CRS that binding contract occurs. Sch. 2 referred by learned Departmental Representative has been provided only to identify territory where TA is located. 7 . 2 Authorised Representative further submitted that it is factually incorrect to allege that nodes or land lines were "hired" from SITA. SITA only provided telecommunication services to appellant as independent service provider. Further, appellant does not maintain telecommunication network which belongs to, and is maintained by, SITA or local owner of communication network e.g. VSNL, at their own cost. Even SITA does not own local communication network. SITA/VSNL are merely independent service providers. SITA is engaged by appellant under separate principal to principal arm s length contracts. These words have been misinterpreted and twisted out o f context. They only mean that appellant "makes arrangements" e.g. through VSNL, for provision, operation and maintenance of network to SITA node. They do not in any way mean that these arrangements, which are with independent third party service providers like VSNL, are appellant s operations. 7.3 He clarified that reliance placed by Departmental Representative on case of Performing Right Society Ltd. vs. CIT (supra) is misplaced. decision of Hon ble Supreme Court is completely distinguishable because in that case royalty income received by Performing Rights Society for broadcasting, from stations of All India Radio within India, was held to be taxable in India on ground that same arose in India. Also, since case involved non-profit- making organisation, it is not relevant precedent for profit-making business enterprise. 7.4 learned Authorised Representative further submitted that it is also contrary to following uncontroverted factual clarification given by appellant pursuant to specific queries of CIT(A) on which learned Departmental Representative has himself relied upon : "The CRS does not contain airline inventory, but rather contains status of airline flight as provided by airline. Typically, travel agent begins booking process by looking at flight availability between origin and destination. status of flight is maintained by airline. If flight status indicates that seat is available, agent will initiate sell request. Most airline vendors provide real-time access to their inventory and thus control their inventory when they receive sell request. majority of airline inventory is accessed real-time. If airline vendor does not provide real-time access to their inventory, then sell is performed in CRS and sell request message is sent to airline when booking is ended. It is possible that flight status on CRS could indicate seats are available, and multiple TAs could request those seats at same time. When they end their booking requests, sell request will be sent to airline and it would be upto airline to either accept or reject request. In either case, CRS booking is updated to reflect airline answer and message is sent to travel agent to advise them of success or failure. In end, inventory is managed by airline. It is their responsibility to update flight status on CRS and to accept/reject sell requests." 7.5 Regarding reliance placed by Department on case of automatic car park, learned Authorised Representative argued that case is not relevant as two out of three Judges specifically refused to go into question of when contract was concluded. Also it was case where on money being put into automatic parking ticket vending machine, ticket was automatically issued unlike appellant s case where, even as per assessment order, TA s click has to travel to airline server for positive response, only after which booking is made. Further, booking process, though done at high speed, is not automatic as alleged. In case of so-called "automatic" contracts general principles of offer and acceptance still apply. Hence, as it is indisputable that till TA s seat request is accepted by airline server through CRS, airline is not bound, no contract takes place till then. 7.6 learned Authorised Representative argued that Department s allegation that activity of airlines, appellant, Interglobe, TAs is integrated and seamless activity is erroneous and untenable as this argument and approach has been specifically rejected by Hon ble Supreme Court in three separate decisions, namely, Ishikawajma Harima Heavy Industries Ltd. (supra), Sriram Bearings Ltd. (supra) and CIT vs. Hyundai Heavy Industries Co. (supra), Sriram Bearings Ltd. (supra) and CIT vs. Hyundai Heavy Industries Co. Ltd. (2007) 2 1CTR (SC) 1 78 : (2007) 29 1 ITR 482 (SC). 7.7 It was argued that analogy with NSE is completely inapt and erroneous because, in appellant s case, airline, SITA, Interglobe and TAs are independent parties dealing with each other at arm s length. In any case, no contracts are concluded on appellant s server. Hence, appellant s server is neither trading platform nor integrated market place. He contended that allegation of Department that moment subscriber accesses host computer, its computer gets integrated with host computer is erroneous as it is not uncommon for computer to access two servers at same time. For instance, with today s technology, person might access his bank account in one window, while he is trying to book train ticket in another, while at same time, his access to Google and Yahoo is on in two other windows. This, in fact, does often happen. In such case, by logic of Department, computer will be integrated with each of host computers, which seems impossibility. Alternatively, on basis of this argument, all various servers, together with all computers connected with them, would become integrated. I n effect, on basis of this argument, given number of computers in any network, ultimately, world would either gravitate towards single integrated computer, or at least, very few computers into each of which very large numbers of computers are integrated . 7.8 He clarified that Department s contention that appellant has rendered services to vendors within India by way of maintaining communication network right upto subscriber s premises and that all three services, namely Host, Network and Customer services are provided by appellant is misconceived. None of these are appellant s operations at all, but are services of independent contractors availed of by appellant. Further, engaging, by appellant, of independent service providers like SITA and VSNL, cannot be regarded as rendering of services by appellant, in India, to airlines. Just as services of independent transport contractor in India, availed of on arm s length payment, by foreign supplier, to transport foreign supplier s goods to destinations within India cannot be regarded as foreign supplier s operations in India, or as services provided by foreign supplier in India, so also, communications services purchased by appellant on arm s length payment, from SITA or VSNL (who, admittedly, are independent third parties), cannot be regarded as appellant s operations in India, or as services provided by appellant in India. He further argued that to allege that services of VSNL and SITA are part of appellant s core activities is like alleging that activities of Department of Posts in acting as carrier of documents/cheques from overseas contracting party to Indian party are overseas contracting party s core activities and therefore, expose overseas contracting party to Indian taxation. He further reiterated that appellant provides computers, not to TAs, but to Interglobe, and it is wrong to allege that computers/modems etc. are provided "so that" TAs can use CRS, because CRS can be used even without computers/modems provided by appellant to Interglobe as is shown inter alia by facts that : TA s business continued even after 2 years when computers were provided to Interglobe. only 265 out of 800 TAs were provided computers by Interglobe. It is therefore submitted that : (i) there is no business connection under s. 9( 1 )(i) of Act. case law cited by appellant in case of Cutler and Hammer (supra) has not been dealt with by Department. (ii) in any event, there are no activities of appellant in India, and therefore there is no tax liability in India. Finding as to existence of business connection 8. We have heard parties at length. In our opinion, following questions arise for consideration : ( 1 ) Whether assessee has any income chargeable to tax in India under s. 5(2) of Act and whether assessee has any business connection in India as per s. 9( 1 )(i) of Act ? If yes, to what extent it is taxable in India ? (2) If answer to question No. 1 is in affirmative, whether, in terms of DTAA between India and USA, appellant has any PE in India ? (3) If answer to question No. 1 is in affirmative, what is extent of income earned in India and whether same can be held as paid by appellant to Interglobe and no further income is attributable to PE in India ? (4) If answer to question No. 3 above is in negative, to what extent income arises in India which can be charged to tax in India ? (5) Whether interest under ss. 234A and 234B is chargeable ? 8. 1 first question before us is whether there is any business connection in India within meaning of s. 9( 1 )(i) of Act. scope of total income is described in s. 5 of IT Act. As per s. 5(2), total income of person, who is non-resident to extent which is received or deemed to be received in India, or accrues or arises or deemed to accrue or arise in India is taxable in India. As per s. 9( 1 )(i) of Act, all income accruing or arising whether directly or indirectly through or from any business connection in India shall be deemed to accrue or arise in India. As per cl. (a) of Expln. 1 , in case of business of which all operations are not carried out in India, income of business deemed under this clause to accrue or arise in India shall be such part of income as is reasonably attributable to operations carried out in India. Thus, as per conjoint reading of s. 5(2) and s. 9( 1 )(i) of Act, only if income is arising directly or indirectly through or from any business connection in India, can be taxed in India. expression business connection was earlier not defined in Act. Finance Act, 2003 w.e.f. 1 st April, 2004 i.e., as applicable to asst. yr. 2004-05 and onwards has inserted two new Explanations to cl. (i) of s. 9( 1 ) clarifying that expression business connection will include person acting on behalf of non-resident and who carried on certain activities. However, for purpose of our present discussion, amended provision has no relevance as same is w.e.f. asst. yr. 2004-05 onwards. Since these appeals are for years prior thereto, we shall discuss only unamended provisions. expression business connection has wide though uncertain meaning. It admits of no precise definition and solution to question must depend upon particular facts of each case. Even amended definition will not determine as to what constitutes business connection as same is not exhaustive definition but is definition which also includes some of activities to be termed as business connection. We shall, therefore, revert to some of judicial pronouncements in this regard. Hon ble Supreme Court in case of CIT vs. R.D. Agarwal & Co. (supra) held thus : "The expression business connection undoubtedly means something more than business. business connection in s. 42 involves relation between business carried on by non-resident which yields profits or gains and some activity in taxable territories which contributes directly or indirectly to earning of those profits or gains. It predicated element of continuity between business of non-resident and activity in taxable territories, stray or isolated transaction is normally not to be regarded as business connection. Business connection may take several forms. It may include carrying on part of main business or activity incidental to main business of non-resident through agent or it may merely be relation between business of non- resident and activity in taxable territories, which facilitates or assists carrying on of that business. In each case, question whether there is business connection from or through which income, profits or gains arises or accrues to non-resident must be determined upon facts and circumstances of case." "A relation to be business connection must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to non-resident. But it must in all cases be remembered that by s. 42, income, profit or gain which accrues or arises to non-resident outside taxable territories is sought to be brought within net of IT law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within taxable territories in previous year is taxable by s. 4( 1 )(a) and (c) of Act, territories in previous year is taxable by s. 4( 1 )(a) and (c) of Act, whether person earning is resident or non-resident. If agent of non- resident receives that income or is entitled to receive that income, it may be taxed in hands of agent by machinery provision enacted in s. 40(2). Income not taxable under s. 4 of Act of non-resident becomes taxable under s. 42( 1 ) if there subsists connection between activity in taxable territories." Hon ble Bombay High Court in case of Blue Star Engg. Co. (Bombay) (P) Ltd. vs. CIT ( 1 969) 73 ITR 283 (Bom) at p. 29 1 , after referring to decision of R.D. Aggarwal & Co. s case (supra) held as under : "It would thus be seen that in order to constitute business connection as contemplated by s. 42, there must be activity of non-resident and contributing to earning of profits by non-resident in his business. business connection must undoubtedly be commercial connection but all commercial connections will not necessarily constitute business connection within meaning of concept unless commercial connection is really and intimately connected with business activity of non-resident in taxable territories and is contributory to earning of profits in said trading activity." 8 . 2 In light of above provisions in IT Act and judicial pronouncements, we may appreciate facts and deal with issue. appellant has developed fully automatic reservation and distribution system known as Galileo system with ability to perform comprehensive information, communication, reservation, ticketing, distribution and related functions on worldwide basis. Through this Galileo system, appellant provides service to various participants, i.e., airlines and hotels etc. whereby subscribers who are enrolled through efforts of NMC can perform functions of reservations and ticketing etc. Thus Galileo system or CRS is capable of not only processing information of various airlines for display at one place but also enables subscribers to book tickets in way which is seamless system originating from desk of subscriber s computer which may or may not be provided by appellant but which in all cases are configured and connected to such extent that such computers can initiate or generate request for reservation and also receive information in this regard so as to enable subscriber to book airlines seat or hotel room. request which originated from subscriber s computer ended at subscriber s computer and on basis of information made available to subscriber, reservations were also possible. It is to be noted that all subscribers in respect of which income is held taxable are situated in India. equipment, i.e., computer in some cases and connectivity as well as configuration of computer in all cases are provided by appellant. booking takes place in India on basis of presence of such seamless CRS system. On basis of booking made by travel agent in India, income generates to appellant. But for booking no income accrues to appellant. Time and again it is contended that whole of processing work is carried out at host computer situated at Denver in Colorado, USA and only display of information is in India for proposition that there is no business connection in India. We are unable to agree with such proposition. CRS extends to Indian territory also in form of connectivity in India. But for request generated from subscriber s computer s situate in India, booking is not possible which is source of revenue to appellant. assessee is not to receive payment only for display of information but income will accrue only when booking is completed at desk of subscriber s computer. In such situation, there is continuous seamless process involved, at least part of which is in India and hence, there is business connection in India. computers at subscriber s desk are not dumb or are in nature of kiosk incapable of performing any function. computers along with configuration have been supplied either by appellant or through its agent Interglobe and connectivity being provided by appellant enables subscribers to access CRS and perform ticketing and booking functions. existence of business connection can be summarised thus : ( 1 ) Assessee hires SITA nodes in most major cities in India together with 800 land lines for maintaining telecommunication network in India as evident at page Nos. 278 to 28 1 of assessee s paper book No. 1 . (2) Assessee secures provision of operation of communication network from SITA node to travel agent as evident at p. 28 1 of assessee s network from SITA node to travel agent as evident at p. 28 1 of assessee s paper book No. 1 . (3) By cl. 1 5.3 of DA, assessee specifically authorises Interglobe (Galileo India) to conclude agreements with TAs in India in accordance with model subscriber agreement which forms annexure to said agreement. (4) Assessee lays down targets and closely supervises and reviews performance of Galileo India on day-to-day basis in accordance with annual plan and service manual prescribed by it as per cl. 1 4 of DA. (5) Assessee allots access code to TAs for using CRS. (6) assessee s business comprises of : (a) Maintenance and running of CRS; (b) Providing computer modem and software to TAs in India so that they can use CRS for making bookings which generate charge on airlines; (c) Assessee hires from SITA and maintains and operates telecommunication network in India so that TAs could make bookings. All these activities are integral part of core business carried on by assessee and these are not auxiliary or preparatory in nature. contention of Shri Vyas regarding reliance on decision in case of Fisher vs. Bell (supra) in this case is misplaced. Whether contract for sale of ticket is completed in India or outside is irrelevant for purpose of present discussion as we are not to determine taxability of income of various airlines accruing as result of sale of tickets through CRS in India. Thus, availability of tickets displayed through CRS at desk of TAs in India is whether offer for sale or invitation to offer is not deciding factor. What we find is that part of Galileo system exists in India in form of configuration and connectivity of such system through which booking activities can be performed in India. decision of Tribunal, Bangalore Bench in case of Wipro Ltd. (supra) is also misplaced as in that case no part of data processing facility was performed in India but wholly outside India. In present case, appellant operates Galileo system which is source of revenue and part of such system exists in India. Thus there is direct business connection established in India and hence in terms of s. 9( 1 )(i) of Act, income in respect of booking which takes place from equipment in India can be deemed to accrue or arise in India and hence taxable in India. 9. next question therefore, arises is whether having held that there is business connection in India, how much income is chargeable to tax in India. As per s. 9( 1 )(i) of Act, income accruing or arising whether directly or indirectly through or from any business connection in India shall be deemed to accrue or arise in India. As per cl. (a) of Expln. 1 to s. 9( 1 )(i) in case of business of which all operations are not carried out in India, income of business deemed under this clause to accrue or arise in India shall be only such part of income as is reasonably attributable to operations carried out in India. Thus in given case if all operations are not carried out in India, income has to be apportioned between income accruing in India and income accruing outside India. In present case, we find that only part of CRS system operates or functions in India. extent of work in India is only to extent of generating request and receiving end-result of process in India. major functions like collecting database of various airlines and hotels, which have entered into PCA with appellant takes place outside India. computer at Denver in USA processes various data like schedule of flights, timings, pricing, availability, connection, meal preference, special facility, etc. and that too on basis of neutral display real time online takes place outside India. computers at desk of TA in India are merely connected or configured to extent that it can perform booking function but are not capable of processing data of all airlines together at one place. Such function requires huge investment and huge capacity, which is not available to computers installed at desk of subscriber in India. major part of work or to say lion s share of such activity, is processed at host computer in Denver in USA. activities in India are only minuscule portion. appellant s computer in Germany is also responsible for all other functions like keeping data of booking made worldwide and also keeping track of all airlines/hotels worldwide that have entered into PCA. Though no guidelines are available as to how much should be income reasonably attributable to operations carried out in India, same has to be determined on factual situation prevailing in each case. However, broadly to determine such attribution one has to look into factors like functions performed, assets used and risk undertaken. On basis of such analysis of functions performed, assets used and risk shared in two different countries, income can be attributed. In present case, we have found that majority of functions are performed outside India. Even majority of assets, i.e., host computer which is having very large capacity which processes information of all participants is situated outside India. CRS as whole is developed and maintained outside India. risk in this regard entirely rests with appellant and that is in USA, outside India. However, it is equally important to note that but for presence of assessee in India and configuration and connectivity being provided in India, income would not have generated. Thus initial cause of generation of income is in India also. On basis of above facts we can reasonably attribute 1 5 per cent of Revenue accruing to assessee in respect of bookings made in India as income accruing or arising in India and chargeable under s. 5(2) r/w s. 9( 1 )(i) of Act. 1 . Next question to be decided is if it is found that income accruing in India is consumed by payment made to agents in India, whether any income still is left to be taxed in India. activities of appellant in India are entirely routed through efforts of NMC namely Interglobe India (P) Ltd. (Interglobe). Interglobe is responsible for monitoring activities of subscribers enrolled in India. request originated from computers at desk of TA is once again routed through facility of processing such information at Interglobe. If Interglobe finds that subscriber accessing CRS is authorized to do so, request is further forwarded. Interglobe is also responsible for establishing connectivity of computers of subscribers and maintaining them. Interglobe is also responsible for training of subscribers in respect of use of CRS. For all these services rendered by Interglobe to appellant, it is being paid remuneration in terms of DA. Broadly assessee receives three Euros as fees per net booking , i.e., gross booking minus cancellation. assessee passed one dollar to Interglobe for each net booking processed through Galileo system by subscriber. Thus in respect of activities carried out in India and considering income accruing in India, remuneration paid to Indian agents consumes entire income accruing or arising in India. It is also to be noted that entire payment made by appellant to Interglobe has been allowed as expenses while computing total income of appellant. In such situation in view of Circular No. 23 of 23rd July, 1 969 no income can be further charged to tax in India. As rightly contended by Shri Vyas, circular equally applies to sale of goods as well as rendering of services. Hon ble Supreme Court has taken judicial note of said circular in case of Morgan Stanley & Co. Inc. (supra) and has held that once associated enterprise which is considered as PE of non-resident assessee is remunerated at arm s length, nothing further would be left to be attributed to PE of non- resident. We, therefore, hold that in view of above facts, no income is taxable in India. Whether PE exists 11 . Shri Vyas submitted that without prejudice to fact that appellant is not subject to tax under domestic law, liability to tax in India has also to be examined under provisions of treaty. It was highlighted that objective of treaty is to grant relief in respect of income on which income-tax has been paid both under Act and income-tax in that country; or avoid double taxation of income under Act and under corresponding law in force in that country. learned Authorised Representative cited that in case of Wipro Ltd. (supra), wherein it was observed that : "the correct recognition of national interest is rule of law impartially applicable to one and all without fear and favour to anyone giving full meaning to Act and Constitution, so as to achieve dreams of founding fathers as found in preamble to Constitution." It was submitted that based on s. 90(2) provisions of Act shall apply to extent they are more beneficial to that taxpayer. Hence, unless appellant s income is taxable in India under provisions of treaty, it would not be liable to tax in India, regardless of position under domestic law, and vice versa. double tax treaties jointly constitute separate regime of taxation and they should not be construed as proviso to Act or as exemption provision. In determination of appellant s income, any relief available under treaty does not operate as exemption from tax (similar, say, to exemption under s. 1of Act). Such relief operates so as to alter scope of taxable income under ss. 4 and 5 of Act. In this context, he placed reliance on observations of Andhra Pradesh High Court in case of CIT vs. Visakhapatnam Port Trust ( 1 984) 38 CTR (AP) 1 : ( 1 983) 1 44 ITR 1 46 (AP) and Union of India vs. Azadi Bachao Andolan (2003) 1 84 CTR (SC) 450 : (2003) 263 ITR 706 (SC). learned Authorised Representative submitted that burden is still on AO under treaty and it is for him to prove, even under treaty, that particular receipt is taxable. It is only thereafter that burden would shift to appellant to point out any provision of treaty under which receipt does not become taxable and this rule is substantiated by observation of Special Bench in case of Motorola Inc. vs. Dy. CIT (2005) 96 TTJ (Del)(SB) 1 : (2005) 95 ITD 269 (Del)(SB) in para 1 24 at p. 399. He further submitted that under treaty, India and USA have agreed, reciprocally, to define extent to which taxes may be levied in each country on residents of other. This is achieved by specifying conditions which have to be satisfied before different classes of income may be taxed, and where such conditions are satisfied with reference to any class of income, by specifying limitations subject to which, and manner in which such income may be quantified, or rate at which it may be taxed. In context of business income, conditions to be satisfied are set out in art. 7( 1 ) of treaty, and include requirement that non-resident should have PE, as defined in art. 5 of treaty. Where these conditions are satisfied, further condition is that income which may be taxed must be attributable to PE and must be derived from assets and activities of PE. It should be noted that conditions specified in art. 7( 1 ) r/w art. 5, and in art. 7(5) are intended to achieve objective of avoidance of double taxation. 11 . 1 In this background, learned Authorised Representative submitted that for good and cogent reasons, dominant aim of treaty is avoidance of double taxation and provisions of treaty should be interpreted with that aim in mind. Therefore, any interpretation which is likely to lead to double taxation is to be avoided. Consequently, for instance, if there is doubt regarding existence of PE, it should be held that there is no PE. Courts should adopt liberal approach, especially in case of doubt, in favour of taxpayer. This is especially so because, as stated above, tax treaty is basically not taxing code, but code for not taxing, or for limiting taxation. Any purposive or other interpretation which moves away from words of treaty would be impermissible, except insofar as it is directed at aim behind treaty. 1 1 . 2 learned Authorised Representative, submitted that appellant s business profit is not taxable by virtue of treaty for reasons which he summarised as under : ( 1 ) It has no "Permanent Establishment ( PE )" in India under art. 5( 1 ) or 5(2) of treaty as phrase is generally or normally understood (2) It particularly does not have (a) fixed place PE (b) installation PE (c) agency PE under art. 5(4) r/w art. 5(5) (3) Without prejudice to above, activities of alleged PE, if any, are only of preparatory or auxiliary character. (4) Without prejudice to above, appellant does not carry on any business in India, whether through alleged PE or otherwise. (5) Without prejudice to above, even if it is assumed, while denying, that appellant has PE, no profits are derived by appellant from any assets or activities of alleged PE. (6) Without prejudice to all above, alleged income, if any, attributable to alleged PE is exhausted by arm s length payment made by appellant. above propositions were elaborated subsequently as under : 11 .3 Based on art. 5( 1 ), words fixed place of business were most crucial in interpreting term "PE". He submitted that it was necessary to ensure that essential meaning of words "PE" should not be destroyed. It is further submitted that expression PE has been judicially recognised in CIT vs. Visakhapatnam Port Trust (supra) as requiring following : "The expression PE used in DTAAs postulates existence of substantial element of enduring or permanent nature of foreign enterprise in another country which can be attributed to fixed place of business in that country. It should be of such nature that it would amount to virtual projection of foreign enterprise of one country into soil of another country." It was submitted that appellant has nothing in India which satisfies above tests of "PE", as generally understood as above, at all, and hence is saved from Indian taxation. Without prejudice to above, in order for non-resident to have fixed place PE in India : He should have fixed place of business in India; and His business should be carried on through that fixed place. learned Authorised Representative submitted that Supreme Court in case of Visakhapatnam Port Trust (supra) and jurisdictional Tribunal in case of Motorola Inc. (supra) and Western Union Financial Services Inc. vs. Addl. Director of IT (2006) 11 TTJ (Del) 56 has interpreted meaning of fixed place of business as specific geographical point at disposal of non- resident through which business is carried on. He submitted that test of PE and fixed place of business as laid down by Special Bench of Tribunal in case of Motorola Inc. (supra) are as under at p. 40 1 : "Article 5. 1 states that term PE means fixed place of business through which business of enterprise is wholly or partly carried on. OECD Commentary on Double Taxation refers to fixed place as link between place of business and specific geographical point. It has to have certain degree of permanency. It is emphasized that to constitute fixed place of business , foreign enterprise must have at its disposal certain premises or part thereof. Phillip Baker in his commentary on Double Taxation Conventions and International Tax Law (3rd edition) states that nature of fixed place of business is very much that of physical location, i.e., one must be able to point to physical location at disposal of enterprise through which business is carried on. However, Revenue has failed to establish that ECI had made certain space available to assessee at its disposal. In other words, there is nothing to indicate that whenever any employee of assessee visited India, he could straightaway walk into office of ECI and occupy space or table." at p. 402 "Therefore, in light of this discussion, it cannot be said that assessee had PE in India as envisaged in art. 5. 1 of DTAA." In case of Western Union Financial Services Inc. (supra), tests laid down for fixed place of business are as follows : (i) PE should project foreign enterprise in India, (ii) assessee can, as matter of right, enter and make use of premises for its business. 1 1 . 4 learned Authorised Representative further submitted that whenever it was desired to deem plant or equipment to be PE, it has been specifically so provided. For instance, in Indo-Australian treaty art. 5(3)(a) which specifically includes substantial equipment within definition of PE. deeming provision has been inserted to artificially create PE out of assets in India. Even then, artificial extension applies only to substantial equipment . As there is no such provision in Indo-US treaty, there would be no basis for deeming equipment to be PE. In any case, and without prejudice, computers of appellant of value of US $ 4,95,7 1 2 cannot be called substantial equipment , and value of these was insignificant as compared to revenues earned. One point to be noted is that, even in Indo-Australian treaty, need was felt to specifically incorporate double deeming, firstly that substantial equipment would be deemed to constitute PE, and, secondly, that enterprise concerned would be deemed to carry on business through that deemed PE. Had it been intended that term fixed place of business should include assets or equipment, provision to that effect would have been expressly included in treaty. This proposition is observed by Supreme Court in case of Azadi Bachao Andolan (supra) at p. 747, as follows : "It is urged by learned counsel for appellants, and rightly in our view, that if it was intended that national of third State should be precluded from benefits of DTAC, then suitable term of limitation to that effect should have been incorporated therein." "The appellants rightly contend that in absence of limitation clause, such as one contained in art. 24 of Indo-US treaty, there are no disabling or disentitling conditions under Indo-Mauritius treaty prohibiting resident of third nation from deriving benefits thereunder." In summary, from above judicial precedents, three tests to determine fixed place of business could be laid down as under : Place of business test; Right to use test; Business activity test. learned Authorised Representative then elaborated above tests as under : (i) Place of business test : There should be certain premises at disposal of appellant and not at disposal of agents. Reference was drawn to commentary by Arvid A. Skaar in his Treatise on "Permanent Establishment". There following test of fixed place PE was laid down as under : "The fixed place of business test therefore qualifies objective presence of enterprise in other country. fixed place of business test is in fact composed of three cumulative tests. (As per OECD Commentary 1 977). enterprise must ( 1 ) have place of business , (2) right to use place of business has to be maintained with certain degree of permanence and (3) distinct geographical place within jurisdiction of treaty." (ii) Right to use test : Appellant should have legal right to use property. It is not necessary to have exclusive right to use property. Extract from commentary by Arvid A. Skaar in support of this was cited as under : "Thus, right to use test is met when enterprise has legal right of use to place of business as owner or lessee. Exclusive right to use premises is not required." "The present author s hypothesis concerning tax treaty law is that right of use test is met if taxpayer s use of place of business cannot be prevented without his consent." It was further submitted that Court of Session, while interpreting expression "place of business" in s. 274 of Companies (Consolidation) Act, 1 908, of UK, in case of Lord Advocate vs. Huron and Erie Loan & Savings Co. ( 1 9 11 ) Session Cases 6 1 2 laid down that test of place of business is company must have local habitation of its own. (iii) Business activity test : Fixed place through which business is carried out. In this connection following reference was drawn to commentary by Skaar (supra) at p. 1 55 "The definition of basic rule PE of modern tax treaties explicitly requires enterprise s objective presence in other country through existence of fixed place of business . It also requires business activity as condition for PE. Furthermore it is clear condition that there must be connection between place of business and activity, i.e., that activity has to be conducted through place of business." "It is common ground, for instance, that warehouse owned by foreign enterprise and at entire disposal of domestic enterprise (consignment stocks) does not constitute PE for foreign enterprise." at p. 229 "The PE definition not only examines physical connection of taxpayer s business to foreign territory and duration of his right to use fixed place of business, but also activities carried out there. Tax treaties characterize fixed place of business as PE only if enterprise undertakes business activity through place of business. basic rule requires activity performed through place of business to be business of enterprise . definition of PE in tax treaties thus presupposes performance of business activity (As per OECD Commentary 1 977 as art. 5)." (Emphasis, italicized in print, added) at p. 230 "To constitute PE, business activity must be performed through place of business. This is business connection test "; "The performance of business activity through fixed place of business i s definition of PE. Thus, taxpayer who has or operates PE is always engaged in business that constitutes PE, but he is not conducting business through PE ." It was submitted that appellant does not satisfy above tests at all, it had no local habitation of its own in India, there is no projection of appellant into India, appellant s presence is not visible through establishment in India, and no business is carried on in India through fixed place PE. Thus, neither computers provided by Interglobe to TAs, nor telecommunication nodes/lines provided by SITA, can be regarded as satisfying tests of Fixed place PE. 1 1 . 5 Based on judicial precedents and commentary, learned Authorised Representative further elaborated why computers and telecommunication lines cannot be regarded as fixed place which is as under : Regarding computers movable machine can never be regarded as local habitation which is prerequisite for fixed place PE. argument that computer software constituted fixed place PE was repelled by jurisdictional Bench of Tribunal in case of Western Union Financial Services Inc. (supra). If computers are regarded as fixed place of business, it would lead to absurd situation that appellant would be regarded as having 50 places of business in single office of TA who has been supplied 50 computers. place of business connotes specific geographical location. movable machine can never be place or location. appellant has no right to enter TA s premises as matter of right and to make use of same for purpose of appellant s business. In any event, and without prejudice to above, even if node is regarded as fixed place of business : it is not appellant s fixed place of business, as it is SITA s place of business, and because appellant has no right to use said place for purpose of its own business. telecommunication lines/nodes can by no stretch be regarded as appellant s local habitation in India or as projection of appellant in India. place through which appellant s business is carried on. If view is taken that appellant is also carrying on its business operations through nodes/telecommunication lines, it would lead to absurd situation that both SITA and appellant are carrying on their business operations through nodes/telecommunication lines. SITA, by providing nodes/telecommunication lines, is carrying on its own operations of providing telecommunication services to appellant, which services appellant is purchasing as means or tool to conduct its business of providing CRS services. For example, if independent car hire company is engaged by foreign engineering consultant firm to transport its engineers whom it has sent to India to conduct preparatory survey, engineering firm cannot be regarded as carrying on its operations in India through car hire company. provision of transport is car hire company s business operations in India and not business operations of engineering firm, which is only using services of car hire company as means or tool to conduct its own business. 1 1 . 6 learned Authorised Representative clarified that appellant does not have installation PE as defined in treaty, which speaks of installation PEs only in relation to installation projects [art. 5(2)(k)] or to installations for exploration or exploitation of natural resources [art. 5(2)(j)], both of which are obviously absent in appellant s case. 1 2. Shri Kapila would submit that object of Indo-US DTAA is to avoid double taxation. This object is achieved by allocating profits of general enterprise to extent of profits derived from assets and activities which are attributable to PE in India. He further contended that treaties, being drafted by diplomats, should not be construed as words of statute. 1 2. 1 He submitted that discussion in preceding para relating to business connection is equally relevant for deciding whether assessee has PE in India. However, following are places of assessee s business in India : (i) Nodes in telecommunication centre at Mumbai and Delhi hired by assessee from SITA and leased lines/network in India are at disposal of assessee for purpose of connecting TAs to node on continuous basis 24 hours of day throughout years. As explained by AO at p. 2 of his order, "Once travel agent is identified by local company, i.e., Galileo India, it refers to Galileo International that travel agent be provided connectivity. Galileo International then, due to their contract with SITA, request them to provide node and lease lines to TAs. Once that is provided, Indian company is provided connectivity code by international company, which it passes on to travel agent. With help of that code command on computer travel agent gets connected to mainframe of Galileo International." (ii) Continuing ownership of equipment and software provided to Galileo India for distribution to TAs. These equipments are situated and used in India in assessee s business. So long as these equipments owned by assessee and used in India under assessee s authority (express or implied) in assessee s business, it is quite immaterial as to who actually operates it. assessee has explained nature of telecommunication expenses, which is reproduced in para 9. 1 of order of CIT(A) dt. 1 5th Dec., 2004, which reads as under : "(i) Nature of telecommunication expenses Galileo avails itself of services of SITA to provide communication links to all parties that need to be connected to data centre i.e., travel agencies. In consideration for such telecommunication services, it pays monthly connection charges to SITA in accordance with telecommunication agreement with SITA. (ii) Nature of network expenses SITA also provides network connections (routers) for processing of data, for which Galileo pays network charges to SITA. Network expenses also include manpower costs, software costs and maintenance costs for network identified equipment. Therefore, network expenses include following costs : Telecommunication expenses paid to SITA; Telecommunication expenses paid to other telecommunication providers; Manpower costs; Software costs; and Maintenance and depreciation costs for network identified equipment. SITA and other telecommunication providers expenses are specifically allocated to country identified on bills from these providers. remainder of network expenses, manpower, software, maintenance and depreciation are allocated based on formula. Specific cost centres are identified for network costs to be allocated." Relevant clauses of DA are listed below : Clause 3. 1 (3.2), (p. 1 6 of APB) "Galileo International shall at its own cost procure provision, operation and maintenance of communications network and associated equipment for distribution of its CRS Services from Galileo Central System to node or router in India." Clause 4.2 (p. 1 7 of APB) "Interglobe shall at its own cost and responsibility provide Galileo International s CRS Services without alteration, except as may be mutually agreed, from node or router to subscribers in market region and shall either provide equipment to subscriber or facilitate connection of equipment to access Galileo International s CRS Services. Galileo International shall provide to Interglobe details of hardware and software specifications approved from time to time by Galileo International for use in conjunction with Galileo International s CRS Services and including, but not limited to, operating, performance or other parameter. Interglobe shall use its best endeavours to ensure that all hardware and software used to access Galileo International s CRS Services in market region comply with such specifications and including, but not limited to, any operating, performance or other parameter imposed by Galileo International." (Though such clause exists in DA, this clause was never implemented. assessee and not Interglobe maintained Indian network at its own cost.) abovequoted clauses of DA establish : (i) Nodes and routers hired by assessee are located in fixed place in premises of telecommunication centres at Mumbai and Delhi in India. Leased lines/network maintained at its own cost by assessee in India is fixed place within India. As observed in para 1of OECD Commentary (p. 1 99 of decision paper book) "a PE may nevertheless exist if business of enterprise is carried on mainly through automatic equipment..." (ii) It is pertinent to mention that leased communication network is permanently at disposal of assessee who has further made it available to airlines and TAs for use round clock for entire year. (iii) Provision of node and communication network within India is not for any preparatory or auxiliary activity. It is integral and essential part of core business activity of assessee for earning commission form airlines. It is also not necessary that assessee itself should own network and nodes. Suffice it for our purpose if assessee has based such equipment on continuous and permanent basis. (iv) Location of equipment (hardware supplied to subscriber) is fixed in premises of travel agent. (v) All these assets in India taken together constitute fixed market place in India for flight reservation. (vi) TA cannot relocate computers without permission (Ref. cl. 2. 1 r/w cl. 4 of model agreement) (pp. 1 75-206) in terms of cl. 6.5 of model DA. (pp. 1 9- 11 /APB). specimen subscriber agreement between Galileo India and Bajaj Travels (subscriber) contains similar terms (p. 35 of DPB). Clause 1 . 1 (p. 1 84/APB) of specimen subscriber agreement specifically provides that Galileo s representative can enter subscribers office premises for "installing, inspecting and view apparatus and its operation". (vii) It is contended by assessee that (a) equipment provided to TAs is relatively of little value and (b) distinction has to be made between "substantial machinery and light portable equipment". This contention is misconceived. It is not value or size of equipment which is relevant but it is its operational and economic significance to business operations of enterprise which is deciding factor. Without display on computers at premises of subscribers, without sifting of information and punching of commands with help of software installed in these computers, no booking can be made CRS will be at standstill and no income will be generated. Regarding portability of equipment, facts noted in (ii) and (iii) make it clear that equipment provided to TAs is not portable but it is installed at specified location within premises of subscribers and cannot be shifted by subscriber without permission of assessee is agent in India. Philip Baker has referred to decision of German Supreme Court wherein Dutch company having gas pipeline running through Germany without any of its personnel being in Germany attending to it, held that part of gas pipeline constituted PE of Dutch company in Germany. (viii) following observations of CIT(A) in para 6.4 of his order are apt : "The customers and subscribers know with certain amount of certainty t h t airlines information is displayed on computers placed in subscriber s premises and it can be used for getting information and booking tickets with minimal effort. Therefore, computer, which occupies place and which is connected with mainframe computer, does answer to description of fixed place of business from which appellant business is wholly and partly carried on." CIT(A) has rightly repelled assessee s contention that communication, display and sifting of information on computers at subscribers premises is not very important to processing of information in Host computer. (ix) As observed by Klaus Vogel (3rd Edition p. 286), "In same vein, para 4 OECD MC Comm. art. 5 states that it was immaterial whether premises, facilities of installations were owned or rented by, or were otherwise at disposal of, enterprise. similar view was held earlier by FC Munster which stated that it was not necessary for power of disposition to be legally confirmed by ownership or lease. All that was required to satisfy power of disposition test was actual disposition which did not need to go any further than necessary for allowing PE to function." assessee satisfies following four conditions, which have come to signify expression "fixed places of business" employed in art. 5( 1 ) of treaty. There must be place of business in India Place of business test; place of business should be at disposal of applicant Disposition test; activities performed through place of business must constitute business activity of applicant Business activity test; place of business must be fixed and activity should last for certain period of time Permanence test. nodes in India and hired by assessee are clearly fixed place of business so are premises of TAs who use computers and network provided by assessee for making bookings. network and nodes are always at disposal of assessee from where assessee s business activities are carried out. Since these activities are continuous over past several years, it also satisfies permanence test. Learned Departmental Representative accordingly submitted that there is nexus of fixed place with assessee s business through network in India. He next submitted that question as to who is responsible for paying for communication network in India needs further elaboration. During assessment proceedings, assessee, vide letter dt. 22nd Jan., 1 999 (pp. 25- 32 at p. 30/DPB) stated that : "As per para 4.2 of DA between Galileo International and Interglobe Enterprises, Interglobe shall at its own cost and responsibility provide Galileo International s CRS Services from node or router to TAs and shall either provide equipment to subscribers or facilitate connection of equipment to access Galileo International s CRS Services. As per para 4.3 of DA Galileo International shall supply to Interglobe licences for all such software products developed by Galileo International for use by TAs in conjunction with Galileo International s CRS Services. Therefore, equipment for facilitating access to CRS Services is provided by Interglobe and software to be used by subscriber is owned by Galileo International and licensed to Interglobe. Para 6.5 and Para 6.6 of DA enables Interglobe to request Galileo International to provide computer hardware for use by TA at no cost to Interglobe for fist two years." Hence as late as January, 1 999 appellant made categorical but misleading statement of fact that cost of maintaining network in India right from inception and provision of equipment to subscribers after first two years was borne by Galileo India and not by assessee. (iii) This is clearly deliberate misstatement of facts. When it was found out that abovequoted paras 4.2 and 4.3 of DA were actually given go- bye and these costs were in fact borne by assessee right from inception, assessee tried to explain it in its written submissions filed with CIT(A), (pp. 2 1 8-276, at p. 266/APB), wherein assessee made following contradictory statement of fact : "Data processing fees US $ 1 was paid by appellant as against US $ 1 .52 specified in schedule as original fee was based on fact that communication costs from SITA node to TAs computer would be borne by distributor. However, as distributor did not bear such costs, fee agreed upon was revised accordingly so that appellant could meet such telecommunication costs. It is well accepted commercial principle that remuneration should be commensurate with services provided. Accordingly, data processing fee payable to distributor had to be scaled down to reflect this position." letter of appellant to Interglobe dt. 1 2th Dec., 1 995 clearly establishes that even this statement is misleading. documents produced by assessee clearly show that revision in price had no nexus with fact that assessee eventually had to pay for maintenance of nodes and regional network in India. However, even going by second version it is clear that assessee h s not only hired facilities of telecommunication centres of SITA at Delhi/Mumbai, for uplinking and down linking host computer in USA with computer installed in premises of subscribers in India, but it also maintains entire communication network within India enabling TAs to make booking on CRS. Hence, network in India together with equipment and software provided to TAs in India constitute fixed place of assessee s own business in India without which it could not have carried on its business. 1 2 . 2 Learned Departmental Representative further submitted that computers belonging to assessee were supplied to TAs free of charge for distribution to TAs. assessee has claimed depreciation on such equipment for all these years and it has been allowed by AO being assets owned by assessee and used in its business in India of earning revenue from airlines on basis of bookings made by TAs. Hence, assessee had fixed place of business where assets are either leased or owned by assessee in India in all years under appeal. 1 3. In reply, Shri Vyas contended that entering into of treaties is matter falling under CBDT. President has, under Art. 77 assigned powers to CBDT Chairman for all matters and references relating to avoidance of double taxation under various treaties. He submitted that tax treaties are to be considered as mini-legislations and interpreted as such. objective of framing tax treaties should be kept in mind, while interpreting same. He argued that equipment or plant is not regarded as PE under Indo-US treaty. It is submitted that absence of "plant" or "equipment" in definition of PE in Indo-US treaty is conclusive that "plant" and "equipment" cannot be PE thereunder, particularly in view of specific inclusion of "plant" or "equipment". This follows from principle laid down by Supreme Court in Azadi Bachao Andolan s case (supra), referred to at p. 28 of appellant s written submissions. Art. 5.3(a) of Australian treaty is examined in detail below to remove confusion caused in this regard by Department : "5.3 enterprise shall be deemed to have PE in one of Contracting States and to carry on business through that PE if : (a) substantial equipment is being used in that State by, for or under contract with enterprise." This clearly means that Australian treaty not only : (i) deems substantial equipment used by enterprise in Contracting State to be PE but also separately and in addition State to be PE but also separately and in addition (ii) deems that such enterprise is carrying on business in that Contracting State through such PE. It is therefore beyond doubt that Indo-Australian treaty specifically treats substantial equipment as PE whereas Indo-US treaty does not. Therefore, applying tests of Supreme Court in Azadi Bachao Andolan s case (supra), conclusion is that US treaty did not envisage "plant" or "equipment" to constitute PE. Even apart from art. 5.3 of Indo-Australian treaty, art. 5.2(j) of Indo- Australian treaty further makes it clear that Indo-Australian treaty, unlike Indo-US treaty, specifically indicates "plant" or "equipment" in definition of PE. "Article 5.2(j) : installation or structure, or plant or equipment used for exploration or exploitation of natural resources." Therefore, it is clear that plant or equipment cannot be PE under Indo-US treaty. Therefore computers, nodes or lines, cannot be regarded as constituting PE under Indo-US treaty at all. Further, Indo-US treaty in art. 5(2)(j) refers only to specific and limited installations or structures e.g., those which are used for exploration or exploitation of natural resources but only if so used for period of more than 1 20 days in any 1 2 months period. All other installations or structures are excluded. It is therefore clear that even if it is accepted (while denying) that SITA nodes and lines constitute installations, they would not come within definition of PE in Indo-US treaty. In view of above, it is evident that, under Indo-US treaty, computers, nodes and communication lines are not contemplated at all as constituting PE. It was further submitted that computers are portable. Merely because care and safeguards are provided for shifting them, does not alter, but in fact confirms fact that they are portable. Under cl. 1of distributorship agreement, Interglobe is given only limited licence to enter TA s office specifically only for purpose of installing, inspecting and viewing computers. appellant or Interglobe therefore, does not have premises of TA at its disposal. This does not at all satisfy right to use test set out in detail at pp. 27 to 30 of appellant s paper book and particularly by jurisdictional Tribunal in case of Motorola Inc. (supra) in following words at p. 40 1 of report. "However, Revenue has failed to establish that ECI had made certain space available to assessee at its disposal. In other words, there is nothing to indicate that whenever any employee of assessee visited India, he could straightaway walk into office of ECI and occupy space or table." "Article 5. 1 states that term PE means fixed place of business through which business of enterprise is wholly or partly carried on." "The OECD Commentary on Double Taxation refers to fixed place as link between places of business and specific geographical point. It has to have certain degree of permanency. It is emphasized that to constitute fixed place of business , foreign enterprise must have at its disposal certain premises or part thereof. Philip Baker in his Commentary on Double Taxation Conventions and International Tax Law (3rd edition) states that nature of fixed place of business is very much that of physical location, i.e., one must be able to point to physical location at disposal of enterprise through which business is carried on." 1 4. Addressing arguments as to whether there exists PE within meaning of art. 5(4) or agency PE, learned Authorised Representative submitted that relationship between appellant and Interglobe is that of supplier and distributor of products and services. Neither party has any authority to bind other party, nor hold itself out as agent of other party (cls. 1 6. 1 and 1 6.2 of DA). He referred that agreement provided option that distribution of CRS services can be undertaken by Interglobe through division or subsidiary (GIPL) of Interglobe and if subsidiary is established it can be added as party to agreement (cl. 2.2 of agreement) and primary responsibility would be of Interglobe. He submitted that based on DA, appellant agreed to following services : Procure provision, operation and maintenance of communication network and associated equipment from appellant s MCS to nodes in India (refer cl. 3. 1 of agreement). Provide licences for software products developed by appellant which are necessary for use by subscribers in conjunction with CRS services (refer cl. 3. 1 of agreement). Share technological innovation, advancements and additions with Interglobe (refer cl. 4.6 of agreement). He argued that appellant does not have any agency PE in form of Interglobe because Interglobe carries on its own business in India and hence, it is not person acting on behalf of appellant in India within meaning of art. 5(4) of treaty; and without prejudice to above, Interglobe does not carry out on behalf of appellant, any of activities specified in cl. (a), (b) or (c) of art. 5(4) of treaty; and without prejudice to immediately above, Interglobe is not dependent agent as described under art. 5(5) of treaty. 1 4. 1 Shri Vyas contented that scope of agency envisaged in art. 5(4) is much more limited than scope of term under general law and submitted that s. 1 82 of Indian Contract Act, 1 872 ( Contract Act ), defines agent to mean person employed to do any act for another or to represent another in dealings with third persons . first limb of definition of agent (doing any act for another) covers any technical, executive or administrative act performed by one person for another without representing that other person in dealings with third parties. second limb of definition of agent (to represent another in dealings with third persons) covers kind of agency where agent deals with third parties representing another. This is case where there are two or more principals, with agent of one principal representing him in his dealings with others. This could include passive dealings like acting as conduit without authority to act, or active dealings, like negotiating and concluding contracts. agents falling within second limb of definition of agent , has authority to represent principal in dealings with others and to sell goods of, or to otherwise carry on business of, principal. learned Authorised Representative submitted that as per art. 5(4) there should be person in India acting on behalf of appellant. term acting on behalf of another is narrower than term representing another in dealings with third persons , used in second limb of definition of agent (supra), since person may represent another without authority to act on his behalf. scope of art. 5(4) is further circumscribed by restricting activities which can constitute PE in course of one person acting on behalf of another, to those specified in cls. (a) to (c) of art. 5(4). Article 5(4) does not use term agent in specifying what may constitute PE but for, what would not constitute PE. Hence, art. 5(4) only encompasses part of second limb of definition of agent when he were to act on behalf of non-resident, and that too only if his actions fell within categories specified in cls. (a) to (c) of art. 5(4). agent falling only within first limb of definition would not constitute agency PE. Hence, any judgments or commentaries on what constitute agent under general law have to be read with great caution while interpreting treaty, and person who may be agent under Contract Act need not be agent under treaty. 1 4.2 learned Authorised Representative without prejudice to above, contended that Interglobe does not carry out any of activities specified in cls. (a) to (c) of art. 5(4), so as to attract provisions of art. 5(4) of treaty and activities of alleged agent are not income-earning activities. learned Authorised Representative elaborated that under art. 5(4)(a) of treaty, only person having, and habitually exercising, authority to conclude contracts on behalf of US resident can lead to creation of PE for US resident. Thus, art. 5(4)(a) requires existence of, inter alia, all following components : (a) Existence of non-resident principal, resident principal, and resident agent of non-resident principal; (b) Existence of authority in favour of resident agent to conclude contracts on behalf of non-resident principal; (c) holding out by resident agent to resident principal that he is agent of non-resident principal; (d) habitual conclusion by resident agent of contracts with resident principal on behalf of non-resident principal; and (e) Resultant contracts between non-resident principal and resident principal. learned Authorised Representative reiterated that cl. 1 6 of agreement between appellant and Interglobe, expressly provides, inter alia, that neither party to agreement has any authority to bind other party; nor can either party hold itself out as agent of other party. This negates existence of any authority on part of Interglobe "to conclude contracts on behalf of enterprise" viz., appellant, so as to attract art. 5(4)(a). Also, this clause would also be complete defence should Interglobe (or TA) ever allege that appellant is bound to TA by any contract entered into by Interglobe with him. Hence, it cannot be said that Interglobe has any authority to conclude contracts on behalf of appellant. learned Authorised Representative highlighted that no material has been brought on record to show that Interglobe habitually exercises, or even purports to exercise, or has even once exercised, any such authority, by concluding any contract with Indian TA on behalf of appellant. Also no material has been placed on record to indicate that Interglobe held out to TAs that it was entering into contracts with them as agent, in law, and not as principal, and that contracts would not be binding on Interglobe. He further submitted that no contract subsists between appellant and TAs in India. contract is agreement enforceable at law. TA would have nothing to enforce against appellant, and appellant is not in any way legally bound to TA to do anything for him. Similarly, appellant would have nothing to enforce against TAs. If Interglobe were to conclude contracts with TAs on behalf of appellant, any contract entered into by Interglobe should, in terms of its legal effects, be contract between appellant and TAs and that there should be consideration flowing from appellant to each TA and vice versa; and appellant should have legal right to sue TA to enforce contractual terms, and vice versa. He argued that contention of Department that appellant grants access to TAs with whom Interglobe has contracts, indicates that there are binding contracts between appellant and those TAs (which) is inconsistent with law of contract, which requires mutual agreement, mutual consideration and, above all, mutual enforceability, for contract to exist between two parties. He pointed out that it is quite common for hotels, airlines, credit card companies, and other companies to tie up with each other or with other businessmen to provide benefits to each other s customers. Such granting of benefits does not result in contract between airlines, etc., and customers, and no enforceable rights accrue to customers. Thus allegation of AO that distributor is concluding contracts on behalf of appellant is plainly erroneous and unsupported and in absence of any authority to conclude contracts on behalf of appellant, relationship between appellant and distributor cannot constitute PE in India, under art. 5(4)(a) of DTAA. 1 4 . 3 learned Authorised Representative further argued that art. 5(4)(b) Maintenance of stocks cannot apply to appellant because there is no question of goods or merchandise being stocked or delivered in appellant s case. Further, it is clear from express terms of cl. (b) that this clause does not apply to any and every kind of goods or merchandise, but only to goods or merchandise which are sold. 1 4.4 Learned Authorised Representative further argued that cl. (c) of art. 5(4) has no application to facts of this case, inter alia, because it can apply only if agent habitually secures orders in India wholly or almost wholly for US resident. Since only function of Interglobe is to provide access code to TA which access code TA has no obligation to use and which access code TA may never in fact use as he may prefer to use CRS of one of competitors of appellant, it is clear that Interglobe, by merely providing access code, does not in any way secure orders or sell goods or merchandise for appellant in India. He emphasised that unless agent s activities were income earning activities, there would be no income derived from assets and activities of alleged PE, as required by para 5 of art. 7, for any income to be chargeable to tax in India. 1 4 . 5 learned Authorised Representative contended that without prejudice to his contentions as regards non-applicability of art. 5(4) of treaty, Interglobe is independent agent within art. 5(5), and, therefore, cannot be regarded as constituting agency PE for reasons given below : (a) Interglobe is agent of independent status. Interglobe is part of Interglobe Group which is huge independent business house having diverse business interests including running of its own airline, Indigo. (b) Interglobe s activities are not devoted wholly or almost wholly to appellant. (c) In any event, appellant s transactions with Interglobe are made under arm s length conditions. He highlighted that reference in art. 5(5) to transactions between non-resident principal and agent being "made under arm s length conditions" is intended to deal with those cases where parties are related and dealings between them are not at arm s length. In ordinary sense, term "arm s length" refers to dealings between two unrelated parties and in present case, it cannot be disputed that appellant and Interglobe are unrelated parties, and hence dealings between them, by definition, are arm s length dealings. For said test for arm s length, reliance was placed on meaning of "arm s length" in Black s Law Dictionary, Seventh Edition. It was pointed out that reference in art. 5(5) is to conditions under which transactions are made, and not to specific prices. He further submitted that Department has not suggested why payment of US $ 1 per segment was not made under arm s length conditions or why amount of US $ 1 was inadequate. commission of 33.3 per cent can never be treated as anything but reasonable and at arm s length. Further, rate of 33.3 per cent was higher than rates paid to distributors in other countries as was evident from letter dt. 27th Jan., 2000 filed before CIT(A) and appearing at p. 285A of APB-I. Authorised Representative argued that Department itself has separately alleged that consideration is at more than arm s length. It was pointed that there is clear conceptual misunderstanding on part of Department in alleging that transactions between appellant and Interglobe were not at arm s length as there was alleged confessional treatment by appellant to Interglobe, which allegedly violated arm s length principle. It is well established that it is only if treatment of Interglobe by appellant were detrimental to Interglobe that arm s length principle could be regarded as violated in context of art. 5(5) of DTAA. In this connection, reference was made to following observations of jurisdictional Bench in case of Western Union Financial Services Inc. (supra) at p. 82 : "There is no material to show that rates of compensation are higher in other cases so as to indicate that agents were discriminated against. Thus there seems to be no basis for charge that compensation paid is not adequate for services rendered by agents." learned Authorised Representative clarified that GIPL, separate undertaking of Interglobe, was formed on 1 7th March, 1 997. As Interglobe on its own volition and at its own option, decided to perform distribution function through this separate company. Thus, allegation made by Department based on this fact cannot, in any event, be applied to asst. yrs. 1 995-96 and 1 996-97 and also, for all practical purposes, to asst. yr. 1 997-98. GIPL is funded and owned wholly by Interglobe and, even assuming that its entire income is from appellant, this does not mean that GIPL is economically dependent upon appellant as GIPL being funded entirely by, and being part of entire Interglobe organization, can, without any doubt, survive economically even without appellant s business, given that it has support and backing of Interglobe Group. Further allegation by Department that GIPL was claiming s. 1 A/80HHE benefits in no way establishes that GIPL is dependent agent, inter alia, because such claim has been made by GIPL on its own only qua its own tax authorities. 1 5 . Shri Kapila, on contrary, would plead that assessee has dependent agent in India under art. 5(4) r/w (5) of DTAA. He invited our attention to art. 5(5) of Indo-US DTAA extracted herein : "An enterprise of Contracting State shall not be deemed to have PE in other Contracting State merely because it carries on business in that other State through broker, general commission agent, or any other agent of independent status, provided that such persons are acting in ordinary course of their business. However, when activities of such agent are devoted wholly or almost wholly on behalf of that enterprise and transactions between agent and enterprise are not made under arm s length conditions, he shall not be considered agent of independent status within meaning of this para." He invited our attention to some of relevant clauses of DA which are reproduced below : Clause 4.3 (p. 1 7 of APB) "Galileo International shall supply to Interglobe licences for all such software products developed by Galileo International as are commercially desirable or necessary for use by subscribers in market region in conjunction with Galileo International s CRS Services, to enable Interglobe to supply such software products to Galileo Subscribers in market region provided always that nothing in this clause shall oblige Galileo International to supply any particular software product." Clause 4.5 (p. 1 8 of APB) "Galileo International and Interglobe shall enter into service level agreement based upon model services level agreement which forms Sch. 4 hereto. Galileo International and Interglobe shall use all reasonable endeavours to achieve objectives set out in such service level agreement, which shall be reviewed at intervals of not less than one year." Clause 4.6 (p. 1 8 of APB) "Galileo International undertakes to share with and provide to Interglobe any such innovations, technological advancements, improvements and additions to its CRS Services and related services and facilities as it deems commercially desirable or necessary for market region. Galileo International will give due weight to any recommendation which Interglobe may make with respect to such innovation and its introduction in market region. From time to time Galileo International may provide to Interglobe new releases of software products, in order to provide enhancements or modifications of existing software products. Galileo International will provide to Interglobe as much advance notice as possible of content of any new release. Galileo International will discuss with Interglobe implementation date for new release and will deliver any new release to Interglobe, on agreed implementation date." Clause 7. 1 (p. 111 of APB) "Galileo International and Interglobe shall devise and adequate training programme for relevant employees of Interglobe engaged in distribution of Galileo International s CRS Service, such training to be carried out at company s premises in United Kingdom, or any other venue acceptable to both parties with due regard to cost effectiveness. Galileo International shall be responsible, at its own cost, for provision of training course. Including all documentation, and services of trainer. Interglobe shall be responsible for all incidental costs, whether incurred by its own personnel (where such training is held at company s premises or premises outside market region) or Galileo International s (there such training is held within market region), associated with such training, including transport and accommodation." 1 5. 1 On basis of above clauses, Shri Kapila submitted that Galileo India is dependent agent of Galileo International for following reasons : (i) Galileo India has been set up first as independent division as separate undertaking in terms of s. 1 of Act of Interglobe. This undertaking was subsequently taken over w.e.f. 1 st April, 1 997 by Galileo India (P) Ltd., exclusively for providing distribution and support services to Galileo International. Ref. cls. 2. 1 and 2.2 of DA (p. 1 4/APB) (ii) Initially, Interglobe had undertaken activities under DA for one year not in ordinary course of its business. Indeed, undertaking was set up exclusively for assisting Indian operations of assessee. Interglobe was carrying on business of travel agency, tour operator etc. business started by Interglobe under DA is totally different kind of business which cannot be said to have been undertaken in ordinary course of business hitherto carried on by Interglobe. new business of providing support services to Galileo International is distinct business requiring specialized skills for which employees of Indian company received specialized training from assessee. (iii) Clause 2 of agreement makes it clear that Interglobe entered into distinct and new business venture which had no nexus with its existing business. It is not extension of business. Right from inception it has been treated as unique and separate undertaking and relief under ss. 1 and 80HHE has been claimed on profits derived from this undertaking. Clauses 2. 1 and 2.2 o f agreement envisage separate company for carrying on Galileo business. It was carried on by independent and distinct undertaking of Interglobe until this business was taken over by new company [Galileo India (P) Ltd.] w.e.f. 1 st April, 1 997. Therefore, on facts of case, proviso to first sentence of art. 5(5) applies and s. 1 undertaking Interglobe or Galileo India cannot be considered to be independent agent, as this business was economically wholly dependent on assessee. (iv) Activities of Galileo India (P) Ltd. are wholly and exclusively devoted to provide service to Galileo International. (Ref. cl. 2.9 of agreement). company was incorporated to take over Galileo business of Interglobe (pp. 68-8 1 of DPB). Therefore, company which has been set up exclusively to carry on Galileo business, ab initio cannot be said to carry on such business in ordinary course of its business. expression "course of business" axiomatically assumes pre-existing business in course of which new business is undertaken. (v) DA between Galileo International and Galileo India creates essentially dependent agency for following reasons : (a) Under agreement assessee has supplied US $ .5 million worth of equipment to Galileo India not by way of sale or lease, but only for distribution of equipment to subscribers in India on its behalf. assessee continues to be owner of this equipment, but it is Galileo India which distributes equipment to subscribers. (b) It supplies/licenses its proprietary software free of charge to Galileo India for supplying same to subscribers under subscriber agreement . (c) Under DA, assessee has authorised Galileo India to conclude subscriber agreement with TAs which allows them to use CRS owned by it. assessee has also ensured in its agreements with airlines that bookings made by subscribers under subscriber agreement with Galileo India must be honoured by airlines. In other words, terms of subscriber agreement concluded independently by Galileo India with subscribers has not only been honoured by assessee, but it has also ensured that vendors (airlines etc.) are contractually committed to honour it. (d) DA clearly states that Galileo India would be paid data processing fees for processing data received from subscribers in India. assessee is therefore not factually correct when it says that data inputs received directly from subscribers is processed in host computer in USA. Indeed, it has been specifically contended by Galileo India that as matter of fact it processes data inputted by subscribers in India before its transmission to host computer in USA. Galileo India also undertakes task of suitably modifying configuration of computers supplied to subscribers in order to make them compatible to host computer in USA. (e) On termination of DA, all subscriber agreements between Galileo India and TAs automatically vest in assessee without cost. Relevant cl. 9. 1 2 (p. 11 4/APB) reads as under : "Article 9. 1 2 of DA (p. 11 4/APB) In event of termination of these agreements under cl. 9.4 or 9.5, parts (b) through (f), upon expiry of notice period as specified hereunder : (a) all subscriber agreements concluded by Galileo India shall be automatically assigned to Galileo International at no cost to Galileo International and Galileo India shall physically deliver to Galileo International its signed originals of all such subscriber agreements within thirty (30) days of such termination taking effect, and (b) Galileo International, at its sole discretion, may purchase all or part of subscriber hardware, title to which at time of termination is vested in Interglobe at lower of net book value or market value in Indian market where net book value is defined to be original purchase price inclusive of freight and duty only and no other costs, depreciated on straightline basis from date of delivery to Interglobe, using 6 (six) year useful life or existing market value in Indian market thereof at that point in time, whichever is lower." (f) three agreements Vendors agreement, DA and subscriber agreement must be read together as none is operationally feasible without existence of other two. When read together, agreements clearly establish that Galileo is not only assessee s agent, but it is economically wholly dependent on it. subscriber s rights vis-a-vis airlines are secured in participation agreement to which it is not party. Similarly, DA (cl. 1 5.3, p. 1 24/APB) between assessee and Galileo India indemnifies assessee "against any claim in respect of inaccurate data supplied by subscriber". claim in respect of inaccurate data supplied by subscriber". (vi) Even if Galileo India is held to be agent acting in ordinary course of its business, it is still dependent agent for reasons stated above and also because conditions laid down in second sentence of art. 5(5) are satisfied : (a) Galileo India is wholly and exclusively carrying on business for Galileo International. It is economically dependent on it. This is its only source of income. (b) alleged certificate from Interglobe at p. 308 of assessee s paper book is not on record of AO. It is not indicated when it was made out and to whom was it submitted. It has neither been referred to in assessment order and nor in appellate order. It is therefore not admissible. In any case, it pertains to asst. yr. 1 995-96 only and therefore has no relevance for other years under appeal. In these years, it was Galileo India (P) Ltd., which was set up exclusively for providing support service in India to assessee. Further, it has been explained that undertaking of Interglobe providing various support services to assessee is separate s. 1 undertaking independent of other business of that company. It is settled law that business of such undertaking must not be confused with or identified with other business of company owning undertaking. (c) nature of work done by Galileo India for which data processing fees was paid has been explained by assessee in remand proceedings, which has been reproduced by CIT(A) in para 6. 1 (ii) at page of his order dt. 1 5th Dec., 2004, which reads as under : "Nature of data processing fees. Marketing expenses are different from data processing fees. Data processing fees are paid to Indian distributor, pursuant to DA." These payments are made in consideration for provision of following services : Provision of facilities to subscribers to access Galileo International s CRS services. Undertaking marketing activities directed at national vendors. Providing following support services to subscribers in market region : Hardware and software installation; Hardware maintenance; Training; Help-desk services. (d) As per cl. 9.8(b) of DA, in case of valid termination of DA all hardwares belonging to Galileo India would vest in assessee. Further, under cl. 9. 1 2(a) all subscriber agreements would vest in assessee; These terms clearly show that agreement is not between two principals. (e) perusal of service agreement (pp. 1 42 to 206/APB) between assessee and Galileo India clearly shows that detailed and continuous procedure has been put in place for reporting, reviewing and monitoring of performance of Galileo India with view to increasing efficiency of CRS and thereby reducing response time to end user (subscriber). Further, it also provides for monitoring and referring top ten problem tickets by Galileo India to assessee for resolution. This again indicates relationship of principal and agent and dependent not that of principal and dependent agent. Article 1 4 of DA read with service agreement annexed to it clearly brings out tight monitoring and supervision of activities of Galileo India by assessee. For instance, Article 1 4 of DA (p. 1 22/APB) "Reporting and planning procedures. 1 4. 1 Galileo International shall provide to Interglobe on regular basis, 1 4. 1 Galileo International shall provide to Interglobe on regular basis, but no less frequently than quarterly, following information for purposes of Interglobe s activities under this agreement : (a) all informations needed by Interglobe in relation to Galileo International s marketing activities as anticipated by cls. 5 and 1 4.3; (b) vendor contract progress; (c) product delivery, development and specification progress; (d) product prices; (e) levels of booking activity; (f) system performance; (g) hardware prices; (h) other relevant information related to Galileo CRS and related facilities." Article 3. 1 of service agreement in terms of DA (p. 1 47/APB) Service Plan There are two key areas of measurement when considering services to end subscriber. These are system availability and response time. This document recognizes that both of these categories are affected by global, regional and market based influences and that measurement of these services can effectively be divided into Host (H) Network (N), and Customer Premises (P) components. Responsibility for stability and performance of Core Host service, and any part of Network that exists at Core Host site, rests with Galileo International. Further down service delivery chain is Network component. Responsibility for stability and performance of this component shall rest with partner or associate and/or network provider in co-operation with Galileo International, as detailed in market specific section. combined availability of H, N and P forms total system availability as end subscriber would experience. Similarly sum of response time within each component forms total response time as perceived by end subscriber. goal is that service level measurement and reporting will be combined function of all service providers in Galileo International delivery chain. End to end measurement of standard focalpoint sites will be catered for by Galileo International. Where non-focalpoint installations exist it will become even more critical that partner or associate, and other network provider that forms part of delivery chain, contribute with measurement of service within their control. Service Management Problem Management Refer to Galileo International s problem management procedures for complete documentation on Problem Management System (PMS). Host, Network and Premises For problems to be recognized and addressed they must be logged into Galileo International PMS. Typically problems are recognized as originating at either Host, Network or Customer Premises components. Currently all problems identified by end subscriber, NDC, partner or associate, n d subsequently logged and escalated via PMS, are assigned business impact value based on nature of problem as defined below : Critical : Critical impact on business. Severe loss of revenue. No work arounds or alternatives. (This value should be assigned with due regard to nature of problem). High : High impact on business. Complex work around required. Serious user dissatisfaction. Medium : Medium impact on business. User dissatisfaction but tolerable work around available. Low : Limited impact. No anticipated effect on revenue. Inconvenience caused to user. One-off problems. Escalation and Resolution End user subscribers will initially report all faults to their NDC help desk. It will be responsibility of that local NDC to escalate local problems that cannot be solved to Galileo International, partner or 3rd party supplier on subscriber s behalf. Service impacting problems will be discussed via service management meetings held quarterly or as agreed by parties to this document. (f) assessee has given basis for claiming marketing expenses as deductible business expenditure, which clearly brings out that Galileo India is dependent agent." 1 5 . 2 Shri Kapila would submit that transactions between Galileo International and Galileo India are not at arm s length for following reasons : (i) AO at p. 1 6 of his order has given clear finding that assessee has not established arm s length payment. That actual commission has been arbitrarily and without any justification reduced to US $ 1 per segment booked as against US $ 1 .52 stipulated in Sch. 3 of DA (p. 1 40/APB). assessee subsequently tried to explain before CIT(A) that Galileo India refused to bear cost of networking in India, i.e., payments for leased lines from SITA node to TAs premises and "fees agreed upon was revised accordingly". assessee has not furnished any explanation as to how reduction of fees by 52 cents per segment (33 per cent) is justified as compared to additional expenditure it had to incur on Indian network. whole exercise is arbitrary and against principles of arm s length negotiations for revision of fees. Further, hiring of SITA s nodes in India is part of worldwide contract between assessee and SITA. Therefore, there could be no question of Galileo India entering into separate contract with SITA. (ii) Evidence on record clearly suggests that parties to DA never intended to implement cl. 3 (p. 1 6/APB) of agreement read with Sch. 3. subsequent version of assessee submitted before CIT(A) that assessee reduced fees payable to Galileo India from US $ 1 .52 to US $ 1 per segment because Galileo India refused to incur these costs is without substance. Firstly, no evidence to this effect has ever been produced. Secondly, this contention is also belied by assessee s letter dt. 1 2th Dec., 1 995 addressed to Interglobe (p. 2 1 5/APB) extracted herein : "To : Interglobe Re : Reduction in segment fees Effective November, 1 995, Interglobe has crossed 1 0,000 segment barrier. Congratulations to you and your team. Our projections reveal that Interglobe should be cash positive. Taking into account advances available with you and increased efforts on our part in facilitating sharp increases in your productivity, we propose data processing fees payable by Galileo International to Interglobe shall be one dollar per booking. payment shall be same for air and non-air bookings effective 1 st Nov., 1 995." (Emphasis, italicized in print, supplied) It will be seen from above, decision was clearly not to reduce but to fix fees, decision which was taken by assessee unilaterally and simply intimated to Galileo India, which clearly had no say in matter. There is also no mention whatsoever of reduction of fees because of assessee having to take on responsibility for maintaining communication network in India. On other hand, congratulatory terms of letter clearly suggest that fees was fixed by assessee for good work on part of dependent agent. It may be also noted that actual expenditure on network expenses bear no relationship with substantial reduction in fees payable to Galileo India (pp. 60-6 1 and 94-97 of APB in ITAs 820-822 for asst. yrs. 1 995-96 to 1 998-99). It is also clear that assessee had been making increased efforts in facilitating sharp increases in Galileo India s productivity. (iii) There was clear breach of cl. 3.2 contract by Galileo India (p. 1 6/APB) and yet assessee did not invoke penal provisions contained in cls. 9.5 to 9. 1 3 of DA (pp. 11 3- 11 4/APB). This once again establishes that dealings between assessee and Galileo India are not at arm s length, but that of principal and its dependent agent. (iv) equipment and software were provided to Galileo India free of charge. concessional treatment granted to Galileo India is violative of arm s length principle. Incidentally, fact that Galileo India has been authorised to distribute assets (both hardware and software) of which Galileo International continues to be owner clearly establishes that premises in which Galileo India stores equipment for distribution is fixed place of assessee s business. (v) As per Sch. 5 of DA, Galileo International also earns service fees from airlines for optional services booked by TAs and yet no commission is paid to Galileo India on this account. 1 5.3 Learned Departmental Representative would submit that appellant has agency PE in form of dependent agent Interglobe in terms of art. 5(4) of treaty. ( 1 ) Clause 6.3 of DA clearly authorises Galileo India to conclude contracts with subscribers broadly in accordance with terms of that agreement. model subscriber agreement is also annexed to that agreement. (pp. 1 75-206 of APB) Some of relevant clauses of DA etc. below : (i) Clause 2.4 (p. 1 5 of APB) "Notwithstanding cls. 2. 1 and 2.3 and subject to cl. 1 , nothing in this agreement shall prevent Galileo International from distributing Galileo International s CRS Services to either : (a) place of business, branch or office in market region of multinational subscriber, or (b) individual subscriber in market region who gains access to Galileo International s CRS Services directly or indirectly via third party online service network or any other means which allow any individual subscriber access to Galileo International s CRS Services provided that, prior to introduction of supply of CRS Services to individual subscribers in market region, parties hereto shall agree upon commercial arrangements applicable to bookings to be made in market region by means of such supply, including payment of data processing fees therefor." (ii) Clause 2.8(b) (p. 1 5 of APB) "Interglobe undertakes to Galileo International that, in event that either party identifies potentially interested and commercially viable participant, associates or shareholder in Indian NDC, Interglobe will negotiate in good faith with such party with view to accepting such party as participant, associate or shareholder in Indian NDC upon reasonable terms." Clause 5. 1 (p. 1 9 of APB) "Galileo International shall have exclusive responsibility for undertaking marketing efforts directed at international vendors and shall have exclusive right to enter into contracts with international vendors. In case of any international vendor whose principal place of business is within market region Galileo International will initiate such efforts after consultation with Interglobe, and, where appropriate, Galileo International and Interglobe shall together conduct negotiations with such international vendors." Clause 5.2 (p. 1 9 of APB) "Interglobe shall have exclusive responsibility for undertaking marketing activities directed at national vendors and shall have exclusive right to enter into contracts with national vendors. Galileo International shall at Interglobe s request assist Interglobe in such marketing activities where such assistance, appears to Galileo International to be appropriate. Galileo International if it considers it reasonable to do so, shall give timely provision of costing if requested by Interglobe (including usage costing under sub-cl. 8.2)." Clause 6.3 (p. 1 9 of APB) "Interglobe shall be responsible for entering into contracts with subscribers who wish to use Galileo International s CRS Services in market region. Such contracts shall be consistent with terms of this agreement and consistent with local laws of relevant jurisdiction and shall provide Interglobe in acting as principal and not as agent for Galileo. Interglobe shall give reasonable consideration to Galileo International proposals with regard to terms of such contracts. Sch. 5 contains Galileo International s Model Subscriber Agreement which Interglobe may use as guideline in drafting its subscriber agreements." Article 3 : Duties of participant (p. 9 1 of APB-I) (B) Participant, at its own cost, shall provide Galileo International with data that are at least as complete, timely, accurate and advantageous, and that are delivered in as favourable manner, as those it provides to any other CRS, including participant s CRS. Participant shall provide any such data in format and through supplier (if supplier is used) that are acceptable to Galileo International. (D) Participant shall ensure that participant s CRS offers services to all air carriers with ownership interest in Galileo International to same extent and on terms and conditions that are at least as favourable as those on which participant s CRS offers those services to other air carriers, including participant. (F) Participant shall accept for transportation any passenger presenting ticket that bears "OK" status and that has been issued as result of booking made through system, consistent with data in system and otherwise in accordance with this agreement, even though no record of that booking may exist in participant s system, overbooking may result therefrom, and denied boarding compensation may be required. (2) However cl. 8. 1 of agreement (p. 111 /APB) grants freedom to Galileo India to fix its own charges to subscribers. Indeed, whereas model subscriber agreement prescribes various charges payable by subscribers for use of equipment and other services to be provided by domestic company Galileo India does not charge subscribers for any of its services or for use of equipment owned by assessee. Hence, whereas Galileo India is authorised to conclude contracts which involve assessee s equipment and software as also network and system for booking orders by subscribers agreement, yet it is independent to fix its own financial charges. Needless to say, nodes and equipment hired or owned by assessee have been allowed by it to be used by TAs and other direct subscribers in India for booking of orders. Further, cl. 5.2 of DA allows Galileo India to conclude contracts with domestic airlines. However, such contracts would bind assessee to allow such airlines to use CRS on which assessee would earn income. assessee has clearly allowed itself to be bound by terms of subscriber agreement between Galileo India and subscriber and it has been always abiding by it. Indeed, not only does it honour contracts which Galileo India has been making on its behalf with subscribers, but assessee has also ensured by terms of vendor agreement that airlines also honour it. It also cannot be denied that activities mentioned in both agreements are intimately interwoven with business operations of assessee." Relevant clauses of DA read as under : Clause 4.3 (p. 1 7 of APB) "Galileo International shall supply to Interglobe licences for all such software products developed by Galileo International as are commercially desirable or necessary for use by subscribers in market region in conjunction with Galileo International s CRS Services, to enable Interglobe to supply such software products to Galileo Subscribers in market region provided always software products to Galileo Subscribers in market region provided always that nothing in this clause shall oblige Galileo International to supply any particular software product." Clause 4.5 (p. 1 8 of APB) "Galileo International and Interglobe shall enter into service level agreement based upon model services level agreement which forms Sch. 4 hereto. Galileo International and Interglobe shall use all reasonable endeavours to achieve objectives set out in such service level agreement, which shall be reviewed at intervals of not less than one year." Clause 4.6 (p. 1 8 of APB) "Galileo International undertakes to share with and provide to Interglobe any such innovations, technological advancements, improvements and additions to its CRS Services and related services and facilities as it deems commercially desirable or necessary for market region. Galileo International will give due weight to any recommendation which Interglobe may make with respect to such innovation and its introduction in market region. From time to time Galileo International may provide to Interglobe new releases of software products, in order to provide enhancements or modifications of existing software products. Galileo International will provide to Interglobe as much advance notice as possible of content of any new release. Galileo International will discuss with Interglobe implementation date for new release and will deliver any new release to Interglobe, on agreed implementation date." provisions of art. 5(4)(a) are therefore attracted. Ref. (i) TVM Ltd., In re ( 1 999) 1 5 1 CTR (AAR) 492 : ( 1 999) 237 ITR 230 (AAR); (ii) Western Union Financial Services Inc. vs. Addl. Director of IT (supra). 1 5 . 4 Learned Departmental Representative would also submit that art. 5(4)(b) would also apply to hold agency PE in India for reason that assessee is supplying stock of hardware equipment, software and manuals to Galileo India which latter maintains on its behalf and distributes to TAs in India under subscriber agreement . Refer art. 6.5 of DA (p. 11 /APB), which read as under : Clause 6.5 (p. 11APB) "All computer hardware for use by subscribers in market region which i s required by Interglobe during first two (2) years hereof in order for subscribers to use Galileo System shall be provided by Galileo International at no cost to Interglobe. For avoidance of doubt, it is intention of parties that costs herein borne by Galileo International are cost of hardware and costs associated with delivery to Interglobe in India inclusive of freight and duty (duty to be initially paid by Interglobe and reimbursed by Galileo International) and that all costs incurred after delivery including but not limited to installation, testing, maintenance, and post-customs warehousing shall be responsibility of Interglobe. Galileo International will retain title to all computer hardware supplied to Interglobe as contemplated in this cl. 6.5." [Note : Galileo India does not pay any rent towards use of computer hardware] 1 5 . 5 Shri Kapila lastly submitted that even art. 5(4)(c) of Indo-US DTAA would also apply to hold agency PE in India as per cls. 5 and 6. 1 /6.2 of DA at p. 1 9/APB. Every contract concluded by Galileo India with TAs and airlines in India clearly establish that Galileo India habitually secures order for assessee for use of CRS from which assessee earns income. 1 5.6 Summing up arguments, Shri Kapila submitted that (A) assessee s income is taxable in terms of s. 9 r/w s. 5(2) of Act as it has assets in India, source of income in India as also business connection in India. (B) assessee has PE in India on account of : (i) having fixed place of business through which its business is carried on in India as per art. 5( 1 ) of Indo-US DTAA. (ii) It also has agency PE in terms of proviso to first sentence of art. 5(5). (iii) Without prejudice, it also has agency PE in terms of second sentence of art. 5(5). (iv) activities of assessee do not fall under any of negative items mentioned in art. 5(3). (v) fee payable to dependent Indian agent is not arm s length price. (vi) Conditions laid down in arts. 4(a), 4(b) and 4(c) are also satisfied. (vii) assessee is taxable both under provisions of Act as well as those of Indo-US DTAA. 1 6 . As regards exclusivity clause in contract between Interglobe and appellant, learned Authorised Representative replied that this does not mean that there is no principal to principal relationship nor does it mean that Interglobe is agent of appellant. There can be exclusive distributors acting on principal to principal basis just as there can be agents acting on non- exclusive basis. learned Authorised Representative submitted that appellant and Interglobe agreed to enter into yearly service level agreement which outlines service quality parameters, tasks required to be performed in relation to system controls, system management and customer services. For benefit of both parties model service level agreement was provided in DA (Sch. 4 of agreement). He argued that model agreement pointed out basic technical requirements to provide compatibility and ensure high quality of services to be rendered. Clause 4.2 of agreement merely provided that "Interglobe is to use its best endeavour" to ensure that hardware and software used to access CRS conform to certain specifications. It does not show appellant s control over Interglobe. This is merely operating agreement, setting out parameters and level of services which both appellant and Interglobe are committed to deliver to end subscriber see cl. 1 appellant and Interglobe are committed to deliver to end subscriber see cl. 1 .2 of service level agreement which is reproduced below : "This document is agreement between Galileo International and....... as national distributor company. It outlines level of service each commits to deliver to end subscriber." He argued that this is in no way inconsistent with Interglobe being independent contractor because even admittedly independent contractor may b e directed to ensure that his work, and materials he uses to perform s m e , conform to certain specifications. For example, architect or contractor appointed by person to design and execute interior work in his flat may specify that only wiring or switches bearing ISI mark or ISO - 9000 mark or bearing particular brand name should alone be used. He further submitted that appellant provided format/model subscriber agreement to help/guide Interglobe in drafting its subscriber agreement for renting hardware and software to TAs on principal to principal basis and not as agent of appellant. As per agreement : Interglobe would provide assistance to TAs relating to : Rented equipment, communications link and all other equipments Information of location, installation and operations of equipment, software and communication links ( Apparatus ) Non-exclusive licence to TAs to use software products and manuals TAs would prepare appropriate location and ensure that installation and operation are safe and satisfactory Interglobe is owner or licensee of rented equipment and software products and does not warranty accuracy or reliability of any schedule, fare quotation or any other information Interglobe would charge specified fees for equipment/services to TAs 1 6. 1 learned Authorised Representative emphasised that training cost incurred by appellant shows that Interglobe is being given beneficial and preferential treatment rather than being discriminated against or dominated by appellant and, hence, as per jurisdictional Tribunal decision in case of Western Union Financial Services Inc. s case (supra), this established that Interglobe was being remunerated at more than arm s length. He argued that allegation of Department that there is control of appellant over Interglobe as on termination of DA, Interglobe s contracts will get assigned to appellant is erroneous. This clause applies only upon termination of DA. It is standard clause to protect contracting party in event of agreement being terminated on account of insolvency of other party. It is natural that on agreement between two parties being terminated on account of bankruptcy or insolvency or for other similar reasons affecting one party, other party would take steps to ensure continuity of its business operations. It was further submitted by learned Authorised Representative that to protect interest of either party, in case agreement is prematurely terminated, both parties have agreed that appellant shall at its own discretion purchase all or part of subscribers hardware, title to which rests in Interglobe. appellant and Interglobe shall endeavour smooth transition of day-to-day business from Interglobe to appellant on termination. It was also agreed that appellant and/or Interglobe may terminate agreement any time by serving notice on other party in case of material breach of terms of agreement, which is non-remedial or otherwise. If appellant legally terminates agreement in event of liquidation, encumbrance etc., then Interglobe will not provide any CRS services in India for 5 years and titles to entire subscribers hardware vested in Interglobe shall immediately vest in appellant. On other hand, if Interglobe legally terminates in event of liquidation, encumbrance etc., then titles to all subscribers hardware vested in appellant shall immediately vest in Interglobe and appellant shall waive all outstanding amounts owe to Interglobe. learned Authorised Representative emphasised that Department s allegation that reduction in fees from USD 1 .52 to USD 1 was unilateral is based on pure conjecture, suspicion and surmise. fact that it was not unilateral is shown by fact that it was only proposal since said letter unilateral is shown by fact that it was only proposal since said letter itself stated : "..........we propose that data processing fees payable by Galileo International to Interglobe shall be one dollar per booking." Further, letter filed by appellant itself shows that reduction was not arbitrary but was based on relevant factors e.g. increase in booking turnover shown by remark : "Effective November, 1 995, Interglobe has crossed 1 0,000 segment barrier"; projection that Interglobe should be cash positive; advances available with Interglobe; appellant s efforts to increase Interglobe s productivity. 1 6.2 It was further submitted that, without prejudice to above and in any event what is relevant to determine whether payment to Interglobe is at arm s length is not why processing fee was reduced from $ 1 .52 to $ 1 but whether such processing fee after reduction (i.e., US$ 1 ) was at arm s length. It was reiterated that even reduced fee worked out to 33 per cent rate of commission and was much higher than commission of US $ .62 to .9 1 paid to other national distributors as indicated in appellant s letter to CIT dt. 27th Jan., 2000 (at p. 285A of APB-I). Further, interest-free advances given by appellant to Interglobe would be advantageous and not detrimental to latter. It is only latter which would make payment not at arm s length. It was stressed that comparable data of other national vendors at p. 285A of APB-I was given pursuant to specific request of CIT(A) and has not been controverted or questioned by CIT(A) as being inadequate or insufficient. It cannot now be questioned on allegation that it is "mere raw data". In any event and strictly without prejudice to above this data regarding commission payable in other countries at rates of $ .62 to $ .90 at p. 285B speaks for itself. It does not relate only to "Central European countries" as falsely alleged but also relates to UK and Netherlands where competition between CRS companies was far greater than in India in asst. yrs. 1 995-96 to 1 999- 2000 and yet lower rate of commission was paid in those countries, despite much higher cost base in those countries. He emphasised that arm s length analysis already done on basis of material produced leads one to irresistible conclusion that appellant is not discriminated against and Department s inability to produce any other comparable data concludes this issue in appellant s favour. 1 6.3 He further submitted that cls. 5.2 and 8.2 of DA relied upon by Department do not deal with airlines at all. They deal with "national vendors" which are "non-air" vendors (definition of "national vendors" in agreement). In any case, if it is Department s case that appellant does not charge fee for said services and let Interglobe earn profits, it establishes that Interglobe has not been dominated by appellant but treated favourable by it. He contented that even if it is assumed ,while denying, that Interglobe falls within art. 5(4) of treaty, it is completely saved by art. 5(5) thereof in view of what is shown below : 1 . As established in detail above, transactions between appellant and Interglobe are made under arm s length conditions. On this ground alone, Interglobe would fall outside art. 5(4) of treaty and appellant would not be regarded as having agency PE. 2. However, apart from above, it has not been shown by Department (as it is required to further show) that transactions of Interglobe are devoted wholly or almost wholly on behalf of appellant as : For first three asst. yrs. 1 995-96, 1 996-97 and 1 997-98, when GIPL was mere division of Interglobe, it is clear from p. 308 of APB-I, as Department itself has conceded, that GIPL s revenue contributed minimal part of Interglobe revenues. For asst. yr. 1 997-98, when GIPL came into existence as 1per cent subsidiary of Interglobe (at Interglobe s option), fact remains that even this company was effectively and in substance and reality part of Interglobe Group so that even in this assessment year it cannot be said that GIPL was Group so that even in this assessment year it cannot be said that GIPL was wholly or almost wholly dependent upon appellant. GIPL was dependent upon Interglobe Group alone. 3. There is no material whatsoever in support of allegation that Interglobe is authorised by appellant to store computers. In fact both DA (cls. 1 6. 1 and 1 6.2) and model subscriber agreement (cl. 20.3) specifically provide that Interglobe is not agent of appellant. Even subscriber agreement filed by Department in paper book relied upon by it contains similar provisions in cls. 1 7. 1 and 1 7.2 of DPBI, p. 42 which are reproduced below : " 1 7. 1 parties hereto are entering into this agreement on principal to principal basis." " 1 7.2 Nothing to this agreement will create or be deemed to create joint venture, partnership or relationship of principal and agent between parties." burden of proving that these clauses have no effect and are to be treated as dead letter is entirely on Department as it is now well established that burden of proving that apparent is not real, lies entirely and heavily on person who makes such allegation. These specific contractual provisions cannot be displaced by mere allegations or ipse dixit of Department. They could, if at all, have been rebutted by examining contracting parties to ascertain if, in fact and reality, above clauses were not implemented. No such thing has ever been done. mere existence of independent, allegedly back-to-back obligations cannot negate legal effect of these clauses. reliance upon back-to-back obligations was categorically rejected by Supreme Court in Ishikawajma Harima Heavy Industries Ltd. s case (supra). These clauses can be displaced only by establishing that appellant could be sued by TA or vice versa. It is nobody s case (as it cannot be) that appellant could sue TA or vice versa. Clause 1 5.3 of DA (see p. 1 24 of APB-I) contains no such authority but merely provides that principal to principal arm s length agreements which Interglobe/GIPL enters into in its own right, and on its own account with TAs are not inconsistent with DA and provide that airlines alone are responsible for correctness of data supplied. provision regarding performance monitoring is also not in any way inconsistent with principal to principal relationship. For example, principal manufacturer may naturally wish to monitor performance of his distributors (who are operating or principal to principal basis) by laying down targets for them and monitoring their performance. 1 6.4 Authorised Representative then submitted that without prejudice to what is stated earlier and even if it is assumed, while denying, that appellant does have PE in India, its income cannot be taxed in India because it is not derived from assets and activities of alleged PE. He argued that it is now well-settled, by decisions of Supreme Court in CIT vs. Sterling Foods ( 1 999) 1 53 CTR (SC) 439 : ( 1 999) 237 ITR 579 (SC) and Pandian Chemicals Ltd. vs. CIT (2003) 1 83 CTR (SC) 99 : (2003) 262 ITR 278 (SC) that term derived requires immediate and direct nexus between income and source. Applying these tests, it is clear that alleged PE is not source of appellant s income as immediate and direct source of appellant s income lies elsewhere. appellant s income is derived only from its MCS in USA, as it is only there and then that booking request is accepted and appellant s income results. alleged activities and assets of appellant in India are certainly not direct and immediate source of appellant s income by way of booking fees. Hence, appellant s income by way of CRS booking fee cannot be taxed in India by virtue of art. 7(5) of DTAA. 1 6 . 5 Learned Authorised Representative further submitted that strictly without prejudice to what has been stated earlier, amount of income which can be considered to be attributable to India is negligible and minuscule proportion of booking income. It was submitted that, if at all any of appellant s income is to be attributable to India under s. 5 or 9 of Act, or under art. 7( 1 ) r/w art. 7(5) of DTAA, it can only be negligible or minuscule part of appellant s income. learned CIT(A) himself, at p. 1 5 of his appellate order for asst. yr. 1 996-97, has observed : "I am in agreement with learned counsel that profit which can be brought to tax is only that amount which can be said to have been derived from assets located in PEs in India and activities carried on by appellant in India. Of course, these activities constitute display of information on screen of TAs located in India." He accordingly pleaded that since income accruing in India is only minuscule sum and since M/s Interglobe has been paid at arm s length, which will consume income accruing in India, no further income is taxable in India. Reliance was placed on Circular No. 23 of 1 979 issued by CBDT which has also been judicially noted and approved by Hon ble Supreme Court in case of Morgan Stanley & Co. Inc. (supra). Findings as regards existence of PE : 1 7. next question to be decided is whether appellant has any PE in India within meaning of art. 5 of DTAA between India and USA [ 1 87 ITR (St) 1 2]. Article 5 of treaty provides as under : "INDO-US TREATY Article 5 Permanent Establishment ( 1 ) For purposes of this convention, term PE means fixed place of business through which business of enterprise is wholly or partly carried on. (2) term PE includes especially : (a) place of management; (b) branch; (c) office; (d) factory; (e) workshop; (f) mine, oil or gas well, quarry or any other place of extraction of natural resources; (g) warehouse in relation to person providing storage facilities for others; (h) farm, plantation or other place where agriculture forestry, plantation or related activities are carried on; (i) store or premises used as sales outlet; (j) installation or structure used for exploration or exploitation of natural resources, but only if so used for period of more than 1days in any twelve-month period; (k) building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for period of more than 1 20 days in any twelve months period; (l) furnishing of services, other than included services as defined in art. 1 2 (royalties and fees for included services), within Contracting State by enterprise through employees or other personnel, but only if : (i) activities of that nature continue within that State for period or periods aggregating to more than 90 days within any twelve month period; or (ii) services are performed within that State for related enterprise (within meaning of para 1 of art. 9 (associated enterprises). (3) Notwithstanding preceding provisions of this article, term PE shall be deemed not to include any one or more following : (a) use of facilities solely for purpose of storage or display or occasional delivery of goods or merchandise belonging to enterprise; (b) maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of storage or display or occasional delivery; (c) maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of processing by another enterprise; (d) maintenance of fixed place of business solely for purpose of purchasing goods and merchandise, or of collecting information, for enterprise; (e) maintenance of fixed place of business solely for purpose of advertising, for supply of information, for scientific research or for other activities which have preparatory or auxillary character, for enterprise. (4) Notwithstanding provisions of paras 1 and 2, where person other than agent of independent status to whom para 5 applies is acting in Contracting State on behalf of enterprise of other Contracting State, that enterprise shall be deemed to have PE in first-mentioned State, if (a) he has and habitually exercises in first-mentioned State authority to conclude contracts on behalf of enterprise, unless his activities are limited to those mentioned in para 3 which, if exercised through fixed place of business, would not make that fixed place of business PE under provisions of that para; (b) he has no such authority, but habitually maintains in first-mentioned State stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of enterprise and some additional activities conducted in that State on behalf of enterprise have contributed to sale of goods or merchandise; or (c) he habitually secures orders in first-mentioned State, wholly or almost wholly for enterprise. (5) enterprise of Contracting State shall not be deemed to have PE in other Contracting State merely because it carries on business in that other State through broker, general commission agent or any other agent of independent status, provided that such persons are acting in ordinary course of their business. However, when activities of such agent are devoted wholly or almost wholly on behalf of that enterprise and transactions between agent and enterprise are not made under arm s length conditions, he shall not be considered agent of independent status within meaning of this para. (6) fact that company which is resident of Contracting State controls or is controlled by company which is resident of other Contracting State, or which carries on business in that other State (whether through PE or otherwise), shall not of itself constitute either company PE of other." Para 1 of treaty gives general definition of term "PE" which brings out its essential characteristic of PE in sense of convention, i.e., distinct sites, fixed place of business through which business of enterprises is wholly or partly carried on. Thus what is to be seen is whether there is existence of place of business, i.e., facility such as premises or in certain instances machinery or equipment. place of business must be fixed, i.e., it must be established at distinct place where certain degree of permanence can be attached. Carrying on of business of enterprise should be through such fixed place of business. This means that person who is in one way or other is dependent on enterprise, conducts business of enterprises in which such fixed place is situated. term place of business covers any premises, facility or installation used for carrying on business of enterprise, whether or not they are used exclusively for that purpose. place of business may also exist where no premises are available or required for carrying on business of enterprise and it simply has certain amount of space at its disposal. It is immaterial whether premises, facilities or installations are owned or rented or are otherwise at disposal of enterprise. place of business may thus be constituted by pitch in market place or by certain permanently used area. place of business can be situated in business permanently used area. place of business can be situated in business vicinity of another enterprise. What is to be seen is that on fact enterprise has certain amount of space at its disposal, which is used for business activities and then it is sufficient to constitute place of business. No formal legal right to use that place is visualized or required. PE could exist even where enterprise unauthorizingly or illegally occupies certain locations where it carried on its business. For place of business to constitute PE, enterprise using it must be carrying on its business wholly or partly through it. It is not necessary that whole of business should be carried on through such PE or fixed place. Time and again it is being contended on behalf of appellant that for application of para 1 of art. 5 of treaty to apply, it must have productive character, i.e., contribution to profits of enterprise. However, considering para 1 of art. 5 of treaty, it is not so mentioned within framework of established business. It will be appropriate to presume that each part of activities carried on contributes to productivity of whole. Thus even if some contribution is made in carrying on business as whole, even then it can be said that business of enterprise would partly be carried on from such place and accordingly PE of such enterprise. Where business of enterprise is carried on mainly by entrepreneurs or employees who receive instructions from enterprise, rights of such persons in its relationship with third parties are irrelevant. So far as para 1 of art. 5 is to apply whether or not, dependent agent is authorized to conclude contracts is irrelevant so long as he operates from fixed place of business. PE will nevertheless exist if business of t h e enterprise is carried on mainly through automatic equipment and activities of personnel being restricted to setting up and operating such equipment. PE will still exist if enterprise which sets up machine also operates and maintains them for its own account and whether operated by itself or by dependent agent. 1 7. 1 In present case it is seen that CRS, which is source of revenue is partially existent in machines namely various computers installed at premises of subscribers. In some cases, appellant itself has placed those computers and in all cases connectivity in form of nodes leased from SITA are installed by appellant through its agent. computers so connected and configured which can perform function of reservation and ticketing is part and parcel of entire CRS. computers so installed require further approval from appellant/Interglobe who allows use of such computers for reservation and ticketing. Without authority of appellant such computers are not capable of performing reservation and ticketing part of CRS system. computer so installed cannot be shifted from one place to another even within premises of subscriber, leave apart shifting of such computer from one person to another. Thus appellant exercises complete control over computers installed at premises of subscribers. In view of our discussion in immediately preceding para, this amounts to fixed place of business for carrying on business of enterprise in India. But for supply of computers, configuration of computers and connectivity which are provided by appellant either directly or through its agent Interglobe will amount to operating part of its CRS system through such subscribers in India and accordingly PE in nature of fixed place of business in India. Thus appellant can be said to have established PE within meaning of para 1 of art. 5 of Indo-Spain (sic-US) treaty. 1 7.2 next question to be considered is if there is PE, whether exception provided in para 3 of art. 5 applies so as to hold that there is no PE in India. case of appellant is that existence of such computers are merely for purpose of advertising and activities are preparatory or auxiliary in character and hence there is no fixed place PE in India in view of exception provided in para 3 of art. 5. We are unable to accept such contention. function of PE in India is not to advertise its products. activity of appellant is developing and maintaining fully automatic reservation and distribution system with ability to perform comprehensive information, communication, reservation, ticketing, distribution and related function on worldwide basis. computers installed at premises of subscribers are connected to global CRS owned and operated by appellant. Using part of CRS system, subscribers are capable of reserving and booking ticket. Thus it cannot be considered as "solely for purpose of advertising" of such CRS system. Similarly it is not in nature of preparatory or auxiliary character. It is difficult to distinguish between activities which are preparatory or auxiliary character and those which are not. decisive criteria is whether or not activity of fixed place of business in itself forms essential and significant part of activity of enterprise as whole. Since part of function is operated in India which directly contributes to earning of revenue, activities as narrated above carried out in India are in no way of preparatory or auxiliary character. Thus exception provided in para 3 of art. 5 will not apply and hence as stated above, assessee shall be deemed to have PE in India. 1 7.3 next question arises is whether assessee has PE in India in form of dependent agent. It is commonly accepted principle that enterprise should be treated as having PE in State if there is under it person acting for it, even though enterprise may not have fixed place of business. Thus there can be two forms of PE, (i) fixed place or (ii) through dependent agent. agent is person employed to do any act for another or to represent another in dealing with third person. What enterprise can do directly but if not so done directly but done through agent appointed for purpose, it will be deemed to have been done indirectly. Even in such situation it can be said that enterprise carrying on business through efforts of such agent and hence can be said to have established PE. In present case appellant avails services of Interglobe to promote use or CRS in India and for that purpose to appoint subscribers in India. Interglobe is authorized to enter into contract with subscribers in terms of authority generated under Distribution Agreement (DA). appellant binds itself in respect of booking made by subscriber using CRS. Thus what could have been done directly by appellant is achieved through service of Interglobe. Hence, Interglobe is to be treated as agent of appellant in India. Even though in agreement between appellant and Interglobe, existence of agency is denied, yet that will not be conclusive if on facts it is found to be agency. That will be relevant only for limited purpose of agreement between these two parties but not relevant for third parties if on facts existence of agency is found. However, all persons other than agent of independent status cannot be deemed to be PE of enterprise. agents can be considered as PE only and only if when person other than agent of independent status (i) has and habitually exercises in that State authority to conclude contract or (ii) though he has no such authority but habitually maintains stock of goods from which he regularly delivers goods on behalf of enterprise. Thus first question to be decided is whether agent is of dependent status or of independent status. In present case we find that Interglobe is totally dependent on appellant in respect of rendering services to subscribers in India. Thus that part of Interglobe s activities which earns its revenue by rendering services to subscribers is carried on solely for appellant. Though Interglobe might be carrying on any other activities, like full-fledged travel agency business, yet in respect of activity relating to installing CRS system of appellant at subscribers computers provide connectivity, configuring computers to enable it to access CRS, train subscribers etc. is only and only for appellant. Such types of activities are not carried on for any other person. Hence, appellant and Interglobe are inter- dependent in this regard. business of Interglobe is to provide data processing and software development services together with relative distribution of Galileo System to subscribers in India. Interglobe has also authority to enter into agreements with subscribers. Interglobe instals computers, configures computers for accessing CRS and also provides connectivity through SITA nodes. Thus functionally as well as financially it is dependent entirely on appellant. It can, therefore, be said that Interglobe is dependent agent of appellant. 1 7.4 next question to be decided is whether Interglobe is habitually exercising authority to conclude contracts on behalf of appellant. Under DA entered into by appellant with Interglobe, it is responsible for effecting and contracting with subscribers in Indian territory and is to use reasonable efforts to provide access to all Galileo System out of Indian territory. Though appellant and even participating airlines are not party to agreement entered into by Interglobe with subscribers, yet appellant through PCA has ensured that subscribers were authorized to use Galileo System . Under authority granted to them, subscribers use such products. reservations and ticketing done using CRS product are being honoured by participants and for which remuneration will be payable by participants to appellant. Thus Interglobe can be said to have and having exercised authority to conclude contracts on behalf of appellant. What appellant could have done directly by entering into agreement with subscribers, was done through Interglobe. subscribers agreement were entered into by Interglobe under authority available to it in view of DA. What could have been done directly is now done indirectly through offices of Interglobe under authority granted to it. phrase "authority to conclude contracts on behalf of enterprise" does not confine to application of para 4 to agent who enters into contract literally in name of enterprise. para applies equally to agent who concludes contracts which are binding on enterprise even if those contracts are not actually in name of enterprise. Lack of activity involved by enterprise in transactions may suggest of authority being granted to agent. It is contended on behalf of appellant that agent to be called dependent agent should have authority to conclude such contract which contributes to income of appellant and no other ancillary contract. It is contended on behalf of appellant that contracts which generate revenue are contracts with participating airlines and since dependent agent has no authority to conclude contracts with such participants, Interglobe cannot be branded as dependent agent within meaning of para 4 of art. 5 of treaty. On other hand, learned Departmental Representative has submitted that on plain reading of treaty, there is no such provision that contract to be habitually concluded should contribute to revenue. In our opinion, what is relevant is that such contract shall have nexus with business operations as such and not merely contracts for hiring employees, premises etc. What is taxable in Contracting State is income accruing to such enterprise and activities are carried on either through PE namely fixed place or through dependent agent. dependent agent is not to be considered as PE unless he has authority to conclude contract on behalf of such enterprise. authority to conclude contracts must be in respect of contracts relating to operations, which constitute business proper of enterprise. appellant in present case in order to enhance its business operations has appointed Interglobe as its agent who promotes Galileo System in India. Interglobe in its turn has appointed various subscribers for use of Galileo System . Though revenue flows only from participants who have entered into PCA with appellant, yet Revenue could not have been generated but for subscribers using Galileo System . In way revenue is generated from participants but only on basis of use of CRS by subscribers. But for such use no revenue would accrue to appellant. Thus agreements entered into by Interglobe with subscribers under authority granted to it, are contracts relating to operations which constitute business proper and not merely in nature of internal operations. Such contracts are habitually exercised and there is nothing on record to suggest that such authority was cancelled at any point of time. We, therefore, hold that Interglobe is dependent agent of appellant who has habitually exercised authority to conclude contracts on behalf of appellant. To that extent appellant has PE in India. Since we have held that Interglobe is dependent agent of appellant in India, we need not discuss para (5) of art. 5 of treaty regarding independent agent form of PE. 1 7.5 next question that arises is whether appellant has PE in India within meaning of cl. (b) of para 4 of art. 5 of treaty. Clause (b) of para 4 of art. 5 will apply only where dependent agent habitually maintains stock of goods from which he regularly delivers goods on behalf of enterprise. In present case, it is seen that appellant is not dealing in any stock of goods. Since appellant is not dealing in any goods, question of delivery of such goods does not arise. contention of learned Departmental Representative that Interglobe maintains stock of computers which are delivered to subscribers should be treated as delivery of goods. He also submitted that what is mentioned in treaty is that there should be delivery of goods which may not necessarily be sale of goods. We are unable to accept such contention of learned Departmental Representative. reference to "stock of goods" in cl. (b) of para 4 of art. 5 has to be understood in sense business proper carried on by enterprise. delivery should be from stock of goods which if considered in proper prospective will only be of stock of goods dealt with by assessee in regular course of its business. If agent is to deliver goods either goods should be such in which enterprise deals in or which are regularly hired out which may be considered as given on bailment from which revenue is to be generated. But in present case computers supplied by Interglobe to subscribers are not dealt with by assessee or which is by itself is source of revenue. Thus cl. (b) of para 4 of art. 5 will not apply to consider dependent agent as PE of appellant in India. Attribution of profits 1 8 . Having considered that appellant has PE in India in two forms namely ( 1 ) fixed place (PE) under para 1 of art. 5 and (2) agency PE under cl. (a) of para 4 of art. 5, we shall examine as to what is profit attributable to PE in terms of art. 7 of DTAA between India and USA. We shall also examine whether income so computed would be absorbed by expenses incurred to earn such income which will prima facie extinguish assessment. Paras 1 to 3 of art. 7 of DTAA are extracted hereunder : "ARTICLE 7 Business profits "( 1 ) profits of enterprise of Contracting State shall be taxable only in that State unless enterprise carries on business in other Contracting State through PE situated therein. If enterprise carries on business as aforesaid, profits of enterprise may be taxed in other State but only so much of them as is attributable to (a) that PE; (b) sales in that other State of goods or merchandise of same or similar kind as those sold through that PE; or (c) other business activities carried on in that other State of same or similar kind as those effected through that PE. (2) Subject to provisions of para 3, where enterprise of Contracting State carries on business in other Contracting State through PE situated therein, there shall in each Contracting State be attributed to that PE t h e profits which it might be expected to make if it were distinct and independent enterprise engaged in same or similar activities under same or similar conditions and dealing wholly at arm s length with enterprise of which it is PE and other enterprise controlling, controlled by or subject to same common control as that enterprise. In any case where correct amount of profits attributable to PE is incapable of determination or determination thereof presents exceptional difficulties, profits attributable to PE may be estimated on reasonable basis. estimate adopted shall, however, be such estimated on reasonable basis. estimate adopted shall, however, be such that result shall be in accordance with principles contained in this article. (3) In determination of profits of PE, there shall be allowed as deductions expenses which are incurred for purposes of PE, including reasonable allocation of executive and general administrative expenses, research and development expenses, interest and other expenses incurred or purpose of enterprise as whole (or part thereof which includes PE), whether incurred in State in which PE is situated or elsewhere, in accordance with provisions of and subject to limitations of taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by PE to head office of enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for use of patents, know-how or other rights, or by way of commission or other charges, for specific services performed or for management, or, except in case of banking enterprise, by way of interest on moneys lent to PE. Likewise no account shall be taken, in determination of profits of PE, for amounts charges (otherwise than towards reimbursement of actual expenses), by PE to head office of enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in case of banking enterprise, by way of interest on moneys lent to head office of enterprise or any of its other offices." Reading above art. 7 of treaty it is clear that profit of enterprise will be taxable only to extent as is attributable to that PE. This is in pari materia with cl. (a) of Expln. 1 to s. 9( 1 )(i) of IT Act. Para 5 of art. 7 of treaty prescribes as to how profit to be attributed to PE is to be arrived at. It provides that only profits derived from assets and activities of PE shall be treated as attributable to PE. It is argued that clause derived from should have narrower meaning and only immediate and direct nexus should be between earning of income and assets and activities of PE which can be brought to tax. For this purpose, heavy reliance is placed on decision of Hon ble Supreme Court in cases of CIT vs. Sterling Foods (supra) and Pandian Chemicals Ltd. vs. CIT (supra). While we broadly agree that profits to be attributed to PE as provided in para 1 (a) of art. 7 shall include only profits derived from assets and activities of PE, reference to judgment of Hon ble Supreme Court in this regard is misplaced. judgment rendered by Hon ble Supreme Court while interpreting clause profit derived from industrial undertaking for purpose of computing deduction under s. 80HH/80-I cannot be applied in relation to computation of profits to be attributed to PE. Hon ble Supreme Court was not called upon to interpret Indo-US treaty or as to how profit should be attributed to PE. Thus, judgment of Hon ble Supreme Court in India rendered in context of interpreting one of incentive provisions cannot be applied in relation to clauses in treaty. wordings in treaty are not to be interpreted like provision of statute. In way there should be some rational connection between existence of PE and profits from assets and activities of PE which can be brought to tax and no further artificial meaning should be given as to clause derived from . Just in case to be decided outside India decisions rendered by apex Court in another country cannot be held as binding precedent in that country in relation to interpretation of clause in treaty, same way judgment of apex Court cannot be applied even in country where such decision is rendered particularly when decision is not rendered interpreting clauses of treaty entered into between two countries. However, in all circumstances only that much of profits as are arising due to assets and activities of PE can be brought to tax and if whole of activities of business are not carried out in India, profit should be apportioned between that arising in India and that arising outside India. Thus where entire activities of enterprise are not carried out in Contracting State where PE is situated, than only so much of profit as is attributable to functions carried through PE can be taxable in such source State. While dealing with question as to what is such part of income as is reasonably attributable to operations carried out in India, we have held that only 1 5 per cent of revenue generated from bookings made within India is taxable in India. same proportion has to be adopted here while computing profit attributable to PE. We have also held that since payment to agent in India is more than what is income attributable to PE in India, it extinguish assessment as no further income is taxable in India. It is to be noted that even in first assessment framed by AO, entire expenses in form of remuneration paid to Interglobe were held as allowable deduction and were reduced while computing income of appellant. If that be case, income attributable to PE in India being less than remuneration paid to dependent agent, it extinguishes assessment and requires no further exercise for computation of income. We accordingly hold so and in view of same income of appellant will be nil. 1 8. 1 Since we have held that remuneration paid to dependent agent is exceeding income attributable to PE in India, question of allowability of various expenses as are in appeal in ITA Nos. 820 to 823/Del/2005 does not survive. question of charging interest under ss. 234A and 234B will also not survive. 1 9 . In cross-objections, Revenue has contended that assessment was completed after issue and service of notice under s. 1 43(2). Thus, ground raised by appellant that assessment was framed without issue of notice under s. 1 43(2) is incorrect. In cross-objection, it is also submitted that tax rate applied is as applicable to foreign company and is in accordance with tax rate payable by foreign companies. It does not amount to discrimination. Thus, grounds raised by assessee that rate applicable to assessee at higher rate is misconceived. At time of hearing, learned counsel for assessee has not pressed ground regarding non- service of notice under s. 1 43(2). Thus, validity of assessment framed is upheld. assessee has also not raised any objection to rate applied. Thus, grounds raised by appellant in this regard are to be dismissed. Accordingly cross-objections raised by Revenue are treated to be allowed. 20. Various case laws have been cited during course of hearing. We have considered same to extent, in our opinion, are applicable to facts of case. Other case law not being decisive of issue in present appeals are not considered. 2 1 . In result, appeals by appellant are partly allowed and cross-objections raised by Revenue are allowed. *** GALILEO INTERNATIONAL INC. v. DEPUTY COMMISSIONER OF INCOME TAX