The Delhi Bench of India’s Income-tax Appellate Tribunal (ITAT) on 9 February, 2024, delivered a landmark decision asserting that granting domestic travel agents access to a computer reservation system located abroad does not establish a fixed place Permanent Establishment (PE) or a dependent agent PE of the taxpayer in India.
The case involved a US tax resident company operating in India’s travel sector, facilitating airline reservations for participating airlines. The company had agreements with airlines and global travel agencies, granting access to its reservation system.
Indian operations included flight booking services through local travel agents using the reservation system.
Fixed Place PE
Pre-2005, the company collaborated with Indian joint ventures (JVs), providing access to the reservation system through installed equipment. Post-2005, the company directly entered agreements with airlines and global travel agencies, eliminating the intermediary JV setup. Notably, the company ceased providing equipment or support services to Indian travel agents.
ITAT’s Observations
The tribunal noted the substantial differences between the pre- and post-2005 business models. It highlighted that access to the reservation system was now facilitated through independent networks, absolving the company of any direct involvement in Indian operations.
Agency PE
The absence of intermediaries and the non-exclusive nature of agreements with global subscribers negated the existence of an agency PE.
The Tribunal ruled out the presence of an agency PE, emphasising the lack of habitual procurement or binding of contracts by any intermediary entity.
The ITAT’s decision carries significant implications for international tax jurisprudence, particularly regarding the determination of PE in the digital age. The ruling underscores the importance of analysing business models comprehensively and adapting legal interpretations to evolving commercial practices.
In a rapidly evolving global business landscape, legal interpretations must keep pace with technological advancements and changing business dynamics. The ITAT’s decision provides clarity on the taxation of digital services, reaffirming the principle that mere access to foreign booking systems by domestic entities does not establish a taxable presence under Indian tax laws.
