The Assessing Officer has found a permanent establishment and wants to tax my client's entire Indian booking revenue. My client already pays its Indian distributor a commission larger than anything that could be attributed to India. Is there anything left to tax?
No, where the commission already paid to the Indian agent exceeds the profit attributable to the Indian operations, the assessment is extinguished. The Supreme Court upheld the Tribunal's attribution of 15 per cent of the revenue to India on a functions, assets and risks analysis and held that, because the distribution commission was more than twice that figure and had already been taxed, no further income was taxable in India — and it declined to decide whether there was a permanent establishment at all, because the attribution answer disposed of the appeals.
Decided by the Supreme Court (V. Ramasubramanian J and Pankaj Mithal J) on 2023-04-19, reported as Civil Appeal Nos. 6511-6518 of 2010 with connected appeals (Supreme Court of India). The treaty construed is the Double Taxation Avoidance Agreement between INDIA and the UNITED STATES OF AMERICA — Article 7 (Business Profits), read with s.9(1)(i) and Explanation 1(a).. It bears on section DTAA art 7, section 9(1)(i), section 9, section 5(2) of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the practical answer to a PE finding in a distribution or agency structure, and it is a Supreme Court answer. The Court's route matters as much as the result. It treated the proportion of profits arising in India as 'essentially one of facts', so concurrent findings of the Tribunal and the High Court on attribution will not be reopened in a further appeal — which cuts both ways and is worth knowing before you appeal an attribution you dislike. It anchored the exercise in Explanation 1(a) to s.9(1)(i), under which only what is reasonably attributable to the operations carried out in India can be deemed to arise here, and it held that Article 7 of the India-United States DTAA 'may not really go to the rescue of the Revenue' because the whole of the receipt is taxable in the contracting state and s.9(1) confines the Indian charge to the attributable proportion. Note the limits. The Court expressly left the permanent establishment question open, so this is not authority that computers placed with travel agents or leased lines are not a fixed place PE. And the arithmetic has to be done: the point is not that an arm's length commission automatically extinguishes attribution, but that on these facts the commission was more than twice the attributed figure. Where the attributed profit exceeds what the agent was paid, a balance remains taxable.
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The respondents were non-resident companies in the business of providing electronic global distribution services to airlines through a Computerized Reservation System. They maintained and operated a master computer system of mainframes and servers located outside India, including in the USA, connected to airline servers from which data on flight schedules and seat availability moved continuously. To market and distribute the CRS services to travel agents in India they appointed Indian entities under distribution agreements. It was not in dispute that the respondents earned USD 3 or EURO 3 per booking made in India, and that of that amount they paid the Indian entities between USD/EURO 1 and USD/EURO 1.8, that is between 33.33 per cent and about 60 per cent of the total earning. The Assessing Officers held the entire USD/EURO 3 taxable in India on the footing that the income was earned through hardware installed by the respondents in the premises of the travel agents; the Commissioners (Appeals) upheld those assessments. The treaty in issue was the Double Taxation Avoidance Agreement between INDIA and the UNITED STATES OF AMERICA, whose Article 7 the Revenue invoked to tax the whole of the receipt. The Tribunal held that the respondents had a permanent establishment in India in two forms, a fixed place PE and a dependent agent PE, but that the lion's share of the activity was processed in the host computers in the USA and Europe and the activities in India were minuscule; on a functions, assets and risks analysis it attributed 15 per cent of the revenue, being 0.45 cents, to India, and since the payment to the distribution agents was USD/EURO 1 or more, held that no further income was taxable in India. The Revenue's miscellaneous applications were dismissed and its appeals were dismissed by the Delhi High Court on the ground that no question of law arose and that the Tribunal's approach to attribution was reasonable.
All the appeals filed by the Revenue were dismissed (para 22). The Tribunal's attribution of 15 per cent of the revenue to Indian operations on a FAR analysis was fair and reasonable, and because the commission paid to the distribution agents was more than twice the amount of the attribution and had already been taxed, the Tribunal rightly concluded that the same extinguished the assessment (paras 14 and 15). What proportion of profits arose or accrued in India is essentially a question of fact and the concurrent orders of the Tribunal and the High Court called for no interference (para 16). Article 7 of the India-USA DTAA did not assist the Revenue, because in the contracting state the entire income of USD/EURO 3 will be taxable and s.9(1) confines the taxable income in India to the proportion attributable to the operations carried out here (para 20). The Court expressly declined to decide the second question, whether the computers placed in the premises of the travel agents and the nodes and leased lines constituted a fixed place PE (paras 14 and 21).
The Additional Solicitor General argued that attributing only 15 per cent of the revenue as income accruing or arising in India within s.9(1)(i) read with Article 7 was wrong, and separately that the computers and leased lines were a fixed place PE (para 13). The Court declined to reach the second contention because it found the approach of the Tribunal and the High Court on attribution fair and reasonable (para 14). It then set out Explanation 1(a) to s.9(1)(i) (para 17) and reasoned that what is reasonably attributable to the operations carried out in India alone can be deemed to arise here, and that what portion is so attributable is obviously a question of fact on which the Tribunal had taken relevant factors into account (para 18). Turning to Article 7 of the India-USA DTAA, which it reproduced (para 19), the Court held that the Article did not rescue the Revenue because the entire income of USD/EURO 3 is taxable in the contracting state, which is why s.9(1) confines the Indian charge to the attributable proportion (para 20).
The question as to what proportion of profits arose or accrued in India is essentially one of facts.
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Handle my notice → Ask a CA on WhatsAppNo, where the commission already paid to the Indian agent exceeds the profit attributable to the Indian operations, the assessment is extinguished. The Supreme Court upheld the Tribunal's attribution of 15 per cent of the revenue to India on a functions, assets and risks analysis and held that, because the distribution commission was more than twice that figure and had already been taxed, no further income was taxable in India — and it declined to decide whether there was a permanent establishment at all, because the attribution answer disposed of the appeals. This was decided by the Supreme Court (V. Ramasubramanian J and Pankaj Mithal J) and bears on section DTAA art 7, section 9(1)(i), section 9, section 5(2) of the Income Tax Act 1961. It is reported as Civil Appeal Nos. 6511-6518 of 2010 with connected appeals (Supreme Court of India). The treaty construed is the Double Taxation Avoidance Agreement between INDIA and the UNITED STATES OF AMERICA — Article 7 (Business Profits), read with s.9(1)(i) and Explanation 1(a).. This is the practical answer to a PE finding in a distribution or agency structure, and it is a Supreme Court answer. The Court's route matters as much as the result. It treated the proportion of profits arising in India as 'essentially one of facts', so concurrent findings of the Tribunal and the High Court on attribution will not be reopened in a further appeal — which cuts both ways and is worth knowing before you appeal an attribution you dislike. It anchored the exercise in Explanation 1(a) to s.9(1)(i), under which only what is reasonably attributable to the operations carried out in India can be deemed to arise here, and it held that Article 7 of the India-United States DTAA 'may not really go to the rescue of the Revenue' because the whole of the receipt is taxable in the contracting state and s.9(1) confines the Indian charge to the attributable proportion. Note the limits. The Court expressly left the permanent establishment question open, so this is not authority that computers placed with travel agents or leased lines are not a fixed place PE. And the arithmetic has to be done: the point is not that an arm's length commission automatically extinguishes attribution, but that on these facts the commission was more than twice the attributed figure. Where the attributed profit exceeds what the agent was paid, a balance remains taxable. If it applies to you, the first step is this: Do the attribution computation first and the PE argument second; if the attributable profit is already covered by what you have paid and taxed in India, the PE dispute may not need to be won.
The respondents were non-resident companies in the business of providing electronic global distribution services to airlines through a Computerized Reservation System. They maintained and operated a master computer system of mainframes and servers located outside India, including in the USA, connected to airline servers from which data on flight schedules and seat availability moved continuously. To market and distribute the CRS services to travel agents in India they appointed Indian entities under distribution agreements. It was not in dispute that the respondents earned USD 3 or EURO 3 per booking made in India, and that of that amount they paid the Indian entities between USD/EURO 1 and USD/EURO 1.8, that is between 33.33 per cent and about 60 per cent of the total earning. The Assessing Officers held the entire USD/EURO 3 taxable in India on the footing that the income was earned through hardware installed by the respondents in the premises of the travel agents; the Commissioners (Appeals) upheld those assessments. The treaty in issue was the Double Taxation Avoidance Agreement between INDIA and the UNITED STATES OF AMERICA, whose Article 7 the Revenue invoked to tax the whole of the receipt. The Tribunal held that the respondents had a permanent establishment in India in two forms, a fixed place PE and a dependent agent PE, but that the lion's share of the activity was processed in the host computers in the USA and Europe and the activities in India were minuscule; on a functions, assets and risks analysis it attributed 15 per cent of the revenue, being 0.45 cents, to India, and since the payment to the distribution agents was USD/EURO 1 or more, held that no further income was taxable in India. The Revenue's miscellaneous applications were dismissed and its appeals were dismissed by the Delhi High Court on the ground that no question of law arose and that the Tribunal's approach to attribution was reasonable. The matter was decided on 2023-04-19 by the Supreme Court (V. Ramasubramanian J and Pankaj Mithal J). On those facts the Supreme Court held as follows. All the appeals filed by the Revenue were dismissed (para 22). The Tribunal's attribution of 15 per cent of the revenue to Indian operations on a FAR analysis was fair and reasonable, and because the commission paid to the distribution agents was more than twice the amount of the attribution and had already been taxed, the Tribunal rightly concluded that the same extinguished the assessment (paras 14 and 15). What proportion of profits arose or accrued in India is essentially a question of fact and the concurrent orders of the Tribunal and the High Court called for no interference (para 16). Article 7 of the India-USA DTAA did not assist the Revenue, because in the contracting state the entire income of USD/EURO 3 will be taxable and s.9(1) confines the taxable income in India to the proportion attributable to the operations carried out here (para 20). The Court expressly declined to decide the second question, whether the computers placed in the premises of the travel agents and the nodes and leased lines constituted a fixed place PE (paras 14 and 21).
The Additional Solicitor General argued that attributing only 15 per cent of the revenue as income accruing or arising in India within s.9(1)(i) read with Article 7 was wrong, and separately that the computers and leased lines were a fixed place PE (para 13). The Court declined to reach the second contention because it found the approach of the Tribunal and the High Court on attribution fair and reasonable (para 14). It then set out Explanation 1(a) to s.9(1)(i) (para 17) and reasoned that what is reasonably attributable to the operations carried out in India alone can be deemed to arise here, and that what portion is so attributable is obviously a question of fact on which the Tribunal had taken relevant factors into account (para 18). Turning to Article 7 of the India-USA DTAA, which it reproduced (para 19), the Court held that the Article did not rescue the Revenue because the entire income of USD/EURO 3 is taxable in the contracting state, which is why s.9(1) confines the Indian charge to the attributable proportion (para 20). In the words reproduced by the source cited on this page: "The question as to what proportion of profits arose or accrued in India is essentially one of facts."
It was decided by the Supreme Court on 2023-04-19 and is reported as Civil Appeal Nos. 6511-6518 of 2010 with connected appeals (Supreme Court of India). The treaty construed is the Double Taxation Avoidance Agreement between INDIA and the UNITED STATES OF AMERICA — Article 7 (Business Profits), read with s.9(1)(i) and Explanation 1(a).. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section DTAA art 7, section 9(1)(i), section 9, section 5(2), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. All the appeals filed by the Revenue were dismissed (para 22). The Tribunal's attribution of 15 per cent of the revenue to Indian operations on a FAR analysis was fair and reasonable, and because the commission paid to the distribution agents was more than twice the amount of the attribution and had already been taxed, the Tribunal rightly concluded that the same extinguished the assessment (paras 14 and 15). What proportion of profits arose or accrued in India is essentially a question of fact and the concurrent orders of the Tribunal and the High Court called for no interference (para 16). Article 7 of the India-USA DTAA did not assist the Revenue, because in the contracting state the entire income of USD/EURO 3 will be taxable and s.9(1) confines the taxable income in India to the proportion attributable to the operations carried out here (para 20). The Court expressly declined to decide the second question, whether the computers placed in the premises of the travel agents and the nodes and leased lines constituted a fixed place PE (paras 14 and 21). It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section DTAA art 7, section 9(1)(i), section 9, section 5(2) of the Income Tax Act 1961, and was decided by V. Ramasubramanian J and Pankaj Mithal J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Build the attribution on a functions, assets and risks analysis and put the underlying material on record before the Tribunal — the Supreme Court treated attribution as a question of fact and refused to disturb concurrent findings on it. Quantify, in the same currency and per unit, the revenue earned from India, the percentage attributed and the amount already paid to and taxed in the hands of the Indian entity, and show the comparison arithmetically. Plead Explanation 1(a) to s.9(1)(i) expressly: only such part of the income as is reasonably attributable to the operations carried out in India is deemed to accrue here. Where the Assessing Officer relies on Article 7 of the India-US DTAA to tax more, meet it with the point the Court accepted — the entire receipt is taxable in the residence state, and s.9(1) confines the Indian charge to the attributable proportion. Do not cite this decision for the proposition that hardware placed with travel agents is not a PE; the Court declined to decide that question.
Still good law. A Supreme Court decision, and the label reflects the deciding court. No check for later treatment has been carried out, so nothing here should be read as a statement that the judgment has never been explained or distinguished. Readers should note the deliberate limit the Court set for itself. The permanent establishment question — whether the computers placed in the premises of travel agents, and the nodes and leased lines, constituted a fixed place permanent establishment — was expressly left undecided at paragraphs 14 and 21. The decision is therefore not authority either way on a Computerized Reservation System fixed place permanent establishment, and it should not be cited as though the Court had accepted or rejected the Tribunal's finding on that question. What the judgment does decide is narrower and more durable. The proportion of profits arising or accruing in India is essentially a question of fact; a functions, assets and risks attribution made by the Tribunal and upheld by the High Court will not be reopened; and where the commission already paid to and taxed in the hands of the Indian agent exceeds the attributed profit, nothing further is taxable here. Two things would change the analysis for a later year. The charge under s.9(1)(i) has been widened since the assessment years in dispute, in particular by the significant economic presence provisions, and this judgment says nothing about them. And the attribution arithmetic is fact-specific: where the attributed profit exceeds what the agent was paid, a balance remains taxable, and the judgment gives no rule for computing that balance beyond Explanation 1(a) to s.9(1)(i). No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment has 22 numbered paragraphs. One artefact of the text should be noticed. Paragraph 5 and the opening of paragraph 6 both begin 'There is no dispute on fact that the respondents earn an amount of USD 3/EURO 3'. That looks like a repetition in the printed text rather than two separate findings, and this entry treats it as one finding; a reader who needs to cite the finding should cite paragraph 5. Paragraph 17 reproduces Explanation 1(a) to s.9(1)(i), but in its post-2018 form, carrying the words 'other than the business having business connection in India on account of significant economic presence'. That form is later than the assessment years in dispute. The Court's use of it is as a statement of the attribution principle — that only so much of the income as is reasonably attributable to the operations carried out in India can be deemed to accrue or arise here — and not as a ruling on significant economic presence, which is nowhere in issue. Anyone quoting paragraph 17 for the text of the Explanation should check which version governs his own year. Two further things about the shape of the decision. The Court reproduced Article 7 of the India-United States Double Taxation Avoidance Agreement at paragraph 19 and dealt with it at paragraph 20; the treaty in issue throughout is the India-USA treaty, and nothing in the judgment turns on the wording of any other Article 7. And the disposal at paragraph 22 dismisses all the Revenue's appeals, so the Tribunal's attribution of fifteen per cent stands as the operative figure — but it stands as a finding of fact on these facts, and the judgment gives no warrant for applying fifteen per cent to another distribution structure. The reader should keep the two questions apart throughout. What was decided is attribution. What was left open is the existence of a permanent establishment. Two sets of figures carry the decision and should be reproduced in any case that relies on it. The respondents earned USD 3 or EURO 3 per booking made in India, and paid the Indian distributors between USD or EURO 1 and USD or EURO 1.8 of that — between 33.33 per cent and about 60 per cent. The Tribunal attributed 15 per cent of the revenue to India on a functions, assets and risks analysis, being 0.45 cents. Because the commission already paid to and taxed in the agent's hands was more than twice the attributed figure, nothing was left to tax. That arithmetic is the whole of the case and has to be done in the same currency and per unit. Where the attributed profit exceeds what the agent was paid, a balance remains taxable. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
All the appeals filed by the Revenue were dismissed (para 22). The Tribunal's attribution of 15 per cent of the revenue to Indian operations on a FAR analysis was fair and reasonable, and because the commission paid to the distribution agents was more than twice the amount of the attribution and had already been taxed, the Tribunal rightly concluded that the same extinguished the assessment (paras 14 and 15). What proportion of profits arose or accrued in India is essentially a question of fact and the concurrent orders of the Tribunal and the High Court called for no interference (para 16). Article 7 of the India-USA DTAA did not assist the Revenue, because in the contracting state the entire income of USD/EURO 3 will be taxable and s.9(1) confines the taxable income in India to the proportion attributable to the operations carried out here (para 20). The Court expressly declined to decide the second question, whether the computers placed in the premises of the travel agents and the nodes and leased lines constituted a fixed place PE (paras 14 and 21).
TaxSphere, “DIT v Travelport Inc.”, https://taxnotice.vittsphere.com/caselaw/case/dit-v-travelport-article-7-attribution-where-agent-already-remunerated/ (validity last checked 2026-09-08)
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