Tax Hotline July 09, 2013

Revenue Considers taxability of CRS and the Limitation of Relief in the India-Singapore DTAA

The Mumbai bench of the Income Tax Appellate Tribunal ("Tribunal"), in the case of Abacus International Pvt. Ltd. vs. DDIT1, has discussed the business model of Computerised Reservation System ("CRS") with respect to profits attributable to India. The case is relevant for several reasons, particularly its reference to Article 24 of the India Singapore Tax Treaty ("Treaty") which limits the relief allowed by India with respect to income that is not actually received in Singapore.


Abacus International Pvt. Ltd. ("Taxpayer") is a company incorporated in Singapore, engaged in the business of making airline reservations for and on behalf of participating airlines using a CRS. The business model of the Taxpayer is based on a system where participating airlines provide necessary information to the Taxpayer which is displayed to travel agents across the globe, enabling them to make necessary requests through CRS. In order to facilitate the use of CRS in various parts of the world, the Taxpayer licenses the right to market the CRS to companies in several countries in the Asia-Pacific region knows as National Marketing Company ("NMC"), which in turn deal directly with the travel agents.

Since the NMC is responsible for directly marketing the product to travel agents and is responsible for sales, the NMC is paid a certain commission by the Taxpayer for each booking made. Abacus Distribution Systems (India) Ltd. ("ADSIL") is a wholly owned subsidiary of the Taxpayer in India and is also its NMC.

As a preliminary issue, the tax authorities took up the question of whether ADSIL was the Taxpayer's Permanent Establishment ("PE") in India and subsequently, how much of the business income was attributable to India. In this regard, it's pertinent to note that 25% of the receipts from India were paid to ADSIL by the Taxpayer as marketing fees. Further, the Taxpayer received amounts on account of line charges, installation charges and service charges which were alleged to be in the nature of reimbursement. The characterization of this receipt was in question.

Another issue taken up for determination by the Tribunal relates to the applicability of Article 24 of the Treaty vis-à-vis interest income received. During the Assessment Year ("AY") 2004-2005, the Taxpayer was granted refund along with interest by the Income Tax Department. The question was whether the benefit of a lower tax rate of 15% on the interest income under the Treaty would be available without such income being "remitted to" or "received in" Singapore in light of Article 24 of the Treaty.


The main issues dealt with by the Tribunal are as follows:

  • Whether the Taxpayer has a PE in India and how much of the profits will be attributable to India

  • Whether the receipts on account of line charges, installation charges and service charges were in the nature of reimbursement.

  • Whether the relief of reduced tax under Article 11 of the Treaty is limited by the requirement of "remitted to or received in" as under Article 24 of the Treaty.

Issue 1: PE and Income Attributable to India

The Tribunal relied on an earlier case of the Taxpayer to hold that the Taxpayer has a PE in India in terms of Article 5(1) of the Treaty i.e. ADSIL constituted a fixed place of business of the Taxpayer through which it carried on its business in India and Article 5(8) i.e. ADSIL was the dependent agent of the Taxpayer in India and habitually carried out and concluded contracts on behalf of the Taxpayer with travel agents in India.

While the Tribunal has not gone into details of how the taxpayer was said to have constituted a PE in India through ADSIL, such a holding is essentially premised on the understanding that the taxpayer carried on its business exclusively through ADSIL and that ADSIL executed contracts in India with travel agents on behalf of the taxpayer. Consequently, ADSIL would be a fixed place of business in India for the Taxpayer. Further, ADSIL is responsible for the sales i.e. bookings made by travel agents in India are carried out through ADSIL. In other words, ADSIL is acting as a dependent agent of Taxpayer.

On the issue of income attributed towards India, the Tribunal relied on the Delhi High Court judgment of Galileo International v. DCIT2 which was in the context of CRS. It was held that though no guidelines were available as to how much should be income reasonably attributable to the operations carried out in India, the same had to be determined on the factual situation prevailing in each case. To determine such attribution one has to look into the factors like functions performed, assets owned and risk undertaken by the alleged PE in India vis-a-vis the taxpayer. In the context of CRS It held that the majority of the functions were performed outside India. Even the majority of the assets, i.e., host computer, which was having very large capacity which processed information of all the participants, were situated outside India. The CRS as a whole was developed and maintained outside India. The risk in that regard entirely rested with Galileo International Inc. and that was in USA, outside India. However it was noted that but for the presence of the Galileo International Inc. in India and the configuration and connectivity being provided in India, no income could've been generated in India. Thus, the initial cause of generation of income was in India. On the basis of said facts, it was held that 15% of the revenue accruing to the Galileo International Inc. in respect of bookings made in India could be reasonably attributed as income accruing or arising in India.

Following this ruling, the Tribunal held that 15% of the revenue of the Taxpayer could be said to accrue or arise in India. Further, the Tribunal observed that since 25% of the receipts were paid to ADSIL in India as marketing fees, i.e., more than the 15% limit, there was no income chargeable to tax in India.

Issue 2: Characterization of receipt as reimbursement

It was observed that the line charges and installation charges were expenses incurred for connectivity provided by a third party. These were the amounts not supported by any evidence in the form of third party vouchers but only debit notes sent by the Taxpayer to the ADSIL. Further, these debit notes did not show that the actual expenditure was incurred by and on behalf of the ADSIL. The Tribunal rejected the Taxpayer's claim that the receipts on account of line charges, installation charges and service charges were in the nature of reimbursement of expenses from ADSIL.

Further, the Tribunal observed that the reimbursement charges sought by the Taxpayer represent the payments initially made by it for the services which were required to be provided by it to the end customers who subscribe to the CRS system. The Tribunal did not rule on whether this receipt was to be characterized as business income as even in a situation that this receipt is taxed as such, it would result in loss for the Taxpayer due to the marketing expenses paid to ADSIL.

Issue 3: Article 24: Limitation of Relief

Under Article 11 of the Treaty provides India sourced interest income received by a Singapore resident may be subjected to tax in India at reduced rate of 15%. Under section 115A of the Income Tax Act, 1961 ("ITA"), interest income is taxed at the rate of 20%. The tax authorities contended that Taxpayer's interest income would not get the benefit of a lower rate of taxation due to the limitation under Article 24.

Article 24 of the Treaty deals with "Limitation of Relief" and clause 1 of this article states that where the Treaty provides that income from source in India shall be taxed at a reduced rate in India and shall also be taxed in Singapore, then the said income shall be taxed at the reduced rate prescribed in the Treaty provided the income is 'remitted to' or 'received in' Singapore. The relevant text of Article 24 reads,

"...where this Agreement provides (with or without other conditions) that income from sources in a Contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first- mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State..."

Accordingly, as per Article 24, interest income being remitted to or received in Singapore, is the sine qua non of claiming the reduced rate of tax under Article 11 of the Treaty. In other words, if the income is not remitted to or received in Singapore, then the benefit of Article 11 providing for a reduced rate of tax of 15% cannot be extended to the Taxpayer.

This aspect of the Treaty arises from the fact that Singapore follows a territorial system of taxation, meaning that residents of Singapore would not be taxed on any offshore income unless it is actually remitted into Singapore. Accordingly, on the ground that the Taxpayer did not establish any proof of remittance or return of interest to Singapore, the Tribunal held that the interest income shall be taxed at the rate of 20% as per Section 115A of the ITA.

The Tribunal opined that the burden of proof to positively establish that the income has been remitted to or received in Singapore with respect to Article 24 of the Treaty was on Taxpayer and was not in the nature of a negative burden on the tax authorities. Further, the Tribunal noted that the Taxpayer could have submitted a copy of pay-in-slip showing deposit of refund voucher in bank account in Singapore, which is eventually credited to the bank in Singapore or even a certificate from a bank in Singapore to prove that the amount was remitted or returned to Singapore as such positive demonstration is necessary by virtue of the unambiguous command of Article 24.


There are two major aspects to this ruling. Firstly, this ruling is significant for the impact it would have on the use of CRS in India. In addition to the abovementioned Galileo ruling, there have been other rulings on CRS; for instance Sabre Inc. v. DCIT3 and Amadeus Global Travel Distribution S.A. v. DCIT4where the taxpayer was similarly operating a CRS system for which sales were carried out by entering into agreements with various distributors located in India. The moot question in rulings on CRS is whether there is a PE in India and if yes, how much of this income is attributable to India. Here, the challenge is that there no guidelines on attribution of income in India. However, on the basic principle on attribution of income, the Supreme Court held in Morgan Stanley & Co. Inc. v. DCIT5 that where an alleged PE of an entity in India has already been compensated at arms' length, no further profits would be attributable to such PE from the taxpayer's income.

This challenge of absence of such guidelines is further compounded in a scenario where technologies such as CRS are used. India has been witnessing quite a few developments characterized by a tightening of the scrutiny by the tax authorities in taxing transactions involving such technologies across frontiers. Systems such as CRS demonstrate the use of technology by entities and the movement of trade and businesses across borders, with minimal physical presence in the country of its clients, often limited to marketing activities. Since the quantum of revenue generated by such business models are extremely high, there is a global trend to tax the revenue so sourced in the country of the use of the CRS.

Secondly, this ruling is significant in its applicability of Article 24 of the Treaty. India and Singapore had signed a protocol to the treaty in 2005 to put in force a limitation of benefits clause. However, there are very few treaties which contain a 'Limitation of Relief' provision in addition to a limitation of benefits provision. The rationale behind its inclusion would be that Singapore is a territorial tax jurisdiction. This ruling is specifically interesting since it gives us a glimpse of how the tax authorities propose to look at Article 24 in terms of the circumstances in which Article 24 would apply, as well as the threshold of 'proof' required by the authorities to grant a benefit under the treaty.

Gautam Swarup and Mansie Sathianathan 
You can direct your queries or comments to the authors

1 ITA No. 1045/Mum/2008.

2 2011] 336 ITR 264 (DELHI).

3 2009-TIOL-488-ITAT-DEL.

4 [2011] 11 153 (Delhi)

5 [2007] 292 ITR 416 (SC).

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