ORDER
Pradeep Parikh, A.M.
1. The Department is in appeal before us against the order of the learned CIT(A) dt. 7th Feb., 2001, for asst. yr. 1996-97. Following grounds have been raised in the appeal:
“On the facts and circumstances of the case, the learned CIT(A) erred in holding that during the year, the Central Reservation System (CRS) did not belong to the assessee despite the fact that-
(i) the manager of Japan Airlines as well as their Authorised Representatives has stated in writing that AXESS was on Japan Airlines.
(ii) the agreement for providing CRS facility has been entered into between Japan Airlines and other Airlines in India.
(iii) the payment for the CRS booking fees is received by Japan Airlines through IATA Clearance House.”
2. The assessee is a non-resident company operating airline services world- wide. On 21st Dec, 1998, a notice was issued to the company asking it to submit the name of the reservation system used by it with the name of the company owning it. It was also asked that in case the assessee-company did not own the system, (to clarify regarding) the total amount paid by the head office to the CRS company yearwise for the last five years. In response to this notice, the assessee replied that they were using AXESS System of reservation belonging to it and not to CRS. The AO informed the assessee that the income earned by it on account of the use of AXESS CRS was taxable in India. The assessee replied that it did not earn any income by the use of AXESS as the same was owned by it and it was for self-use only and was not given to any one for use. For this explanation, the assessee relied on Double Taxation Avoidance Agreement (DTAA) between India & Japan. The AO brought to the notice of the assessee the agreement between the assessee and Indian Airlines to impress upon it that the assessee did receive payment from Indian Airlines through IATA Clearance House for the user of AXESS CRS. The AO also asked the assessee to show cause as to why the total receipts be not taken at Rs. 5,00,00,000 for taxation purposes. The assessee again explained its position emphasising the fact that it had not earned any income by giving the AXESS System on hire to any one. The AO was not convinced with the explanation of the assessee and also was of the view that the assessee had been non-co-operative in its attitude as well as had been misrepresenting the facts before the AO. The AO then took note of certain facts. He observed that the assessee had entered into agreement with several airlines by virtue of which those airlines or any travel agent could access the software owned by the assessee in consideration for which the assessee was to receive certain payments. The software was meant for the purpose of ticket booking by the various airlines and the travel agents. The AO then referred to certain clauses of the agreement. As per the agreement, the assessee was to maintain and operate the AXESS system and provide standard functionalities specified in the schedule to the agreement. The assessee was also to provide neutral flight availability display to all AXESS subscribers.
3. The AO referred to Clause 12.2 of the agreement to take note of the fact that the title and full and complete ownership rights to all software utilised by AXESS system was to remand with the assessee. The participant’s licence was non- exclusive, non-transferable and was limited to the right to use such software during the terms of the agreement only according to the guidelines established by the assessee from time to time. The AO then referred to the definition of the term “royalty” as provided in the Indo-Japan DTAA as per which it was payment of any kind received as a consideration for the use of or the right to use any copyright of literary, artistic or scientific work including cinematography films and films or tape for radio or television broadcasting, the right to use industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific exports. From these agreements and other relevant facts, the AO inferred that other airlines were making payments to the assessee for the use of or for the right to use software and commercial information. According to him, therefore, the payment received by the assessee was covered under the term “royalty”. Since the assessee had not provided the correct figure received by it and had not contradicted with evidence the figure of Rs. 5 crores as communicated to it earlier, the AO adopted the total receipts at Rs. 5 crores and levied tax thereon.
4. The assessee was aggrieved by the assessment order so framed. An appeal was preferred before the CIT(A). In the statement of facts filed before the CIT(A), it was, inter alia, mentioned that (i) no charges were payable by domestic or other careers for use of CRS for bookings made from terminals in India, and (ii) the CRS did not belong to the assessee as it was assigned to its subsidiaries AXESS International Net Ink w.e.f. 1st April, 1994. The CIT{A) took note of the declarations made by the Director (Accounting), that the assessee never received any revenues from bookings made on CRS through terminals in India and also took note of the communication sent out by the assessee to various airlines informing them that w.e.f. 1st April, 1994, the AXESS Airlines Participation agreement was assigned to AXESS. From these facts, CIT(A) came to the conclusion that the CRS did not belong to the assessee w.e.f. 1st April, 1994. It was also observed that the assignment of CRS to AXESS by the assessee was not found to be sham or that it was done to avoid or evade payment of tax in India. It was further held that the payments were received by the assessee on behalf of AXESS through IATA clearing house. In view of these facts, the CIT(A) concluded that there was no question of accrual of any income to the assessee in India. As a consequence, the CIT(A) did not decide the other grounds raised in the appeal.
5. The learned Departmental Representative, by and large, reiterated the facts mentioned by the AO in his order. His foremost contention was that the assessee itself had admitted in its letter dt. 7th Jan., 1999 (p. 3 of the paper book) that it owned the AXESS system of reservation. To further strengthen this argument, the learned Departmental Representative referred to two clauses in the agreement entered into by the assessee with Indian Airlines. As per Clause 7.1 of the agreement, the assessee was to submit monthly invoices to the participants for all charges due under the agreement. As per Clause 17.1 of the agreement, any notice or information which was required to be served or given to the assessee, the address of the addressee was that of the assessee by its name and the address given was also the assessee’s postal address in Japan. Thus, it was contended that it was the assessee only who owned the AXESS system and hence the income was rightly taxed in its hands. It was also contended that the income was rightly taxed as royalty for the use of software by the other airlines which was owned by the assessee.
6. The learned counsel for the assessee, at the outset, appraised us as to what the AXESS system was about. It was stated that it was one of the several systems used by various airlines for air ticket booking through computers by using a specific software. AXESS was stated to be one such software like the others being Amadeus, Abacus, Galileo, Sabre etc. It was submitted that the assessee uses AXESS system only. Upto 31st March, 1994, this system was owned by the assessee itself. However, w.e.f. 1st April, 1994, the system was assigned over by the assessee to its subsidiary company known as AXESS International Network Inc. which is also incorporated in Japan. With this assignment, all the existing agreements also stood assigned to the said subsidiary. Therefore, it was contended that if at all there was any accrual of income, it was to the subsidiary company and not to the assessee for the year under consideration. Further explaining the arrangement, the learned counsel submitted that even if the system was held to be owned by the assessee, then also no income would have accrued to the assessee. This is because of the fact that as per the agreements entered into with various airlines and travel agents, if the latter used the terminal installed in India, no charges were payable by them to the owner of the system. In other words, the contention was that if an airline used the terminal located anywhere outside India, then only the user of the system was to be billed. Thus, the contention was that in any case no income accrued to the assessee at all in India through the AXESS system of reservation.
7. We have duly considered the rival contentions and the material on record. On perusal of record, we do observe that there was some misunderstanding and communication gap between the assessee and the AO. This led the AO to believe that the assessee was non-co-operative and had misrepresented certain facts. Let us first bridge this gap. The first communication from the AO to the assessee, inter alia, required the latter to name the reservation system used by it and the name of the company which owned it. It also required the assessee to furnish copies of contract entered into by it with Amadeus, Abacus, Galileo etc. From this communication, the assessee got an impression that the AO is making a pointed enquiry as to whether the assessee has entered into any contract with any of the companies owning reservation systems other than AXESS. Now, as mentioned earlier, the assessee itself was earlier owning the AXESS system. Presently, it was owned by its own subsidiary AXESS International Network Inc. The system was installed in the offices of the assessee. On account of these factors, though the assessee did not own the AXESS system, it did have a sense of belonging, particularly when viewed vis-a-vis other systems. It was in this background that the assessee replied to the above communication of the AO stating that it had not entered into any contracts with Amadeus, Abacus etc. but was using its own system AXESS. While replying in this manner, the assessee did not realise the repercussions it would have under the tax laws. The AO in turn, treated this as misrepresentation of facts. Further, since the assessee was under a bona fide belief that income accruing to it, if any, was not taxable under the Double Tax Avoidance Agreement (DTAA) and since the contracts with other airlines stood assigned to the subsidiary company, its reply was that it has not entered into any agreement. This was taken as misrepresentation of facts and non-co- operation on the part of the assessee. In our view, in fact, there was neither any misrepresentation nor any non-co-operative attitude on the part of the assessee.
8. Coming to the facts of the case, it cannot be disputed that the AXESS” system stood assigned to the subsidiary company w.e.f. 1st April, 1994. The assignment was in accordance with Clause 13.3 of the agreement. On assignment, the concerned parties were informed about the fact of assignment. Copies of the relevant correspondence are on record. Since the mere assignment in terms of Clause 13.3 of the agreement and the intimation thereof to the concerned parties were sufficient enough, the parties did not think it necessary to execute fresh agreements. This is evident from the fact that the agreement which is placed on record is dt. 8th July, 1993, i.e., prior to the date of assignment. As a matter of fact, the AO has relied on this very agreement to conclude that income accrued to the assessee on account of the use of AXESS system. At the time of issuing notices to the assessee, the AO was not aware of the assignment and in the initial correspondence, the assessee could not categorically convey the changed situation to the AO on account of misunderstanding as mentioned earlier. Nonetheless, fact remains that the AXESS system is not owned by the assessee since 1st April, 1994 and hence any income arising from the use of the said system cannot accrue to it. A question, however, may arise as to why is the system installed in the office of JAL and why payment is made through JAL by the user of the system. Well, the reply is quite simple. As mentioned earlier, prior to 1st April, 1994, the system was owned by JAL and obviously the system was installed in its office. Subsequent to the assignment w.e.f. 1st April, 1994, the system continued to be there more as a matter of convenience and after all, the assignment was to its own subsidiary. Therefore, nothing turns on that. As regards payments being routed through JAL, it needs to be appreciated that these payments have to be through the IATA clearing house. IATA clearing house can be used only by its members and no one else. Acquiring the membership of IATA is not an easy task. JAL happens to be its member whereas AXESS International is not. Therefore, again as a matter of convenience, AXESS thought it nothing to be improper if it received its payments through JAL, a member of IATA. Thus, JAL is merely acting in a fiduciary capacity collecting payments on behalf of AXESS and making over the payments to AXESS, Therefore, we are of the firm view that no income can be assessed in the hands of the assessee. The income which was assessed by the AO is royalty or not is no longer an issue since we are holding that no income is taxable in the hands of the assessee. In fact, no arguments had been advanced from either side to convince us as to how it was royalty or not. Moreover, the proper course for the AO would have been to resort to the provisions of Sections 5 and 9 of the Act to find out whether any income had accrued or arisen to the assessee in India or not. Without undertaking this exercise, the AO concluded that some income was taxable in the hands of the assessee. His approach was somewhat arbitrary. At any rate, the CIT(A) was justified in deleting the addition and hence we uphold his order.
9. In the result, the appeal of the Department is dismissed.