Notional Interest Income on Loan, would be assessable as Income of assessee having Business Connection/PE in India: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai held that the notional interest income on the loan (interest-free) that was advanced by the assessee to its AE in relation to Abacus Distribution System (India) Ltd. (ADSIL) would be assessable as the income of the assessee which has a business connection or Permanent Establishment (PE) in India.

The assessee, Sabre Asia Pacific Pte. Ltd. is a company resident of Singapore engaged in the business of promotion, development, operation, marketing, and maintenance of a Computerized Reservation System (CRS).

The primary business of the assessee is to make airline reservations for and on behalf of the participating airlines by using the CRS. The participating airlines provide the necessary information which is displayed to the travel agents throughout the world so that they could guide their customers to make the necessary requests for booking of tickets through the CRS. The assessee had licensed its wholly-owned Indian subsidiary company, in relation to ADSIL as its NMC in India.

The AO observed that the principal activities including marketing, distribution, sales, and revenue generation had taken place in India. The AO after perusing the recitals in the “distribution agreement” executed between the assessee and ADSIL observed that ADSIL was carrying on the business activities of the assessee in India.

The AO concluded that the assessee had a PE in terms of Article 5 of the India-Singapore tax treaty, accordingly assessment order proposed to attribute income of Rs. 9,37,18,332 to the assessee’s PE in India.

The assessee filed objections with the Dispute Resolution Panel-2, Mumbai (DRP). The DRP after deliberating on the contention of the assessee that as it had no business connection/Permanent Establishment in India, therefore, no income was liable to be brought to tax in India, did not find favor with the same.

The tribunal consists of the Accountant Member, N.K. Pradhan and Judicial Member, Ravish Sood held that the notional interest income on the loan (interest-free) that was advanced by the assessee to its AE in relation to Abacus Distribution System (India) Ltd. (ADSIL) would be assessable as the income of the assessee which has a business connection or Permanent Establishment (PE) in India.

“At the same time, we are in agreement with the claim of the Ld. A.R that the said notional interest income on the loans advanced by the assessee to its AE would be entitled to be adjusted against the expenditure incurred by the assessee by way of marketing service fees paid to its National Marketing Agency in India, i.e it’s NMC viz. ADSIL,” the tribunal said.