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Issues: (i) Whether the final assessment order passed after DRP directions was barred by limitation; (ii) Whether the MLI or its underlying spirit could be invoked to determine PE for assessment year 2020-21; and (iii) Whether the alleged PE and the 30% profit attribution could be sustained on the existing record.
Issue (i): Whether the final assessment order passed after DRP directions was barred by limitation.
Analysis: The retrospective amendment clarified that the limitation under Section 153 governs the passing of the draft assessment order, whereas the final assessment order following DRP directions is governed by Section 144C.
Conclusion: The final assessment order was not time-barred. Against the assessee.
Issue (ii): Whether the MLI or its underlying spirit could be invoked to determine PE for assessment year 2020-21.
Analysis: The relevant MLI provisions were admittedly inapplicable to the assessment year. The existence of a PE must therefore be determined strictly under Article 5 of the India-United Kingdom Double Taxation Avoidance Agreement applicable for that year.
Conclusion: Neither the MLI nor its underlying spirit can be invoked to determine PE for the relevant year. In favour of the assessee.
Issue (iii): Whether the alleged PE and the 30% profit attribution could be sustained on the existing record.
Analysis: Determination of a dependent-agent PE requires examination of the actual contractual arrangements and conduct, including control over pricing, credit risk, contractual obligations, performance responsibility, and the Indian entity's role in soliciting, negotiating, securing and processing orders. Fixed-place and service PE require separate satisfaction of their respective treaty conditions; the Revenue bears the burden of establishing a PE. Acceptance of an earlier assessment concerning another group entity does not create an estoppel for the relevant year. If a PE is found, profit attribution must follow a functions, assets and risks analysis. Arm's-length remuneration does not determine PE existence, but may eliminate further attribution where it fully captures the relevant functions and risks; ad hoc attribution is impermissible.
Conclusion: The PE issue and related profit attribution were remitted for fresh treaty-compliant determination; no final finding on PE or attributable profits was made. In favour of the assessee to the extent of remand.
Final Conclusion: The limitation challenge fails, while the PE inquiry and any profit attribution must be redetermined independently under the applicable treaty, without reliance on the MLI or an ad hoc percentage of receipts.
Ratio Decidendi: PE existence and resultant profit attribution must be determined independently for each year under the applicable treaty on the actual functions, assets, risks and conduct of the parties, and cannot rest on inapplicable MLI principles, prior group assessments or ad hoc attribution.
Permanent establishment determination requires treaty-specific functional analysis, barring inapplicable MLI reliance and ad hoc profit attribution.
The final assessment order following DRP directions was governed by the procedure under section 144C rather than the limitation applicable to the draft assessment order, and was therefore not time-barred. For the relevant assessment year, permanent establishment had to be determined under Article 5 of the applicable India-UK tax treaty; inapplicable MLI provisions or their underlying spirit could not be invoked. Dependent-agent, fixed-place and service PE required separate treaty-specific examination of contractual arrangements, conduct, and functions, assets and risks, with the Revenue bearing the burden of proof. Profit attribution required FAR analysis and could not rest on an ad hoc percentage; arm's-length remuneration could eliminate further attribution if fully compensatory.
Permanent establishment under India-UK DTAA - Applicability of Multilateral Instrument to India-UK DTAA - Profit attribution to permanent establishment - Limitation for final assessment order pursuant to DRP directions Limitation for final assessment order pursuant to DRP directions - Validity of the final assessment order on the ground that it was passed beyond the time prescribed for completion of assessment - HELD THAT: - The retrospective statutory amendment clarified that the limitation under section 153 governs the passing of the draft assessment order, whereas the final order pursuant to DRP directions is governed by section 144C. The final order could not therefore be treated as time-barred merely because it was passed beyond the period under section 153. [Paras 6] The limitation ground was dismissed as infructuous. Compliance with DRP directions in final assessment order - Alleged non-compliance with the DRP directions while passing the final assessment order - HELD THAT: - No specific deviation from the DRP directions was demonstrated on examination of those directions and the final assessment order. [Paras 7] The challenge based on alleged non-compliance with the DRP directions was rejected. Applicability of Multilateral Instrument to India-UK DTAA - Reliance on the Multilateral Instrument for determining the existence of a permanent establishment for A.Y. 2020-21 - HELD THAT: - As the relevant MLI provisions were admittedly inapplicable to A.Y. 2020-21, neither those provisions nor their purported spirit or purpose could be invoked. The permanent-establishment question had to be determined strictly under Article 5 of the India-UK DTAA applicable for that year. [Paras 12] The MLI was held inapplicable for determining the existence of a permanent establishment for A.Y. 2020-21. Dependent-agent permanent establishment - Fixed-place and service permanent establishment - India-UK DTAA - Existence of a dependent-agent, fixed-place or service permanent establishment of the foreign software enterprise through its Indian group entity - HELD THAT: - The lower authorities had not examined the actual contractual arrangements and conduct necessary to determine whether the Indian entity was an independent reseller or performed functions bringing it within Article 5(4). The assessment required verification of the role in soliciting, negotiating, securing and processing orders, including pricing, credit risk, contractual obligations and performance. Fixed-place and service PE required independent examination of their respective treaty conditions; the existence of an Indian associated enterprise and its activities could not, without further examination, establish either form of PE. Earlier assessments of another group entity did not operate as an estoppel, and the Revenue bore the burden of establishing a PE on the facts of the relevant year. [Paras 12] The PE issue was remanded without adjudication on merits for fresh examination under the applicable treaty provisions, after granting the assessee a reasonable opportunity of hearing. Profit attribution to permanent establishment - Arm's-length remuneration of associated enterprise - Functions, assets and risks analysis - Attribution of profits from Indian software sales to the alleged permanent establishment - HELD THAT: - The arm's-length remuneration of the Indian entity did not by itself determine whether a PE existed, since that inquiry was distinct. If a PE were found, attribution had to rest on an examination of the functions performed, assets employed and risks assumed, including whether the remuneration already received fully captured the functions and risks relevant to the alleged PE. An ad hoc attribution based merely on the approach adopted in earlier years was impermissible. [Paras 12] The profit-attribution issue was remanded for a reasoned determination, conditional upon a finding that a PE existed. Final Conclusion: The appeals were allowed for statistical purposes by remanding the PE and profit-attribution questions for fresh adjudication. The limitation and alleged non-compliance with DRP directions grounds were rejected.