Permanent establishment and profit attribution may arise where India-based contract execution performs core business functions, with advance tax interest also applicable.

An India-linked turnkey telecom supply contract may give rise to a permanent establishment in India where Indian premises, a subsidiary or liaison office participate in negotiation, execution and performance, and the activities carried on in India form core business functions rather than preparatory or auxiliary functions. In such circumstances, profits may be estimated under Rule 10 if the assessee's accounts lack reliable evidentiary value, and an attribution percentage may be applied to the India presence based on the operational role performed there. Interest under section 234B may also apply where the non-resident consistently claims no Indian tax liability and fails to pay advance tax.

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Issues: (i) Whether the assessee constituted a permanent establishment in India under Article 5 of the India-USA tax treaty. (ii) Whether 50% of the profits from supply of telecom hardware was rightly attributed to the alleged permanent establishment in India. (iii) Whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Issue (i): Whether the assessee constituted a permanent establishment in India under Article 5 of the India-USA tax treaty.

Analysis: The supply contract was treated as an integrated turnkey arrangement involving supply, installation, testing, commissioning, after-sales support and related activities in India. The assessee's Indian subsidiary and liaison office were found to have participated in negotiation, execution and performance of the contract, and the activities carried out in India were held to be core business functions rather than preparatory or auxiliary. On that basis, the premises and activities in India were treated as a fixed place, dependent agent, installation and service presence.

Conclusion: The assessee was held to have a permanent establishment in India.

Issue (ii): Whether 50% of the profits from supply of telecom hardware was rightly attributed to the alleged permanent establishment in India.

Analysis: The accounts filed by the assessee were accepted as not having true evidentiary value, and the global accounts and gross profit margins were used as the basis for estimation under Rule 10 of the Income-tax Rules, 1962. After allowing expenses relatable to the permanent establishment, the remaining profit was apportioned on the footing that substantial operational activities connected with the contract were carried out in India. The attribution percentage was considered reasonable in the facts of the case and was not reduced by reference to other cases on different facts.

Conclusion: The attribution of 50% of the profits to the permanent establishment was upheld.

Issue (iii): Whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Analysis: The assessee had consistently maintained that its receipts were not taxable in India and had not discharged advance tax. In these circumstances, the liability to interest for default in advance tax was held to arise, following the approach adopted in later Delhi High Court authority relied upon in the order.

Conclusion: Levy of interest under section 234B was upheld.

Final Conclusion: The assessee's challenge failed on the substantive tax issues, and the revenue's position on permanent establishment, profit attribution and interest was sustained.

Ratio Decidendi: Where a foreign enterprise's India-linked contract is performed through Indian premises and associated entities in a manner that carries out the core business functions in India, the enterprise may be treated as having a permanent establishment there and profits may be reasonably estimated and attributed to that presence under the treaty and domestic computation rules.

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