Permanent establishment attribution requires evidence; arbitrary allocation of foreign receipts to Indian tax was unsustainable.

Business profits of a foreign enterprise may be taxed in India only to the extent they are shown, on evidence, to be attributable to its permanent establishment in India. Under Article 7 of the India-Korea tax treaty, attribution must reflect the profits the permanent establishment could be expected to earn as a distinct and separate enterprise. The revenue failed to prove that 25 per cent of the gross receipts was earned through the Indian permanent establishment or that the allocation had any factual basis, so an arbitrary apportionment was impermissible. Accordingly, taxation of that portion of the receipts in India was unsustainable.

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Issues: Whether 25 per cent of the gross receipts could be brought to tax in India without evidence that such income was attributable to the assessee's permanent establishment in India.

Analysis: The agreement between India and Korea contemplated taxation of business profits in the other Contracting State only to the extent attributable to a permanent establishment situated there. Article 7 required attribution of only those profits that the permanent establishment might be expected to make as a distinct and separate enterprise. The revenue did not establish that the disputed portion of the receipts was, in fact, earned through the Indian permanent establishment or that any material on record justified an arbitrary allocation of 25 per cent of the gross receipts to that establishment. In the absence of evidence linking the amount to business carried on through the permanent establishment, the tax liability could not be fastened on that basis.

Conclusion: The question was answered in favour of the assessee, and the addition of 25 per cent of the gross receipts to taxable income in India was unsustainable.

Final Conclusion: The assessment could not stand to the extent it taxed the disputed receipts without proving nexus with the Indian permanent establishment, and the appeal succeeded.

Ratio Decidendi: Business profits of a foreign enterprise may be taxed in India only to the extent they are shown, on evidence, to be attributable to its permanent establishment in India; a notional or arbitrary apportionment is impermissible.

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