Service permanent establishment under the India-UK treaty limited taxability to Indian-attributable profits and excluded pure expense reimbursements.

A service permanent establishment was recognised under the India-UK treaty, and taxation in India was confined to profits attributable to the Indian services rather than global receipts. Reimbursements of actual expenses supported by evidence and without markup were treated as non-taxable, not income of the assessee. Treaty benefits under the India-UK DTAA were allowed, interest under section 234B was held not chargeable, and interest under section 234D was upheld for assessment year 2001-02 in line with later judicial precedent.

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Issues: (i) Whether the assessee had a permanent establishment in India under the India-UK treaty and, if so, whether only profits attributable to services performed in India were taxable; (ii) whether reimbursements of expenses received by the assessee formed part of taxable income; (iii) whether the assessee was entitled to the benefit of the India-UK treaty and whether interest under sections 234B and 234D was chargeable.

Issue (i): Whether the assessee had a permanent establishment in India under the India-UK treaty and, if so, whether only profits attributable to services performed in India were taxable.

Analysis: The assessee's challenge to the finding of a permanent establishment was rejected by following the earlier Tribunal decisions in the assessee's own case. The Tribunal applied Article 5(2)(k) of the treaty and held that the assessee had a service permanent establishment in India. On the Revenue's appeals, the Tribunal also followed the Special Bench ruling on the force of attraction principle and held that only the profits attributable to the permanent establishment and the services rendered in India could be brought to tax in India.

Conclusion: The finding of a permanent establishment was upheld, but taxation was confined to profits attributable to the Indian services and not to the entire global receipts.

Issue (ii): Whether reimbursements of expenses received by the assessee formed part of taxable income.

Analysis: The Tribunal followed its earlier orders in the assessee's own case and held that the reimbursements were in respect of specific and actual expenses, without any markup, and supported by evidence. In such circumstances, no part of the reimbursements could be treated as income.

Conclusion: The reimbursements of expenses were held not taxable as income of the assessee.

Issue (iii): Whether the assessee was entitled to the benefit of the India-UK treaty and whether interest under sections 234B and 234D was chargeable.

Analysis: The Tribunal reiterated that the assessee was eligible for treaty benefits under the India-UK DTAA. It further held that interest under section 234B was not chargeable in the assessee's case, following binding precedent. For assessment year 2001-02, the Tribunal held that interest under section 234D was leviable, following the later judicial precedent on retrospective application.

Conclusion: Treaty benefit was allowed, interest under section 234B was deleted, and interest under section 234D was upheld for assessment year 2001-02.

Final Conclusion: The assessee succeeded on the major substantive issues relating to treaty benefit, attribution of income, reimbursement of expenses, and section 234B interest, while the Revenue succeeded only on section 234D interest for assessment year 2001-02; the appeals were accordingly disposed of partly in favour of each side.

Ratio Decidendi: Where a non-resident enterprise has a service permanent establishment in India under the applicable treaty, only profits attributable to the Indian operations are taxable, reimbursements of actual out-of-pocket expenses without markup do not constitute income, and treaty entitlement is available where the treaty conditions are satisfied; interest under section 234B is not chargeable in such treaty-governed cases, while section 234D applies according to its judicially determined temporal reach.

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