Treaty residence, permanent establishment, and profit attribution rules shape taxation of UK partnership services connected with Indian projects.

A fiscally transparent UK partnership may qualify for India-UK treaty benefits if the full partnership income is taxed in the residence State through taxation of the partners. Article 5(2)(k) was treated as an independent deemed permanent establishment provision covering services furnished through personnel for the required duration, including professional services. Under Article 7(2), arm's length attribution applies to intra-enterprise dealings and not to substituting actual client receipts with notional market rates. Reimbursements supported by evidence and incurred without markup were not income. Interest under section 234B was not chargeable where tax was deductible at source, and the force of attraction principle extended Indian taxability to income connected with Indian projects.

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Issues: (i) whether a UK partnership firm not taxable in its own right in the residence State was entitled to the benefits of the India UK tax treaty; (ii) whether the assessee had a permanent establishment in India under Article 5(2)(k); (iii) whether profits attributable to the permanent establishment could be computed by substituting actual client billings with hypothetical market rates under Article 7(2); (iv) whether reimbursement of expenses could be treated as income; and (v) whether interest under section 234B was chargeable and whether the force of attraction principle applied to income from services connected with Indian projects.

Issue (i): whether a UK partnership firm not taxable in its own right in the residence State was entitled to the benefits of the India UK tax treaty.

Analysis: The treaty applies to persons who are residents of one or both Contracting States. The expression "resident of a Contracting State" requires liability to taxation by reason of domicile, residence, place of management, or a similar locality-linked criterion. The decisive factor was held to be whether the entire income of the entity is subjected to tax in the residence State, even if the tax is levied in the hands of the partners rather than the partnership itself. Treaty interpretation was required to be purposive and contextual, and the OECD partnership commentary did not compel denial of treaty access where the residence State taxed the full partnership income through its own fiscal regime.

Conclusion: The assessee was entitled to the benefits of the India UK tax treaty.

Issue (ii): whether the assessee had a permanent establishment in India under Article 5(2)(k).

Analysis: Article 5(1) lays down the basic rule, while Article 5(2)(k) is a deemed PE provision extending to furnishing of services through employees or other personnel for the prescribed duration. The listed clauses in Article 5(2) were not treated as a single homogeneous set merely illustrative of Article 5(1); clause (k) was held to operate independently. The distinction between "furnishing" and "rendering" was rejected as overly technical, and professional services were held to fall within the clause. The assessee had satisfied the duration requirement and the services were not otherwise excluded by Article 13.

Conclusion: The assessee had a permanent establishment in India under Article 5(2)(k).

Issue (iii): whether profits attributable to the permanent establishment could be computed by substituting actual client billings with hypothetical market rates under Article 7(2).

Analysis: The fiction of hypothetical independence under Article 7(2) was held to govern transactions within the enterprise, including head office and PE dealings, for arm's length attribution of profits. It was not extended to substitute actual receipts from independent clients with notional market prices. The provision was treated as a mechanism for allocating real income and preventing distortion in intra-group pricing, not for rewriting external client invoices into hypothetical amounts.

Conclusion: The assessee could not replace actual billings with notional market rates for PE profit computation.

Issue (iv): whether reimbursement of expenses could be treated as income.

Analysis: The reimbursements were found to be against actual expenses incurred on behalf of clients, without markup, and supported by sufficient evidence and internal controls. The partial ad hoc disallowance was held to rest on surmises and conjectures rather than on a factual basis justifying income addition.

Conclusion: No part of the reimbursed expenses was liable to be treated as income.

Issue (v): whether interest under section 234B was chargeable and whether the force of attraction principle applied to income from services connected with Indian projects.

Analysis: The interest issue was covered by binding precedent holding that where tax is deductible at source, advance tax interest is not chargeable in the manner suggested by the Revenue. On attribution, the treaty language taxing profits directly or indirectly attributable to the PE was held to incorporate a force of attraction rule. Income from services rendered outside India but in relation to Indian projects was treated as indirectly attributable to the Indian PE and therefore taxable in India.

Conclusion: Interest under section 234B was not chargeable, and the force of attraction principle applied so as to tax income connected with Indian projects even if some services were rendered outside India.

Final Conclusion: The assessee succeeded on treaty entitlement, reimbursement, and interest, but failed on PE existence, profit attribution methodology, and force of attraction. The Revenue succeeded on the domestic taxability and broader attribution issues, but not on interest and reimbursement.

Ratio Decidendi: For treaty purposes, a fiscally transparent partnership can qualify as a resident if its entire income is subjected to residence-State taxation, and under Article 7, profits attributable to a PE are to be computed on real receipts with arm's length adjustment limited to intra-enterprise dealings, not by substituting hypothetical market values for receipts from independent clients.

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