Permanent establishment taxation under the Indo-US DTAA upheld for Indian branch business receipts and 10% profit estimate sustained.

Receipts earned by the Indian branch from software product enhancement, customer care and medical transcription for the US head office were treated as taxable in India because the branch functioned as a permanent establishment under Article 7 of the Indo-US DTAA and the activities formed part of normal commercial operations. Article 7(3) was read as excluding only payments tied to specific non-commercial services for the head office, not income from ordinary business carried on by the permanent establishment, and the assessee failed to show that the work was non-commercial. Profit was required to be computed on the branch's own income, and in the absence of reliable computation data the 10% profit estimate was upheld.

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Issues: Whether the receipts arising from the Indian branch's activities for the head office in the USA were taxable in India under Article 7 of the Indo-US DTAA, and whether the profit attributable to the branch was rightly estimated at 10%.

Analysis: The branch office in India was held to be a permanent establishment and its functions, namely software product enhancement, customer care and medical transcription, were found to be part of the commercial operations outsourced by the head office. Article 7(3) of the DTAA was held to exclude only amounts relating to specific non-commercial services performed for the head office, not income from normal business activities carried on by the permanent establishment. The assessee did not establish that the work was of a non-commercial character. On quantum, the assessee furnished no reliable basis for computation of profit. The estimate made by the Assessing Officer at 15% was reduced by the CIT(A) to 10% on the footing that some supporting data was necessary, and the branch's profit had to be computed on its own income irrespective of any loss in the head office.

Conclusion: The receipts from the Indian branch were taxable in India, and the estimation of profit at 10% was upheld.

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