Permanent establishment cannot be inferred from common ownership alone; related-party ad dealings escaped withholding, while reimbursement issue was remitted.

A permanent establishment cannot be inferred merely from common ownership, common directors, or related-party dealings; where the assessee transacted with Indian clients on a principle-to-principle basis and did not act on behalf of the foreign enterprise, no PE arose and no withholding obligation attached, so the first disallowance was deleted. The payment described as reimbursement for use of a third-party server platform and software licence required verification of its true contractual character and tax incidence; because the record was insufficient, the matter was remitted to the Assessing Officer for fresh consideration, leaving that issue open.

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Issues: (i) Whether the assessee constituted a permanent establishment of its foreign associated enterprise so as to attract tax withholding on payments for purchase of online advertisement space and consequential disallowance under section 40(a)(i)(A) of the Income-tax Act, 1961; (ii) Whether the payment described as reimbursement towards use of a third-party server platform and software licence was liable to tax deduction at source and disallowance under section 40(a)(i)(A) of the Income-tax Act, 1961.

Issue (i): Whether the assessee constituted a permanent establishment of its foreign associated enterprise so as to attract tax withholding on payments for purchase of online advertisement space and consequential disallowance under section 40(a)(i)(A) of the Income-tax Act, 1961.

Analysis: The arrangement for booking and resale of advertisement space was found to be an independent business transaction on a principle-to-principle basis. Common directorship, shareholding, similarity of business, or the existence of commercial dealings between associated enterprises did not by themselves create a permanent establishment. The assessee dealt with its own Indian clients, bore the business risks, and nothing showed that it was acting on behalf of the foreign enterprise or falling within the agency permanent establishment concept under Article 5. In the absence of a permanent establishment, the business profits of the foreign enterprise were not taxable in India under Article 7, and no withholding obligation arose on that remittance.

Conclusion: The assessee did not constitute a permanent establishment of the foreign associated enterprise, and the disallowance on the first issue was unsustainable.

Issue (ii): Whether the payment described as reimbursement towards use of a third-party server platform and software licence was liable to tax deduction at source and disallowance under section 40(a)(i)(A) of the Income-tax Act, 1961.

Analysis: The payment was connected with the use of a server platform and licence belonging to a third party and routed through the foreign associated enterprise. The nature of the payment and the real incidence of tax deduction required verification of the contractual and financial arrangement, including whether the payment was a true reimbursement or a charge for services or rights attracting section 195. The record was insufficient for a final adjudication on this aspect, and the matter required fresh examination by the Assessing Officer after giving the assessee an opportunity of hearing.

Conclusion: The issue was remitted to the Assessing Officer for fresh consideration in accordance with law.

Final Conclusion: The first disallowance was deleted, while the second issue was sent back for re-examination, leaving the Revenue's appeal only partly successful.

Ratio Decidendi: A permanent establishment cannot be inferred merely from common ownership, common directors, or related-party business dealings; independent transactions on a principle-to-principle basis do not by themselves create taxability in India, and a payment routed through an intermediary requires factual verification of its true character before withholding consequences are applied.

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