2014 (11) TMI 725 - AT - Income Tax

UK Firm's Indian Taxation: PE Establishment Upheld, Income Computation, TDS Compliance, Double Taxation Agreement Benefits.

The Tribunal upheld the establishment of a Permanent Establishment (PE) in India for a UK-based partnership firm, making profits attributable to the PE ... Permanent establishment - Whether the assessee had a permanent establishment in India or not – Held that:- Following the decision in Linklaters LLP Versus ITO (Int’l Taxation) [2010 (7) TMI 535 - ITAT, MUMBAI] - in a situation where specific provisions for professional services or independent personal services or included services exist under article 15, when services are rendered by the enterprise, article 5(2)(k) will come into play, and when services are rendered by an individual, article 15 will find application - article 15 will not be applicable, as the assessee did have a PE in India under article 5(2)(k) of the India-UK tax treaty, and profits attributable to the PE are taxable under article 7 of the India-UK tax treaty - the assessee did have Permanent Establishment in India. Computation of income – Held that:- Following the decision in Linklaters LLP Versus ITO (Int’l Taxation) [2010 (7) TMI 535 - ITAT, MUMBAI] - the plea put forth by the assessee proceeds on fallacy that arm’s length price adjustment can be made in respect of the transactions with the clients of the assesse - the revenues earned by the assessee are to be taken at actual figures and no adjustment is permissible in respect of the same - the order of CIT(A) is upheld. Validity of Receipts – Reimbursement of expenses – Held that:- Following the decision in Linklaters LLP Versus ITO (Int’l Taxation) [2010 (7) TMI 535 - ITAT, MUMBAI] - The reimbursements received by the assessee are in respect of specific and actual expenses incurred by the assessee and do not involve any mark up, there is reasonable control mechanism in place to ensure that these claims are not inflated, and the assessee has furnished sufficient evidence to demonstrate the incurring of expenses - There is no reason to make any addition to income in respect of these reimbursements of expenses - the AO is directed to delete the disallowance of expenses as sustained by the CIT(A) and hold that no part of reimbursements of expenses received by the assesse is to be treated as income of the assessee. Assessment of Professional receipts – Held that:- Following the decision in Linklaters LLP Versus ITO (Int’l Taxation) [2010 (7) TMI 535 - ITAT, MUMBAI] - only that portion of the income relating to the services performed in India is assessable - the entire profits directly or indirectly attributable to the Permanent Establishment is assessable and accordingly upheld the order of the AO – the matter is remitted back to the AO. Interest u/s 234B – Held that:- Following the decision in Director of Income tax Vs. Alcatel LUCENT USA Inc. [2013 (11) TMI 734 - DELHI HIGH COURT] - Assessee have denied its liability to pay income tax right from the beginning, should not take the plea that the Indian payers should have deducted tax at source from the remittances made to it - where the revenue has been deprived of use of monies and thereby put to loss for no fault on its part and where loss arose as a result of vacillating stands taken by the assessee, it is not expected of assessee to shift responsibility to Indian Payers - the levy of interest u/s 234B of the Act upheld – Decided against assesse. Issues Involved:1. Permanent Establishment (PE) in India.2. Computation of income based on Profit and Loss account.3. Assessment of receipts related to reimbursement of expenses.4. Charging of interest under Section 234B of the Income Tax Act.5. Eligibility for benefits under the Indo-UK Double Taxation Avoidance Agreement (DTAA).Issue-wise Detailed Analysis:1. Permanent Establishment (PE) in India:The assessee, a UK-based partnership firm, contended that it did not have a PE in India as per Article 5 of the Indo-UK DTAA. The Assessing Officer (AO) observed that the firm's partners and staff stayed in India for more than 90 days during the financial year, thus establishing a PE in India. This decision was upheld by the CIT(A) and the Tribunal, which referenced previous rulings for assessment years 1995-96 and 1996-97. The Tribunal reiterated that the assessee had a PE in India under Article 5(2)(k) of the Indo-UK tax treaty, making profits attributable to the PE taxable under Article 7.2. Computation of Income Based on Profit and Loss Account:The assessee argued that income should be assessed based on the Profit and Loss account related to Indian operations, prepared by estimating fee rates akin to those paid to Indian professionals. The AO and CIT(A) rejected this alternative contention, and the Tribunal upheld this decision citing previous years' rulings. The Tribunal maintained that revenues should be taken at actual figures without adjustments, as the arm's length price adjustment was not applicable in this context.3. Assessment of Receipts Related to Reimbursement of Expenses:The AO included reimbursements of expenses as part of the assessee's income, which was upheld by CIT(A) with a 25% disallowance on claimed expenses. However, the Tribunal reversed this decision, referencing its earlier rulings for assessment years 1995-96 and 1996-97. The Tribunal concluded that reimbursements were made on an actual basis without any markup and were supported by sufficient evidence. Therefore, these reimbursements should not be treated as income, and the AO was directed to delete these amounts from the total income.4. Charging of Interest Under Section 234B:The AO charged interest under Section 234B, which was deleted by CIT(A) on the grounds that the entire amount received by the assessee was subject to Tax Deducted at Source (TDS). The Tribunal upheld CIT(A)'s decision, favoring the assessee based on the jurisdictional High Court's ruling in DIT Vs. Ngc Network Asia LLC, which held that no interest could be imposed on the payee when the payer was responsible for TDS.5. Eligibility for Benefits Under the Indo-UK DTAA:The revenue contended that the assessee, being a fiscally transparent entity in the UK, was not entitled to DTAA benefits. The Tribunal rejected this argument, referencing its decision for assessment year 1995-96. It held that the assessee was eligible for DTAA benefits as long as the entire profits of the partnership firm were taxed in the UK, either in the hands of the firm or its partners.Conclusion:The Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal. The order was pronounced in the open court on 8th August 2014.