Permanent establishment and treaty attribution: actual receipts taxable, genuine expense reimbursements excluded, and no section 234B interest
Permanent establishment under the India-UK treaty was treated as existing on the facts, and profits attributable to that presence were held taxable in India on the actual receipts, not on a notional or arm's-length reworking of what comparable Indian professionals might earn. Reimbursements of expenses were not assessed as income where they represented actual out-of-pocket costs without markup and were supported by verification, leaving no taxable surplus. Interest under section 234B was held not leviable because tax was deductible at source from the non-resident's receipts. The overall result was partial relief to the assessee and partial acceptance of the Revenue's case.
Issues: (i) Whether the assessee had a permanent establishment in India under the India-UK tax treaty and whether profits attributable to that establishment were taxable in India; (ii) whether the professional receipts should be restricted to the value of services performed in India or taken at actual figures; (iii) whether reimbursements of expenses were liable to be assessed as income; (iv) whether interest under section 234B was leviable.
Issue (i): Whether the assessee had a permanent establishment in India under the India-UK tax treaty and whether profits attributable to that establishment were taxable in India.
Analysis: The finding on permanent establishment had already been concluded in the assessee's own case for earlier years and was followed consistently. On the facts, the business presence in India satisfied the treaty test for a permanent establishment, and once such presence existed, the profits attributable to that establishment fell within the taxing power under the treaty framework.
Conclusion: The issue was decided against the assessee and in favour of the Revenue.
Issue (ii): Whether the professional receipts should be restricted to the value of services performed in India or taken at actual figures.
Analysis: The Tribunal followed its earlier view that the entire profits directly or indirectly attributable to the permanent establishment are assessable, and that the receipts cannot be reworked on an arm's length or notional basis by estimating what might have been paid to comparable Indian professionals. The actual receipts formed the correct base for assessment.
Conclusion: The issue was decided against the assessee and in favour of the Revenue.
Issue (iii): Whether reimbursements of expenses were liable to be assessed as income.
Analysis: The Tribunal accepted that the reimbursements represented actual expenses incurred without markup, supported by evidence and controlled by a reasonable verification mechanism. Even on an alternative basis, such expenses would be deductible in full, leaving no taxable surplus. No contrary material was shown for the year under appeal.
Conclusion: The issue was decided in favour of the assessee and against the Revenue.
Issue (iv): Whether interest under section 234B was leviable.
Analysis: The Tribunal preferred the binding jurisdictional view that where tax was deductible at source from the payments to the non-resident recipient, interest under section 234B could not be levied on the recipient. The contrary view of another High Court was not followed in the presence of the local binding precedent.
Conclusion: The issue was decided in favour of the assessee and against the Revenue.
Final Conclusion: The assessment was sustained on permanent establishment and attribution of professional receipts, but relief was granted on reimbursements of expenses and on interest under section 234B, resulting in a mixed outcome with the assessee obtaining partial relief and the Revenue's appeal failing.
Ratio Decidendi: Where receipts are directly attributable to a permanent establishment, the full actual profits so attributable are taxable under the treaty, but reimbursements shown to be actual out-of-pocket expenses without markup are not income, and interest under section 234B is not leviable where tax was deductible at source from the remittance.