Permanent establishment attribution: final service PE finding barred recharacterisation, and 2.5% sales attribution was upheld.

An earlier Tribunal finding that LTIL constituted only a service permanent establishment in India had attained finality, so the Revenue could not later recharacterise it as a fixed place, dependent agent, or installation permanent establishment. The Tribunal also upheld attribution of income at 2.5% of sales made by the overseas entities in India, holding that only profits attributable to activities carried on through the Indian permanent establishment may be taxed as business profits under the treaty, and that the CIT(A)'s basis was a reasonable measure in the absence of a better attribution method. The Revenue failed on both issues.

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Issues: (i) whether LTIL constituted only a service permanent establishment of the assessee in India; (ii) whether 2.5% of the sales made by the overseas entities in India was the proper basis for attribution of income to the Indian permanent establishment.

Issue (i): whether LTIL constituted only a service permanent establishment of the assessee in India.

Analysis: The earlier Tribunal order had expressly held LTIL to be a service permanent establishment of the assessee under the applicable treaty provisions. That finding had attained finality because no effective challenge was made to it on that point. The Revenue could not, in the present proceedings, enlarge the character of the permanent establishment by contending that it was also a fixed place, dependent agent, or installation permanent establishment.

Conclusion: The finding that LTIL constituted only a service permanent establishment of the assessee in India was upheld.

Issue (ii): whether 2.5% of the sales made by the overseas entities in India was the proper basis for attribution of income to the Indian permanent establishment.

Analysis: Only profits attributable to activities carried on in India through the permanent establishment can be taxed as business profits under the treaty. The assessee's supply of hardware was not shown to have been carried on through the service permanent establishment, and the Revenue produced no better attribution mechanism. The basis adopted by the CIT(A), namely 2.5% of sales made in India, was consistent with the Department's own approach in later proceedings and was found to be a reasonable measure of attribution.

Conclusion: The attribution of income at 2.5% of the sales made by the overseas entities in India was upheld.

Final Conclusion: The Revenue failed on both issues, and the assessee retained the benefit of the CIT(A)'s order.

Ratio Decidendi: Where a finding that a foreign enterprise has only a service permanent establishment has attained finality, the Revenue cannot seek to recharacterize the permanent establishment in later proceedings, and only profits directly or indirectly attributable to activities carried on through that permanent establishment may be taxed as business profits.

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