Permanent establishment and reimbursements under the India-UK treaty: taxable profits are limited and actual expense refunds are not income.

The commentary notes that, under the India-UK tax treaty, a permanent establishment in India may arise on the facts of the case, with tax confined to profits attributable to the Indian activities under Article 7. It also states that reimbursements of specific, actual expenses without any markup and supported by evidence are not treated as income. In addition, interest under section 234B is said to be unsustainable where binding precedent in the assessee's own case and the relevant jurisdictional ruling so require. The overall result described is a partial allowance of the assessee's appeals and rejection of the Revenue's appeals.

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Issues: (i) whether the assessee had a permanent establishment in India under Article 5(2)(k) of the India-UK tax treaty and, if so, whether profits attributable to that permanent establishment were taxable in India; (ii) whether reimbursements of expenses could be treated as income of the assessee; (iii) whether interest charged under section 234B of the Income-tax Act was liable to be deleted.

Issue (i): whether the assessee had a permanent establishment in India under Article 5(2)(k) of the India-UK tax treaty and, if so, whether profits attributable to that permanent establishment were taxable in India.

Analysis: The issue was held to be covered by earlier orders in the assessee's own case. The Tribunal followed the settled view that, on the facts of the case, Article 5(2)(k) applied and the assessee had a permanent establishment in India. It also followed the further principle that where a permanent establishment exists, only the profits attributable to the Indian activities are assessable in India under Article 7.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): whether reimbursements of expenses could be treated as income of the assessee.

Analysis: The Tribunal followed its earlier orders holding that reimbursements representing specific and actual expenses, without markup and supported by evidence, do not constitute income. On the same reasoning, the disallowance sustained by the lower authorities could not be upheld.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (iii): whether interest charged under section 234B of the Income-tax Act was liable to be deleted.

Analysis: The Tribunal followed binding precedent in the assessee's own case and the jurisdictional High Court ruling relied upon therein to hold that the levy of interest under section 234B was not sustainable on the facts considered.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The assessee succeeded on the reimbursement and section 234B issues, while the Revenue succeeded on the permanent establishment question, resulting in a partial allowance of the assessee's appeals and dismissal of the Revenue's appeals.

Ratio Decidendi: Where earlier decisions in the assessee's own case have settled the legal position, the Tribunal will follow that position; reimbursements of actual expenses without markup are not income, profits are taxable only to the extent attributable to the Indian permanent establishment, and interest under section 234B cannot be sustained where the governing precedent so holds.

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