Attribution of foreign enterprise profits to a permanent establishment requires evidence of Indian business activity; arbitrary allocation was rejected.

Profits of a foreign enterprise were taxable in India only to the extent attributable to the permanent establishment or business activities carried on in India under the treaty framework. Attribution required evidence that the receipts were generated through the Indian project office or otherwise linked to the assessee's Indian tax identity. In the absence of material supporting an arbitrary allocation, 25% of the gross receipts could not be brought to tax in India. The addition was therefore unsustainable and the issue was decided in favour of the assessee.

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Issues: Whether 25% of the gross receipts could be brought to tax in India without evidence that the amount was attributable to the assessee's Indian tax identity or permanent establishment.

Analysis: The Agreement recognizes that an enterprise may have separate tax identities in the contracting states and that profits are taxable in the other state only to the extent attributable to the permanent establishment there. Attribution must be based on material showing that the income was generated through the permanent establishment or business carried on in India. No evidence was brought on record to justify an arbitrary allocation of 25% of the gross receipts to the Indian establishment, and no finding established that the disputed receipts were fully attributable to activities in India through the project office.

Conclusion: The addition of 25% of the gross receipts to tax in India was unsustainable and the issue is decided in favour of the assessee.

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