Treaty residency and force-of-attraction rules shape PE attribution, reimbursements, and advance-tax interest for cross-border service income.

A United Kingdom partnership firm may qualify for India-UK treaty benefits if its entire income is taxed in the residence state, even where taxation occurs in the partners' hands. The text also states that Article 5(2)(k) creates a distinct deemed permanent establishment for services furnished through personnel in India, and that actual billing for client work cannot be replaced by notional market rates under Article 7 attribution. Reimbursements of actual expenditure without markup are described as non-income, interest under section 234B as not chargeable on these facts, and the force-of-attraction principle as extending taxation to profits connected with Indian projects.

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Issues: (i) whether a United Kingdom partnership firm was entitled to the benefits of the India-UK tax treaty; (ii) whether the assessee had a permanent establishment in India under Article 5(2)(k); (iii) whether profits attributable to the permanent establishment could be recomputed by substituting market rates for actual billing; (iv) whether reimbursements of expenditure could be treated as income; (v) whether interest under section 234B was chargeable; and (vi) whether the force of attraction principle applied to tax profits connected with Indian projects.

Issue (i): whether a United Kingdom partnership firm was entitled to the benefits of the India-UK tax treaty.

Analysis: The relevant treaty provisions required the person to be a resident of a contracting state and to be liable to taxation there by reason of domicile, residence, place of management, or another similar criterion. The Court held that the decisive factor was not the mode of taxation but whether the entire income of the entity was subjected to tax in the residence state. It further held that a fiscally transparent partnership could still satisfy the residency requirement if its profits were taxed in the residence state, even if taxation occurred in the hands of the partners.

Conclusion: The assessee was entitled to the benefits of the India-UK tax treaty.

Issue (ii): whether the assessee had a permanent establishment in India under Article 5(2)(k).

Analysis: The Court held that Article 5(2)(k) was not merely illustrative of Article 5(1) but created a distinct deemed permanent establishment. It also held that the expressions "furnishing of services" and "rendering of services" were materially interchangeable for the purpose of the treaty. Since the assessee's professional services were furnished through personnel in India for the requisite duration and were not covered by Article 13, the conditions of the deeming provision were satisfied.

Conclusion: The assessee had a permanent establishment in India under Article 5(2)(k).

Issue (iii): whether profits attributable to the permanent establishment could be recomputed by substituting market rates for actual billing.

Analysis: The Court held that the fiction of hypothetical independence in Article 7(2) permits recognition of intra-enterprise transactions at arm's length, but does not authorize rewriting actual revenue from independent clients at notional market rates. The treaty mechanism was confined to attribution and adjustment of internal dealings within the enterprise structure, not to substituting actual client receipts with hypothetical figures.

Conclusion: The actual billing figures had to be adopted and the assessee's plea for market-rate substitution failed.

Issue (iv): whether reimbursements of expenditure could be treated as income.

Analysis: The Court found that the reimbursements represented actual expenditure incurred on behalf of clients, without markup, and that the assessee had produced adequate supporting material. The addition sustained by the lower authority rested on conjecture rather than evidence.

Conclusion: The reimbursements could not be treated as income and the addition was deleted.

Issue (v): whether interest under section 234B was chargeable.

Analysis: The Court followed the settled view that where income is subject to deduction of tax at source, interest for failure to pay advance tax is not chargeable in the hands of the non-resident assessee on these facts.

Conclusion: Interest under section 234B was not chargeable.

Issue (vi): whether the force of attraction principle applied to tax profits connected with Indian projects.

Analysis: The Court held that Article 7(1) taxed not only profits directly attributable to the permanent establishment but also profits indirectly attributable to it. On that basis, income from services rendered in connection with Indian projects, whether performed in India or abroad, was held taxable in India to the extent covered by that attribution rule.

Conclusion: The force of attraction principle applied and the Revenue's ground succeeded.

Final Conclusion: The cross appeals were disposed of by sustaining treaty entitlement and permanent establishment findings, rejecting the notional revaluation of receipts, deleting the reimbursement addition, upholding the deletion of interest under section 234B, and accepting the Revenue's attribution contention on Indian project income.

Ratio Decidendi: For treaty purposes, a fiscally transparent partnership may qualify as a resident if its entire income is taxed in the residence state, and Article 7 permits attribution of profits from Indian projects on a force-of-attraction basis while not permitting substitution of actual client receipts with hypothetical market rates.

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