Treaty attribution and reimbursements: only India-linked service profits taxed, expense recoveries excluded, and 234B interest deleted.

A foreign professional firm was held to have a permanent establishment in India under the India-UK DTAA, but only profits attributable to services performed in India were taxable there. Reimbursements of actual expenses incurred without markup were treated as non-income receipts and the disallowance was rejected. Interest under section 234B was held not leviable on the facts, following the assessee's own prior case law. The ruling therefore upheld treaty-based attribution for Indian taxation, excluded pure expense reimbursements from income, and deleted the interest charge.

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Issues: (i) Whether the assessee had a permanent establishment in India under Article 5(2)(k) of the India-UK DTAA and whether only income attributable to services performed in India was taxable in India; (ii) whether reimbursements of expenses received by the assessee could be treated as its income; (iii) whether interest under section 234B of the Income-tax Act, 1961 was chargeable.

Issue (i): Whether the assessee had a permanent establishment in India under Article 5(2)(k) of the India-UK DTAA and whether only income attributable to services performed in India was taxable in India.

Analysis: The disputed year involved the same factual matrix as earlier years in the assessee's own case. The Tribunal followed its earlier orders and the Special Bench decision relied upon in those orders, holding that the assessee had a permanent establishment in India under Article 5(2)(k). At the same time, the Tribunal accepted that only the profits attributable to the permanent establishment, namely the income relatable to services rendered in India, could be brought to tax in India.

Conclusion: The issue was decided against the assessee on the existence of a permanent establishment, but in favour of the assessee on the limited taxability of income attributable only to services performed in India.

Issue (ii): Whether reimbursements of expenses received by the assessee could be treated as its income.

Analysis: The Tribunal applied its earlier consistent view that reimbursements represented actual expenses incurred without markup and were supported by evidence. On that basis, the amounts could not be characterised as income of the assessee, and the disallowance sustained by the lower authorities was not justified.

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

Issue (iii): Whether interest under section 234B of the Income-tax Act, 1961 was chargeable.

Analysis: Following binding precedent already applied in the assessee's own case, the Tribunal held that the levy of interest under section 234B was not sustainable on the facts of the case and directed deletion of the interest charged.

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

Final Conclusion: The assessee succeeded on the attribution of income, reimbursement of expenses, and interest under section 234B, while the finding of a permanent establishment in India was upheld. The cross appeals were thus disposed of with mixed results, the assessee obtaining substantial but not complete relief.

Ratio Decidendi: In a treaty case involving a foreign professional firm with a permanent establishment in India, only profits attributable to services performed in India are taxable in India, reimbursements of actual expenses without markup are not income, and interest under section 234B is not leviable where the tax consequence follows the treaty attribution framework applied in the assessee's own case.

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