2019 (4) TMI 1474 - AT - Income Tax

UK legal consultancy firm not liable for tax in India due to no Permanent Establishment

Linklaters C/o Deloitte Haskins & Sells LLP Versus Dy. Director of Income Tax (IT) Circle–3 (2), Mumbai And (Vice-Versa)

Linklaters C/o Deloitte Haskins & Sells LLP Versus Dy. Director of Income Tax (IT) Circle–3 (2), Mumbai And (Vice-Versa) - TMI Issues Involved:1. Existence of Permanent Establishment (PE) in India.2. Taxability of income received for work rendered outside India.3. Disallowance on account of reimbursement of expenditure.Detailed Analysis:1. Existence of Permanent Establishment (PE) in India:The core issue in the assessee's appeal was whether the assessee, a UK-based partnership firm engaged in legal consultancy, had a Permanent Establishment (PE) in India under Article 5(2)(k)(i) of the India-UK Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) contended that the assessee had a PE in India as its employees rendered services in India for more than 90 days during the relevant financial year. This conclusion was based on the observation that the employees/personnel of the assessee stayed in India for over 90 days.The assessee argued that the period of stay of employees should be calculated cumulatively and not individually. Additionally, the assessee contended that the vacation period of one employee, Shri Narayan Iyar, should not be counted. The Commissioner (Appeals) upheld the AO's decision, rejecting the assessee's contention regarding multiple counting and vacation period, stating that the activities of furnishing services by an enterprise through its employees should be seen employee-wise and aggregated.Upon appeal, the Tribunal examined whether the employees of the assessee had stayed and rendered services in India for more than 90 days. The Tribunal found that the vacation period of Shri Narayan Iyar should be excluded from the calculation, as documentary evidence showed he was on study leave and did not render services during that time. Additionally, the Tribunal held that multiple counting of employees on a single day is impermissible under Article 5(2)(k)(i) of the India-UK Tax Treaty. Consequently, the aggregate period of stay of the assessee's employees in India was determined to be 87 days, and thus, the assessee did not have a PE in India. The income from legal consultancy services rendered in India was not taxable in India.2. Taxability of Income Received for Work Rendered Outside India:The Revenue's appeal challenged the decision of the Commissioner (Appeals) that the income received by the assessee for work rendered outside India is not taxable. The Tribunal noted that this issue had been consistently decided in favor of the assessee in previous years. Following the consistent view of the Tribunal in the assessee's own case for earlier assessment years, the decision of the Commissioner (Appeals) was upheld, and the ground raised by the Revenue was dismissed.3. Disallowance on Account of Reimbursement of Expenditure:The Revenue also challenged the decision of the Commissioner (Appeals) in restricting the disallowance on account of reimbursement of expenditure to the extent of 15%. The Tribunal observed that this issue had been consistently decided in favor of the assessee in earlier years, holding that reimbursement of expenditure cannot be treated as income of the assessee. Additionally, since the Tribunal had already held that the assessee did not have a PE in India during the relevant year, the amount was not taxable otherwise. Therefore, the ground raised by the Revenue was dismissed.Conclusion:The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal concluded that the assessee did not have a PE in India during the relevant assessment year, and thus, the income from legal consultancy services rendered in India was not taxable. Additionally, the income received for work rendered outside India and the reimbursement of expenditure were not taxable.