Service PE and royalty attribution under the India-UK DTAA turn on employee presence, treaty nexus, and factual profit allocation.

Service permanent establishment under the India-UK DTAA was treated as existing where employees were deputed and services continued in India for the required period, while royalty for transfer of intellectual property rights was held not to be effectively connected with that permanent establishment because the PE had no role in creating or exploiting those rights. Profit attribution to Indian operations was to be freshly determined on proper facts under Article 7 after hearing the assessee, and interest under sections 234A and 234B was left for verification based on the timing of return filing and the facts found.

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Issues: (i) Whether the assessee had a service permanent establishment in India under the India-UK DTAA; (ii) Whether royalty receipts were effectively connected with the alleged service permanent establishment; (iii) Whether profits attributable to the Indian operations had to be freshly determined; (iv) Whether interest under sections 234A and 234B of the Income-tax Act, 1961 required verification.

Issue (i): Whether the assessee had a service permanent establishment in India under the India-UK DTAA.

Analysis: The dispute on existence of a service permanent establishment had already been decided in the assessee's own case for earlier assessment years. The earlier view, followed here, was that the conditions for a service permanent establishment were satisfied on account of deputation of employees and continuation of services within India for the requisite period.

Conclusion: The issue was decided against the assessee.

Issue (ii): Whether royalty receipts were effectively connected with the alleged service permanent establishment.

Analysis: The earlier orders in the assessee's own case held that the royalty was consideration for transfer of intellectual property rights simpliciter and that the service permanent establishment had no role in creating or making available those rights. On that reasoning, the royalty was not treated as effectively connected with the permanent establishment.

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

Issue (iii): Whether profits attributable to the Indian operations had to be freshly determined.

Analysis: Since separate details of receipts and actual expenses were not available on record, the question of attribution was remitted for fresh determination in accordance with Article 7 of the DTAA after giving the assessee a reasonable opportunity of being heard. The Tribunal followed the same course for the year in question.

Conclusion: The issue was restored to the Assessing Officer for fresh determination.

Issue (iv): Whether interest under sections 234A and 234B of the Income-tax Act, 1961 required verification.

Analysis: The assessee's contention that the return had been filed within time was required to be verified by the Assessing Officer, and interest was to be charged only in accordance with law if the factual position so warranted.

Conclusion: The issue was left for verification and consequential action.

Final Conclusion: The appeal succeeded overall, with the assessee obtaining relief on the royalty attribution controversy while the service permanent establishment issue remained adverse and the attribution and interest aspects were sent for further consideration.

Ratio Decidendi: Royalty for transfer of intellectual property rights is not effectively connected with a service permanent establishment where the permanent establishment plays no role in creating or exploiting those rights; attribution of profits must be made only on a proper factual basis consistent with the treaty and after giving an opportunity of hearing.

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