2023 (11) TMI 434 - AT - Income Tax

UK company's India services create permanent establishment under Article 5(2)(k) after 90 days threshold

Linklaters C/o. Deloitte Haskins & Sells LLP Versus DDIT (International Taxation) – 4 (1), Mumbai And (Vice-Versa)

ITAT Mumbai ruled against the assessee on PE existence, confirming a permanent establishment in India under Article 5(2)(k) of the India-UK DTAA based on ... Income deemed to accrue or arise in India - PE in India - attribution of income relating to work done outside India to the PE - consideration of disbursement as income attributable to the PE and invocation of article 15 of the DTAA - HELD THAT:- We observe from the record that the similar issue was considered by the coordinate bench and decided the issue against the assessee in AY 1995-96 [2010 (7) TMI 1226 - ITAT MUMBAI] where they dealt with the issue of existence of permanent establishment wherein it was held that assessee’s permanent establishment exists in India under Article 5(2)(k) of the DTAA. has elaborately discussed the Article 5 and its sub Articles 5(1), 5(2) and 5(3) of the Indo-UK Treaty. They came to the conclusion by bringing on record the relevant clauses of the treaty, by also discussing the other model conventions like OECD, UN along with its commentaries. They held that the Article 5(2) is no more than an illustration or examples of application of permanent establishment under basic rule under Article 5(1). However, so far as the provisions of India - UK tax treaty are concerned, the clauses (j) and (k) of Article 5(2), which are on the lines of provisions in Article 5(3) in all most standard model conventions. Therefore, they rejected the earlier submissions of the assessee that unlike the applicability of basic rule are in consonance with the illustrations contained in Article 5(2)(a) to (i) and even the clauses (j) and (k) has to pass the test of basic rule. We observe that the “meaning of furnishing” emphasizes the idea of providing necessary or other services. It provides general meaning to emphasize to carry out certain services, which may include provision of services. It is fact on record that legal interpretation or technical interpretation of treaty will leads to nowhere. It is also a fact on record that the assessee provides various services to the clients in the contracting state, i.e., in India. When the other conditions contained in the clause (k) exists like the employees or other personnel are in India for more than 90 days in the twelve months, the deeming provisions get attracted. Decided against assessee. Assess only fees relatable to work performed in India - We observe from the record that identical issue is decided in favour of the assessee for the A.Y. 1997-98 [2014 (11) TMI 725 - ITAT MUMBAI] wherein as relying on Clifford Chance. [2013 (6) TMI 544 - ITAT MUMBAI] decided issue in favour of assessee which held that the profit which is attributable to the PE, can only be assessed in India. Reimbursement of expenses as an income - HELD THAT:- Identical issue is decided in favour of the assessee for the preceding Assessment Years [2015 (9) TMI 1532 - ITAT MUMBAI] as held that reimbursements received by the assessee are in respect of specific and actual expenses incurred by the assessee and do not involve any markup, there is reasonable control mechanism in place to ensure that these claims are not inflated, and the assessee has furnished sufficient evidence to demonstrate the incurring of expenses. There is thus no good reason to make any addition to income in respect of these reimbursements of expenses. Interest u/s 234B was not chargeable in the case of assessee, as all sums chargeable to tax in the hands of the assessee are liable to deduction of tax at source u/s 195. Liability to tax in India under Article 15 of the tax Treaty between India and the U.K - HELD THAT:- As identical issue is decided in favour of the assessee for the A.Y. 1995-96 [2010 (7) TMI 1226 - ITAT MUMBAI] as held that while we agree with the learned counsel that Article 15 will not be applicable on the facts of the present case, this finding does not really come to the rescue of the assessee since, as we have already held, the assessee did have a PE in India under Article 5(2)(k) of the India UK tax treaty, and, accordingly, profits attributable to the PE are taxable under Article 7 of the India UK tax treaty.” Issues Involved:1. Existence of Permanent Establishment (PE) in India.2. Attribution of income to PE.3. Treatment of reimbursement of expenses as income.4. Applicability of interest under section 234B.5. Applicability of Article 15 of the India-UK DTAA.Summary:Existence of Permanent Establishment (PE) in India:The primary issue was whether the assessee had a PE in India under Article 5(2)(k) of the India-UK DTAA. The Tribunal upheld the previous decision that the assessee had a PE in India, emphasizing that Article 5(2)(k) is independent and does not require the conditions of Article 5(1) to be met. The Tribunal rejected the argument that 'furnishing of services' should be interpreted narrowly and affirmed that the assessee's activities met the criteria for a PE under Article 5(2)(k).Attribution of Income to PE:The Tribunal agreed with the assessee that only the income attributable to services rendered in India should be taxed in India. This was based on the precedent set in the assessee's own case for previous years, where it was held that only income related to services performed in India is taxable.Treatment of Reimbursement of Expenses as Income:The Tribunal followed its earlier decisions and held that reimbursements received by the assessee for specific and actual expenses incurred, without any markup, should not be treated as income. This decision was consistent with the assessee's previous cases where the Tribunal had ruled in favor of the assessee on this issue.Applicability of Interest under Section 234B:The Tribunal upheld the decision that interest under section 234B is not chargeable to the assessee, as the tax was deductible at source under section 195. This was in line with the decisions in the assessee's previous cases and supported by the jurisdictional High Court's ruling in DIT vs. NGC Network LLC.Applicability of Article 15 of the India-UK DTAA:The Tribunal agreed with the assessee that Article 15, which pertains to independent personal services, was not applicable. Instead, Article 5(2)(k) was applicable, and the profits attributable to the PE were taxable under Article 7 of the India-UK DTAA.Conclusion:The assessee's appeal was partly allowed, affirming that only income attributable to services rendered in India is taxable, and reimbursements should not be treated as income. The revenue's appeal was dismissed, upholding the Tribunal's previous decisions on these matters.