Service permanent establishment and Form 26AS additions fail where actual presence and actual receipt are not proved

Under the India-Singapore DTAA, service permanent establishment requires actual furnishing of services in India through physical presence within the treaty threshold; as no fixed place or qualifying presence was shown, and the treaty did not recognise a virtual service permanent establishment, the receipts were not taxable in India as business profits. Interest under section 234B was not leviable because the relevant income was subject to deduction at source. Additions based only on Form 26AS entries for alleged bank receipts and refund interest could not be sustained without proof of actual receipt, so verification by the Assessing Officer was required before any fresh decision.

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Issues: (i) Whether the assessee constituted a service permanent establishment or virtual service permanent establishment in India under Article 5(6) of the India-Singapore DTAA, and whether the receipts were taxable in India as business profits; (ii) Whether interest under section 234B of the Income-tax Act, 1961 was leviable; (iii) Whether additions based solely on amounts reflected in Form 26AS towards alleged ICICI Bank receipts and income-tax refund interest were sustainable.

Issue (i): Whether the assessee constituted a service permanent establishment or virtual service permanent establishment in India under Article 5(6) of the India-Singapore DTAA, and whether the receipts were taxable in India as business profits.

Analysis: Article 5(6) required the furnishing of services within India through employees or other personnel, with the activities continuing beyond the stipulated threshold. The decisive factor was actual physical rendition of services in India. For the relevant years, the assessee had no fixed place in India. In the first year, the employees' stay had to be computed after excluding vacation days, business development days, and common days, resulting in service days below the treaty threshold. In the second year, no employee was physically present in India. The treaty did not contain any provision for a virtual service permanent establishment, and the treaty language could not be expanded by reference to an unamended concept of virtual presence.

Conclusion: The assessee did not constitute a service permanent establishment or virtual service permanent establishment in India, and the receipts were not taxable in India as business profits.

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

Analysis: The liability to advance tax and consequential interest under section 234B had to be examined in the statutory setting where tax was deductible at source from the relevant income. In the case of a non-resident whose income was subject to deduction at source, interest under section 234B was not exigible on the same line of reasoning adopted in the binding precedent relied upon.

Conclusion: Interest under section 234B was not leviable and stood deleted.

Issue (iii): Whether additions based solely on amounts reflected in Form 26AS towards alleged ICICI Bank receipts and income-tax refund interest were sustainable.

Analysis: A figure appearing in Form 26AS could not, by itself, establish receipt of income in the assessee's hands. Where the assessee denied receipt and no contrary material was brought on record, verification by the Assessing Officer was necessary. The proper course was to examine the claim and, if the receipts were not actually received during the relevant year, delete the additions and grant corresponding TDS credit in accordance with law.

Conclusion: The additions were not sustained on the existing record and the matter was restored to the Assessing Officer for verification and fresh decision in accordance with law.

Final Conclusion: The appeals succeeded on the principal taxability issue and on section 234B interest, while the Form 26AS-based additions were remitted for verification, resulting in a substantial relief to the assessee.

Ratio Decidendi: Under the India-Singapore DTAA, service permanent establishment requires actual furnishing of services in India through physical presence within the treaty threshold, and income cannot be brought to tax merely because it is reflected in Form 26AS unless actual receipt is established; consequential interest under section 234B is not leviable where tax is deductible at source from the relevant income.

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