Seconded expatriate employees did not create a permanent establishment, and treaty rate protection barred separate surcharge and cess.

Expatriate employees seconded to an Indian subsidiary did not, on the material examined, establish a fixed place permanent establishment of the foreign assessee in India, because the evidence showed support functions for the subsidiary rather than the assessee's core business being carried on in India. As no treaty service permanent establishment clause applied, estimated attribution of income based on expatriate remuneration cost could not be sustained. The Tribunal also treated the DTAA tax rate as the governing all-inclusive rate and held that surcharge and cess were not separately leviable where the treaty did not provide for them.

---

---

Issues: (i) Whether the expatriate employees seconded to the Indian subsidiary constituted a fixed place permanent establishment of the assessee in India, and whether any estimated attribution of income could survive on that basis; (ii) Whether surcharge and cess could be levied in addition to the tax rate under the applicable DTAA.

Issue (i): Whether the expatriate employees seconded to the Indian subsidiary constituted a fixed place permanent establishment of the assessee in India, and whether any estimated attribution of income could survive on that basis.

Analysis: The Tribunal examined the statements and surrounding material and found that the secondees were engaged in the discharge of functions for the Indian subsidiary, including reporting, information exchange, and support relating to customer preferences, product design, market strategy, and logistics. The material did not establish that any core management or business activity of the assessee was carried on in India through those employees, nor that decisions on product, pricing, or market launch were taken in India by the assessee. The Tribunal also noted that the relevant treaty did not contain a service permanent establishment clause. In the absence of proof of business activity of the assessee in India through the expatriates, the estimated attribution based on remuneration cost could not stand.

Conclusion: No fixed place permanent establishment was held to exist, and the addition made by attributing estimated income on the expatriate remuneration cost was unsustainable, in favour of the assessee.

Issue (ii): Whether surcharge and cess could be levied in addition to the tax rate under the applicable DTAA.

Analysis: The Tribunal accepted the contention that the treaty rate was the governing and all-inclusive rate for the levy in question, and that surcharge and cess were not separately provided for under the DTAA.

Conclusion: Surcharge and cess were not leviable, in favour of the assessee.

Final Conclusion: The appeals succeeded on the PE and surcharge and cess issues, while the question of the rate applicable to royalty and fees for technical services was sent back for reconsideration. The remaining consequential issue of interest did not alter the substantive relief granted.

Ratio Decidendi: Expatriate employees seconded to a subsidiary do not create a permanent establishment unless the assessee's own business is shown to be carried on in India through them; absent such proof, profit attribution based on the alleged PE cannot be made, and treaty protection governs ancillary levies where the DTAA does not authorize them separately.

---