Service permanent establishment requires physical presence of personnel; virtual PE cannot justify business income taxation under the treaty.

A service permanent establishment under Article 5(2)(k) of the India-UK DTAA requires actual rendition of services by personnel physically present within the contracting state; the clause was read as having territorial content, and a virtual service permanent establishment could not be inferred by judicial construction in the absence of such presence. On that interpretation, treating remittances as business income on the basis of a virtual service PE was unsustainable, and the nil withholding certificate could not be rejected on that ground. The matter was therefore directed to be reconsidered by the assessing officer.

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Issues: Whether income could be treated as business income on the basis of a virtual service permanent establishment under Article 5(2)(k) of the India-UK DTAA in the absence of physical presence of personnel in India, and whether the rejection of the nil withholding certificate could be sustained.

Analysis: The impugned order rested on the premise that the recipient had a virtual service permanent establishment in India. The relevant treaty provision was treated as pari materia with the corresponding provision considered earlier in another matter. The governing interpretation was that the words "within a Contracting State through employees or other personnel" carry a territorial content and contemplate actual rendition of services by personnel physically present within the country. In the absence of such physical presence, a virtual service permanent establishment cannot be read into the treaty by judicial construction. The reasoning that the provision does not require physical presence was rejected, and the basis for taxing the remittance as business income was held unsustainable.

Conclusion: The rejection of the nil withholding certificate on the ground of a virtual service permanent establishment could not be sustained, and the matter was to be reconsidered by the assessing officer.

Ratio Decidendi: A permanent establishment under the relevant service-PE clause of a double taxation treaty cannot be inferred without physical rendition of services by personnel within the contracting state, and a virtual service permanent establishment cannot be judicially engrafted where the treaty does not expressly provide for it.

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