2014 (5) TMI 1185 - AT - Income Tax

Permanent Establishment(PE) in India under the provisions of Article 5(2) (k) - scope of expressions rendering and furnishing - case of the assessee that it did not have any Permanent Establishment(PE) in India under the provisions of Article 5(2) (k) as it was rendering services in India where as per Article 5(2)(k) of DTAA it was necessary to Furnish services in India - HELD THAT - Expressions rendering and furnishing are somewhat inter changeable in the normal course of business and it will be too pedantic hyper technical approach to narrow down the meaning of expression furnishing to exclude rendering of professional services and if the answer of this question is in yes then it was to be held that assessee did not have a P.E in India in terms of Article 5(2)(k) of India UK DTAA and accordingly profits attributable to P.E were taxable under Article 7 of India UK DTAA and this question was answered in favour of Revenue and against assessee. As decided in own case 2010 (7) TMI 535 - ITAT MUMBAI 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. - Decided against the assessee. Profits attributable to P.E in India - computation provided by the appellant in the Income and Expenditure Account as being the income attributable to the permanent establishment - whether value of services rendered by the PE is to be taken at market value of such services in India and not the price at which permanent establishment should be taken? - gross income at 1, 56, 813 deduction for direct expenditure at 52.445 deduction for overheads 2, 623 and net profit at 1, 01, 745 - HELD THAT - The very plea of the assessee proceeds on fallacy that arm s length price adjustment can be made in respect of the transactions with the clients of the assessee. The revenues earned by the assessee are to be taken at actual figures and no adjustments are permissible in the same. We reject this plea of the assessee as well. The action of the authorities below is confirmed on this count as well - Decided against the assessee. Disallowance of disbursements to the extent of 25% of the disbursement claim proportionate to the fee relating to services rendered in India as compared to the total fees - permanent establishment in India under Article 5(2)(k) of the Tax Treaty between India and the U.K - HELD THAT - The Commissioner (Appeals) ought to have directed the Assessing Officer to allow deduction for the entire amount of the disbursements. AR was able to demonstrate that similar evidence which was furnished in respect of A.Y 1995-96 was also placed before AO during the course of assessment proceedings and on the basis of that evidence CIT(A) has given part relief to the assessee on account of reimbursement of expenses. The decision relied upon by DR also does not support the case of the Revenue for restoration of the issue to the file of AO as in the present case reimbursement has been compensated directly and not through third party. In this view of the situation we are of the opinion that the issue raised by the assessee in ground No.6 of this appeal and raised by the Revenue in Ground No.2 of its appeal are covered in favour of the assessee.

Issues Involved:
1. Determination of total income of the appellant.
2. Existence of a Permanent Establishment (PE) in India under Article 5(2)(k) of the Indo-UK DTAA.
3. Computation of income attributable to the PE.
4. Computation of total income based on hours charged at appropriate rates for an Indian lawyer.
5. Taxability of reimbursement of expenditure.
6. Disallowance of disbursements.
7. Penalty proceedings under section 271(1)(c) of the Income-tax Act.
8. Applicability of Article 15 of the Indo-UK DTAA.
9. Nature of the appellant's activities.
10. Interest charged under section 234B of the Income-tax Act.

Detailed Analysis:

1. Determination of Total Income:
The appellant's first ground was general in nature and did not require separate adjudication. It was dismissed without further arguments.

2. Existence of a Permanent Establishment (PE):
The appellant contended that it did not have a PE in India under Article 5(2)(k) of the Indo-UK DTAA, arguing that it was "rendering" services in India rather than "furnishing" them. The Tribunal upheld the earlier decision in Linklaters LLP vs. ITO, determining that the appellant did have a PE in India. The Tribunal concluded that the terms "rendering" and "furnishing" were interchangeable and that the appellant's activities fell under the scope of Article 5(2)(k). Therefore, the profits attributable to the PE were taxable under Article 7 of the Indo-UK DTAA. This ground was decided against the appellant.

3. Computation of Income Attributable to the PE:
The appellant argued that the profits attributable to the PE should be computed based on hypothetical profits, considering the market value of similar services in India. The Tribunal referred to Article 7(2) of the Indo-UK Treaty, which suggests that the profits of the PE should be those expected if it were a distinct and separate enterprise. The Tribunal rejected the appellant's plea, stating that the revenues earned by the appellant were to be taken at actual figures without adjustments. This ground was decided against the appellant.

4. Computation of Total Income Based on Hours Charged:
Similar to Ground No. 3, the appellant argued for computing income based on the hours charged at appropriate rates for an Indian lawyer. The Tribunal dismissed this ground, reiterating that the actual revenues earned by the appellant should be considered without adjustments.

5. Taxability of Reimbursement of Expenditure:
The appellant contended that the reimbursement of expenses should not be treated as part of its income. The Tribunal agreed with the appellant, noting that the reimbursements were for specific actual expenses incurred without any markup. The Tribunal directed the Assessing Officer to delete the disallowance of expenses and held that no part of the reimbursement should be treated as income. This ground was decided in favor of the appellant.

6. Disallowance of Disbursements:
The Tribunal found that the appellant had provided sufficient evidence to demonstrate the incurring of expenses and that there was a reasonable control mechanism in place. The Tribunal directed the Assessing Officer to delete the disallowance of expenses. This ground was decided in favor of the appellant.

7. Penalty Proceedings Under Section 271(1)(c):
The appellant's ground regarding the initiation of concealment penalty was deemed premature and was dismissed.

8. Applicability of Article 15 of the Indo-UK DTAA:
The appellant did not press this ground, and it was dismissed accordingly.

9. Nature of the Appellant's Activities:
The appellant's grounds related to the nature of its activities were general and not argued separately. These grounds were dismissed.

10. Interest Charged Under Section 234B:
The Tribunal dismissed the Revenue's ground regarding the interest charged under section 234B, as it did not arise from the impugned order passed by the CIT(A).

Conclusion:
The appeal filed by the appellant was partly allowed, while the appeal filed by the Revenue was dismissed. The Tribunal's order was pronounced in the open court on 07/05/2014.

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