2015 (12) TMI 1799 - AT - Income Tax

Permanent establishment in India under Article 5(2)(k) of DTAA between India and the UK - profits attributable to the PE - HELD THAT - As decided in assessee s own case 2015 (9) TMI 1532 - ITAT MUMBAI while we agree with the learned counsel that art. 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 art. 5(2)(k) of the India-UK tax treaty and accordingly profits attributable to the PE are taxable under art. 7 of the India-UK tax treaty. In view of the above discussions we are unable to uphold the plea so strenuously argued by the learned counsel for the assessee and we hold that the authorities below have rightly invoked the provisions of art. 5(2)(k). We approve the same and decline to interfere in the matter. On adjustments required claimed by the assessee in earnings of the PE on the basis of prevailing market prices of similar services in view of independence fiction of art. 7(2). Reimbursement of the expenses as part of the income of the assessee - HELD THAT - As decided in assessee s own case 2015 (9) TMI 1532 - ITAT MUMBAI the 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. The action of the CIT(A) as learned counsel rightly contends on pure surmises and conjectures. Income accrued in India - income relatable to work performed in India in liable for taxation in India - profit as attributable to the PE can only be assessed in India - HELD THAT - This issue also stands covered in favour of the assessee on the basis of orders of the Tribunal passed in the case of the assessee for A.Y. 1997-98 wherein it was held that only income related to services rendered in India is liable to tax in India. Further reliance was also placed by him upon the judgment of Hon ble Mumbai Special Bench of the Tribunal in the case of Clifford Chance 2013 (6) TMI 544 - ITAT MUMBAI - income in respect of services rendered in India which are attributable to PE only would be taxable in India. Thus ground no. raised by the Revenue stands dismissed. 85% of disbursement claim proportionate to the fee related to the services rendered in India as compared to total fees - HELD THAT - As relying on assessee s own case 2015 (9) TMI 1532 - ITAT MUMBAI no amount should be disallowed. Thus ground no.2 of the Revenue s appeal stands dismissed.

Summary

Issues Involved:
1. Permanent Establishment (PE) in India.
2. Taxation of income related to work performed in India.
3. Treatment of reimbursements as income.
4. Disallowance of bad debts.
5. Application of tax rates.
6. Levy of interest under section 234B.
7. Initiation of penalty proceedings under section 271(1)(c).
8. Deduction for remuneration paid to employees for services performed outside India.
9. Applicability of Article 15 of the Tax Treaty between India and the UK.
10. Fixed base in India.

Detailed Analysis:

1. Permanent Establishment (PE) in India:
The assessee challenged the Ld. CIT(A)'s decision that it had a PE in India under Article 5(2)(k) of the India-UK DTAA. The Tribunal noted that this issue had been decided against the assessee in previous years, including AY 1995-96, 1996-97, 1997-98, and 1998-99 to 2001-02. The Tribunal upheld the lower authorities' decision, stating that the assessee had a PE in India, and profits attributable to the PE were taxable under Article 7 of the India-UK tax treaty. Thus, this ground was dismissed.

2. Taxation of Income Related to Work Performed in India:
The Revenue was aggrieved by the Ld. CIT(A)'s decision to tax only the income related to work performed in India. The Tribunal referred to previous orders and the Special Bench decision in Clifford Chance, which held that only income related to services rendered in India is taxable in India. The Tribunal upheld this view, dismissing the Revenue's ground.

3. Treatment of Reimbursements as Income:
The assessee contested the inclusion of reimbursements as part of its income. The Tribunal found that in previous years, reimbursements were considered actual expenses without any markup and were not treated as income. The Tribunal directed the AO to delete the disallowance of expenses and held that reimbursements should not be treated as income. This ground was allowed in favor of the assessee.

4. Disallowance of Bad Debts:
The assessee claimed that the Ld. CIT(A) failed to direct the AO to allow deductions for bad debts. However, it was submitted that the AO had already given appropriate relief, rendering this ground academic and infructuous. Thus, it was dismissed.

5. Application of Tax Rates:
The assessee argued that the Ld. CIT(A) erred in applying the tax rate for a firm instead of an association of persons. This ground was not pressed by the senior counsel and was thus dismissed.

6. Levy of Interest Under Section 234B:
The assessee challenged the interest levied under section 234B. The Tribunal noted that this issue had been decided in favor of the assessee in previous years, following the Bombay High Court's decision in DIT vs. NGC Networks LLC. The Tribunal directed the AO to delete the interest charged under section 234B, allowing this ground in favor of the assessee.

7. Initiation of Penalty Proceedings Under Section 271(1)(c):
The assessee contested the initiation of penalty proceedings. The Tribunal deemed this ground premature and dismissed it.

8. Deduction for Remuneration Paid to Employees for Services Performed Outside India:
The assessee argued that the Ld. CIT(A) failed to allow deductions for remuneration paid for services performed outside India. This issue was requested to be directed similarly to the Tribunal's order for AY 1998-99. The Tribunal directed the AO to follow the same directions, allowing this ground.

9. Applicability of Article 15 of the Tax Treaty Between India and the UK:
The assessee contended that Article 15, applicable only to individuals, was wrongly applied. The Tribunal did not specifically address this ground, but it was implicitly covered under the directions for other grounds.

10. Fixed Base in India:
The assessee argued against the finding of having a fixed base in India. The Tribunal directed the AO to follow the directions given in previous orders, implicitly addressing this issue.

Conclusion:
The appeals filed by the assessee were partly allowed, and the appeals filed by the Revenue were dismissed. The Tribunal directed the AO to follow previous orders and judicial precedents, ensuring consistency in the application of tax laws and principles. The order was pronounced on 16th December 2015.