2019 (4) TMI 1474 - AT - Income Tax

Permanent Establishment (PE) in India - taxability of fee for legal consultancy services in India - amount received by the assessee from the clients in India is not in the nature of either royalty or fees for technical services has been accepted by the AO - whether the employees/other personnel of the assessee have stayed and rendered services in India during the financial year exceeding the period of 90 days to constitute a PE in India. - Counting of vacation period of one of the employees - multiple counting of employees in a single day - India UK DTTA - HELD THAT - Thus, from the aforesaid facts and materials available on record, the authenticity of which has not been disputed, it is proved that Shri Narayan Iyar, has not rendered any services in India from 17th April 2001 to 4th May 2001, as he was availing study leave. Therefore, the period beginning from 17th April 2001 to 4th May 2001, have to be excluded for computing the period of 90 days as no other employee of the assessee was rendering services in India. Whether multiple counting of employees on a single day is permissible - India UK Tax Treaty - HELD THAT - multiple counting of employee in a single day, as was done by the Departmental Authorities, is impermissible under Article 5(2)(k)(i) of India UK Tax Treaty. The aforesaid view has been expressed by the Tribunal in case of Clifford Chance 2001 (9) TMI 1141 - ITAT MUMBAI . In fact, in the remand report dated 27th February 2006, a copy of which is at Page 110 of the paper book, the Assessing Officer has accepted the aforesaid legal position in Para 9. Thus, if the period during which Shri Narayan Iyar was on leave is excluded and the multiple counting of employees in a single day is avoided, the aggregate period of stay of assessee s employees in India during the period from 1st April 2001 to 31st March 2002, is 87 days as per the statement placed. Therefore, there was no PE of the assessee in India during the impugned assessment year. That being the case, the fees received by the assessee from legal consultancy services rendered in India is not taxable in India. The addition made, therefore, deserves to be deleted. This ground is allowed.

Summary

Issues Involved:
1. Existence of Permanent Establishment (PE) in India.
2. Taxability of income received for work rendered outside India.
3. Disallowance on account of reimbursement of expenditure.

Detailed Analysis:

1. Existence of Permanent Establishment (PE) in India:
The core issue in the assessee's appeal was whether the assessee, a UK-based partnership firm engaged in legal consultancy, had a Permanent Establishment (PE) in India under Article 5(2)(k)(i) of the India-UK Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) contended that the assessee had a PE in India as its employees rendered services in India for more than 90 days during the relevant financial year. This conclusion was based on the observation that the employees/personnel of the assessee stayed in India for over 90 days.

The assessee argued that the period of stay of employees should be calculated cumulatively and not individually. Additionally, the assessee contended that the vacation period of one employee, Shri Narayan Iyar, should not be counted. The Commissioner (Appeals) upheld the AO's decision, rejecting the assessee's contention regarding multiple counting and vacation period, stating that the activities of furnishing services by an enterprise through its employees should be seen employee-wise and aggregated.

Upon appeal, the Tribunal examined whether the employees of the assessee had stayed and rendered services in India for more than 90 days. The Tribunal found that the vacation period of Shri Narayan Iyar should be excluded from the calculation, as documentary evidence showed he was on study leave and did not render services during that time. Additionally, the Tribunal held that multiple counting of employees on a single day is impermissible under Article 5(2)(k)(i) of the India-UK Tax Treaty. Consequently, the aggregate period of stay of the assessee's employees in India was determined to be 87 days, and thus, the assessee did not have a PE in India. The income from legal consultancy services rendered in India was not taxable in India.

2. Taxability of Income Received for Work Rendered Outside India:
The Revenue's appeal challenged the decision of the Commissioner (Appeals) that the income received by the assessee for work rendered outside India is not taxable. The Tribunal noted that this issue had been consistently decided in favor of the assessee in previous years. Following the consistent view of the Tribunal in the assessee's own case for earlier assessment years, the decision of the Commissioner (Appeals) was upheld, and the ground raised by the Revenue was dismissed.

3. Disallowance on Account of Reimbursement of Expenditure:
The Revenue also challenged the decision of the Commissioner (Appeals) in restricting the disallowance on account of reimbursement of expenditure to the extent of 15%. The Tribunal observed that this issue had been consistently decided in favor of the assessee in earlier years, holding that reimbursement of expenditure cannot be treated as income of the assessee. Additionally, since the Tribunal had already held that the assessee did not have a PE in India during the relevant year, the amount was not taxable otherwise. Therefore, the ground raised by the Revenue was dismissed.

Conclusion:
The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal concluded that the assessee did not have a PE in India during the relevant assessment year, and thus, the income from legal consultancy services rendered in India was not taxable. Additionally, the income received for work rendered outside India and the reimbursement of expenditure were not taxable.