DIRECT TAX - Nangia & Co

Tax & Regulatory Newsletter
Issue 05 – AUGUST, 2010
NANGIA & CO.
Chartered Accountants
New Delhi – Mumbai - Dehradun
services directly to its clients whereas the IPS article of the UK Treaty
extended only to individuals and, hence, it could not be applied to a
partnership like the taxpayer.
The Assessing Officer rejected
the taxpayer’s arguments and
concluded that it had a PE in
India under the Services PE rule
and proceeded to tax its entire
Income in relation to India projects (including services rendered from
the UK office) on the basis of actual revenues received. On appeal,
the first appellate authority agreed with the Assessing Officer on the
existence of the PE but restricted taxation to the extent of services
rendered in India.
Upon appeal by both sides the Income Tax Appellate Tribunal ruled
that –
Though a UK partnership was a “person” under Article 3(2), the
question whether it was a “resident of UK” was of question.
Article 4(1) defined a “resident of a Contracting State” to mean a
person “liable to tax in that State by reasons of domicile,
residence, place of management or any other criterion of similar
nature”. Also, according to the OECD Report on Partnerships,
mere computation of income at the level of partnership was not
sufficient to hold that the partnership firm was ‘liable to taxation’
in the residence country, however, this view was not correct and
had also been rejected by India. A partnership was eligible to the
benefits of the DTAA provided the entire profits of the firm were
taxed in UK whether in the hands of the firm or in the hands of
the partners directly;
The Service PE formed part of the second category of the two
heterogeneous categories of PE in the Indo-UK tax treaty which
consisted of extensions of the basic PE rule and deemed PEs and
hence did not need to satisfy the requirement of a Basic PE rule.
Also, the term ‘rendering’ and ‘furnishing’ were interchangeably
used and the term furnishing could not exclude the rendering of
professional service directly to clients as suggested by the
taxpayer;
The IPS article of the UK Treaty could not be applied as it related
to performance of services by individuals;
As regards the quantum of profits attributable to the PE, the
argument that by virtue of Article 7(2), the PE must be assessed
by taking the value of services rendered by the PE at the market
value of such services in India and not the price at which the
taxpayer billed its clients was not acceptable. The fiction of
hypothetical independence in Article 7(2) was confined to a PE’s
transactions with its head office and branches and did not extend
to transactions with third parties. The arms length principle in
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