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India Income Tax Appellate Tribunal Holds PE May Continue to Exist After the Conclusion of Main Business Activities — Orbitax Tax News & Alerts

The Delhi Income Tax Appellate Tribunal (ITAT) issued an order on 30 May 2023 concerning the continued existence of a permanent establishment (PE) after the main business activities of the PE are concluded, so as to entitle the assessee to claim certain expenses and other benefits. The assessee, a UK partnership firm, had contracted with an Indian broadcasting company, Prasar Bharti, for the production and telecasting of the Commonwealth Games in 2010. For this purpose, the assessee set up a project office in India, which constituted a PE under the terms of Article 5 (Permanent Establishment) of the 1993 India-UK tax treaty. Subsequently, Prasar Bharti refused to pay the entire contract value and the assessee invoked the arbitration clause. An arbitral award was passed in July 2020 but, still unsatisfied with the award of the arbitrator, the assessee challenged it before the Delhi High Court.

Due to the ongoing legal proceedings arising out of the arbitration, the assessee claimed that it continued to operate its PE in India and claimed that the expenditure incurred in India in connection with the legal proceedings and others were in relation to the activities of the PE, which resulted in a loss. During this time, the assessee also transferred certain amounts from its overseas bank accounts to its associated enterprises, on which interest was earned and reported as taxable business profits attributable to the PE in India. In returns filed for assessment years 2018-19 and 2019-20, the assessee claimed the expenditure and carried forward losses against the interest income, which was challenged by the assessing officer (AO). The AO held that since the assessee had no business activity or operation in India, it cannot be said that it has a PE in India and, therefore, the business expenditure claimed by the assessee and the carried forward losses cannot be allowed. With respect to the interest income, the AO held that the income is to be taxed on a gross basis by applying the rate of 15% as per Article 12(2) of the India-UK tax treaty. This was appealed by the assessee.

In the order, the ITAT found in favor of the assessee. In particular, the ITAT found that the PE of the assessee is still in existence as all acts and measures connected with the former activities of the PE are not terminated, which include looking after the arbitration proceedings and other contractual issues. Once it is held that the PE of the assessee exists, then in terms of Article 12(6) of the India-UK treaty, the interest income connected to the PE has to be treated as business profits under Article 7 of the treaty, against which the expenditure of the PE must be allowed as a deduction. The ITAT further held that the claim for brought forward losses must also be allowed.