The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that the fiction of a Virtual Service Permanent Establishment (VSPE) cannot be read into the provisions of the DTAA, as Article 5 of the India-UK DTAA makes no provision for VSPE. Thus, in the absence of explicit language in the DTAA, courts cannot artificially create or read in concepts not expressly provided in the DTAA, including virtual PE.
The physical presence of employees or personnel of the UK enterprise in India for an aggregate period of more than 90 days in any 12 months is a mandatory requirement to constitute a Service PE under Article 5(2)(k) of the India-UK DTAA, clarified the ITAT.
The Division Bench comprising Vikas Awasthy (Judicial Member) and Brajesh Kumar Singh (Accountant Member) observed that Article 5(2)(k) of the India-UK DTAA defines a Service Permanent Establishment (PE) as the furnishing of services within a Contracting State by an enterprise through employees or other personnel, provided activities continue within that State for a period aggregating more than 90 days within any twelve-month period. Thus, the AO’s understanding that there is no requirement for physical presence of the employees/personnel under the DTAA is thoroughly misconceived and untenable.
The Tribunal found it manifestly evident from a plain reading of Article 5(2)(k) of the India-UK DTAA that the physical presence of employees/personnel of the UK enterprises in India for an aggregate period of more than 90 days in any 12 months is a must. Reference was made to the decision of the Apex Court in the case of ADIT vs. E-Funds IT Solutions Inc. [86 taxmann.com 240] where it was held that to constitute ‘Service PE’, the requirement is that an enterprise must furnish services ‘within India’ through employees or other personnel.
The Tribunal also referred to the decision of the Delhi High Court in the case of CIT vs. Clifford Chance [181 taxmann.com 254 (Del.)] which held that the concept of a virtual service permanent establishment does not find mention anywhere in the DTAA, and language which is not explicitly included in treaty provisions cannot be artificially read into such provisions by way of judicial fiction. Thus, the Tribunal concluded that the provisions of Article 5(2)(k) of the India-UK DTAA are pari-materia to Article 5(6)(a) of the India-Singapore DTAA with respect to the physical presence of employees or personnel of a foreign enterprise in the Contracting State.
Briefly, the appellant company, a tax resident of the United Kingdom (UK), is engaged in providing various common area services, global services, and market development support services to various members of the Ernst & Young (EY) network, including members in India. The appellant incurs costs on behalf of various members and recovers the same without any markup based on actual usage under the Area Services and Market Development Agreement (ASMDA).
During the assessment year 2022-23, the appellant earned gross receipts of Rs.739.74 Crores from EY Member firms in India, which were claimed as exempt relying on the Authority for Advance Rulings (AAR) decision in the case of Ernst and Young P Ltd. During the year under consideration, none of the employees of the appellant visited India for rendering services; the services were rendered through emails, conference calls, Microsoft team sessions, internal weblinks, etc. The Assessing Officer (AO) however taxed the receipts from India, holding that the appellant has a Service PE/Virtual Service PE in India, estimating gross profit @30% of the gross receipts and attributing 50% of such estimated gross profits to the alleged PE.
Appearances:
Senior Advocate Ajay Vohra and Advocate Ananya Kapoor, for the Appellant/ Taxpayer
CIT-DR M.S Nethrapal, for the Respondent/ Revenue
