A Service Permanent Establishment (PE) under Article 5(2)(k) of the India-UK DTAA requires the physical presence of employees or personnel in India. The concept of 'Virtual Service PE' is not legally recognized under the existing treaty provisions and cannot be inferred via judicial interpretation.

आदेश/ORDER

PER VIKAS AWASTHY, JM:

This appeal by the assessee is directed against the Assessment Order dated 09.01.2025 passed u/s.143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’), for AY 2022-23.

The ld. Counsel for the assessee before us has confined his submissions assailing the assessment order on ground of appeal no.2 only. The same reads as under:-

“Ground 2.1: That on the facts and in the circumstances of the case and in law, the Ld. AO/ DRP has erred in constituting a Service PE of the Appellant as per Article 5 of the India-UK tax treaty without appreciating and completely disregarding the fact that none of the Appellant's employees were present in India.

Ground 2.2: That on the facts and in the circumstances of the case and in law, the Ld. AO/ DRP has erred in holding that the Appellant constituted 'Virtual Service PE', which is against the settled law, that a PE cannot be constituted when there is no physical presence in the source country.

Ground 2.3: Without prejudice to the above, on the facts and in the circumstances of the case and in law, even assuming, without conceding, that the Appellant constitutes a Virtual Service PE in India, the Ld. AO/ DRP failed to appreciate the settled provisions of Article 7 of the India-UK tax treaty, which clearly mandate that only such part of income that is attributable to the operations carried out in India, can be taxed in India.

Ground 2.4: That on the facts and in the circumstances of the case and in law, the Ld. AO/ DRP has erred in not adhering to the principle of judicial discipline and disregarding the fact that the issue in Appellant's case is squarely covered by the ruling of the Hon'ble ITAT in the case of Clifford Chance Pte. Ltd. [TS-186-ITAT-2024(DEL)].

Ground 2.5: Without prejudice to above, that on the facts and in the circumstances of the case and in law, the Ld. AO / DRP has erred in applying an arbitrary profit rate of 30% completely ignoring the fact that the global audited financial statements submitted by the Appellant depicted "NIL" profits.

Ground 2.6: That on the facts and in the circumstances of the case and in law, the Ld. AO/ DRP has erred in arbitrarily computing the profits attributable to the alleged PE of the appellant in India by attributing the 50% of revenue earned from India, without any cogent basis.”

Shri Ajay Vohra, Sr. Advocate appearing on behalf of the assessee submits that the assessee is tax resident of United Kingdom (UK) and he is engaged in providing various common area services, global services, market development support services, etc. to various members of Ernst & Young (EY) network including members in India. Such membership enables the member firms to co-operate, collaborate and work closely together to achieve the provision of seamless consistent high quality client services within the area. The assessee incurs cost on behalf of various members and thereafter based on actual usage recovers the same without any markup from the respective member firm. The Member firms of the EY network enter into Area Services and Market Development Agreement (ASMDA) with the assessee. One such agreement is at page 40 to 60 of the paper book. Agreements with all Indian Area Members are identically worded.

4.1. During the period relevant to assessment year under appeal, the assessee has earned gross receipts of Rs.739,74,98,525/- from EY Member firms in India. The entire receipts were claimed as exempt by the assessee on strength of the decision of Authority for Advance Rulings (AAR) in the case of assessee’s group concern that is Ernst and Young P Ltd. reported as 18