The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that a foreign enterprise cannot be taxed on business profits in India in the absence of a Permanent Establishment (PE), particularly where services were rendered entirely from outside India and no employees visited India. 

The bench of Vikas Awasthy (Judicial Member) and Sanjay Awasthi (Accountant Member) has observed that the department cannot simultaneously make substantive and protective assessments of the same income in the hands of the same assessee, while remanding the issue of taxability as Fees for Technical Services (FTS) for fresh examination under the India–UK Double Taxation Avoidance Agreement (DTAA). 

The appellant/assessee is a company incorporated in the United Kingdom, against the assessment order passed under Sections 143(3) read with 144C(13) of the Income Tax Act for Assessment Year 2022-23.

Buy Now: INCOME TAX E-COMPILATION – JUNE 2026

The dispute revolved around the taxability of receipts amounting to ₹62.11 crore earned by the company from its associated enterprise, Bechtel Engineering & Construction India Private Limited (BECI). BECI had engaged the UK entity to provide engineering, procurement support and technical advisory services in connection with infrastructure projects executed for Reliance Industries Limited (RIL). 

The assessee maintained that the receipts were not taxable in India under the India–UK DTAA because it neither had a Permanent Establishment in India nor did the services satisfy the “make available” requirement necessary to qualify as Fees for Technical Services. 

The Assessing Officer initially proposed to tax the receipts as Fees for Technical Services under Article 13 of the India–UK DTAA. However, the Dispute Resolution Panel (DRP), relying upon findings recorded for earlier assessment years, concluded that the assessee had a Permanent Establishment in India.

Consequently, the DRP directed that the receipts be taxed substantively as business income under Section 44DA while also directing that the very same receipts be taxed protectively as Fees for Technical Services under Article 13 of the DTAA. This resulted in the same income being subjected to both substantive and protective additions in the hands of the same taxpayer. 

Before the Tribunal, the assessee argued that the DRP had mechanically followed findings recorded for Assessment Year 2016-17 without considering the material change in facts arising from a new service agreement effective from January 1, 2020.

It was submitted that under the new arrangement, all services were rendered remotely from outside India and none of the assessee’s employees visited India for execution of the contract. Therefore, the factual basis on which the Revenue had previously alleged the existence of a Permanent Establishment no longer survived. The assessee further relied upon judicial precedents holding that Indian tax law does not recognize the concept of a “virtual PE” merely because services are rendered remotely. 

The Tribunal observed that the concept of protective assessment has evolved through judicial precedents and is intended only for situations where there is uncertainty regarding who is the real recipient of the income.

It held that the Revenue cannot simultaneously make substantive and protective assessments in respect of the same income in the hands of the same assessee merely by characterising the income differently—as business income on one hand and Fees for Technical Services on the other.

Although the Tribunal stopped short of declaring the assessment void on this ground, it categorically held that such an exercise was legally irregular and that the Revenue would have to choose only one mode of taxation. 

Examining the Permanent Establishment issue, the Tribunal found that the DRP had simply relied upon findings recorded for earlier years without analysing the new contractual arrangement effective from January 2020.

The Tribunal noted that even the Assessing Officer had acknowledged that the assessee’s employees did not visit India, and the services were rendered remotely.

The Bench observed that the earlier findings regarding a Permanent Establishment could not automatically be applied to the current assessment year because the contractual arrangements had materially changed. Referring to judicial precedents rejecting the concept of a virtual Permanent Establishment, the Tribunal concluded that the Revenue had failed to establish the existence of a PE in India.

Accordingly, it held that the receipts could not be taxed as business income under Section 44DA. 

On the separate question of whether the receipts constituted Fees for Technical Services, the Tribunal found that the lower authorities had not adequately analysed the “make available” clause contained in Article 13 of the India–UK DTAA.

The assessee argued that although it provided engineering designs, procurement schedules, technical documents and advisory support, it never transferred its underlying technical knowledge, know-how or expertise to BECI. According to the assessee, BECI remained dependent upon the UK entity whenever similar technical assistance was required and therefore the technical knowledge had never been “made available.”

The Tribunal observed that neither the Assessing Officer nor the DRP had comprehensively examined the latest service agreement or evaluated whether the services actually enabled BECI to independently perform similar functions in future without assistance from the assessee. Since such examination was essential for determining whether Article 13 applied, the Tribunal remanded the issue to the Assessing Officer and the DRP for fresh adjudication after granting adequate opportunity of hearing to the assessee. 

Allowing the appeal partly, the ITAT held that the department cannot simultaneously make substantive and protective assessments of the same income in the hands of the same assessee. The assessee did not have a Permanent Establishment in India for Assessment Year 2022-23 and, therefore, the receipts could not be taxed as business income under Section 44DA. 

The issue of taxability as Fees for Technical Services under Article 13 of the India–UK DTAA requires fresh examination of the post-2020 contractual arrangements and the “make available” condition, and has accordingly been remanded to the Assessing Officer/DRP. 

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: Socio-Economic Status Relevant While Determining Unexplained Cash Seized During Air Travel: ITAT