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Judgment
PER SANJAY AWASTHI, ACCOUNTANT MEMBER:
This appeal arises from Ld. AO’s order u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereafter as “the Act”) dated 24.01.2025. This order itself incorporates the directions of Ld. DRP dated 31.12.2024.
The assessee is a tax resident in Canada and as per the India-Canada DTAA (hereafter as “the DTAA”), it holds a valid Tax Residency Certificate issued by the Canadian Government. The assessee is engaged in the business of providing maintenance services of Theatre Systems (IMAX Theatre Systems) globally, including India. The assessee entered into a separate agreement with an Australian vendor for providing maintenance services to its customers in India as well as other globally placed entities.
The main controversy in this case pertains to an allegation that the assessee has a Fixed Place Permanent Establishment (PE). There is also an allegation that there is a services PE of the assessee in India and therefore some profits were proposed by the AO to be attributed on the basis of the said PE as under:
Maintenance Services – Rs.590,35,967/-;
Sale of glasses etc. 19,69,881/-.
Thereafter, the Ld. AO applied a profit rate of 25% on the resultant amount of Rs.610,05,848/- by invoking Rule 10 of the I.T. Rules and made an addition of Rs.152,51,462/-. The Ld. DRP upheld the proposal of the Ld. AO regarding the existence of a fixed place PE and also of a supervisory PE in India. However, the DRP reduced the profit rate from 25%, as proposed in the draft order, to 12.5%. This resulted in a total addition of Rs.76,25,731.
Aggrieved with this action, the assessee has approached the ITAT with the following grounds: -
“Ground No.1: Allegation of Fixed Place Permanent Establishment (‘PE’) of the Appellant in India:
1.1On the facts and in the circumstances of the case and in law, the Ld. AO and the Ld. DRP have erred in holding that the Appellant had a Fixed Place PE in India without appreciating that the conditions for constituting a Fixed place PE are not satisfied in this case.
1.2On the facts and circumstances of the case and in law, the Ld. AO and Ld. DRP grossly erred in holding that the Appellant has a Fixed place PE in India under India Canada DTAA through remote access of the Theatre system without appreciating that:
(a)The remote access of the Theatre system is provided by the customers for the limited purpose of maintenance services, assistance in troubleshooting, software updates, bog fixing, etc.
(b)No modification (technical/hardware/software) can be made through such remote access.
(c)The remote access of the system is provided by the Indian customers to monitor the performance and ensure smooth running of such system.
(d)The remote access for the purpose of merely rendering maintenance services to the customer cannot be construed as control for service provider's own account.
1.3On facts and circumstances of the case and in law, the Id. AO and Id. DRP having failed to appreciate that there was no degree of permanence or continuity in the activities carried out by the Appellant through the sub-contractor (ie. Australian vendor).
Ground Ne. 2: Allegation of Service PE of the Appellant in India:
2.1On the facts and circumstances of the case and in law, the Ld. AO has grossly erred in holding that the Appellant has a Service PE in India under Article 5(2)(1) of the India-Canada DTAA.
2.2.On the facts and circumstances of the case and in law, the Lit AO grossly erred in ignoring that the maintenance services were provided only for 67 days and accordingly the threshold of 90 days for constitution of Service PE under India-Canada DTAA is not breached.
2.3On the facts and circumstances of the case and in law, the Ld. AO has grossly erred in holding that the Indian sub-contractor was providing marketing support services, business development services, installation services, etc., and he is a dependent agent of the Appellant as the basis of assumption and imagination.
2.4On the facts and circumstances of the case and in low, the Ld. AO grossly erred in holding that the Indian sub-contractor is an employee of the Appellant on the basis of his Linkedin profile without confronting the Appellant about the same to the Appellant which is against the principles of natural justice.
2.5On the facts and circumstances of the case and in law, the Ld. DRP has grossly erred in holding the Supervisory PE of the Appellant in India-Canada DTAA without appreciating the facts in the case of Appellant as no supervisory activities were performed by the Appellant during the year under consideration. The Ld. DRP, while passing the directions, erred in concluding the Supervisory PE of the Appellant in India by incorrectly considering the facts of the parent entity of the Appellant (Le. IMAX Corporation).
Ground No. 3: Attribution of profits to alleged PE of the Appellant in India:
3.1Without prejudice to the fact that the appellant does not have a PE in India, the Ld. AO and Ld. DRP, have grossly erred in attributing entire revenue from maintenance services to the alleged PE in India on ad-hoc basis.
3.2Without prejudice to the fact that the appellant does not have a PE in India, the Ld. AO and L4. DRP, have grossly erred in attributing revenue from Sale of glasses and other related goods to the alleged PE in India on ad-hoc basis.
3.3On the facts and in the circumstances of the case, the Ld. AO and Ld. DRP, grossly aired in applying the profit rate of a group entity i.e., IMAX China on the income attributed to alleged PE to determine profit in India without considering the consolidated financial statements of the Appellant's parent entity (i.e. IMAX Corporation) wherein it is clear that the Appellant has incurred losses at global level for the year under consideration.
4.That on the facts and in the circumstances of the case and in law, the Ld. AD erred in initiating the penalty proceedings under section 270A of the Act on account of underreporting of income by way of misreporting.
5.The above grounds of appeal are independent and without prejudice to one another.
6.That the Appellant reserves its right to add, alter, amend and or modify any ground of appeal before or at the time of hearing of this appeal.”
The assessee had also filed additional grounds of appeal dated 16.09.2025 but later on decided not to press the same. This fact is recorded in the order sheet dated 02.04.2026.
Before us the Ld. AR argued with the help of a paper book and filed several case laws in support of his arguments. The ld. AR informed that the assessee has remote access to the system and assists in troubleshooting etc. to ensure the smooth working thereon. It was emphasized by the Ld.AR that such services are provided remotely and always under the direction and control of the customers. It was the submission that the allegation of Fixed Place PE of the assessee under Article 5(1) of the DTAA was on the basis that the maintenance services are provided from a remote location. The Ld. AR elaborated on the nature of services provided through such remote access and described the same as involving fixing of bugs and stressed on the point that the assessee did not control the theatre system or any business activity through such remote access. The Ld. AR also argued that the “place of business” test was not fulfilled in this case, nor was the “disposal” test since the assessee did not have unfettered access or overriding control over the theatre system owned by the client business entity. It was informed that one Shri Sunil Kumar, an employee of the Australian vendor was visiting the customers’ site for providing maintenance services. It was the submission that the “permanence” test for determining the PE was also not fulfilled in this case since there was no “Permanent Establishment” (PE) nor the premises of the Indian customers were at the disposal of the assessee. Lastly, it was the submission that the “business activity” test was also not fulfilled in the case since the presumption of the performance of business activity by a foreign enterprise through an identified place was not happening in this case. For this proposition the Ld. AR relied on the case of Formula One World Championship Limited vs. CIT [2017] 249 taxman 192 (SC) to canvass the point that for a fixed place PE to be inferred the premises needed to be put at the disposal of the enterprise and not merely providing access.
Regarding the allegation of service PE for performing maintenance services, the Ld. AR read Article 5(2)(1) of the DTAA and stated that neither the test of furnishing of services in India by employees or other personnel of the Canadian entity, nor the test of such services being provided for a period exceeding 90 days in a 12 months period was satisfied. The Ld. AR argued that the Ld. AO assumed that Mr. Sunil Kumar is an employee of the assessee and he also assumed that Mr. Sunil Kumar is a dependent agent of the assessee who was providing other support services such as delivery of goods, marketing, business development etc. for the remaining period of the year in addition to the maintenance services for 67 days. It was the submission that Mr. Sunil Kumar was not an employee of the assessee and the Ld. AO merely presumed that on the basis of his Linkedin profile. In this regard, the assessee had submitted an affidavit from the Australian vendor that Mr. Sunil Kumar was their employee, who was working for multiple customers of M/s ESPM (Australian vendor) globally, including India. It was stressed by the Ld. AR that Mr. Sunil Kumar visited the premises of the customers of the assessee for a total period of 67 days in relation to maintenance services during FY 2021-22. It was stated that this could not trigger the service PE since the period was less than 90 days and the affidavit provided by M/s ESPM clearly states that Mr. Sunil Kumar only provides maintenance services to customers of IMAX in India.
The Ld. AR stated that even though no PE was in existence, the action of Ld. AO in attributing profits to the PE were erroneous. Thereafter, the Ld. AR relied on several case laws in his support. The gist of his argument was that the Rule 10 could be invoked only if income of non-resident accruing or arising from any business connection in India could not be definitely ascertained from accounts or material available on record.
The Ld. DR relied on the findings of DRP/AO and specifically pointed out para 9.6.4 at page 40 of the AO’s order to emphasize the point that Mr. Sunil Kumar’s Linkedin profile stated that he was working for IMAX on full time basis. The Ld. DR called in question the later document indicating that the Linkedin profile was changed to reflect that he was employed with M/s ESPM. The Ld. DR stated that this was an afterthought once the facts were already brought on record.
We have carefully considered the arguments of Ld. AR/DR and have gone through the documents before us. There is considerable force in the arguments of Ld. AR that none of the tests provided for indicating the existence of a fixed place PE namely; place of business test, disposal test, permanence test and business activity test are found to be fulfilled in this case. At this stage, we do not deem it necessary to reiterate the non-applicability of such tests to the case under consideration since the argument of the Ld. AR have been extensively recorded (supra) in this regard. Thus, it deserves to be held that there is no fixed place PE under Article 5(1) of the DTAA.
Regarding allegation of a service PE or a supervisory PE (as per the Ld. DRP) it deserves to be held that the total period of visit by Shri Sunil Kumar on the specific sites of the theatre systems is exactly 67 days. This fact is an admitted one and thus, the only other consideration is whether the services being provided remotely could bring into existence a service PE. In this regard the case of Ernst & Young (EMEIA) Services Limited vs. ACIT reported in [2026] 184 taxmann.com 671 (Delhi – Trib.) would help us to decide this issue. Some relevant extracts are as under: -
“11.We find that one of the question of law for consideration before the Hon'ble Delhi High Court in the case CIT vs. Clifford Chance Pte. Ltd. (supra) was:
"B. Whether on the facts and in the circumstances of the case, and in law, the Tribunal erred in holding that the assessee does not have a virtual service permanent establishment in India?
The Hon'ble High Court after examining the provisions of India-Singapore DTAA answered the above question as under: -
41.Another Issue that has been raised is that even when the employees were not physically present in India, services continued to be rendered virtually, for more than 90 days. That apart, in AY 2021-22, though the assessee did not have physical presence of any employees in India, services were still provided virtually by the assessee to its clients in India, and as such, it constituted a virtual service permanent establishment in India. The view of the assessing officer, as propounded by the Revenue before the Tribunal and before us, is that as a result of rapid digitalisation, services including consultancy services can be provided virtually without the physical presence of employees in the contracting state According to them, nothing in the DTAA requires the employees to be physically present in India for providing the services.
42.Article 5(6)(a) of the DTAA reads "An enterprise shall be deemed to have a permanent establishment in a Contracting State if it furnishes services, within a Contracting State through employees or other personnel.. The words "within a Contracting State" and "through employees or other personnel" contemplates rendition of services in India by the employees of the non-resident enterprise, while mandating a fixed nexus, a physical footprint within India. The term within has a certain territorial connotation and in the absence of personnel physically performing services in India, there can be no furnishing of services, within India. A plain reading of the whole provision would thus reveal that, it such rendition of services by employees present within the country which would constitute a service permanent establishment.
43.Mr. Rai has vehemently contended that receipts on account of virtual services rendered by the assessee must be held to be amenable to taxation in India, since a virtual service permanent establishment has been established. We find that no such eventuality is contemplated by the DTAA. The concept of a virtual service permanent establishment does not find mention anywhere in the DTAA. In the absence of any such provision, the argument of Mr. Rai would be at variance that the express provisions of the DTAA which we have already interpreted above.
44.At this juncture, we find it necessary to acknowledge that the Revenue may potentially be justified in raising concerns regarding taxability of foreign entities in the increasingly open global virtual economy, and the diminishing requirement of physical presence of non-resident employees to furnish services. However, taxability of entities in such instances, as always, remains subject to the applicable provisions of law-both treaty and domestic.
45.The law insofar as the present controversy is concerned, is clear and unambiguous. The DTAA, which has been carefully drafted and executed after numerous rounds of bilateral deliberations and negotiations at the highest level, must necessarily be interpreted strictly. If something is conspicuous by its absence, the presumption is that it has deliberately been done so. It is not for courts to read in concepts which are not expressly provided for by the treaty. The guiding principle here is that language which is not explicitly included in treaty provisions cannot be artificially read into such provisions by way of judicial fiction.
46.As already stated, Article 5(6) of the DTAA only contemplates rendering of services by employees present within the country. If that be so, it is not for this Court to analyse the status or merits of a virtual service permanent establishment which does not find mention either in the DTAA or in the domestic Act. As such, the contention of the Revenue that a virtual service permanent establishment of the assessee has been established for AYs 2020-21 and 2021-22 cannot be accepted. [Emphasized by us]
The provisions of Article 5(2)(k) of India-UK DTAA are pari-materia to Article 5(6)(a) of India-Singapore DTAA w.r.t. physical presence of employee or personnel of foreign enterprise in the Contracting State (India) for rendering service to constitute Service PE. The Hon'ble High Court emphasized for strict Treaty interpretation and held that in the absence of explicit language of the DTAA, courts cannot artificially create or read in concepts not expressly provided in DTAA, including virtual PE.
12.The impugned assessment order is based solely on the concept of VSPE, which is not supported by the treaty language or judicial precedent. Thus, in light of the aforesaid judgment, the theory of VSPE cannot be accepted, unless DTAA provides for the same. The provisions of Article 5 of India-UK DTAA makes no provision for VSPE. Hence, the fiction of VSPE cannot be read into provisions of the DTAA. Thus, ground of appeal No. 2.1 to 2.4 are allowed.”
A perusal of this order of ITAT which itself relies heavily on the case of Clifford Chance Pte Limited reported in 181 taxmann.com 254 (Del.) (HC), demonstrates that there is every reason to hold that the concept of virtual PE on the basis of services provided remotely cannot be a valid construct for the purposes of determining a service PE in this case. Accordingly, it deserves to be held that there is no service PE in existence since the threshold of 90 days as per the DTAA could not be crossed. We are also not in agreement that a Linkedin profile of Shri Sunil Kumar could be the deciding factor in determining his employment status, more so because an affidavit was filed by M/s ESPM explicitly mentioning the employment status of the said Shri Sunil Kumar.
Since the issue of fixed PE and service PE has been decided in favour of the assessee hence, we do not deem it necessary to venture offering any opinion on the issue of attribution of profits.
In the result, the appeal of the assessee is allowed.