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The Tax Publishers Fee for technical services besides PE existence -- Meaning of "effectively connected" -- PE taxation v. Presumptive taxation under Section 115A *Facts:* Assessee was a Hongkong based entity who was into project consulting besides having a Permanent Establishment (PE) in India. They had two streams of income viz. (i) arising out of PE which was offered as Business income (ii) Presumptive income by way of fee for technical services offered @ 10% tax as per Section 115A. It was the case of the revenue that since assessee already has a PE in India (though not effectively connected with the FTS income) the FTS income will also need to be treated business income and since expenses were unknown against it an ad hoc deduction of 50% was allowed for expenses and the net result FTS was held taxable @ 40% instead of its 10% rate. Commissioner (Appeals) reversed the order of the assessing officer on assessee's own case. On higher appeal by the revenue - Held against the revenue that unless the FTS income is "effectively connected" to the PE it cannot be treated as business income and Section 115A will need to be applied. *Ed. Note:* Existence of a PE in India can the force of attraction rule extend to all other incomes as well? The answer to this lies in the fact if there is an "effective connection" of such income to the PE. "The phrase 'effectively connected with' has neither been defined under the Act nor the DTAA. In such a situation, it becomes crucial to understand the import of such an expression. In our considered opinion, the words 'effectively connected' are akin to 'really connected'. In the context of royalties, it is in the nature of something more than the mere possession by the PE of property or right but equal to or little less than the legal ownership of such property or right. But in no case the remote connection between the PE and property or right can be categorized as effectively connected". *Case:* DCIT v. Aecom Asia Company Ltd. ( 2023 TaxPub(DT) 91Del-Trib)

The Tax Publishers

Fee for technical services besides PE existence -- Meaning of "effectively connected" -- PE taxation v. Presumptive taxation under Section 115A

Facts:

Assessee was a Hongkong based entity who was into project consulting besides having a Permanent Establishment (PE) in India. They had two streams of income viz. (i) arising out of PE which was offered as Business income (ii) Presumptive income by way of fee for technical services offered @ 10% tax as per Section 115A. It was the case of the revenue that since assessee already has a PE in India (though not effectively connected with the FTS income) the FTS income will also need to be treated business income and since expenses were unknown against it an ad hoc deduction of 50% was allowed for expenses and the net result FTS was held taxable @ 40% instead of its 10% rate. Commissioner (Appeals) reversed the order of the assessing officer on assessee's own case. On higher appeal by the revenue -

Held against the revenue that unless the FTS income is "effectively connected" to the PE it cannot be treated as business income and Section 115A will need to be applied.

Ed. Note: Existence of a PE in India can the force of attraction rule extend to all other incomes as well? The answer to this lies in the fact if there is an "effective connection" of such income to the PE.

"The phrase 'effectively connected with' has neither been defined under the Act nor the DTAA. In such a situation, it becomes crucial to understand the import of such an expression. In our considered opinion, the words 'effectively connected' are akin to 'really connected'. In the context of royalties, it is in the nature of something more than the mere possession by the PE of property or right but equal to or little less than the legal ownership of such property or right. But in no case the remote connection between the PE and property or right can be categorized as effectively connected".

Case: DCIT v. Aecom Asia Company Ltd. ( 2023 TaxPub(DT) 91Del-Trib)