ITAT Rejects Virtual Service PE Theory, Holds LinkedIn Profile Not Conclusive for PE Determination

Case Details

Background

IMAX Theatre Services Ltd (Assessee) is a company incorporated and tax-resident in Canada holding a Valid Tax Residency Certificate as per the India-Canada DTAA. It provides maintenance services for IMAX Theatre Systems globally, including in India. For on-site maintenance at Indian customer sites, it engaged an Australian sub-contractor M/s ESPM, whose employee, Mr Sunil Kumar, visited Indian customer premises. The assessee also provided maintenance support remotely through electronic access to the theatre systems of Indian clients, limited strictly to troubleshooting, bug-fixing, and software updates.

The Assessing Officer (AO), vide order dated 24 January 2025 under Section 143(3) r.w.s. 144C (13), incorporating directions of the DRP dated 31 December 2024, held that the assessee had a Permanent Establishment (PE) in India and attributed income as follows:

• Maintenance Services: Rs  5,90,35,967
• Sale of Glasses: Rs  19,69,881

Applying a profit rate of 25% under Rule 10 of the IT Rules on the total attributed income of Rs  6,10,05,848, the AO made an addition of Rs 1,52,51,462. However, the DRP reduced the profit rate to 12.5%, bringing the final addition to Rs 76,25,731

Issues Before the Tribunal

• Issue 1: Whether the assessee had a Fixed Place PE in India under Article 5(1) of the India-Canada DTAA on account of remote access to IMAX theatre systems at Indian customer premises.
• Issue 2: Whether the assessee had a Service PE under Article 5 of the India-Canada DTAA, either through Mr Sunil Kumar’s physical visits or through services rendered remotely.
• Issue 3: Whether profit attribution under Rule 10 at 12.5% of gross revenues was legally tenable.

SUBMISSIONS BY PARTIES

Assessee’s Submissions

• On Fixed Place PE: The assessee argued that none of the four essential tests, Place of Business, Disposal, Permanence, and Business Activity, were satisfied. The remote access granted by Indian customers was strictly limited in purpose and scope. The assessee had no unfettered access or overriding control over the theatre systems owned by the clients. The Indian customer’s premises were never at the disposal of the assessee within the meaning of Article 5(1). Reliance was placed on the Supreme Court ruling in Formula One World Championship Ltd vs CIT [2017] 249 Taxman 192 (SC).
• On Service PE/Virtual Service PE: Sunil Kumar visited Indian premises for only 67 days during FY 2021-22, which is below the 90-day threshold under Article 5(2)(l) of the India-Canada DTAA. Additionally, Mr Sunil Kumar was an employee of M/s ESPM, not the assessee. The AO’s reliance was based solely on his LinkedIn profile, but an affidavit from M/s ESPM explicitly confirmed his employment with them. The assessee also submitted that the concept of Virtual Service PE (VSPE) finds no mention in the India-Canada DTAA and cannot be judicially read in.

Department Submissions

• The AO relied on Mr Sunil Kumar’s original LinkedIn profile, which described him as working for IMAX on a full-time basis & he was a dependent agent of the assessee, providing not just maintenance but also marketing, business development, and goods delivery services.
• The AO also contended that remote access to the theatre systems amounted to the assessee carrying on business from a fixed location in India and that virtual/remote services can constitute a Service PE even without the physical presence of employees.

ITAT RULING

1. On Fixed Place PE

The Tribunal held that all four tests for Fixed Place PE were not satisfied. The Indian customers’ theatre premises were never at the disposal of IMAX Canada. Remote access was limited, client-controlled, and served the client’s own operational interest. There was no permanence or continuity of operations at any Indian site. Accordingly, no Fixed Place PE existed under Article 5(1) of the India-Canada DTAA.

1. On Service PE and Virtual Service PE

The Tribunal accepted the admitted fact that Mr Sunil Kumar’s on-site visits totalled 67 days in FY 2021-22, which is below the mandatory 90-day threshold under Article 5(2)(l). Hence, Service PE is not constituted. On the employment question, the tribunal held that the LinkedIn profile is not a deciding factor in determining his employment status when the formal affidavit from M/s ESPM was on record.

Placing reliance on Ernst & Young (EMEIA) Services Ltd vs ACIT [2026] 184 taxman.com 671 (Del. Trib.) and the Delhi High Court’s ruling in Clifford Chance Pte. Limited, 181 taxman.com 254,

The Tribunal held that Article 5(2) of the India-Canada DTAA requires the physical presence of employees within India for a Service PE. In the absence of physical presence, there can be no furnishing of services within the contracting state.

The concept of Virtual Service PE finds no mention in the India-Canada DTAA or the domestic Act. DTAAs must be interpreted strictly.

1. On Profit attribution

Since both Fixed Place PE and Service PE were decided in favour of the assessee, the question of profit attribution under Rule 10 did not survive.

The appeal was allowed in favour of the assessee, and the entire addition of Rs 76,25,731 was deleted.

SUMMARY