The Delhi Bench of the Income Tax Appellate Tribunal has delivered a significant ruling clarifying the conditions under which a foreign enterprise can be deemed to have a Permanent Establishment in India under the India-Canada Double Taxation Avoidance Agreement. The decision reinforces the principle that physical presence alone, without control or disposal of premises, cannot trigger tax liability under PE provisions.
Background & Facts
The Dispute
The appellant, IMAX Corporation, a Canadian company engaged in developing, selling, leasing, and installing large-format theatre systems globally, entered into agreements with Indian customers for the sale of theatre systems, installation services, and licensing of the IMAX trademark. The Indian Revenue authorities alleged that these activities constituted a Fixed Place Permanent Establishment (PE) and an Installation/Supervisory PE in India, leading to tax additions of Rs. 1.82 crore. The dispute centered on whether IMAX’s activities in India met the legal thresholds under Article 5 of the India-Canada DTAA.
Key Facts
- IMAX Corporation is a tax resident of Canada with PAN AACCI5528C.
- The company sells theatre systems to Indian customers under contracts signed on 11.10.2021.
- Under Clause 5.02 of the agreement, the Indian customer was responsible for constructing the theatre building and providing a "substantially complete" space for installation.
- The theatre system arrived in India on 02.04.2022.
- A single IMAX employee, Mr. Jim Krimbalis, visited India from 28.02.2022 to 04.03.2022 (5 days) solely for site inspection and design coordination.
- Actual installation of the theatre system occurred between 13.09.2022 and 28.09.2022 (16 days), performed by an employee of Entertainment Services Project Management Pty. Ltd. (ESPM), an Australian vendor, not IMAX.
- Revenue from installation services (Rs. 57,51,000) was recognized in AY 2022-23 on mercantile accounting principles, despite physical performance occurring in AY 2023-24.
- Theatre design services were rendered remotely from Canada; no employee visited India for this purpose.
- Sale of glasses and ancillary items (Rs. 34,95,704) was explicitly excluded by the DRP but erroneously included in the final assessment.
- IMAX’s global financials for the year showed net losses.
Procedural History
- 11.10.2021: Sale and service agreement executed between IMAX and Indian customer.
- 28.02.2022 - 04.03.2022: First and only visit by IMAX employee to India for site inspection.
- 02.04.2022: Theatre system imported into India.
- 13.09.2022 - 28.09.2022: Installation carried out by third-party vendor (ESPM).
- 27.01.2025: Final assessment order issued by Ld. AO under Section 143(3) read with Section 144C(13), proposing additions of Rs. 1.82 crore on PE grounds.
- DRP Proceedings: DRP directed exclusion of sale of glasses but upheld PE allegations and reduced additions to Rs. 1.63 crore.
- 17.09.2025: Additional grounds filed but not pressed.
- 06.05.2026: Hearing before ITAT Delhi.
- 03.06.2026: Judgment pronounced.
The Parties' Positions
For the Appellant (IMAX Corporation):
- Argued no Fixed Place PE existed because Indian customer premises were never at IMAX’s disposal.
- Emphasized that IMAX had no ownership, lease, or control over the multiplex premises.
- Contended that the 5-day inspection visit and 16-day installation period fell far below the 120-day threshold under Article 5(2)(k).
- Highlighted that installation was performed by a third party (ESPM), not IMAX employees.
- Stated that revenue recognition on mercantile basis does not equate to physical activity in India.
- Relied on Formula One World Championship Ltd. v. CIT (394 ITR 80) to establish the "disposal test" for PE.
For the Respondent (Revenue):
- Argued that sale, installation, and design services formed a composite contract.
- Claimed that the multiplex premises were effectively at IMAX’s disposal due to access granted for installation.
- Asserted that the 120-day threshold was breached by aggregating preparatory visits and installation.
- Maintained that attribution of profit was justified under Rule 10 of the Income Tax Rules.
- Contended that exclusion of glasses sale by DRP was ignored by the AO.
Relief Sought
The appellant sought:
- Quashing of the addition of Rs. 1.82 crore on PE grounds.
- Removal of Rs. 34,95,704 relating to sale of glasses, as directed by DRP.
- Cancellation of interest under Section 234B and penalty under Section 270A.
- Declaration that no PE existed in India under the India-Canada DTAA.
The Legal Issue
The central question was whether IMAX Corporation’s activities in India - specifically, a 5-day site inspection and a 16-day installation performed by a third party - constituted a Fixed Place Permanent Establishment or an Installation/Supervisory Permanent Establishment under Article 5 of the India-Canada DTAA, and whether the Revenue was justified in attributing income to such an alleged PE.
Arguments Presented
For the Appellant
The appellant’s counsel relied on the four tests for Fixed Place PE as articulated in Formula One World Championship Ltd. v. CIT: place of business, disposal, permanence, and business activity. It was argued that none were satisfied. The premises were owned and controlled by Indian customers; IMAX had no right to use or control them beyond temporary access. The 5-day visit was preparatory and non-business in nature. The 16-day installation was conducted by a third party, not IMAX employees. The 120-day threshold under Article 5(2)(k) was not breached even if all days were aggregated. The revenue was booked on mercantile basis, but physical performance occurred in the next financial year. The attribution of profit using IMAX China’s margin was arbitrary and ignored global losses.
For the Respondent
The Revenue contended that the contracts were artificially split to avoid PE creation. It argued that the cumulative activities - sale, installation, design - formed an integrated business operation in India. The DRP’s finding that the multiplex became a fixed place of business was supported by the level of control exercised by IMAX over the installation process. The Revenue maintained that preparatory activities (site inspection) should be included in the 120-day calculation. It further argued that Rule 10 of the Income Tax Rules permitted a 25% profit rate, and the AO’s computation was correct despite DRP’s directions.
The Court's Analysis
The Tribunal conducted a meticulous review of the facts and the legal framework under Article 5 of the India-Canada DTAA. It emphasized that the "disposal test" is the cornerstone of Fixed Place PE determination, as established in Formula One World Championship Ltd.: "The place would be treated as at the disposal of the enterprise when the enterprise has right to use the said place and has control thereupon."
"Merely giving access to such a place to the enterprise for the purposes of the project would not suffice."
The Tribunal found that IMAX had no right to use, occupy, or control the multiplex premises. Access was granted solely for installation, and the premises remained under the exclusive control of the Indian customer. The 5-day visit by Mr. Krimbalis was purely preparatory and did not constitute business activity. The installation, performed by a third-party vendor, lasted only 16 days - well below the 120-day threshold under Article 5(2)(k). The Tribunal rejected the Revenue’s attempt to aggregate preparatory and installation days, noting that preparatory activities are excluded from the calculation of PE duration under OECD Commentary and Indian jurisprudence.
The Tribunal also noted that the DRP had explicitly directed the exclusion of Rs. 34,95,704 from the addition, yet the AO had ignored this direction. The attribution of profit using IMAX China’s margin was deemed arbitrary, particularly since IMAX reported global losses. The Tribunal held that once the existence of a PE is negated, the entire basis for income attribution collapses.
The Verdict
The appeal was allowed. The ITAT Delhi set aside the addition of Rs. 1.82 crore, including the Rs. 34,95,704 for sale of glasses erroneously included despite DRP directions. The interest of Rs. 24,14,986 under Section 234B and penalty proceedings under Section 270A were cancelled. The Tribunal held that no Fixed Place PE or Installation/Supervisory PE existed in India under the India-Canada DTAA. The assessment for AY 2022-23 was restored to the original return position, with no additions on PE grounds.
What This Means For Similar Cases
Fixed Place PE Requires Control, Not Just Access
- Practitioners must now argue that mere physical access to client premises for installation or maintenance does not satisfy the "disposal test" under Article 5(1).
- Tax authorities cannot infer PE merely because a foreign enterprise sends personnel to a client’s site.
- Documentation showing client ownership and control of premises is critical to rebut PE allegations.
Installation PE Threshold Must Be Strictly Calculated
- Only days spent on actual installation or supervision count toward the 120-day threshold.
- Preparatory visits, site inspections, or design coordination do not qualify as installation activities.
- Third-party performance of installation services cannot be attributed to the foreign enterprise for PE purposes.
- The 120-day period must be calculated within a rolling 12-month window, and cumulative days must exceed the threshold.
Profit Attribution Cannot Be Arbitrary
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Profit attribution must be based on the actual functions, assets, and risks of the enterprise, not on margins of unrelated group entities.
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Global losses must be considered before applying a presumed profit rate under Rule 10.
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Revenue cannot override DRP directions on specific exclusions without valid legal reasoning.
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Always verify whether the foreign enterprise has any legal right to use or control the premises.
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Maintain clear records distinguishing preparatory, installation, and operational activities.
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Challenge aggregation of non-installation days in PE calculations.
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Use global financials to contest arbitrary profit attribution.
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Cite Formula One World Championship Ltd. and OECD Commentary to reinforce legal position.
