ITAT Judgment Mumbai The UK Trade Desk Case and PE Taxation in India

Here is a situation that plays out more often than you might think. A foreign company sets up an Indian subsidiary to handle local sales and marketing. The subsidiary does its job, gets paid properly a rate that any unrelated party would accept and everything is documented. And yet, when the Assessing Officer comes knocking, he looks at the arrangement and says: yes, the Indian company was paid fairly, but we still want to tax you more on what your permanent establishment earned in India.

That is precisely what happened to The UK Trade Desk Ltd., a UK-based internet advertising company. And when the Income Tax Appellate Tribunal (ITAT), Mumbai took up the matter, it did not mince words. The addition was struck down. Entirely.

This case is important not because it breaks new ground, but because it reaffirms principles that tax authorities sometimes seem to forget and that businesses and their advisors need to keep reminding them of.

A Quick Look at the Company and the Dispute

The UK Trade Desk Ltd. provides programmatic advertising technology. It buys media inventory from publishers around the world and makes it available to advertisers. For its India operations, it had a subsidiary called Trade Desk India Private Limited referred to throughout the case as TTD India.

TTD India was not just a letterbox entity. It handled marketing, sales, post-sales service and tech support for the Indian market. It was paid for all of this through two agreements a Master Service Agreement and a Marketing Service Agreement. The payments were at arm's length, meaning they reflected what the market would normally charge for such services.

For Assessment Year 2022-23, The UK Trade Desk Ltd. filed a Nil income return in India. After all, if your Indian subsidiary has been properly compensated for its work, there is nothing left to attribute to the foreign parent right?

The Assessing Officer disagreed.

What the Tax Department Actually Did and Why It Was Problematic

The AO examined the agreements between The UK Trade Desk and TTD India and concluded that TTD India was functioning as a Dependent Agent — essentially an extension of the foreign company in India. This, he said, created a Dependent Agent Permanent Establishment (DAPE) under Section 9(1)(i) of the Income Tax Act, 1961.

So far, that conclusion was not unusual. The assessee had, in fact, already acknowledged the existence of a PE under Article 5(4) of the India-UK DTAA.

Where things went off the rails was what happened next. Instead of referring the matter to the Transfer Pricing Officer — which is the standard and legally required step when international transactions are involved — the AO decided to estimate profits on his own. He applied Rule 10 of the Income Tax Rules and arrived at some eye-catching numbers: 25% of Indian revenues should be attributed to Indian operations, and then 20% of that should be treated as taxable profit. The result was an addition of Rs. 58.93 lakh.

The Dispute Resolution Panel (DRP) upheld this approach. It noted that TTD India was performing substantive business activities — not just auxiliary or preparatory work — and therefore the DAPE was taxable. The addition stayed.

The assessee appealed to the ITAT.

The Assessee's Case Simply Put

Before the Tribunal, the company's representative made a focused and well-grounded argument. It essentially came down to four points.

First: the Supreme Court in DIT vs Morgan Stanley & Co. Inc. (292 ITR 416) has already settled this. Once the Indian agent is remunerated at arm's length, there is nothing further to attribute to the PE. You cannot tax the same income twice — once in the hands of the Indian entity and again in the hands of the foreign parent.

Second: the India-UK tax treaty's Article 7 is clear about how PE profits are to be determined. You treat the PE as a separate, independent entity and apply transfer pricing principles. The AO ignored this entirely and jumped straight to Rule 10 — a residual provision that should be a last resort, not a first choice.

Third: any profit attribution involving an international transaction must go through the Transfer Pricing Officer under Section 92CA. Bypassing that step is not just procedurally sloppy — it is jurisdictionally invalid.

Fourth: The UK Trade Desk Ltd. was actually running at a loss during this period. Audited financial statements confirmed this. It defies logic to attribute a notional profit to Indian operations when the global entity is in the red.

How the ITAT Saw It

The Tribunal agreed with the assessee on all counts that mattered.

On the core question whether further profits can be attributed to a PE when the Indian agent has been paid at arm's length the ITAT was unequivocal. The Morgan Stanley principle is settled law. There was no dispute that TTD India had been remunerated at arm's length. The AO had access to the transfer pricing study report and had not challenged it. That being the case, the entire basis for the addition collapsed.

The Tribunal also noted that multiple benches of the ITAT have consistently held the same position. It was not as though this was a novel or contested area of law. The AO was choosing to ignore well-established precedent.

On the procedural question, the ITAT reinforced that invoking Rule 10 without even attempting to engage with the transfer pricing framework and without referring the matter to the TPO was beyond what the Act permits.

The addition of Rs. 58.93 lakh was deleted in its entirety.

Key Takeaways

• Arm's length payment to an Indian AE = no further PE tax. If the subsidiary has been fairly compensated, there is nothing left to attribute to the foreign entity. This is not a loophole — it is the law.

• Rule 10 is a fallback, not a formula. Assessing Officers cannot pull it out whenever they want a quick shortcut. It exists for cases where no accounts are available and other methods have failed.

• The TPO reference under Section 92CA is not optional. When international transactions are involved, this step is mandatory. Skipping it makes the resulting assessment jurisdictionally vulnerable.

• Global losses are relevant. You cannot create India-specific profits in a vacuum when the parent company is loss-making globally. Financial statements matter bring them to the table.

• A good TP study is your first line of defence. In this case, the transfer pricing documentation went unchallenged. That was critical to the outcome.

• Treaty protections are real and powerful. Article 7 of the India-UK DTAA was ignored by the AO and the DRP. The ITAT would not let that stand.

What This Means in Practice

If You Are Running a Foreign Company with an Indian Subsidiary

Get your transfer pricing documentation in order before the taxman asks for it. Make sure the agreements between the parent and the subsidiary clearly reflect the functions each party performs, the risks each bears, and the assets each uses. Keep audited global accounts accessible. And know your DTAA  treaty protections often go beyond what domestic law offers.

When a client faces PE attribution without any TPO reference, that is a ground for challenge right there. You do not even need to get into the merits. Push the AO to follow the process the law prescribes.

And when the other side invokes Rule 10, remind them what it is actually for. Ad hoc percentages applied to gross revenue without any proper transfer pricing analysis are not assessment — they are guesswork. The courts have seen enough of that to know the difference.

Final Thoughts

The UK Trade Desk case is a good example of how tax disputes sometimes persist not because the law is unclear, but because it is inconvenient. The Morgan Stanley principle has been settled law for nearly two decades. Article 7 of the India-UK DTAA says what it says. And yet here we were a company having to fight all the way to the ITAT to have these basic protections applied.

The lesson for businesses is simple: document everything, know your treaty rights, and do not accept arbitrary additions quietly. The lesson for tax professionals is equally plain: the law gives you more ammunition than you might think use it.