Certain kinds of income which are deemed to accrue or arise in India are provided under the provisions of Section 9(1)(i) of Income-tax Act, 1961 ("the Act"). It includes all those incomes, whether directly or indirectly, which are accruing or arising through or from any business connection in India. Therefore, an income which is earned directly or indirectly is to be deemed to accrue or earned in India. Further, such income should have some business connection in India.
Meaning of an 'enterprise':
Section 92F of the Act provides the definitions of certain terms used under the Act. Sub-section (iii) of Section 92F of the Act defines the term 'enterprise' and such an enterprise, inter alia, includes a Permanent Establishment ("PE") of a person.
Meaning of 'PE':
Further, sub-section (iii-a) of Section 92F provides an inclusive definition of "PE" – which includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. Similar to the definition provided under the Act, the Double Taxation Avoidance Agreement(s) ("DTAA") between and other countries generally provide the meaning of PE (under Article 5 of the respective DTAA) to mean "a fixed place of business through which the business of an enterprise is wholly or partly carried on".
Some of the categories of establishments which stand specifically included are set out in clauses (a) to (k) of Article 5(2) and which, inter alia, include a "place of management", "a branch", "an office", "a factory" and "workshop" amongst others. If a non-resident has a PE in India, then, business connection in India stands established.
The Hon'ble Andhra Pradesh High Court in the case of Commissioner of Income Tax vs. Vishakhapatnam Port Trust (1983) 144 ITR 146, inter alia, explained the meaning of PE in the following words (at page.162) – "...In our opinion, the words " permanent establishment " postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country...".
Fixed Place PE:
The Hon'ble High Court of Delhi in the case of GE Energy Parts Inc. vs. Commissioner of Income Tax (2019) 411 ITR 243, inter alia, laid down the following tests which need to be cumulatively satisfied by a foreign enterprise to constitute a fixed place PE in India:
First test: 'a fixed place of business' –a place from where the business of an enterprise is conducted. The foreign enterprise should have a fixed place in India from where the business operates.
Philip Baker Q.C. in 'A Manual on the OECD Model Tax Convention on Income and on Capital"[1], , provides some interesting examples of fixed place of business, like, a temporary restaurant operated in a mirror tent at a Dutch flower show for a period of seven months, a writer's study, a stand at a trade fair occupied regularly for three weeks a year, through which an enterprise obtained contracts for a significant part of its annual sales amongst others. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be 'at the disposal' of the enterprise.
However, merely providing access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as 'at the disposal' of the enterprise when the enterprise has the right to use the said place and has control thereupon. The same has been duly held by the Hon'ble Supreme Court in the case of Formula One World Championship Limited vs. Commissioner of Income tax and anr. (2017) 394 ITR 80. Further, a work bench in a caravan, restaurants on permanently anchored river boats, steady oil rigs or a transformator or generator on board a former railway wagon may also qualify as PE.
In Verizon Communications Singapore Pte. Ltd. vs. Income Tax Officer International Taxation-1 (2012) SCC OnLine ITAT 8582, the Hon'ble Income Tax Appellate Tribunal, Chennai, , held that the only requirement to constitute a fixed place PE is that a place should be fixed in the context of nature of business being carried out. Further, no time period test is prescribed for permanence as permanence of establishment has to be determined in the context of nature of business being carried on.
The Hon'ble High Court of Delhi in the case of Progress Rail Locomotive Inc. vs. Deputy Commissioner of Income Tax (2024) SCC OnLine Del 4065 , , explained that the expression "disposal" means a right to use a place and exercise "control" thereupon. "Control" means the place of business being at the "disposal" of an enterprise and which may have use of the same for a considerable period of time.
In Progress Rail Locomotive Inc. (supra), the Hon'ble Court, held that the Indian enterprise and the foreign enterprise do not appear to have been established with a commonality of general purpose. The expression "preparatory" has been understood to mean work which is undertaken in contemplation of the essential and significant part of the principal activity of an entity. The principal or for that matter the essential activity of the foreign enterprise is the manufacture and production of goods needed by rail road companies. The principal activity is concerned with the core business of the foreign enterprise that has clearly not been shown to have been undertaken at the premises of the Indian enterprise.
Second test: 'through which' –This phrase underlines the primary purpose for which the place of business is to be utilized. The Organization for Economic Co-operation and Development ("OECD") in its 'condensed version' on 'Model Tax Convention on Income and on Capital2', states that the words "through which" must be given a wide meaning so as to apply to any situation where business activities are carried on at a particular location which is at the disposal of the enterprise for that purpose. For this reason, an enterprise engaged in paving a road will be considered to be carrying on its business "through" the location where this activity takes place.
However, The Hon'ble Supreme Court in the case of ADIT vs. E-funds IT Solution Inc (2018) 13 SCC 294,, held that there must exist a fixed place of business in India, which is at the disposal of the foreign companies, through which they carry on their own business in India.
Third test: the business activity of an enterprise to be "wholly or partly carried on" from such fixed place of business. The Authority for Advance Ruling in the case of In re., Speciality Magazines Ltd. (2005) 274 ITR 310, held that "...The terms "wholly" and "almost wholly" are not technical terms or terms of art. They must receive their ordinary meaning as understood by English speaking people. The word "wholly" means entirely, completely, fully, totally: "almost wholly" would mean very near to wholly, a little less than whole. The terms of percentage "almost wholly" would mean anything less than 90 percent..."
The foreign enterprise should have 'control' over the place in India and such place should be at the disposal of the said foreign enterprise. In Progress Rail Locomotive Inc. (supra), the Hon'ble Court, , held that for the purposes of adjudging whether a fixed place PE had come into existence, one would have to necessarily come to the conclusion that the core business of a foreign enterprise was being carried on through a PE in India.
In Union of India vs. U.A.E. Exchange Centre (2020) 425 ITR 30, the Hon'ble Supreme Court, held that the Indian liaison office of a UAE company providing fund remittance services did not qualify as a PE in India. The Court held that the activities carried out by the Indian liaison office were "preparatory and auxiliary" in nature, and thereby they do not form part of the main business activity of the UAE company, hence, it was held that they were outside the scope of PE.
Construction / Installation PE:
Where any construction/installation projects are carried on by a foreign enterprise in India for a prescribed period of time (as prescribed under the relevant DTAA), the said foreign enterprise may constitute as having a PE in India. The Authority for Advance Ruling, in Advance Ruling P. No. 24 of 1996 [1999] 237 ITR 798, held that the construction, installation or assembly site etc., cannot be taken permanent establishment if the duration of its existence falls short of the prescribed period.
Service PE:
When a foreign enterprise furnishes services through its employees or other personnel in India, then, in such a case, such foreign enterprise may be said to have a service PE in India.
- The Hon'ble Supreme Court in the Case of DIT (International Taxation) v. Morgan Stanley & Co. Inc., (2007) 7 SCC 1, held that the employees of a foreign company visiting other country for the purpose of supervising the activities of its subsidiary does not constitute service PE.
- Further, the High Court of Delhi in the case Progress Rail Locomotive Inc. (supra), held that it is incumbent upon the income tax department to have established that the employees of the foreign enterprise were in fact discharging functions in connection with the business of the Indian entity. The mere fact that the Indian enterprise standing in the shoes of its parent foreign company deemed it appropriate and expedient to exercise the degree of managerial oversight, the same would not result in a service PE coming into existence. The visit of employees of the parent foreign company, their interaction with employees of the Indian subsidiary, discussion on subjects of mutual concern or interest does not amount to rendering of a service. Such forays are principally concerned with sharing of best practices, experiences and problem solving. It cannot possibly be understood to constitute rendering of a service. Similarly, the periodic visits of employee of the foreign enterprise to India were at best liable to be recognised as an extension of the right of the parent foreign enterprise to oversee India operations and exercise broad managerial oversight.
- Recently, the Hon'ble Income Tax Appellate Tribunal, Delhi, in the case of Clifford Chance PTE Ltd. vs. ACIT (2024) 160 taxmann.com 424, in the context of India-Singapore DTAA, has, held that the vacation days of employees of the foreign enterprise are to be excluded while determining the threshold days for constitution of a service PE. Further, the days spent on business development activities by the employees of the foreign enterprise and the common days are to be excluded while computing the number of days for the purpose of service PE. The requirement of service PE is that services must be furnished "within India". Physical rendition of services in India beyond the threshold period is a pre-requisite for creation of service PE and as none of the employees of the Taxpayer were physically present in India during the relevant AYs, thus, the foreign enterprise does not constitute service PE under the provisions of the DTAA.
Dependent agent PE:
This PE may be constituted where a person acts on behalf of a foreign enterprise in order to do the following:
a. habitually exercises an authority to conclude contracts on behalf of the foreign enterprise; or
b. habitually maintains a stock of goods or merchandise on behalf of the foreign enterprise; or
c. habitually secures orders for the foreign enterprise.
Virtual PE:
The Hon'ble High Court of Delhi in the case of Progress Rail Locomotives (supra), held that the concept of "virtual projection" is concerned with a functional integration between the two units and which would mean an establishment which has been virtually used for all purposes to carry out the paramount business activity of an enterprise (that is, foreign enterprise). Merely because the submission of tenders was aided as a collaborative exercise between employees of the foreign enterprise and those of the Indian subsidiary, the same would clearly not meet the test of a complete take over, a virtual projection or for that matter the Indian subsidiary being liable to be viewed as an alter-ego.
A well-functioning concept of virtual PE requires negotiation and agreement, ideally on an international level but at least bilaterally. Multilateral agreements, while challenging to establish, typically create soft guidelines rather than binding laws due to the sovereignty of tax rules. However, a multilateral soft law instrument could facilitate the spread of new taxing regulations beyond national borders.
Consequences of an enterprise being treated as a PE in India:
Once a foreign enterprise is said to have a PE in India, then, in such a case, the profits attributable to its activities in India will be taxed as "business income" in the hands of the said foreign enterprise under the relevant provisions of the respective treaties. The profits attributable to such a PE are the profits that the PE would have made as if it had operated independently in the same or comparable activities within the same or similar conditions as the rest of the company in India.
Conclusion:
As held by the Hon'ble Supreme Court in the case of Formula One World Championship (supra) a PE must qualify and meet the tests of stability, productivity and dependence as elaborated above. With the digitization of the economy in India, amongst other things, multi-national companies are re-working their respective business activities to have a stronger presence in India, making the concept of PE under income tax laws extremely essential. Therefore, there is a continuous stronger need to examine the evolving law on PE on a case-to-case basis.
1. Double Taxation Conventions, A Manual on the OECD Model Tax Convention on Income And On Capital, Philip Baker Q.C, Thomson Reuters, (2009)
2. Model Tax Convention on Income and on Capital 2017, https://www.oecd.org/ctp/model-tax-convention-on-income-and-on-capital-full-version-9a5b369e-en.htm
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