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Permanent Establishment (PE) in India

The concept of a PE is defined in the Double Tax Avoidance Agreement between countries and Income Tax Act 1961. The foreign enterprise would consider as a Permanent Establishment in India (as per Article 5 of Income Tax Treaty of India and foreign countries) if the foreign enterprise would have a fixed place of business in India or doing a business in India through:

  1. a place of management, branch, office, factory, workshop, warehouse etc. or

  2. a building site or construction, installation or assembly project or supervisory activities in connection therewith where such site, project or activities continue for a specified period, or

  3. furnish a service for a specified period, or

  4. an agent (other than independent agent) who habitually exercise an authority to conclude contracts or regularly deliver goods or merchandise or habitually secure orders on behalf of the foreign company.

In case the foreign enterprise would be considered to have a Permanent Establishment in India, the business income of the such foreign enterprise attributable to the business carried out in India is become taxable in India under Article 7 of the Income Tax Treaty between India & foreign country and would require to do all the compliances (such as filling of tax return etc.) as per Income Tax Act 1961 in India.

The following are the main categories under which the foreign enterprise would be considered as a Permanent Establishment in India:

  1. Fixed Permanent Establishment

  2. Agency Permanent Establishment

  3. Service Permanent Establishment

Fixed Permanent Establishment (Fixed PE):

The Indian subsidiary company can consider as a Permanent Establishment of foreign enterprise under the fixed place clause of the Article 5(1) of the Income Tax Treaty between India and foreign country. The following are the two conditions under which the foreign enterprise would be considered as Fixed PE in India:

  1. Foreign enterprise has a Fixed Place of Business in India;

  2. Business of the foreign enterprise is wholly or partly carried on.

Any space or premises belonging to the Indian subsidiary at the disposal of the foreign enterprises as a matter of right can meet the requirement of the Article 5(1) i.e., a fixed place through which the business is carried on.

Agency Permanent Establishment (Agency PE):

The Indian subsidiary company can consider as a Permanent Establishment of foreign enterprise under agency clause of Article 5(4) of the Income Tax Treaty between India and foreign country. The agency clause of Permanent Establishment is attracted if the agent appointed by the foreign enterprise in India is a dependent agent. The agent who is dependent and performs the following functions will be considered as a PE of the foreign enterprise:

  1. Exercises an authority to conclude contracts on behalf of the foreign enterprise.

  2. Secures orders wholly or almost wholly for the foreign enterprise.

  3. Maintains the stock of goods or merchandise from which the agent regularly delivers on behalf of the foreign enterprise.

The following three requisites are necessary for establishing an agent as an independent agent:

  • He should be acting in the ordinary course of his business;
  • His activities should not be devoted wholly or almost wholly on behalf of the foreign enterprise for whom he is acting as an agent;
  • The transactions between the foreign enterprise and the agent should be at arm’s length.

Service Permanent Establishment (Service PE):

The Service PE is attracted by the foreign enterprise in India if the employees of foreign enterprise furnish or perform services in India exceeds specified period of time. The employees of a foreign enterprise working in India for a period more than specified and the employment agreement in the name of foreign enterprise established that foreign enterprise through employees providing a service to the customers in India and constitute a Service PE in India.

Conclusion:

  1. Any space or premises belonging to the Indian subsidiary at the disposal of the foreign enterprises or employees of foreign enterprise as a matter of right can be considered as the Permanent Establishment of foreign enterprise in India.

  2. The transactions between foreign enterprise and Indian subsidiary is of actually on a principal - to- principal basis & at arm’s length and the subsidiary company functions & carries on business of its own, instead of functioning as agent of the foreign enterprise, the mere fact that the company is a subsidiary of the foreign company is not a valid ground for holding it to be a Permanent Establishment. However, in case the Indian subsidiary functioning as a dependent agent, the Indian Subsidiary can consider as Permanent Establishment of foreign enterprise into India.

  3. If the employees of foreign enterprise furnish or perform services in India exceeds specified period of time would be considered as Permanent Establishment of foreign enterprise in India.


- As on 1st July 2019