Conference on International Taxation and FEMA
Coimbatore Branch of SIRC of ICAI
8th and 9th Feb 2013
Permanent Establishment
&
Business Profits
Snap shot of this presentation
 Residence and Source Based taxation
 Permanent establishment
- Relevance of PE taxation
- Basic Rule PE / Fixed Base PE
- Examples of PE (Positive definitions of PE)
- Constructions / Installation PE
- Exceptions to PE (Negative definitions of PE)
- Agency PE
- Service PE
- Force of Attraction
 PE in E- commerce Scenario
- Internet website
- Use of server – hosting arrangement
- Use of server – Own server
- Internet service provider
Snap shot of this presentation (contd…)






Business Profits
Relevance of PE in Business Profits
Force of Attraction
Allocation of profits to PE
Business Connection
Attribution and Indian Tax laws
Need for DTA
• The problem with the Classical system of taxation is that
Double Tax is built-in in the system. By the very nature of the
Classical system of taxation; moment, there is a cross border
income; two or more countries will claim the right to tax the
same.
• It is also understood that if double tax is allowed, either the
international trade will not take place, or it will go under
ground. In other words, there will be more smuggling & black
money. Ultimately, the Governments will lose their tax
revenues in more ways than one.
• Hence most Governments have entered into Double Tax
Avoidance Agreements (DTAs).
Country of Residence (COR) tax
capability
• Country of Residence (COR) has an inherent jurisdiction to tax
its resident’s global income.
• This need not/ cannot be stated in the treaty.
• A Government acquires its taxing jurisdiction by its domestic
legislation.
• DTA neither grants/vests/nor allots such jurisdiction.
• Therefore, the DTA does not grants this taxing right.
Permanent establishment’s(PE’s) effects on
COR & Country of Source (COS)
COR
• A person resident in a country will be fully taxed on his
Global income of all kinds in the COR.
• Category of income is not important at all.
• When we are considering the income of a person in his
COR, the question of PE just does not arise at all.
• Liability arises purely because he is resident of the
country. No further reason is required for the
Government to tax him
COS
• A Government cannot tax a non-resident.
• However if a non-resident businessman has presence in
the host country (COS) beyond a critical line (thresh
hold), then he can be liable to income-tax.
• For Business Profits that critical line is permanent
establishment.
 PERMANENT ESTABLISHMENT
Relevance of Permanent Establishment in International taxation
Country R
Corporate Tax
Business
Profits
• Head
Office
Country S
Corporate Tax
Business
Profits
• PE
Article 5(1) of the OECD
model DTA
Basic Rule PE
For the purposes of this convention, the term “Permanent Establishment” means a
fixed place of business through which the business of an enterprise is wholly or partly
carried on.
• Place of
Business
• Physical
presence eg:
some
premises or
equipment
which are
used in the
business
• A Fixed Place
• Carry on Business
• distinct place
• exhibits some degree of
permanence
• no formal legal right is
required like leasing
arrangement
• shall not be a temporary
place except in case
nature of business
requires premises for a
short period of time
• “Permanent
Establishment” and
“Carry on Business” are
inextricably bound up
together.
• Any employees of the
enterprise found at
fixed place conducting
any part of the business
of the enterprise, then
PE is located
 PERMANENT ESTABLISHMENT
Article 5(1) of the OECD model DTA, says a PE will
exist if there is a fixed place of business through
which the business of an enterprise is carried on
Does this mean that human intervention is required
before a PE can exist?
OECD commentary suggests that the answer is “No”:
automatic equipment, such as gaming and vending
machines and pumping equipment, can constitute
PEs. – [Para 10 and 42.6 of the said commentary]
This was originally propounded in the German Pipeline decision (1996)
Dutch
Company
Netherlands
Technical
functions and
business
administration
were exercised
exclusively by
personnel
located in
Netherlands
Operated by
remote control
through a
computer in
Netherlands
Transported crude oil and crude
oil products
Underground pipeline network
German Court held PE exist
in Germany
•Pipeline was a fixed place of business
•It was firmly connected to German
Territory
Dutch company’s nature of
business being
• Usage of Pipeline network
• Used for Transportation Services
Employment of Personnel in
Germany was not necessary
for fixed place of business
•Mechanical and Automatic installations
are sufficient
German
Company
Germany
Independent firms
were hired to
maintain and
repair that part of
the pipeline
network that was
situated in
Germany
Article 5(2) of the OECD model tax treaty gives
examples of PE and includes especially…
A place of
management
Branch
Office
A
Factory
A
Workshop
An
Office
A
mine
AN OIL OR
GAS WELL
ARTICLE 5(3): Construction PE
Building Site
• Building Site
Construction Site
• Construction of Buildings
• Sewerage systems
• Bridges and canals
Planning & Supervision carried on
by builder incusive falls within
Construction PE.
If a person carries on only
planning and supervision without
construction then it does not
constitute construction PE
Project
lasts for
more
than 12
months
Installation Project
. Excavating, dredging and
laying of pipelines
Constitutes PE
6 months
in case of
UN Model
Service PE
Service PE
Furnishing Services of any kind
A service PE comes into being
including Consultancy constitutes
when an enterprise is –
Service PE
Furnishing services,
Other than those services referred
under Article dealing with Royalties
Through its employees or
& Fees for technical services
Other Personnel,
This clause goes beyond the ‘fixed
In the same or the connected
base’ concept
project
This extension of taxation by the
For a period or periods aggregating state of source is of particular
more than 6 months
significance in connection with
making personnel available and
with providing technical assistance
Morgan Stanley & Co., - 292 ITR 416 (SC)
Morgan Stanley & Co., Inc – Investment Bank
Sent Stewards to ensure high standards
of the quality of the services are met to
Morgan Stanley Advantage Services India
Held, that stewardship activities did
not create PE. The presence was not to
carry on significant activity of business
but ensuring that standards are
maintained
Deputed certain employees on request
of Morgan Stanley India to work for
Morgan Stanley India
PE is created since Morgan Stanley Inc would be
responsible for the work of deputed
employees
Employees continue to be on the
payroll of Morgan Stanley Inc
Employees continue to have lien on
their employment with Morgan Stanley
Inc
Article 5(4)
Excluded Activities
Maintenance of
fixed place of
business for any
combination of
these activities
which are
preparatory or
auxiliary
Maintenance of a
fixed place of
business solely for
the purpose of any
preparatory or
auxiliary activity
PE not formed
Due to
insignificant
economic activity
Use of Facilities
solely for the
purpose of
Storage, display
or delivery
Maintenance for
the purpose of
storage, display or
delivery
Goods or
Merchandise
of the
Enterprise
“SOLE
PURPOSES”
Maintenance for
the purpose of
processing by
another enterprise
Maintenance of a
fixed place of
business solely for
the purpose of
Purchasing or of
collecting
information
UN model does
not recognise
“delivery”
Article 5(4) is not
exhaustive
Auxiliary Activities
include
• 5(4)(e) captures “any
other activity of a
preparatory or
auxiliary nature”
• Storage, display,
processing and
delivery of goods
• Purchasing of goods
• Collecting information
• Public Relations
• Invoicing
• Collecting claims
• Research and
Development
• OECD commentary - if
an activity forms
essential and significant
part of the activity of
the enterprise as a
whole then it is not
Preparatory or auxiliary
activity Eg:AFTER SALE
activity
Instances - essential
and significant part
of business activity
• Research performed
by pharmaceutical
company is part of its
main activity
• Management offices
that maintains
subsidiary companies,
agents or licences,
with coordinating or
supervisory function
3 Year
Contract
Singapore
Illustration 1
Singco.
Information Technology
and communication
services
Polrail
Poland
Employee of
Singco visits
Polrail frequently
Most of the
work is done
at Singco’s
facilities in
India
To present and discuss the
results of work done to date.
To gather and analyse further
Each visit never lasts for
more than a week
All visits in a 12 month
period certainly do not
exceed 3 months.
Employee was assigned
whichever office facilities
happened to be available in
Polrail’s Warsaw building
technical
data
other
information,
To formulate with the Polrail’s
management the strategy for
subsequent work.
IS PE CREATED BY SINGCO IN POLAND?
and
Notwithstanding Art
5(1) & 5(2)
Such enterprise is
deemed to have a PE
in that State
Unless the activities
of such a person are
those specified in
Art 5(4)
A Person not being
an independent
agent
An authority to
conclude contracts
in the name of the
enterprise
Which if exercised as
per Art 5(4) through
a fixed place of
business would not
constitute PE
Acts on behalf of an
enterprise
Habitually exercises
in the contracting
state
Article 5(5) terms
such a person as a
DEPENDENT AGENT
A person’s commercial activities for an enterprise are subject to detailed
instruction or comprehensive control by the enterprise, the person is regarded
as dependent.
A person acting for only one principal would appear to be a dependant agent.
IRC v/s London Produce Co [1968] 2 ALL ER 1975 and Case 23/93 (1003) 93
ATC 288
Dependant
Agent
Concluding
Contracts
• Powers do not need to extend
to actual signing of the
contracts
• Authorised to negotiate all
elements and details of a
contract that binds the contract
Fixed place
of business
• Art 5(5) deems existence of PE
even without existence of fixed
place of business
• This ensures as a anti avoidance
measure to appoint agents and
in order to avoid PE status
ARTICLE
5(6)
INDEPENDENT AGENT
• An
enterprise
in
Resident
State is
not
deemed
to have PE
in Source
State
• Business
carried on
through a
broker,
general
commission
agent of an
independent
status
• Such
agents
act in
the
ordinary
course of
their
business
Independent
Status of an
agent
determined by
Legal
Independence
Economical
Independence
The Principal has no
control over, or
power to interfere
in, the day-to-day
business of the
agent
Agent conducts its
own exclusive
business wherein It
bears the
entrepreneurial risk
of the business
Criteria for Dependence
Nature of Relationship Between
Agent and Principal
Agent has NO
entrepreneurial Risk
Agent is subject to
detailed instructions or to
comprehensive control
Agent is DEPENDENT
Holding
Company
Subsidiary
Company
A subsidiary can be
PE of its parent if
It Is not an
independent
agent of its
parent AND
Habitually
exercises
authority to
conclude
contracts in the
name of its
parent
company
ARTICLE
5(7)
Existence of Holding and
Subsidiary Relationship
does not make each
other PE of the other in
the respective states
Impact of e-commerce
In the increasing interactive commercial use of the Internet in recent
years, the location of a PE as a geographical point is more challenging
Is human intervention required before a PE can exist?
Does the use of the internet create a PE abroad for an enterprise?
E- Commerce - PE
PE by definition needs –
(i) A fixed place of business; or
(ii) A dependent agent working in the Country of
Source
E- Commerce by its very structure needs
neither fixed base nor human intervention
Can the concept of PE be applied to E-Commerce?
Internet constitutes
PE?
Internet
Website
An entity want to have its own
website
- It acquires
Dreamweaver software
to create its own
website programme
- Website is then
uploaded to
Geocities.com Public
Server
- It is a combination of
software and data
- A website is not tangible
property
- There is no “facility such
as premises or, machinery
or equipment
- It does not have a
location constituting
“Place of business” as per
Art. 5(1)
Hence no PE created
Internet constitutes
PE?
Use of Server –
hosting
arrangement
Website of
an
enterprise
Hosted on
the server
of a ISP
Fees are
normally
paid for
use of ISP
disk Space
Server and
its location
are not “at
the disposal
of the
enterprise”
So, hosting
arrangement
DOES NOT
GIVE RISE TO
A PLACE OF
BUSINESS
Internet constitutes
PE?
Use of Server
– Own
Server
Server to constitute PE
Enterprise has leased or owned the server
where the website is stored
The place where the server is “Fixed”
determines the Place of PE
Is the enterprise business then carried on through the server?
Depending on the business presence
of personnel not required
An interactive site might be a PE if the activities
conducted through it include the conclusion of
contracts, processing of payments and automatic
online delivery
No PE if the activities carried out through the server are merely preparatory or
auxiliary activities as in Article 5(4) e.g
Merely communicating with customers,
advertising, supplying information,
gathering data etc…
If such activities are essential and
significant part of the business enterprise,
then Art 5(4) exclusions does not apply
Internet constitutes
PE?
Internet
Service
Providers
Server is an
essential part of
ISP business
• ISP business is
conducted through
the place where
server is located
ISP cannot be
Dependent Agent
of its customers
• ISPs do not have the
authority to conclude
contracts in the name
of their customers nor
do they habitually do
so
HOW TO DETERMINE PE?
1
2
Does the
building /
construction/
installation
project rule in
Art 5(3) apply?
Does the Basic
Rule in Arts.
5(1) and 5(2
)apply?
NO
YES
YES
3
Do the
Exceptions in
Art 5(4)
Apply?
YES
NO
NO
PE
EXISTS
6
YES
4
Is the business
conducted
through agents
who are legally
and economically
independent or
by a non – agent
subsidiary?
NO
YES
5
Is the
business
conducted
through
Dependant
agent?
NO
NO
PE
7
Illustration 2
Canada
Mr. Bush resident of
Los Angeles,
California, USA.
He carries on a small
part-time, but
lucrative business
selling knives, gloves
and handy utensils
from a trailer and
collapsible booth –
transports to 2
markets in California
for a period of 2-3
weeks per year.
Pacific Business
Development
Trade Fair
For 15 years
He has towed his
trailer and booth
to the Trade fair
Sells goods for
over a 3-week
period
At the end of
each trade fair
tows back to USA
Returns to
Canada only in
the next Trade
fair
He participates in the trade fair under
following circumstances:
1. Has a non-exclusive annual licence
to occupy a specific area. The
licence can be varied, suspended
or revoked at any time.
2. Entry into Canada is temporary
for immigration purposes for
limited purpose of attending fair
3. Canadian customers cannot
order or return his products. He
has no telephone in Canada
4. His goods are not stored in
Canada (apart from inventory in his
van and booth.
5. Significant proportion of his
total business profits each year
is earned at the trade fair.
Does Mr.Bush have a PE in
Canada?
 BUSINESS PROFITS
Residence State
Source State
ENTERPRISE
Business
Activity
Article 7(1): Source State
may only tax if Business
Activity constitutes a PE
Article 5:
Definition of
Permanent
Establishment
Article 7: Income
Attribution
Relevance of PE for Business Profits
• Permanent Establishment is a Litmus test that is used in all
the treaties to determine whether the business income is
subject to tax in the Country of Source
• Concept of PE is totally irrelevant in considering the assessee’s
tax liability in COR. It assumes importance only while
considering the tax liability in the host country (COS).
• There is considerable scope for PE profits to be “massaged” by
the manipulation of charges for goods and services supplied
between the entity’s head office and its PE.
Relevance of PE for business Profits
IT Act
DTA
Royalties & FTS
No PE
No PE
PE
R/FTS/IPS
10%
u/s
115A(1)(BB)
On Gross
Receipts
PE
40%
As per
FA, 2012, I Sch
Part II
Entry No. 2(b)(ix)
On Net receipts
after expenses
Concessional
rate
On Gross
Receipts
BP
No Tax
BP/FTS/
R/IPS
40%
As per
FA Act, 2012, I Sch
Part II
Entry No. 2(b)(ix)
On Net receipts
after expenses
Business profits – Treaty Provisions
Article
Article 7(1)
Provisions

Existence of PE and attributable to business of such PE

Force of Attraction Rule
Article 7(2)

Distinct and separate enterprise approach
Article 7(3)

Principles of computation of Income of PE – Direct method
Article 7(4)

Principles of computation of Income of PE – Indirect method
Article 7(5)

No attribution for mere purchase of goods for the enterprise
Article 7(6)

Attribution method should be consistently followed
Article 7(7)

Profits include any income taxable under other article, such article
should be applied
Attribution of profits to Permanent
establishment – Article 7(1)
Article 7(1) lays down the following broad principles:
• Business profits of ‘R’ Company, resident of “R” state shall be taxed in
“R” state ONLY.
• If ‘R’ Company carries on business in ‘S’ state through a PE situated in
“S” state, business profits of ‘R’ Company may be taxed in “S” state
• Only that much profits should be taxed in “S” Country, where the PE is
situated, which is attributable to the PE.
R – Resident Country; S- Source Country
Note
• “S” country, where PE is situated is not
authorized to tax the entire profits of ‘R’
Company
• “S” country is authorized to tax only that much
of profits of ‘R’ Company, which is attributable
to the PE.
Attribution of profits to PE – Article 7(1)
• Article 7 (1) merely provides that profits attributable to PE
may be taxed in “S” country.
• Provisions of section 9(1)(i) is also worded on similar lines. It
states, if in case part of business is carried out in India and
balance outside India, then the profits attributable to
operations carried out in India is deemed to accrue or arise in
India.
• Note: law does not prescribe any method to attribute profits
to PE
Attribution of Profits - Conditions
• Existence of PE must for attribution
• Business is carried on through such PE
– Preparatory activities do not trigger attribution
• Only profits attributable to such PE is taxable in the source country
ALLOCATION OF PROFITS TO A PE
Where Company R has a PE in Country S, Country S is normally entitled to tax the
profits derived from its jurisdiction and will also normally have first claim to tax
those profits. If Company R’s Country of Residence taxes worldwide income of its
residents it would typically give relief to Company R for the tax it pays to Country S
by way of the foreign tax credit System
Decision regarding taxation of profits
attributable to PE in COS
Case
Law
CIT vs.
SRM
Firms
208 ITR
400
(Mad)
Issues
Findings
Assessee,
an
Indian
resident, had a PE in
Malaysia. On the basis of
Article 7(1) it was claimed
that income from Malaysia
was not subject to tax in
India.
High Court held that Article 7(1)
provides that business income is
subject to tax in the country of source
if the enterprise has PE in that country.
The use of words “may be it was held that DTAAs are entered
taxed” were brought to the into by countries for avoidance of
notice of the High Court
double taxation and accordingly if
taxing rights were given to both the
countries, then the purpose of the
agreement would not be served
Taxation of profits of PE in the country
of residence
•Country of residence has right to tax its residents irrespective of the
country in which the income arises
•The language of Article 7(1) should not be interpreted to mean that
the state of residence gives up its right to tax – contrary to SRM case
Whenever profits attributable to PE are taxed ONLY in the COS and not
in the COR, it would be made clear by a language which categorically
says so.
Eg: DTAA between India with Bulgaria, Hungary, Czechoslovakia,
Poland.
In Bombay Burmah Trading Corp vs. ACIT 82 ITD 531 (Mumbai Tribunal)
held that profits attributable to PE in Tanzania were subject to tax in India
in terms of Article 7 of DTA.
Excerpt of DTAA between India and Tanzania
ARTICLE 7 - Business profits - 1. The profits of an enterprise of a
Contracting State shall be taxable only in that Contracting State unless the
enterprise carries on business in the other Contracting State through a
permanent establishment situated therein. If the enterprise carries on
business as aforesaid, the profits of the enterprise may be taxed in the
other Contracting State but only so much of them as is attributable to that
permanent establishment.
ATTRIBUTION OF PROFIT – ARTICLE 7(1)
OECD
Model
UN Model
Profit
attributable
to the
Permanent
Establishm
ent should
be taxed in
source
country
(CoS)
In addition to profit earned by the PE, Article 7 (1) is extended
to include profits of an enterprise even though the
transactions are not directly carried on through the Permanent
Establishment. Profits covered are those:
Which arise in the other contracting state from the sale of
same or similar goods as are sold by the Permanent
Establishment;
Which arise in the other contracting state from other
business activities which are similar to the activities carried on
by the Permanent Establishment. The above is called as
‘Force of Attraction” rule. Several DTAAs signed by India
contains this clause. This rule targets avoidance of tax by
planning the affairs in such a manner that no or minimum
profits accrues to the permanent Establishment.
Force Of Attraction
A Inc.
$ 200
(US Co.)
USA
$ 100
Direct sale
of
Garments
Import of
Garments
Branch in
India
Sale of Imported
garments
India
Various
Customers
Profits of India Branch = Profit earned through own sales + Profit earned by
A Inc. from direct sales to customers
Distinct and separate enterprise approach
Article 7(2)-Arms Length Pricing
• where an enterprise of a Country R carries on
business in Country S through a PE situated in
Country S, there shall in each Country be
attributed to that PE the profits which it might
be expected to make if it were a distinct and
separate enterprise engaged in the same or
similar activities under the same or similar
conditions and dealing wholly independently
with the enterprise with which it is a PE.
Issues arising on application of Article 7 (2)
Can profit be earned from transaction with self?
• When Capital asset is converted into stock-in-trade, law treats
it as a transfer and is subject to Capital Gains tax
• Associated Enterprise as per definition u/s 92A mean a person
(includes PE of such person) …..intending thereby that even a
PE is to be treated as separate enterprise.
• Income Tax law itself, in above cases accepts the concept of
taxing profits from transaction with self.
Issues – Article7(2)
• CBDT Circular no. 649 dtd 31/03/1993
When PE remits FTS to the HO, fee would be taxable in the
hands of HO. Therefore, PE is required to deduct tax.
• CBDT Circular no. 740 dtd 17/04/1996
Indian banking branch of Non-Resident company makes
interest payment to its HO or branch situated in any other
country, it is required to deduct tax at source u/s 195.
• The above 2 circulars admit the concept that one can make
profit by trading with self.
Issues arising on application of Article 7 (2)
Challenges while adopting Separate Entity Approach…
• A head office transfers goods to a PE and
• PE sells the goods to a customer.
• Is the income recognized by the head office
(i) upon transfer of the goods to the PE – as if the PE
were a subsidiary company of a foreign parent or
(ii) upon sale to the client, because the entity as a
whole only realizes the income upon sale to the
separate legal entity (the client) and not upon the
internal transfer?
Issues arising on application of Article
7 (2)
• Typical approach, therefore, as far as PE is concerned
for the purpose of calculating taxable Income in S
Country is concerned, would be to adopt Arm’s
Length Price (ALP)
• Transfer pricing provisions require transaction
between two A.E be at ALP. If not, certain
adjustments are made to ensure that ALP is taxed.
Issues arising on application of Article 7 (2)
Challenges while adopting ALP method…
• Company R, a resident of Country R, which manufactures
bikes in Country R. It transfers the bikes to its PE in Country S,
which sells bikes to customers in Country S. what is the
correct value at which bikes should be transferred from
Company R in Country R to the PE in Country S?
• ALP would differ if PE is sales agent or Distributor.
• Undertake functional analysis to determine nature of work of
PE
Process of Attribution
Identify the
economic
activities of
enterprise
Postulate the
existence of PE
Identify the
activities
PE plays
directly or
indirectly
Process of attribution
Identify
scope, type
value of
dealings of
PE
Determine
the
Character of
PE
Business
Select the
most
appropriate
methodology
Apply
the
Most
appropriate
methodology
Principles of computation of Income of PE Article 7(3)
In the determination of the profits of a PE, there shall
be allowed as deductions - expenses which are incurred
for the purposes of the business of the permanent
establishment including executive and general
administrative expenses so incurred, whether in the
State in which the permanent establishment is situated
or elsewhere.
Deduction of expenses (Para 3, Article 7)
In determining profits of a PE, Deduction shall
be allowed for expenses (including executive &
general administrative)
- Incurred for the PE
- Incurred in or outside the source country
•
Deduction for expenses should be allowed in
accordance with the provisions of domestic law
of the Country where the PE is situated (India
specific DTAs).
Deduction of expenses (Para 3, Article 7)
– No deduction shall be allowed for any amount paid by PE to the HO or any
other offices of the enterprise ~ other than reimbursement of actual
expenses
• For use of patents or other rights in the form of royalties, fees or other
similar payments
• For specific services performed or for management in the form of
commission
• For money lent in the form of interest
– Exception for banking enterprises as explained by CBDT Circular
740
– Similarly, income received by PE from HO for aforesaid purposes shall be
ignored
Deduction of expenses (Para 3, Article 7)
• According to OECD Commentary – Transaction between enterprise and PE need not be at arms
length if
• Those are not entered into with third parties or
• Cannot be expected to have entered into between independent
parties
– In case of intangible property, cost shall be apportioned over
various parts of the enterprise without any mark-up
Deduction of expenses (Para 3, Article 7)
– In case of services provided by HO being general in nature and
for the enterprise as a whole, cost shall be charged at actuals
without any mark-up
– However, group company providing support services shall be
at arm’s length
– As regards internal debts, interest shall be ignored except in
case of banking enterprise
Principles of computation of Income of PE –
Indirect method - Article 7(4)
• In so far as it has been customary in Country S to
determine the profits to be attributed to a
permanent establishment on the basis of an
apportionment of the total profits of the enterprise
to its various parts, nothing in paragraph (2) shall
preclude that Country S from determining the profits
to be taxed by such an apportionment as may be
customary. The method of apportionment adopted
shall, however, be such that the result shall be in
accordance with the principles contained in this
article.
Principles of computation of Income of PE –
Indirect method - Article 7(4)
• Source Country has been given right to apply apportionment
method
– If it is customary in the source country
– Profits are apportioned to various parts of the enterprise to
ascertain profits attributable to the PE
• Result of such apportionment method shall be in line with article
7(2) and 7(3)
• Principles of Art 7 are satisfied if the apportionment of
worldwide profits is done based on reasonable weight to PEs
activities.
No attribution for mere purchase of goods
for the enterprise – Article 7(5)
• No profits shall be attributed to PE for mere purchase of goods for the
enterprise
– Goods shall include services
• This Article reiterates that an Enterprise must have some reasonably
significant economic activity in a source state before profits are attributed.
Article 7(6)
Attribution to be worked out based on consistent
method
– Method can be changed for good and sufficient reasons
It is not open to tax payer to adopt different profit allocation
methods from year to year in order to manipulate profits of
the PE to reduce tax payer’s tax liability in either Country S or
Country R.
Article 7(7)
Priority of specific article over the general article
– In case profits include any income which is chargeable under any
specific article, the same shall be dealt with by that specific article
– Article 7 will override Art 10 (Dividends), Art 11(Interest), Art 12
(Royalties), and Art 21 (Other Income) if the income covered by
those Articles is “effectively connected with a PE”
Income deemed to accrue or arise in India – Sec 9
Section 9(1) – Income accruing or arising through or from any
Business Connection in India. If all the operations of a business are not carried
out in India, only a reasonable part of the income from such operations shall be
deemed to accrue or arise in India
Explanation 2 of S.9(1)(i) – Business Connection
Business connection shall include any business activity carried out through
a person who, acting on behalf of the non-resident a. Has an authority to conclude contracts and habitually exercises such
authority in India
b. Has no such authority, but habitually maintains in India a stock of
goods or merchandise from which he regularly delivers goods or
merchandise on behalf of the non- resident; or
c. Habitually secures orders in India mainly or wholly for the non-resident
or for that non- resident along with other non-residents who are subject
to the same common control as that non-resident.
THANK YOU
.