Role of Permanent Establishment vis-a-vis Indian laws

Posted On - 27 November, 2019 • By - Adithya Reddy

India’s position w.r.t Permanent Establishment

  1. Section 92F of the Income Tax Act

One of the most
important aspects of a treaty-based law or Double Taxation Avoidance Agreement
(DTAA) is the existence of a Permanent Establishment (PE). As per
general parlance, a non-resident taxpayer is not required to pay income tax on
its business profits unless it has a Permanent Establishment in the source
country and the profits are attributing from such PE. Usually, as per Section
90(2) of the Income Tax Act, while ascertaining the tax liability of a
non-resident, the provisions of the Income Tax Act and the DTAA are taken into
consideration and whichever is more beneficial shall apply. The term Permanent
Establishment can be defined by making reference to Section 92F(iiia) read
along with Section 92F(iii) of the Income Tax Act. Section 92F(iii) defines
enterprise which includes the definition of PE and the same is explained
further by Section 92F(iiia)[1]
which substantiates the definition further by stating that PE includes a fixed
place of business through which the business of the enterprise is wholly or
partly carried on.

In Samsung Heavy Industries Co. Ltd.[2], it was held that the assessee had a fixed PE in India as it was carrying on core business activities in India. Further, in the case of Motorola Inc v. DCIT[3], Motorola US had a right to use the offices of Motorola India. The ITAT held that the use of offices of Motorola India by the employees of Motorola US gave rise to Motorola US’s fixed place PE in India.[4]

2.Business Connection as defined under Section 9

The domestic laws of India recognize business connection under Explanation 2 of Section 9(1)(i) of the Income Tax Act. This is explained by emphasizing the definition of business connection which is explained in a very clear manner. It has to be read in consonance with Section 5 of the Act[5] which states that a non-resident company is liable to pay tax in India on income received or is deemed to be received in India, or accrues or arises or is deemed to accrue or arise in India, on income that is accrued through business connection in India. Business connection can sometimes be interchangeably used with PE, though it is much wider in connotation and it is the Indian equivalent of PE.

3.Payment of Minimum Alternate Tax as per 115JB of the Income Tax Act

If foreign companies have a place of business or PE in India then they
have to pay Minimum Alternate Tax (MAT) under Section 115JB of the IT
Act. If foreign company is an independent agent and it does not have PE or
place of business in India, then it is not required to pay MAT.

After the Finance Act, 2015 was introduced, the IT Act was amended by
inserting clauses (fb) and (iid) to Explanation 1 to subsection (2) to Section
115JB and foreign companies were not required to pay MAT. Reliance can be
placed on AP Shah Committee Report, Press Release, and CBDT Instruction wherein
it was mentioned that only a foreign company with place of business/PE in India
is liable to pay MAT. In a Press Release[6],
the Government of India clarified that if the foreign company is a resident of
a country having DTAA with India and does not have a PE within the definition
of the term in the relevant DTAA then with effect from 01.04.2001 the provisions
of section 115JB won’t be applicable to that company.

The rulings of AAR in The Timken
v. Director of Income Tax
(International Taxation)
[7]and Praxair Pacific Limited v.
Director of Income Tax (International Taxation)
[8]explicitly held that if foreign
companies have any place of business in India then such companies will be
liable to pay MAT as per 115JB.

As clarified in A. P. Shah Committee
Reportand in the Press Release[9],
the amendment of section 115JB is applicable only to FIIs/FPIs that have any PE
in India, even if it had retrospective operation. The report did not express
any view on the issue of FIIs/FPIs without PE in India.[10]
As per the Taxation Laws (Amendment) Ordinance, 2019 the tax rate under section 115JB of the Income Tax Act has been
reduced from 18.5% to 15%.

Interpretation of Permanent Establishment under OECD and UN Conventions

The United Nations Model Double Taxation Convention between Developed
and Developing Countries (the UN Model Convention) forms part of the continuing
international efforts aimed at eliminating double taxation. These efforts were
begun by the League of Nations and pursued in the Organisation for Economic
Co-operation and Development (OECD) as well as in the United Nations, and have
in general found concrete expression in a series of model or draft model
bilateral tax conventions.[11] Article
5 of the OECD Model Convention[12] defines PE.  As such, Article 5 is not a substantive
provision. Rather, it is a definitive provision. 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.

The official commentary[13] on the OECD model explains
the criterion for the existence of PE on the existence of a place of business,
fixed place of business and carrying on of the business. In the landmark case CIT v. Vishakhapatnam Port Trust[14]
on the subject of the permanent establishment, the Andhra Pradesh observed that
to qualify as PE it should have a fixed place of business and there should be virtual
projection of foreign company in the host country. 

In Ericsson Radio Systems A.B v.
Ericsson was a tax resident of Sweden. It was observed that Ericsson’s
employees had used the office facilities of Ericsson India during their
business visits to India. It was held by the ITAT that although Ericsson’s
employees had used Ericsson India’s office facilities during their business
visits, it could not be substantiated the office space provided to Ericsson
could be used as a matter of right. Therefore, it was held that Ericsson could
not be regarded as having a fixed place PE in India.[16]

The definition of
PE as encompassed under the United Nations Model Convention contains several
significant differences from the OECD Model which are as follows: –

  1. There is a six-month test for a
    building or construction site constituting a permanent establishment, rather
    than the twelve-month test under the OECD Model Convention, and it expressly
    extends to assembly projects, as well as supervisory activities in connection
    with building sites and construction, assembly or installation projects
    (paragraph 3 (a));
  2. the furnishing of services by an
    enterprise through employees or other personnel results in a permanent
    establishment where such activities continue for a total of more than 183 days
    in any twelve-month period commencing or ending in the fiscal year concerned
    (paragraph 3 (b));
  3. Article 14 (Independent personal
    services) has been retained, whereas in the OECD Model Convention, Article 14
    has been deleted, and Article 5 addresses cases that were previously considered
    under the “fixed base” test of that Article. As noted below (in paragraph 15.1
    and thereafter), while the United Nations Model Convention has retained Article
    14, the present Commentary provides guidance for those countries not wishing to
    have such an article in their bilateral tax agreements;
  4. in the list of what is deemed not to
    constitute a permanent establishment in paragraph 4 (often referred to as the
    list of “preparatory and auxiliary activities”) “delivery” is not mentioned in
    the United Nations Model Convention but is mentioned in the OECD Model
    Convention. Therefore, a delivery activity might result in a permanent
    establishment under the United Nations Model Convention, without doing so under
    the OECD Model Convention;
  5. the actions of a “dependent agent” may
    constitute a permanent establishment, even without having and habitually
    exercising the authority to conclude contracts in the name of the enterprise,
    where that person habitually maintains a stock of goods or merchandise and
    regularly makes deliveries from the stock (paragraph 5 (b));
  6. there is a special provision
    specifying when a permanent establishment is created in the case of insurance
    business; consequently, a permanent establishment is more likely to exist under
    the United Nations Model Convention approach (paragraph 6).

DTAA versus General provisions of Income Tax Act

In CIT v. VR.S.R.M. Firm,[17]it was asserted: “Tax treaties are for that matter considered being mini legisla­tions
containing themselves all the relevant aspects or features which are at
variance with the general taxation laws of the respective countries. Such
variations are in some cases in addition to the existing local tax laws and in
other cases in lieu thereof.”
When the definition of PE is given in DTAA,
the definition of PE in any other legislation will not be applied.

Circular[18] the legal
position for the tax authorities is made clear when there is a difference
between provisions of DTAA and ITA: “The correct legal position is that where
a specific provision is made in the double taxation avoidance agreement, that
provisions will prevail over the general provisions contained in the Income-tax

Numerous decisions of various Courts in
India have been applied the above circular. In DCM Ltd. v. ITO,[19] it was held that: “The laws in force in either country
continue to govern the assessment and taxation of the income in the re­spective
countries except where provisions to the contrary have been made in the
 It was further reiterated in CIT v. R.M.
[20]. Likewise, in CIT v. Hindustan
Paper Corp. Ltd.
[21] it
was reasserted that: “It is by now
well-settled that wherever there is a con­flict between a DTA and the specific
provisions contained in the Income-tax Act, the provisions of DTA will prevail
over the statutory provisions contained in the said Act.”

The same position was supported in
numerous other cases like CIT v. Davy Ashmore Ltd.[22],
ITO v. Degremont Interna­tional[23]
 Elkem Spigerverket v. ITO.[24]From the above circular and cases, it is evident that the DTAA will prevail
over those of the Income Tax Act whenever there is a conflict. When the
definition of PE is clearly given in the DTAA, which will be applicable to the
petitioner by virtue of its residence, the same will apply. A slightly
different opinion was also expressed in Nagarjuna Fertilizers
and Chemicals Limited vs. ACIT (ITAT Hyderabad) (Special Bench)
[25] wherein it was held by the Hon’ble ITAT
that in their opinion, it, therefore, cannot be said that the provisions of
section 206AA, despite the non-obstante clause contained therein, would
override the provisions of DTAA to the extent they are more beneficial to the
assessee and it is the beneficial provision of treaty that will override the
machinery provisions of section 206AA.

Overall, after
analysing the various precedents so far it can be made out that every matter
has to be considered carefully after looking at the facts in hand and the DTAA
or the general provisions of the Income Tax Act whichever are more beneficial
to the assessee would be made applicable[26].


  2. Available at
  3. Committee on Direct Tax Matters,
    Report on Applicability of Minimum Alternate Tax (MAT) on FIIs/FPIs for the
    Period Prior to 01.04.2015, 24(2015).
  4. Pg 2, Update of the UN Model Double
    Taxation Convention between Developed and Developing Countries – Permanent
    Establishment, Committee of Experts on International Cooperation in Tax
    Matters, Eighteenth session, 28th March, 2019
  5. OECD Model Tax Convention on Income
    and on Capital, July 15, 2014

  • [1] (iiia) “permanent establishment”, referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;
  • [2] Samsung Heavy Industries Co. Ltd. v. ADIT [2011]13 14 (ITAT Delhi)
  • [3] [2005] 95 ITD 269 (Delhi) (SB)
  • [4] CIT v. Vishakhapatnam Port Trust [1983] 144 ITR 146
  • [5] Income Tax Act, 1961 (As amended by the Finance Act, 2018)
  • [6] Press Release issued by Ministry of Finance dated September 24, 2015
  • [7] (2010) 326 ITR 193 (AAR)
  • [8] (2010) 326 ITR 276 (AAR)
  • [9] Press Release issued by Ministry of Finance dated September 01, 2015
  • [10] Supra note 15, at 68.
  • [11] pg 5, UN Model Double Taxation Convention between Developed and Developing Countries, 2017
  • [12] OECD (2017), Model Tax Convention on Income and on Capital: Condensed Version 2017
  • [13] ¶ 2 of Art.5(1) of the Commentary of the OCED Model
  • [14] (1983) 144 ITR 146 (AP)
  • [15] [2005] 95 ITD 269 (Delhi) (SB).
  • [16] 1981 AIR 1922
  • [17] [1994] 208 ITR 400 (Mad.)
  • [18] CBDT Circular No. 333 dated 2-4-1982
  • [19] [1989] Taxation 92(4)-16(Delhi – Trib.)
  • [20] [1993] 202 ITR 508 (Kar.)
  • [21] [1994] 77 Taxman 450 (Cal.)
  • [22] [1991] 190 ITR 626 (Chd.)
  • [23] [1985] 11 ITD 564 (Jp. – Trib.)
  • [24] [1988] 32 TTJ (Cal. – Trib.)
  • [25] I.T.A No.s 1187 & 1188/H/2014
  • [26] supra note at 1

Contributed By – Adithya Reddy, Associate
Rachit Jain, Intern

King Stubb & Kasiva,
Advocates & Attorneys

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