Businesses are changing their company operations by implementing new technologies and solutions to penetrate new markets and establish their presence in the global market in this quickly evolving business climate where the entire world is one global village for business operations. With the onset of globalization, significant technology advancements have made it possible for people to easily access and communicate across national boundaries. As a result, businesses all over the world are operating more globally in order to grow and take advantage of economies of scale by expanding outside of their own nation.

This gives rise to cross border transactions where business company conduct their business activities in another country due to which the tax mechanism of both the concerned country comes into play. This taxation related implications of cross border transactions are complex. Various questions arise related to the taxation of income and gains coming out of the business.

Thus, the idea of PE and profit attribution, as well as the advent of international taxation, come into play. These laws aid in determining whether a nation has the authority to tax the profits of a business that is based in another nation. It consists of guidelines and considerations for the formation of PE, as well as strategies for attribution of profits and tax arrangements that prevent double taxation.


1. PE – Permanent Establishment

2. India Bilateral Tax Treaty

3. UN and OECD MTC

4. Income Tax Act, 1961

5. Constitution of PE

6. Business Connection


Every country has its own tax mechanism for the implementation of collecting revenue in the form of taxes from individual or companies. Both the individual and companies have different tax slabs. In India, the income tax act,1961 levies corporate tax on domestic as well as foreign companies. The government collects tax on the basis of sources of income and the calculation is bases upon the net income of a company. There are 4 types of income that a company earns.

1. Profits earned by the business

2. Income from renting a property

3. Capital gains

4. Income from other sources.

Both public and private companies registered under the Companies Act of 1956 are subject to the corporate tax rate in India. Currently, a 30% tax rate applies to all domestic businesses.

Range of Taxability Companies that are not residents in India are subject to income taxation based on their residential status under the country’s taxation system. Section 6(3) of the Income Tax Act[1] specifies the residential status and the amount of total income. A company is considered a resident of India if in any previous year,

1. it is an Indian Company; or

2. India was the location of its place of effective management (P.O.E.M.) in that year. POEM is an acronym for a place where key personnel and commercial decisions that are required for the operation of business are made.

If a foreign company operates in India through a fixed base or PE (where a tax treaty between India and the company’s country of residence exists), the business is subject to taxation in India. These businesses pay 40% tax on their business income that originates in India. The Income Tax Act of 1961’s concept of business connection takes effect in the absence of a tax treaty between the two nations. A foreign company’s business income is subject to tax under section 9[2] of the act to the extent that it originates from or accrues as a result of a business connection in India. Foreign companies are also subject to Indian withholding taxes on following income-

1. Royalties

2. Fee from technical services

3. Interest

4. Capital Gains

Research methodology

This research paper’s research methodology is doctrinal in nature, which is the most used methodology used in legal research. It deals with studying existing laws and provisions and case laws related to the title.

The research paper involves analysing of the provisions of the Income Tax act as well as international tax treaties relating to the laws and provisions regarding Permanent establishment in a country. The research is based on secondary sources of information like articles and bare act. The researcher will also analyse the existing legal framework existing in the domestic country. The paper will also be supported with current case laws regarding the topic in India. This will further help in deriving the importance of the concept of Permanent establishment and bringing out a detailed explanation as to rule out any lacunas.

A lot of secondary research sources, including articles and other electronic sources, have been consulted in order to gather data and information for the paper’s conclusion.

Review of literature

Review of literature helps to give an idea about the research work done by another senior researcher in the past. It helps the researcher an idea about the topic. The title of the research paper is an international matter and has been discussed around for a while now.

The literature reviewed are as under-

  • Double taxation avoidance treaty between India and Malasia, Income Tax Department

The income tax department lays down all the provisions relating to the tax treaty for avoidance of double taxation under which Permanent Establishment is mentioned U/A 5 of the DTAA.

  • Analysis of concept of permanent establishment, Taxmann

This article gives the brief detail about the concept of PE and how it can be established in India.

  • “The past, present and future of Permanent Establishment, PWC India.”

This is a detailed description of how PE works and how many types of PE can be established in a country of a foreign company. It gives clear understanding of the difference between business connection and permanent establishment. It also includes various case laws supporting the title.

Research Paper

Concept of Permanent Establishment

Whenever a cross border transactions take place two main question arise:

a. which country has the right to tax the business profits earned by the foreign company through its formal presence in a country?

b. if the country in which the formal presence of business is situated has the right to tax the profits, then how can the proportion of profits to be taxed be determined?

PE in India: Under Article 5 of its international tax treaties, Permanent Establishment, India takes into account and recognizes the concept of PE. Nonetheless, there are concepts of business connection and PE in Section 9 and Section 92F of the Income Tax Act, 1961, respectively, in domestic laws.

Business Connection:

The definition of “business connection” is given in Section 9 of the Income Tax Act of 1961. If income is accrued or presumed to have accrued in India, or if it arises from a “business connection” in India, a foreign company is required to pay taxes in India[3]. Indian tax laws define “business connection” broadly to include any type of business activity conducted by a person on behalf of a foreign company, where the person:[4]

A. has the authority to conclude contracts on behalf of the foreign company and exercises this authority.

B. habitually maintains a stock of goods in India and regularly delivers these on behalf of the foreign company.

C. habitually secures orders for the foreign company or its group companies in India.

The Supreme Court established the following guidelines for a foreign company establishing a business connection in India in the seminal case of R.D. Aggarwal in 1964[5]:

1. Business continuity: The foreign company must be able to show that its operations in India have continued uninterrupted; isolated incidents should not be considered a business relationship.

2. Business activities: There should be a genuine and close relationship between the foreign company’s business operations and those conducted in India, including those that don’t qualify as a PE in the nation, like support services and back-office operations.

PE in India’s bilateral tax treaty

The Model Tax Conventions (MTCs) of the United Nations and some of the OECD’s MTCs are the primary sources of inspiration for Indian bilateral tax treaties. As was already mentioned, article 5 of these tax treaties typically contains the guidelines for establishing a foreign company’s PE in India. Even though each country’s tax treaty with India is unique, they all generally contain provisions about the following categories of PE:

1. PE of Fixed Place

The primary factor used by the bilateral tax treaties to define a PE is whether the company has a “fixed place of business” in the target nation. A fixed place of business, through which an enterprise conducts all or part of its business, is referred to as a PE.

Features of Fixed Place Participation

1. The presence of a place of business that the foreign company owns, such as premises, equipment, etc.

2. a fixed office location

3. Foreign company business carried out via the fixed place of business.

Typically, three tests are required to certify a permanent location. PE-

1. Place of business test: As has been said time and time again, a place of business is any building, equipment, etc. that a foreign company uses to carry out its operations within the nation. The company’s ability to use such a location for business purposes is the primary requirement. The foreign company should have access to it in order to create a Fixed Place PE.

2. Permanence Test- another essential element of this test is that there should be an amount of permanence in relation to the business activities of a foreign company in India. That particular fixed place must not be temporary rather should be permanent.

In contrast to the OECD’s commentary, which states that a company must maintain a place of business for a period of more than six months in order to qualify as PE, Indian bilateral tax treaties do not have a threshold regarding a foreign company’s presence in the nation.

Nonetheless, the Indian judiciary supports the bilateral treaties and has acknowledged that India’s tax treaties do not specify a threshold period for the establishment of a fixed place. According to PE in India, a foreign company’s presence in the nation must be sustained for a reasonable amount of time in order for it to qualify as a PE in India, despite the foreign company’s curious activities in the country[6].

“The Supreme Court ruled in the 2017 Formula One World Championship Ltd[7]. case that a foreign business can still be considered a PE even if it only conducts business in India for three days. This choice was made with the justification that if a business is conducted in India by a foreign company for a limits number of days, during which it has complete control o0ver and access to it, this is sufficient for it to constitute a PE in India. This means that whether a foreign company constitutes a PE or not in India by satisfying the above test is a fact or situation-based exercise based on the nature of activities.”

3. Business activity test

When conducting its business activities at a fixed location, a foreign company may include its nosiness activities as part of its PE in India. The company’s PE cannot be constituted in India unless it conducts its business operations at his location, even if the place of business test and permanence test are satisfied.

Case laws-

a. Morgan Stanley and Co.: The Supreme Court ruled in this case that a local subsidiary that performs back-office tasks for its foreign parent in India does not meet the requirements to be considered a PE in the nation because there were no commercial activities conducted in India[8].

b. Airlines Rotables Ltd. – As with the previous example, the Mumbai Tax Tribunal determined that the Indian company’s warehouse did not qualify as a PE in India because none of the business operations that drove the company’s expansion there were conducted there.[9]

c. Galileo International Inc. (Delhi ITAT): The Delhi Tax Tribunal ruled that if a business maintains and runs automated machinery or equipment that doesn’t need human intervention, then it could be considered a fixed place PE.[10]


A clause in India’s tax treaties stipulates that certain activities carried out in India by a dependent agent on behalf of a foreign company may result in the establishment of a PE in India.

The creation of an agency relationship between a foreign company (principal) and its representatives in India (agent), who will act on behalf of the foreign company, is the fundamental requirement for establishing an Agency PE in India. The Indian judiciary has noted in a notable case that an agency relationship possesses the following traits:[11]

a. When interacting with third parties, an agent operates within the bounds of the principal’s authority.

b. The activities carried out by the agent are connected to the principal’s business operations.

c. The principal can interfere with the agent’s ability to carry out the agency function and has some degree of control over the agent’s actions.

d. The principal will reimburse the agent for any losses incurred.

To constitute an agency PE the agent has to be a dependant one and not an independent agent. Independent agent can not constitute a PE.


It is necessary to ascertain whether the individual is a dependent agent after it has been proven that they are an agent of a foreign corporation. To ascertain whether an agent is a dependent agent, the OECD has established the following guidelines:

1. It is economically and legally reliant on its principal.

2. Its operations are carried out as part of its regular business operations.

3.  Service PE

According to the provisions of India’s tax treaties, a foreign company may be considered a service enterprise (PE) if it offers services in the nation through its employees or other staff members who are under its control and supervision for a duration longer than the threshold specified in particular tax treaties.

There are 4 types of Service PEs-

1. Activity related to stewardship: An international business’s activities that are primarily focused on safeguarding its interests are referred to as stewardship-related functions. Depending on the needs of the Indian group company, these responsibilities may involve a wide range of tasks. For instance:

a. Monitoring the Indian group company’s operations to ensure that they adhere to the group’s policies.

b. Overseeing quality control procedures for products and services and examining company operations to make sure that the final product satisfies necessary specifications.

c. Overseeing the Indian group company’s business operations.

2.Secondment of employees: Large corporations establish their headquarters and other facilities abroad as a result of the world becoming a single global market. Among the well-liked methods used by these companies to make sure the secondment or deputation of employees to these nations ensures that the operations of their group companies there comply with the global policies of their organization.

Some characteristics of employee secondment include:

• When employees are sent from a foreign company to an Indian company for secondment, the foreign company is not allowed to assign them work or place any kind of lien or restriction on them while they are on assignment.

• The Indian company has complete control and supervision over the workers.

• The Indian company bears responsibility for the labour performed by its employees, including the associated risks and rewards.

• The Indian business must make up for any losses it might sustain as a result of a seconded employee’s actions.

In the case of Centrica India Offshore (P) ltd.[12] It was decided that “the seconded employees were entitled to participate in foreign companies’ retirement and social security plans as well as other benefit according to the applicable policies of the organisation and their salaries should be paid by the foreign companies, which would claim this money from the assesses. The Court also observed that reimbursement of salaries to a foreign company was not a decisive factor. Subsequently, the Delhi High Court observed that such seconded employees render services to Indian companies on behalf of foreign companies and therefore, their presence in India can lead to the constitution of a Service PE in the country. The Special Leave Petition filed by Centrica in relation to the decision of the Delhi HC was dismissed by the Supreme Court.”

3.  Services in the nature of ‘Fees for technical services’

A service PE cannot be constituted when services provided by the foreign entities is in the form of FTS as explained in some of India’s bilateral tax treaties. This is done to make sure the minimum tax to be levied on such transaction in order to attract technical experts to India from abroad. Though if the employees’ tenure is of long tenure, then a Fixed PE can be established in the country.

4. Other personnel

A service PE can be established if services are provided by other personnel. This category includes people who are not the employee of the company but works under the supervision and control of a foreign company.

It is not defined in any of the OECD or UN model. However, there are some cases in which its meaning has been mentioned.

In “case of e-funds IT Solutions, the Delhi High Court interpreted the term “other personnel” to mean persons (other than employees) engaged or appointed by a foreign company.”

Similarly, in the case of Lucent Technologies International Inc (Del ITAT) (2009), “it observed that the term “other personnel” refers to persons over whom the foreign company has a certain degree of control.”

4. Construction PE

According to Indian Tax treaties there is provision for setting up of a construction PE. A foreign business that engages in the following activities may qualify as its PE:

1. Building-related or construction-site activities

2. Installation

3. Assembly

4. Services associated with supervision for these services

This provision, which is part of the Indian tax treaties, combines the MTC provisions of the OECD and the UN. It states that a construction site, assembly project, or building project is related to the MTC provisions of the OECD, and that supervisory activities are linked to the MTC of the UN.


According to the OECD’s commentary, the definition of a building, construction, or installation site includes the laying of pipelines, the construction of roads, bridges, or canals, as well as excavation and dredging.


The process of assembling a machine or piece of equipment is called assembly. India’s legal system has ruled that when multiple steps are taken and different parts come together to create a single item, this qualifies as “manufacture” and cannot be viewed as just a straightforward assembly.


For the establishment of construction PE in India, supervisory services for a building site and construction or installation services are required.  A “supervisory” role entails both observation and direction. In other words, when a foreign company has the authority to watch over and guide an Indian company regarding its related operations, this could result in the establishment of the former’s supervisory PE in India[13].

Activities which are not taken under Permanent Establishment

“In some situations, even if a place of business of an enterprise satisfies the conditions of fixed place PE as per Article 5(1)/ (2) or construction PE under article 5(3) or agency PE under article 5(5), it would not constitute PE if the business purely carries on the activities listed under Article 5(4). These are the list of activities provided under article 5(4):

a. The use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise.

b. The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display.

c. The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise.

d. The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information for the enterprise.

e. The maintenance of the fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character.

f. The maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.[14]


International taxation is a very complex matter as it involves cross border transaction between two countries. The main issue that arises is the taxation of the income that is earned by the foreign company in India. Both the domestic law and tax treaties are kept in mind before the application of tax on the income.

Determining whether a non-resident in a state has a PE or not is an important step in international taxation. A PE is a fixed place of business that establishes a non-resident’s taxable presence in the state and is used by the non-resident to conduct business. The state imposes tax obligations upon the existence of a PE, and noncompliance with these obligations may lead to fines and legal ramifications. Therefore, in order to make sure that a non-resident fulfils their tax obligations and stays out of trouble, it is crucial to accurately determine whether or not they have a PE in a given state. Therefore, one must conduct a functional and factual analysis of each of the following in order to determine whether a PE is constituted.

Prerna Mishra

New law college, Bharati Vidyapeeth University

[1] Section 6; Income Tax Act,1961

[2] Section 9; Income Tax Act, 1961

[3] Section 5; Income Tax Act, 1961

[4] Section 9; Income Tax Act, 1961

[5] Commissioner of Income Tax vs R.D. Aggarwal & Company; 1965 AIR 1526

[6] Commissioner Of Income Tax vs Visakhapatnam Port Trust; 1983 144 ITR 146 AP

[7] Formula One Championship Ltd. Vs CIT; 394 ITR 80 SC

[8] M/S DIT (International vs M/S Morgan Stanley & Co. 2007)

[9] Airline Rotables Ltd., Mumbai vs Department of Income Tax on 4th September, 2013 (Mumbai ITAT)

[10] Galileo International Inc. Vs Dcit, 20th November, 2007 (19 SOT 257) (Del)

[11] Bhopal Sugar Industries Ltd. SC 1977

[12] Centrica India Offshore Pvt Ltd v. CIT & Ors. [TS-237-HC-2014(DEL)]

[13] Steel Authority of India Ltd. (Delhi ITAT), 2007

[14] Article 5(4), India-Czech Republic DTAA