The two important points arise while studying a PE, that whether the non-resident is said to have a permanent establishment in India and if exists how much profit is attributable to it. Hence assessment of permanent establishment risk is very much imperative while embarking upon any cross-border expansion of the business and trade. While establishing a branch office, liaison office etc. in India a foreign company must ensure that the transactions with the branch /liaison office should be immune from the effect of permanent establishment risk.
Permanent establishment as per Article 5.1 DTAA means a fixed place of business through which the business of the enterprise is wholly or partly carried on. The conditions as enumerated under Article 5.1 of DTAA are as follows:
- There must be a place of business.
- The place of business must be fixed.
- The business of the enterprise must be carried on through that place of business.
- Such carrying on of the business may be wholly or partly.
In view of the aforesaid, it may be concluded that the basic condition to be satisfied before a PE comes into existence is that a foreign enterprise must have a place of business in the other country. The concept of place of business envisages following:
- A facility such as office premise which is used for carrying out the business of the enterprise.
- Such facility must be at the constant disposal of the enterprise.
Place of business – at Non-resident’s disposal with certain degree of permanency
The place of the business in very crucial. The place of the business must be at the foreign enterprise disposal before it could be construed that the foreign enterprise has a permanent establishment in India.
The scope of article 5 very well examined in the case of SAIL v ACIT by the coordinate bench of the tribunal “As per article 5 Para 1 PE means a fixed place of business through which the business of the enterprise is wholly or partly carried on. Based on PARA 1 it can be inferred that the fixed place of business should be that of the assessee. It may be owned, rented out to the assessee or assessee might have obtained the facility by way of license to carry on the business from that fixed place. But the assessee should have domain or control over the place for the conduct of the business either wholly or partly.”
OECD commentary on double taxation refers a ‘fixed place a link between a place of business and a specific geographic point. It has to have a certain degree of permanency. To constitute a “fixed place of business the foreign enterprise must have at its disposal certain premises or a part thereof.
The decision of the Andhra Pradesh High Court in the case of CIT vs. Vishakhapatnam Port Trust 144 ITR 146, is worth mentioning, in which it was held that the PE postulates 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.
Note on Holding & subsidiary relationship
The existence of subsidiary company in India does not per se constitute a permanent establishment of a foreign company. However, it may constitute a permanent establishment if the place or premises belonging to the subsidiary is at the disposal of the parent company where the parent company carries on its business. Hence while drafting any kind of agreements / MOU /pricing agreements /business takeover agreements it should be ensured that the subsidiary in its business dealing holds an independent status. The place of business of subsidiary company should not be at the parent’s company’s disposal.
Article 5.1, 5.2 & 5.3 should be read in conjunction to assimilate the true concept of permanent establishment. Article 5.2 enumerates the cases where prima facie a permanent establishment can be said to comes into existence but these are the cases which lead ourselves to the conclusion that the permanent establishment is prima facie in existence. The overall theme as enumerated in Article 5.1 is important while determining whether the foreign company have had a permanent establishment in India or not.
As per Article 5.2 The term “permanent establishment” includes especially:
- A place of management,
- A branch,
- An office,
- A factory,
- A workshop,
- A mine, an oil or gas well, a quarry, or any other place of extraction of natural resources,
- A warehouse, in relation to a person providing storage facilities for others,
- A farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on,
- A store or premises used as a sales outlet,
- An installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve-month period,
- A building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period,
- The furnishing of services, other than included services as defined in article 12 (royalties and fees for included services), within a Contracting State by an enterprise through employees or other personnel, but only if:
(i) Activities of that nature continue within that State for a period or periods aggregating to more than 90 days within any twelve-month period, or
(ii) The services are performed within that State for a related enterprise (within the meaning of paragraph 1 of article 9 (associated enterprises)).
Notwithstanding the preceding provisions as enumerated in Article 5.2, the term “permanent establishment” shall be deemed not to include any one or more of the following:
- The use of facilities solely for storage, display, or occasional delivery of goods or merchandise belonging to the enterprise.
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely for storage, display or occasional delivery.
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely for processing by another enterprise.
- The maintenance of a fixed place of business solely for purchasing goods or merchandise, or of collecting information, for the enterprise.
- The maintenance of a fixed place of business solely for advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise.
Hence if an enterprise could not be construed as having a permanent establishment in India in the following situations:
- If enterprise is maintaining a fixed place of business in India.
- The sole objects should be:
(i) Purchase of goods, or collecting information for the enterprise.
(ii) Advertising of supply of information for scientific research
(iii) Other activities of preparatory and auxiliary character.
The crucial point for consideration is that in case of activities, other than the activities which leads to advertising for the enterprise and supply of information for scientific research, the activity must be merely of preparatory and auxiliary character for the enterprise. Hence incurrence of such other activities if otherwise not permissible, would expose to an entity to a permanent establishment risk.
- Enterprise is solely using the facility for storage, display and occasional delivery of goods or maintaining the goods belonging to the enterprise for the sole purpose of processing by another enterprise.