The concept of permanent establishment has recently been introduced into the Indian In-come Tax Act of 1961 (the act). The PE concept was imported from tax treaties. However, in the process the scope of PE seems to be getting restricted. This article analyses the scope of PE under the act as compared to under the tax treaties.
In tax treaties the concept of PE consists of three types of presence in the other country, through: (1) a fixed place of business, including a installation, an office, branch, and so forth (basic rule PE); (2) the presence of employees over a period of time (service PE); and (3) the presence of a dependent agent (agency PE). Some tax treaties have no service PE clauses. In those cases the presence of employees does not result in a PE unless the enterprise has a fixed place of business at its disposal.
The concept of PE was introduced in the act as a part of the transfer pricing provisions. However, the transfer pricing provisions introduced by the Finance Act in 2001 did not have the above definition of PE. The Central Board of Direct Taxes (CBDT) circular 14 of 2001 gave the following
explanation:
The term “permanent establishment” has not been defined in the provisions, but its meaning may be understood with reference to the tax treaties entered into by India. Thus, the clear intention was to import the concept from tax treaties without any change.
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