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    Business connection and Permanent Establishment - First rudiment

CA Amit Poddar

Business Connection

As per section 9(1)(i) of the Act where any income arises to a non resident though a business connection in India, then such income is deemed to accrue or arises in India and hence taxable in India. However, the term business connection has been defined in the Act in an inclusive manner to include activities carried on through dependent agency. There is no definitive meaning of the term business connection and so steering needs to be drawn from various judicial precedents1 which have probed the scope and meaning of the term business connection.

The principle engrossing from judicial precedent on the term “business connection” can be summarized as under:
  • Business connection means something more than business;
  • There should be some connection between business carried on by non-resident which earn profit and some activity in India;
  • There should be a real and intimate relation between the trading activity carried on outside India and trading activity in India; and
  • There should be an element of continuity between the business of non-resident and activity in India.

Permanent Establishment (‘PE’)

The conception of PE is important to determine the right of contracting state to tax the business profits of an enterprise of another contracting state. The business profits of an enterprise of one contracting state are taxable in the other state if the enterprise maintains a PE in the latter state and only to the extent the business profits are attributable to such PE.

Article 5 of the tax treaty defines PE and broadly covers the following type of PE’s
1. Fixed Place PE
2. Installation PE
3. Service PE
3. Agency PE

Fixed place PE

As per Article 5 (1) of the tax treaty, the term PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on.  Article 5(2) list out illustration of general PE which includes place of management, branch, and office premises etc.

The essential characteristic of a fixed place PE are as follows:
  • Existence of a fixed place of business2;
  • Place of business must be at the disposal of a foreign enterprise; and
  • The business of the foreign enterprise should be carried through this fixed place of business.

It might interest you to note that for constitution of a fixed place PE, no time threshold has been fixed. However, through analysis of commentaries and opinion of tax laureate PE is normally consider to exist where a business in carried on in a contracting state through a place of business for six months or more.

Installation PE

As per Article 5(2)(k) a building site or construction, installation or assembly project or supervisory activities constitute a PE only if the site, project or activities (together with such site, project or activities if any) continue for a specified period ( 120 days as per India – Us treaty) or more. Further, even the services performed by a sub-contractor to whom the work has been subcontracted will also be counted for the purpose of determination of PE of the main contractor.

It is pertinent to note that term installation, project has not been defied in the Act or tax treaty and hence the meaning ascribed in the commentaries would be relied on.

Service PE

As per article 5(2)(l), a PE is deemed to exist if services, other than royalties or fees for technical services ,are furnished in a contracting state by the employees or other personnel of foreign enterprise for a specified period (90 days as per India – Us treaty) or more.

In the context of service PE, it is important to highlight the term ‘other personnel’.  There are two views possible as to the meaning and interpretation of the term ‘personnel’. First personnel should only include individuals and second should includes non individuals also. However, through interpretation of word ‘personnel’ as used in treaty one may defend that personnel is restricted to individual only. 

Agency PE

As per Article 5(4) of the tax treaty, a foreign enterprise is deemed to have a PE if a person (other than independent agent) is acting on behalf of a foreign enterprise in a contracting state and can exercise the following:
  • Conclude contract on behalf of a foreign enterprise;
  • Habitually maintains and deliver stock on behalf of such foreign enterprise; and
  • Habitually secures orders for the foreign enterprise

It is pertinent to note that before analyzing whether an agent satisfy the condition laid down in Article 5(4) it is important to check that is doesn’t satisfy the condition given in Article 5(4) i.e independent agent.

To determine the status of Indian Co. (whether dependent or independent) following test are necessary:
  • Whether or not the I Co. is legally or economically independent of foreign enterprise.
  • Whether the I Co. is acting in the ordinary course of business, when acting as an agent of foreign enterprise.
  • Whether the I Co. activities are devoted wholly or almost wholly on behalf of foreign enterprise.

1. CIT v. R.D. Agarwal & Co. [1965] 56 ITR 20 (SC). Barendra Prasad Ray v. ITO [1981] 129 ITR 295 (SC).  Blue Star Engg. Co. (Bombay) (P.) Ltd .vs. CIT [1969] 73 ITR 283 (Bom.). CIT v. R.D. Aggarwal & Co. [1965] 56 ITR 20

‘Place of business’ covers any premises, facilities, or installation used for carrying on the business of the enterprise whether or not   they are exclusive used for that purpose. Such place of business may also be rented place.

The view expressed are strictly personal. We and author are not liable for any damage caused to any person.
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