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July 17, 2014Natwar Thakrar
PERMANENT ESTABLISHMENT & BUSINESS PROFITS
INTERNATIONAL TAXATION &
YOUNG MEMBERS EMPOWERMENT COMMITTEE OF
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
ARTICLE 5- PERMANENT ESTABLISHMENT
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STRUCTURE OF ARTICLE -5 (OECD) – QUICK OVERVIEW
Para 1 Basic Rule
Para 2 Specific Inclusions -Illustrative list of PEs
Para 3 Building site, Installation projects, Furnishing of Service, etc.
Para 4 Exclusions – Activities which do not constitute PE
Para 5 Dependent agents may be a PE
Para 6 Independent agents not a PE
Para 7 Associate Enterprises – Control of a subsidiary does not constitute a PE
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BASIC RULE PE
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ARTICLE 5(1)- BASIC RULE PE
“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.” There must be a fixed place of business (situs test);
The fixed place of business must be located [in a] certain territorial area (locus test);
The use of the fixed place of business must last for a certain period of time (tempus test);
The taxpayer must have a certain right of use [over] the fixed place of business (ius test);
The activities performed through the fixed place of business must be of a business character (business activity test)
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3CONDITIONS MUST BE MET FOR A BASIC RULE PE TO EXIST
locus, tempus and ius test
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CONDITION 1- A PLACE OF BUSINESS
Fixed place: Usually linked to a specific geographical spot (the “Locus Test”) Presence should be visible in the other contracting state
Any premises, facilities or installation or tangible asset used for carrying on the business whether or not used exclusively for that purpose
Movable places of business with a temporary fixed location meet the locus test
Activities carried out within a defined geographical location could constitute a PE; eg, a diving offshore vessel functioning within a defined area, dealer selling merchandise from a mobile van
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CONDITION 1- A PLACE OF BUSINESS
Place should be at the disposal of the foreign enterprise for the purpose of its business activities
The foreign enterprise should have the ability to exercise some right or dominion or control
Legal right to use need not be the sole determinant; factual use or exercise of such right will have a greater bearing
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MEANING OF PE – EXTRACRS FROM JUDICIAL PRECEDENTS
The concept as explained by Andhra Pradesh High Court in C.I.T. V/s. Visakhapatnam Port Trust (144 ITR 146…..162):
“The words ‘permanent establishment’ 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. It should be such as that it would
amount to a virtual projection of the foreign enterprise of one
country into the soil of another country”.
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PLACE OF BUSINESS – EXAMPLES
Fishing boat operated within the territorial waters
Streets in a city? E.g. milkman selling milk on streets
Circus or a carnival performing at different places in a city
Concert tours, music shows etc.
Restaurants and shops on-board ships in international traffic?
Home offices
Partner’s premises – a PE for the partnership?
Joint ventures/ AOP
Trusts
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MEANING OF PE – EXTRACTS FROM JUDICIAL PRECEDENTS
Extract from (Subsea Offshore Ltd. - 66 ITD 296… 303, 304)(Mum - ITAT)
“…..it seems to be evident that permanent establishment denotes some place of fixed nature with permanency, and it does not include in its ambit a moving vessel which operates near a fixed place and which does not belong to the assessee.”
Assessee’s vessel being in India only for 2 1/2 months cannot be said to be of enduring continuity nor could it be said in this case that there was a virtual projection of the assessee into the soil of India
Extract from (P. No. 24 of 1996 - 237 ITR 798… 805)(AAR)
“It seems to the authority that the expression “fixed place” envisages the possibility of locating, identifying or pointing out to a definite place as the place from which a business is carried on and does not import a requirement that the place of business should be stationary and not moving”.
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CONDITION 2 – PLACE OF BUSINESS MUST BE FIXED
It may be owned, rented or leased. Even illegal occupation could constitute a PE.
It may also include machinery or equipment. Machinery or equipment constituting the place of business need not be actually
fixed to the soil on which it stands. It is enough if it remains on a particular site
Some examples- Ships used as Museum, Restaurant etc. and located at a certain place Oil rigs firmly anchored to the sea bed and repeatedly used for a certain work or
for the same principle An automatic vending machine, gaming machine at a fixed place and operated
and maintain by enterprise or its dependent agent
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CONDITION 3 – BUSINESS ACTIVITY THROUGH FIXED PLACE
Business of the enterprise (wholly or party) must be carried through the fixed place of business
No minimum threshold under Indian law An isolated activity cannot lead to establishment of a fixed base PE as the
ingredients of regularity, continuity and repetitiveness will be missing.
Activity need not be of productive character (OECD Commentary)
“Activity test” would be satisfied by having personnel (Employee or dependent agent) at the fixed place of business.
“Activity test” would also be satisfied by having fully automatic equipment – Say Fully Automatic pumping stations or Gaming or vending Machines.
Leasing tangible property or arranging finance through a fixed place of business can constitute a PE
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SOME JUDICIAL PRECEDENCE
The residence of a country manager was held to be a fixed place of business as the same was also an office address [Sutron Corporation, 268 ITR 156 (AAR)]
An office space of 3 X 6 metres was held to be fixed place of business [Motorola Inc & Others, 95 ITD 269 (Del)]
The diving offshore vessel functioning within a defined area (defined geographical location) was held to be a fixed place [P. No. 24 of 1996, 237 ITR 798(AAR)]
However, a moving vessel performing repairs of submarine pipelines in India was held as Not constituting a PE. [Subsea Offshore Ltd.. 66 ITD 296 (Mum)]
Conducting of golf tournament in India for a week’s duration does not lead to existence of a fixed base PE in India. [Golf in Dubai, LLC, 306 ITR 374 (AAR)]
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SOME JUDICIAL PRECEDENCE
The use of the premises by an agent for the purpose of the business of the principal may lead to the interpretation that such premises are at the disposal of the principal and therefore constitute a PE [Galileo International Inc and Maruthi Info and Tech Centre v DCIT (114 TTJ 289)]
Similarly, in ACIT v DHL Operations BV (108 TTJ 152), the office of a local courier company was considered to constitute a PE for the foreign company engaged in providing courier services since the foreign company delivered packages to the local courier company for onward delivery to the addressee
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COMMENCEMENT & CESSATION OF A PE
PE comes into existence, as soon as the foreign enterprise commences business activities through a fixed place.
The time spent to establish the fixed place of business should be excluded.
A PE ceases to exist when the foreign enterprise disposes the fixed place of business.
A PE ceases to exist when the business activities being carried out through it cease or terminate.
Temporary closure or interruption of operations – No cessation of PE
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SPECIFIC PE
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ILLUSTRATIVE LIST
Article 5(2) provides for an illustrative list of facilities constituting a PE
The term PE includes especially: A place of management
A branch
An office
A factory
A workshop; and
A mine, an oil or gas well or any other place of extraction of natural resources
OECD considers the satisfaction of conditions prescribed in paragraph 1 of Article 5 as a prerequisite for examples in paragraph 2 to constitute a PE [Para 12]
India does not agree with the above interpretation and holds that all the examples provided under paragraph 2 of Article 5 could independently constitute a PE [Para 28]
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ARTICLE 5(2) - SOME JUDICIAL PRECEDENT
In case of Micoperi SPA Milano (82 ITD 369), Mumbai Tribunal held that a project office constitutes a PE since expenses are incurred on account of telex, telephone, postage etc. out of rupee receipts by a project office.
However, Delhi Tribunal in BKI/HAM VOF (70 TTJ 480) held that a project office does not carry on a business at all and is merely a support office existing solely for the purpose of facilitating the performance of a contract; hence it is not a PE.
Andhra Pradesh High Court, in case of Vishakhapatnam Port Trust (144 ITR 146), held that a representative office would not constitute a PE.
In case of Motorola Inc. (95 ITD 269) and Western Union Financial Services Inc. (101 TTJ 56), it was held that a liaison office would not constitute a PE.
However, In UAE Exchange Centre LLC (268 ITR 9), depending upon the facts of the case, AAR ruled that an Indian liaison office of a foreign enterprise was a PE.
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EXCLUSIONS
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EXCLUSIONS
The following are excluded from the definition of PE: Use of facilities solely for storage or display of merchandise
Maintenance of stock of goods solely for the purpose of processing by another enterprise
Maintenance of a fixed place of business solely for Advertising
Supply of information
Scientific research
Other similar activities which have a preparatory or auxiliary character
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CONSTRUCTION OR INSTALLATION PE
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ARTICLE 5(3) – CONSTRUCTION OR INSTALLATION PE
A building site or construction or installation project” includes:
construction of roads, bridges or canals
renovation (involving more than mere maintenance or redecoration) of buildings,
roads, bridges or canals
Laying of pipelines
excavating and dredging
installation of new equipment in an existing building or outdoors
onsite planning and supervision of the construction of a building
[OECD model treaty commentary, para 17]
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CONSTRUCTION PE – TEMPUS TEST
The permanence element of a PE is replaced by a test of minimum length of time
The minimum period starts when the enterprise starts to perform business in connection with the building or construction or installation project
A site exists from the date on which the contractor begins his work, including any preparatory work, in the country where the construction is to be established and it continues to exist until the work is completed or permanently abandoned
Seasonal interruptions including interruptions due to bad weather and temporary interruptions should be included in determining the life of a site
If a contractor subcontracts parts of a project, the period spent by a sub-contractor working on the building site must also be considered as being time spent on the building project
The sub-contractor himself has a PE at the site if his activities there last more than 12 months
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SERVICE PE
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SCOPE
The term permanent establishment includes especially:
……..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: • Activities of that nature continue within that State for a period or periods
aggregating more than 90 days within any twelve-month period; or
• The services are performed within that State for a related enterprise within the meaning of paragraph 1 of Article 9 (Associated Enterprises)
The permanence element of a PE is replaced by a test of minimum length of time in the case of Service PE as in case of Construction PE
It is important to evaluate the requirements of Article 12 before examining the service PE clause
The number of days calculation is based on man days
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STEWARDSHIP
Stewardship services are rendered to protect the interest of the customer/ principal
Stewards are typically not involved in the day-to-day management or in rendering the services undertaken by the service provider
Their function is essentially of quality control and ensuring confidentiality
Usually, the foreign enterprise does not receive fees from the recipient of such services and the cost of the personnel performing these services are also borne by the foreign enterprise
Given the above, stewardship activities do not lead to the constitution of a service PE
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SECONDMENT
The typical features of a secondment are: An employee of enterprise X in State X is seconded to enterprise Y in State Y;
he continues on the payroll of enterprise X
Employee resides and renders services in State Y; he reports to enterprise Y
The employee may continue to be paid by enterprise X who in turn is reimbursed by enterprise Y
Critical parameters in determining the existence of a PE or otherwise Commercial justification
Enterprise which exercises control over the employee
Existence or otherwise of a lien on employment with enterprise X for the employee
The SC distinguished between legal employment and economic employment in the case of Morgan Stanley
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DEPUTATION
The typical features of deputation are: An employee of enterprise X in State X is deputed to enterprise Y in State Y; he
shifts to the payroll of enterprise Y
Employee resides and renders services in State Y; he reports to enterprise Y
Salary of the employee is paid by enterprise Y
It may be possible to demonstrate that the employee does not retain a lien on his employment with enterprise X
Deputation may not be preferred since: Employees are keen to retain a lien
Continuity of social security/ provident fund/ mortgage could be affected
Position of the employee within the organization could be affected
The period for which the services of the employee are required could be short
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AGENCY PE
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DEPENDENT AGENCY
“Notwithstanding the provisions of paragraphs 1 and 2, where a person — other than an agent of an independent status to whom paragraph 6 applies — is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.”
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AGENCY UNDER TREATY
Replaces requirement of fixed place of business
Employees of the enterprise can be dependent agents if they meet the requirements of paragraph 5 (habitually exercise authority to conclude contracts etc.)
Only dependent agent constitutes a PE who- Acts on behalf of enterprise
Has authority to conclude contracts
Has no authority but habitually maintains stock of goods and regularly delivers goods for the enterprise
PE in the State would be only in respect of activities which the agent undertakes for the enterprise
Contracts must relate to the profit making activity of the enterprise - “the business proper” of the enterprise
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DEPENDENT AGENCY
An agent will not constitute a PE of its principal if he is “ agent of an independent status”, i.e., Legally and economically, he is independent of the enterprise on whose behalf he
acts, and
When acting on behalf of the enterprise, he acts in the ordinary course of his business.
Under Indian contract law, agency can be created in the following ways: Actual express or implied authority
Ratification
Ostensible authority
Necessity
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JUDICIAL PRECEDENT - ORDINARY COURSE OF THE BUSINESS
A newspaper company, collecting advertisements for other foreign newspapers, acts in the “ordinary course” of its business when it enters into solicitation agreement with foreign principals [Al Nisr Publishing, In re, 239 ITR 879 (AAR)]
The department of Posts accepts money orders for transfer of funds within India, Engaging itself in the same type of business with international ramifications, i.e., money transfer services across international borders, is just an extension of its business and hence, is in the “ordinary course of its business” [Western Union Financial Services Inc., 101 TTJ 56 (Del)]
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JUDICIAL PRECEDENT - ORDINARY COURSE OF THE BUSINESS
A local custodian providing custodial services to various FIIs is acting in “ordinary course” of its business in providing such agency services since it is not a special business done exclusively for a single FII. Fidelity Advisor Series - 271 ITR 1 (AAR) XYZ / ABC Equity Fund- 250 ITR 230 (AAR)
An entity, that produces television software (A) and which licenses its software to a broadcasting entity (B), acts in the “ordinary course of its business” when it solicits advertisements for B and is able to factually prove that such solicitation is incidental to its (A’s) business of producing television programmes (TVM Ltd., 237 ITR 230 (AAR)]
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ASSOCIATED ENTERPRISE
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ARTICLE 5(7)- ASSOCIATED ENTERPRISE
“The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.”
The article clarifies that a company is not deemed to have a PE in the other state merely because it controls, or is controlled by, a company that is resident of the other state.
Each company constitutes an independent legal entity.
Mere existence or possibilities of existence of close relationships is not sufficient to constitute a PE [TVM Ltd., 237 ITR 230 (AAR)] [DDIT Vs. Daimler Chrysler Ltd (2010-TII-99ITAT-MUM-INTL)]
Subsidiary was held to be PE in case of eFund Corporation Vs. ADIT [2010-TII-165-ITAT-DEL-INTL]
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ARTICLE 5(7)- ASSOCIATED ENTERPRISE
Mere fact that the subsidiary company is managed by its parent or that the parent exercise control over activities of its subsidiary and desires stringent financial reporting, does not constitute the subsidiary a PE of the parent.
However, if the activities of the subsidiary on behalf of the parent are within other provisions of Article 5 then the subsidiary may become a PE of the parent [P - 8 of 1995 - 223 ITR 416 (AAR)]
A subsidiary would be regarded as PE of parent, if it has habitually exercised in the other country, an authority to conclude contracts for sale of goods on behalf of the parent.
DTAA with UAE has no such clause
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Types of PE
Fixed Place PE Agency PE Installation PE Service PE
An office is a fixed place
Dependent Agent
Independent Agent
Building site, Construction, Installation or
assembly project
Service by employee or other
personnel
Preparatory and auxiliary
activities
Income generating activities
PE (if certain conditions are
satisfied)PENo PE
No PE
PE if lasts greater
than 6/12 months
PE if services
last beyond specified time
ARTICLE- 7: BUSINESS PROFITS
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STRUCTURE OF ARTICLE -7 (OECD) – QUICK OVERVIEW
Para 1 Charging Paragraph
Para 2 Framework for Profit Attribution
Para 3 Elimination of Double Taxation
Para 4 Limitation of Scope
Article 7(1) – Charging paragraph
“The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.
If the enterprise carries on business as aforesaid, the profits that are attributable to the permanent establishment in accordance with the provisions of paragraph 2 may be taxed in that other State.
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Article 7(1) – Exception to Basic Rule
Key Aspects
• NR carries on a business in the host country
• There is a Permanent Establishment (‘PE’) in the host country
• The business is carried on through the PE; and
• There is income attributable to the PE
All FOUR pre-conditions must be satisfied
Business should be carried on
- Preparatory activities do not trigger attribution
Only profits attributable to such PE is taxable in the source country
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Force of Attraction Rule – UN MC
‘Force of attraction’ rule not present in OECD Model Convention
Does exist in the US Model Convention
“ The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in that other State of goods or merchandise of
the same or similar kind as those sold through that permanent establishment; or
(c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment”
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Force of Attraction Rule
Different kinds of Force of Attraction in context of DTAA’s entered by India
Type 1:- Once activities are same / similar - Without specific requirement of role by PE
Type 2:- Business reasons for not routing the direct business of HO through PE- Tax avoidance motive need to be established
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Force of Attraction…
Examples Type 1:
Article 7(1) of India USA DTAA
“The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment ; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment ; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment.”
Some other countries having similar Force of Attraction rule are Cyprus, Denmark, Indonesia, New Zealand, Italy.
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Force of Attraction…
Examples Type 2:
Article 7(1) of India JAPAN DTAA
“The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment.
Some other countries having similar Force of Attraction rule are Malta, Vietnam, Oman, Switzerland, Uzbekistan.
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Article 7(2)
For the purposes of this Article and Article [23A] [23B], the profits that are attributable in each Contracting State to the permanent establishment referred to in paragraph 1 are the profits it might be expected to make, in particular in its dealings with other parts of the enterprise, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the enterprise through the permanent establishment and through the permanent establishment and through the other parts of the enterprise
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Article 7(2): Approaches to determine profit
Approaches to determine profit:
- relevant business activity; or
- functionally separate entity.
Recommended approach – OECD report suggest functionally separate entity approach as preferable
Profit should be determined by applying the arm’s length principle – OECD Transfer Pricing Guidelines could be applied
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Article 7(2) – Approaches to determine profit
Profits attributable to PE are the profits it might be expected to make, in particular in its dealing with other parts of the enterprise, if it were a:
Separate and independent enterprise; Engaged in same or similar activities; Under the same or similar conditions
Taking into account the functions performed, assets used and risks assumed by the enterprise through the PE and through other parts of the enterprise
– The above rule applies for purposes Article 23A / 23B [Methods for Elimination of Double Taxation] as well
Deeming fiction (qua rest of the enterprise) Corresponding to the Arm’s-length Principle applicable under Article 9 for
adjusting profits between Associated Enterprises
No need to allocate overall profits to PE – but determine as a separate enterprise
PE can have profits when overall enterprise as a whole never made profits; or
No profits could be attributed to PE even where enterprise as a whole has made profits
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Article 7(3) - Provisions
Where, in accordance with paragraph 2, a Contracting State adjusts the profits that are attributable to a permanent establishment of an enterprise of one of the Contracting States and taxes accordingly profits of the enterprise that have been charged to tax in the other State, the other State shall, to the extent necessary to eliminate double taxation on theses profits, make an appropriate adjustment, the competent authorities of the Contracting states shall if necessary consult each other
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Article 7(3) - Principles of computation of Income of PE
In determining profits of a PE Deduction shall be allowed for expenses (including executive & general
administrative) Incurred for the PE Incurred in or outside the source country In accordance with and subject to limitations of domestic law
No deduction – amount paid by PE to the HO or to any other offices of the enterprise, except reimbursement of actual expenses
For use of patents or other rights in the form of royalties, fees or other similar payments
For specific services performed or for management in the form of commission
For money lent in the form of interest (exception for banking enterprises as explained by CBDT Circular 740)
Similarly, income received by PE from HO for aforesaid purposes shall be ignored
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Attribution of income to the extent of operations / activities carried in trade
Nothing attributable if activities are preparatory or auxiliary in nature e.g. purchasing of goods
No specific mechanism provided for attribution of profits Transfer pricing rules can be applied Rule 10 of the Income-tax Rules can be applied
Function / Asset / Risk analysis imperative to determine profit attribution – Morgan Stanley
Article 7(3) - Principles of computation of Income of PE
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Rule 10 – Method of Attribution under the Act:Determination of actual profits if it can be ascertained
Methods prescribed in Rule 10 are not accurate methods These involve estimation and subjectivity Hukumchand Mills Ltd. v. CIT, 103 ITR 548 (SC)
Can be followed only when the AO is of the opinion that profits cannot be definitely ascertained Rule is last in priority list and is to be applied in exceptional situations
Rule 10(i) - Presumptive Method• Adhoc profits is estimated as attributable to the PE
Computation of profits attributable to PE under the Act
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Computation of profits attributable to PE under the Act
Rule 10(ii) - Proportionate Method Proportionate profits based on world income is attributed to the PE Difficult method as World income of the enterprise is to be computed
under the ITA before applying proportionate method In case of different businesses relevant business income be
considered
Rule 10(iii) - Discretionary Method Attribution in some other method
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Specific provisions for computing profits: All provisions applicable as is applicable to resident enterprise for e.g.
section 32, 40(a), 43B, etc,. Section 44C – Branch Section 44D and 44DA – Taxability of royalties and FTS Section 115JB – MAT provisions
Computation of profits attributable to PE under the Act
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Presumptive basis of taxation
Income is computed on presumptive basis
Provisions of sections 28 to 44 not applied
Applied in case of specific types businesses/assesses
It is not in line with the principles laid down in Article 7(2)
Examples
Shipping business (u/s 44B) - 7.5% of gross revenue
Business of Exploration (u/s 44BB) - 10% of gross revenue
Business of Aircraft (u/s 44BBA) - 5% of gross revenue
Turnkey Power Projects (u/s 44BBB) - 10% of gross revenue
Computation of profits attributable to PE under the Act
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Example: Attribution of Profit – Fixed place PE
SalesLess: Expenses incurred-Cost of garments imported (to be on arm’s length basis based on FAR)-Personnel cost of branch employees-Rent of branch office premises-General administrative expenses of HO – Rs. 20,000 (10% allocable to PE)-Depreciation on branch assets-Royalty on intangible assets (assuming economic ownership rests with HO)Total expensesProfit attributable to PE
Rs. 1,00,000 Rs. 70,000 Rs. 3,000 Rs. 5,000 Rs. 2,000 Rs. 2,000 Rs. 3,000 Rs. 85,000 Rs. 15,000
US
India
PE sells garments manufactured by F Co.
F Co.
Customers in India
Branch
Profit & Loss A/c of Branch as a PE of F Co. for India tax purpose:
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Example: Attribution of Profit – Service PE
US
IndiaOnshore Activities
F Co.
Customers in India
Total man days spent on job Offshore man days Onshore man daysProject revenue Revenue attributable to India (PE only on account of onshore)Less: Expenses incurred -Personnel cost-Depreciation on India assets (Assuming all assets acquired from India)-Royalty for know-howTotal costProfit taxable in India
1000 mandays 600 mandays 400 mandays Rs.1,000,000 Rs. 400,000
Rs. 75,000 Rs. 75,000 Rs. 100,000 Rs. 250,000 Rs. 150,000
Ren
derin
g o
f le
gal
serv
ices
Offshore Activities
Service PE
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Example: Attribution of Profit – Agency PE …
SalesLess: Cost of goods paid to F Co. (Based on FAR / TNMM)
Less: Commission @ 20% of sales (agent sufficiently remunerated)Profit attributable to PE
Rs. 100,000Rs. 80,000Rs. 20,000Rs. 20,000NIL
Dependent Agent
US
India
F Co.
Customers in India
Sup
ply
of g
arm
ents
to
age
nt
Pay
men
t of
com
mis
sion
Sale of garments to final customer
Credit / Inventory risk by HO
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Article 7(4) - Provisions
Other Articles to prevail
Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article
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Deleted Paragraphs
Existing Article 7(4) on customary determination of profits of PE on apportionment method deleted
Apportionment method not warranted in view of new Article 7(2)
Existing Article 7(5) on no Attribution of profits to PE by reason of mere purchase of goods / merchandize deleted
Exemption under Article 5(4) [Preparatory / Auxiliary ] continues
If activities constitute taxable pursuant to other functions then its exclusion or that of corresponding expenses inconsistent with arm’s-length principle
Existing Article 7(6) according to which profits to be attributed by the same method year by year deleted
New approach does not allow following of fundamentally different approach
Existing Article 7(7) substantially retain in the form of new Article 7(4)
Article 7 does not prejudice items of income dealt with separately in other Articles
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