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Unit 12: Advance Tax Planning and Tax Relief

habitually secures orders on behalf of the non-resident principal. In such a case, the profi ts Notes
of the non-resident or foreign company attributable to the business activities carried out in
India by the Permanent Establishment becomes taxable in India.
(e) If a foreign enterprise carries on business in another country through a Permanent

Establishment situated therein, the profits of the enterprise may be taxed in the other
country but only so much of them as is attributable to the Permanent Establishment.

(f) Profits are to be attributed to the Permanent Establishment as if it were a distinct and
separate enterprise engaged in the same or similar activities under the same or similar
conditions and dealing wholly independently with the enterprise of which it is a Permanent
Establishment.
(g) In determining the profits of a Permanent Establishment there shall be allowed as deduction,

expenses which are incurred for the purposes of the Permanent Establishment including
executive and general administrative expenses so incurred, whether in the State in which
the Permanent Establishment is situated or elsewhere.

(h) The expenses that are deductible would have to be determined in accordance with the
accepted principles of accountancy and the provisions of the Income-tax Act, 1961.
(i) The profits to be attributed to a Permanent Establishment are those which that Permanent

Establishment would have made if, instead of dealing with its Head Office, it had been

dealing with an entirely separate enterprise under conditions and at prices prevailing in
the ordinary market. This corresponds to the “arm’s length principle”.

(j) Hence, in determining the profits attributable to an IT-enabled BPO unit constituting a
Permanent Establishment, it will be necessary to determine the price of the services
rendered by the Permanent Establishment to the Head offi ce or by the Head offi ce to the
Permanent Establishment on the basis of “arm’s length principle”.

12.3.6 Concept of Permanent Establishment

In order to determine the taxability of business income of foreign enterprises operating in India,
it is important to determine the existence of a Permanent Establishment (‘PE’). Article 5(1) of
the DTAA provides that for the purpose 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. The term ‘Enterprise’ has been defined in section 92F (iii).

According to Article 5(2), which enumerates various instances of PE, the term PE includes (a) a
place of management; (b) a branch; (c) an offi ce; (d) a factory; (e) a workshop; (f) a sales outlet;
(g) a warehouse; (h) a mine, an oil or gas well, a quarry or other place of extraction of natural
resources (but not exploration).

1. Permanent establishment means a fixed place of business through which the business of an
enterprise is wholly or partly carried on.
2. Every DTAA has a specific clause, which will deal with an explanation of permanent

establishment for the purpose of such DTAA.
3. Business Income of a non resident will not be taxed in India, unless such non-resident has
a permanent establishment in India.

Self Assessment

State whether the following statements are true or false:
9. Double taxation is a situation where the same income becomes taxable in the hands of the
same company or individual (tax-payer) in more than one country.

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