Does the Establishment of a Business Connection in India Indicate the Presence of a Permanent Establishment for a Company?
Before delving into the answer to this question, let’s first understand the concept and significance of Business Connection and Permanent Establishment (PE) ruling.
Significance of Business Connection
All assesses, whether resident or not, are chargeable to tax in respect of their income accrued, arisen, received, or deemed to accrue, arise or to be received in India. An Income accruing or arising whether directly or indirectly through or from any business connection in India, would be deemed to accrue or arise in India [Section 9(1)(i)], Hence an Assesse as non-Resident income become taxable in India if he earn income directly or indirectly through or from any business connection in India.
Significance of Permanent Establishment
If the enterprise does not have a PE, then it can be taxed only in the country where it is a resident. However, where the enterprise operates through a PE, the profits attributable to it, would also be taxed by the country where the PE is located. So, the primary use of the PE concept is to determine the right of a country to tax the profits of an enterprise of another country. Where a PE is in existence, the country where it is located may also tax its capital gains, dividends, interest and royalties that are effectively connected to such PE.
When did the Business Connection established?
In the case a person carried Business activity in India and if that person;
- have an authority, to conclude contracts on behalf of the non-resident or plays the principal role leading to conclusion of contracts by that non-resident and such contracts are in the name of the non-resident, or
- maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident, or
- secures orders in India, mainly or wholly for the non-resident.
to be treated as business connection in India
However the business carried by on behalf of Non -resident shall not be treated as business connection in India if ;
- Some of the business operations are carried out from
- Business run through an independent Agent, broker who does not work mainly or wholly for the non-resident.
- Purchase of goods in India for export
- Collection of news and views in India for transmission out of India
- Shooting of cinematograph films in India and a non-resident, is:
- an individual, who is not a citizen of India or
- a firm which does not have any partner who is a citizen of India or who is resident in India; or
- a company which does not have any shareholder who is a citizen of India or who is resident in
Further, as per the provisions of the Income-tax Act, ‘significant economic presence’ would also constitute a ‘business connection’ in India.
‘Significant economic presence’ means:
any transaction in respect of any goods, services, or property carried out by a non-resident with any person in India, including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds INR 20 million, or systematic and continuous soliciting of business activities or engaging in interaction with 300,000 users in India will constitute significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India.
Concept of Permanent establishment
As per Article 5 of OECD model Convention Permanent establishment means
Article 5(1) defines PE as “a fixed place of business at the disposal of the enterprise through which the business of the enterprise is carried on. So the important parameter As per this article is to constitute a PE the fixed place of business must be at the disposal of the enterprise. The OECD commentary makes it clear that the premises need not be owned or even rented by the enterprise. All that is required is that the premises should be at the disposal of the enterprise. for example, a stand at a trade fair, occupied regularly through which the enterprise obtained contracts for a significant part of its annual sales, has also been held to constitute a PE
Article 5(2) Defines following list of places of business, which constitute PE, provided they satisfy the requirements of Article 5(1)
- Place of management
- Branch
- Office
- Factory
- Workshop
- Mine, oil or gas, quarry or any other place of extraction of natural resources etc..
Article 5(3) – Constitute PE Rule Specifically for construction & installation sites. If an enterprise has a building site, a construction, assembly or installation project or supervisory activities in connection therewith, a PE will come into existence if such site, project, or activities continue for twelve-month period.
Article 5(4) sets out those activities, which even if carried on through a fixed place of business will not Constitute a PE. Like;
- Use of facilities for storage or display of goods
- Maintenance of stock of goods solely for storage or display.
- Maintenance of fixed place for purchasing merchandise or for collecting information etc.
Article 5(5) and (6) Stated PE may constitute if business run by Non-resident through dependent Agent. If Business run through an independent Agent, broker who does not work mainly or wholly for the non-resident then in that case does not constitute PE
Article 5(7) states that an overseas subsidiary company is a separate legal entity from its parent and as such cannot automatically be regarded as PE. However, if the subsidiary functions as a non-independent agent/entity on behalf of its parent, it will constitute a PE.
Let’s understand this above concept from the following illustration
Q1. Netflix has more than 300,000 subscribers and receives payments from users exceeding INR 20 million, and Netflix has no fixed place of premises in India, is the income earned by Netflix treated as income deemed to accrue or arise in India? Additionally, given that Netflix has no fixed place in India, is it subject to taxation in India?
Answer: In the scenario where Netflix has 300,000 subscribers and receives payments from users exceeding INR 20 million, it indicates that Netflix has a significant economic presence in India. Consequently, it can be established that Netflix has a business connection in India. Thus, the income may be considered as deemed to accrue or arise in India under the provisions of the Income Tax Act.
However, since Netflix does not have a fixed place of premises in India, it may be treated as not having a Permanent Establishment (PE) in India. As a result, Netflix may not be subject to taxation in India on the income generated from subscriptions, even if the payment exceeds INR 20 million.
Q2.Company X, a UK-based motorbike company, engages in business activities in India through an individual, Y. Person Y takes orders on behalf of Company X, enters into contracts with Indian customers, and manages the stocking and delivery of motorbikes to the customers in India. In this scenario, does Company X have a business connection in India, and is it subject to taxation in India?
Answer: The tax implications for Company X, a UK-based motorbike company, depend on the nature and extent of its business activities in India. In this case, where Person Y in India is actively involved in taking orders, entering contracts, and managing the stocking and delivery of motorbikes on behalf of Company X, it is likely that a business connection is established in India.
Also, a business connection can arise when there is a significant economic presence or operational involvement within the country. The activities described, involving order processing, contract management, and delivery logistics, suggest a direct connection to the Indian market.
As a result, Company X may be subject to taxation in India on the income generated from these activities. Further Person Y in India taking Order, delivery an all of Motorbike logistics, there exists the possibility of Company X having a Permanent Establishment (PE) in India.
Q3. XYZ Corp is a multinational technology company, based outside India. XYZ Corp has developed software that is widely used by Indian businesses. The company has a team of software engineers who work remotely from India, collaborating on the development and maintenance of the software. XYZ Corp does not have any physical offices or fixed premises in India. XYZ Corp’s software is licensed to several Indian companies, and it generates significant revenue from these licenses, exceeding INR 50 million. The remote team in India plays a crucial role in providing technical support and updates to the software.
Answer: In this scenario, even though XYZ Corp does not have a fixed place of business or premises in India, it may be considered to have a Permanent Establishment (PE) in India. The remote team of software engineers, contributing substantially to the development and maintenance of the software, could be deemed as creating a PE for XYZ Corp in India.
However, having a PE in India does not necessarily establish a business connection in every case. A business connection typically implies a closer nexus between the person in India who helps to make the profits and the person outside India who receives or realizes the profits, is necessary. The remote team’s activities are limited to technical support and software development, and there is no direct engagement in business decisions or strategic planning for the Indian market, a business connection may not be established.
Conclusion
To constitute a Business Connection some continuity of relationship between the person in India who helps to make the profits and the person outside India who receives or realizes the profits, is necessary. Where all that has happened is that a few transactions of purchases of raw materials have taken place in India and the manufacture and sale of goods have taken place outside India, the profits arising from such sales cannot be considered to have arisen out of a Business connection in India it would be deemed to accrue or arise in India [Section 9(1)(i)] but this income would be taxed only when the company’s PE is located in that country. Understanding these concepts is crucial for businesses operating internationally to navigate their tax obligations accurately.
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Disclaimer: The views expressed in this article are the personal views of the author. Neither the views nor the analysis constitute a legal opinion and are not intended to be advice
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