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In order to align the domestic laws with the modifications being done by Organisation for Economic Co-operation and Development (OECD) through Base Erosion and Profit Shifting (BEPS) and the Multilateral Instruments (MLI) some very significant amendments have been done in international taxation.

Business connection as defined in section 9 has been further aligned with the modified Permanent Establishment (PE) rule in line with MLI and inclusion of concept of Significant Economic Presence (SEP). Scope of business connection has been expanded in the following ways:-

Purview of dependent agency PE :

International TaxationBEPS Action Plan 7 recommended modification to agency PE definition under Art.5 of the OECD MC to include a person who habitually concludes contracts on behalf of the non-resident but also to include a person who habitually plays a principal role leading to conclusion of contracts.

In order to make the provisions of tax treaties effective, so that the taxpayer cannot avail the provisions of the domestic law which are more beneficial [sec 90(2)], section 9(1)(i) has been amended by replacing “habitually concludes contract” with the words “habitually plays the principle role leading to conclusion of contracts”.

Commissionaire Arrangements and effects of amendment : –

In the commissionaire structure, the local agent concludes contracts in its own name but on behalf of and at the risk of

its foreign principal.

An enterprise is deemed to have an agency PE only if a person acting on its behalf, habitually exercises authority to conclude contracts in the name of enterprise.

Contract between commissionaire and third party is not legally binding on the principal since it is in the name of commissionaire instead of the principal.

Due to amendments in line with BEPS Action Plan 7 an agency PE would be framed if an agent habitually plays a principal role in conclusion of contracts. Further exception with respect to purchasing goods/ merchandise in India for a foreign enterprise is also removed thereby enlarging the existing scope.

Significant Economic Presence Test :-


As per the amended provisions of section 9(1)(i) an enterprise would have a significant economic presence w.e.f 1/4/2018

  • If it does transactions in respect of any goods in India above a specified value, including digital goods or
  • Transaction in respect of any services in India above a specified value, including digital services.
  • Transaction in respect of any property in India above a specified value, included download of data or software or
  • Systematic and continuous solicitation of business from India from a prescribed number of users through digital means or
  • Systematic and continuous engagements with prescribed number of users through digital means

It may be noted that the tax payer will be able to avail the beneficial treatment under the tax treaties in the absence of a similar concept of SEP under MLI or the existing tax treaties unless corresponding modifications are made in them.

There is a lot of uncertainty till the time threshold limit for the specified value in terms of revenue and users are prescribed.

For making amendments in tax treaties a consensus from the other treaty countries is required. Thus the above proposed amendments are at a very nascent stage.

As the new provisions are supposed to kick in from 1st April, 2019 will the revenue authorities come out with the specified value in terms of revenue and users ?


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July 2024