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Article 5 - Permanent Establishment - Overview of Model Tax Convention - CA Arinjay Jain - CA Final International Taxation Elective Paper 6C

ARTICLE 5 - UNDERSTANDING PE
Where instead of incorporating a subsidiary which has independent existence and business operations, a foreign company engages an agent, uses an office etc and carried out business itself, it can result in a PE of the foreign company in India.
In order to tax business profit of a non-resident, tax Treaty require the existence of a permanent establishment in the source country. Permanent Establishment occurs when the non-resident has some degree of permanent presence, in the source country. This could be in the form of an office, place of management, agent or otherwise. The illustrative condition under which an enterprise may have a permanent establishment in source country are provided in Article 5.

PROVISION OF INCOME TAX ACT, 1961 – BUSINESS CONNECTION AND PE
The Income Tax Act, 1961, also provides that where the foreign company has a business connection in India, all income accruing or arising, whether directly or indirectly, through or from any business connection in India shall be deemed to accrue or arise in India and accordingly taxable in India.

Further, in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India

INCLUSIVE DEFINTIONOF PE ALSO EXISTS UNDER SECTION 92F (IIIA) OF THE IT ACT.

PE referred to in clause (iii) includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

IMPORTANCE OF PE

• Business profits can be taxed in the source state, only when the non- resident has a permanent establishment in the source state

• Dividend, royalty, interest and certain other income are taxable at a gross reduced rate, only when the non-resident does not have a permanent establishment in the source state

• Existence of a permanent establishment in the source state is based on the analysis of the functions performed by the non-resident in the source state. Search functions would be performed directly by the non-resident or through any agent