Changing contours of permanent establishment

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SummaryAs taxation norms continue to evolve, MNCs need to structure their operations appropriately to mitigate adverse tax consequences

In the context of taxation of business profits in India, the concept of permanent establishment (PE) has been of intense debate and interpretation. Over a period of time, the concept of PE has undergone significant evolution, due to several developments such as tax commentaries and judicial rulings. It would be interesting to look at and analyse the trend of some recent rulings.

E-commerce

Gone are the days when MNCs were required to invest in setting-up physical presence to further their business ambitions. The explosion of e-commerce has brought businesses to the door step (or better said, finger tips!) of the consumers. Tax laws of countries across the world have relied on physical presence or nexus theory for taxing income of MNCs. Where the income has nexus with a physical presence, such income is taxable to the extent attributable to such presence. In the case of Right Florists Pvt Ltd, the Kolkata Tribunal had to decide whether payments made to search engines like Google for online advertising on their search engines were taxable in India, given the fact that web-servers were located outside India. The OECD commentary specifies that an internet website, which is a combination of software and electronic data, does not in itself constitute tangible property. It, therefore, does not have a location that can constitute a PE as there is no facility such as premises, machinery or equipment. However, India had expressed reservations to the commentary and stated that website may constitute PE in certain circumstances. Till date, these circumstances have not been specified, in light of which the Tribunal held that Google’s presence in India through its website cannot be said to constitute PE in India, unless the web-server is also situated in India. In the absence of a PE, such payments were not taxable in India.

Subsidiary company

In many cases, MNCs have set up subsidiary in India which undertakes transactions with other group companies. In a decision in the case of Pubmatic India Pvt Ltd, the Mumbai Tribunal held that where transactions are between related parties on principal to principal basis and at arm’s length, a PE cannot be said to be created merely because one entity is a subsidiary of the other. In this case, an Indian company purchased advertisement space for its clients from its US holding company which, in turn, would purchase space on foreign websites. Both transactions were undertaken at a cost-plus mark-up. It was observed that

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