By Mayur B. Nayak | Tarun Kumar G. Singhal | Anil D. Doshi | Mahesh G. Nayak
Chartered Accountants
BACKGROUND
With
the ever-evolving tax world, in light of the BEPS Project and the
resultant Multilateral Instrument, transactions involving physical
presence in India would be under greater scrutiny for the constitution
of a Permanent Establishment (‘PE’). Once it has been concluded that a
PE exists in a particular jurisdiction, one of the key issues to be
navigated is in respect of the profit attributable to the PE. The
concept of a PE deems the PE to be considered as a separate taxable
entity from the Head Office (‘HO’) for limited specific purposes. In
this article, the authors analyse some of the interesting issues which
arise due to ‘transactions’ between the PE and the HO. The topic of
profit attribution to the PE and the interplay between the tax treaties
and domestic law as well as transfer pricing provisions is a vast topic
in itself and in this article only the limited issues of ‘transactions’
between the PE and the HO are considered.
WHETHER TRANSACTIONS BETWEEN PE AND HO WOULD TRIGGER INCOME TAX IMPLICATIONS IN THE HANDS OF THE HO
Article 7(2) of the UN Model Tax Convention 2021 provides as follows:
“Subject
to the provisions of paragraph 3, where an enterprise of a Contracting
State carries on business in the other Contracting State through a
permanent establishment situated therein, there shall in each
Contracting Sta
