Mayur B. Nayak | Tarun Kumar G. Singhal | Anil D. Doshi | Mahesh G. Nayak
Chartered Accountants

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 State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.”

Therefore, Article 7(2) forms the genesis behind treating a PE of a taxpayer as an independent and separate entity.

Further, while Article 7(3) of the UN Model restricts the claim of deduction in respect of certain payments such as royalty, fees, commission, or interest by the PE to its HO, while computing the profits attributable to the PE, the language differs in various DTAAs entered by India. For example, one would not find such restriction in Article 7 of the India – Singapore DTAA.

Similarly, Para 7(2) of the OECD Model 2017 provides as follows:

“For the purposes of this Article and Article [23 A] [23 B], the profits that are attributable in each Contracting State to the permanent establishment referred to in paragraph 1 are the profits it might be expected to make, in particular in its dealings with other parts of the enterprise, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the enterprise through the permanent establishment

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