This article will focus on very vital topic in International taxation field. This is of paramount importance. There are different views as regarding permanent establishment based on OECD model and UN model also based on judicial case laws at high court and apex court.
OECD model
It is used by developing countries. It follows residence based taxation. The headquarter of OECD is at Paris (france). It consist of committee members who broadly work on best practice of International taxation. These guidelines are well recognised.
UN Model
More between developed countries and developing countries. It focus more on source based taxation. Headquarters is at United states.
US model
This model is used by United states.
India follows source based taxation. Any income accruing or arising in India will be taxed in India irrespective of residential status. This is whether resident and ordinary resident , resident but not ordinary resident or Non resident. India is a member of UN but although not member of OECD but has renowed educationist academician in OECD group. India despite follows source based taxation still adopt OECD guildlines in best practices.
Some of them are
- Equalisation Levy
- Country by country reporting (turnover of the group exceed 5500 crores).
- POEM (Place of effective management is with respect to foreign company).(applicable for companies having turnover exceed 50 crores)
- Deemed resident (finance act 2020)
- Limitation of interest deduction
- General anti avoidance rule (applicable exceed 3 crores)
India while adopting this Permanent establishment in finance act 2018 had widened the term business connection. Business connection includes significant economic presence. Business connection is wider than Permanent establishment. This was widened to catch hold of business controlled by agent but concluding contracts on behalf of them. Particularly targeting business carried in India without Permanent establishment from low tax jurisdiction. The term Permanent establishment as been defined under the act includes a fixed place of business through which business or enterprise is wholly or partially carried on.
Now we understand the term Permanent establishment under article 5 of UN model and OECD model. They are difference which are described below.
- In case with the United nation model service by itself will constitute a permanent establishment however in case of OECD model the same does not create a permanent establishment.
- In UN model the maintenance of stock of goods or merchandise belonging to enterprise solely for storage display will constitute a PE in UN model. In OECD model the maintenance of stock of goods or merchandise belonging to enterprise solely for storage display delivery will constitute a PE in OECD model. The term delivery is not included in UN model.
- UN model give a specific reference to assembly projects and supervisory activities. if it exceed 6 months then only will constitute a permanent establishment. OECD model also gives reference to assembly projects and supervisory activities but the time limit if it exceed 12 months it will constitute a permanent establishment.
- A significant difference and crucial point
In UN model furnishing of services including consultancy services by an enterprise through employees or other personnel engaged by the enterprise for such purpose if activities of such nature within contracting state exceed 183 days in 12 months period commencing or ending in 12 month fiscal period.
- UN model explicitly describes about Insurance which creates a Permanent establishment whereas OECD does not.
Case laws to explain the concept and the scope of Permanent establishment
Fixed place of business
In the leading case law of CIT Vs formula one world championship court relied on International tax expert that PE must have three attributes stability , productivity, dependence. In order to examine whether establishment has a fixed place of Business such physically located enterprise must be only at the disposal of enterprise. The apex court relied upon this view while giving judgement in case of FOWC(formula one world championship). In case of FOWC even the number of days was less but as there was substantial economic activity carried irrespective of the number of days it will constitute a permanent establishment .
Project office
A project office was set for facilitating the performance of contract. The project office was set as auxiliary office to act liaison office between ONGC and assesse would not constitute PE. Merely activities being auxiliary and preparatory would not constitute PE.
Advertising activity
There is no PE in source state when a fixed place of business engaged in promotional advertisement for goods manufactured by foreign enterprise.
Liaison office
This is highly subjective and depends on case by case basis.
- GE Energy parts in this case activities carried were substantial and core and not merely preparatory and auxiliary hence it will amount to Permanent establishment.
- Union of India vs UAE exchange center Indian liason office of a foreign enterprise engaged in remittance services would not constitute Permanent establishment. The liaison office does activity like downloading information by accessing main servers in UAE. It was held by supreme court that activities were preparatory auxiliary character and hence does not constitute Permanent establishment.
- I n Jebon corporation vs CIT identifying new customers marketing activities , price negotiation discuss of commercial issues securing and processing orders have led to PE based on judicial judgment.
Conclusion
Whether to establish a Permanent establishment is constituted it will depend on facts circumstances of the case. It is highly subjective.
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