Permanent Establishments

As already discussed above, the business income becomes chargeable to tax if it is attributable to a permanent establishment of a foreign enterprise in India. Though different agreements have defined permanent establishment is slightly manner, generally it postulates existence of substantial element of a permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country and it can be of such nature that it would amount to virtual projection of a foreign enterprise of a country into the soil of another country. The term ‘place of business’ covers any premises, facility or installation used for carrying on the business of the enterprise whether or not they are used exclusively for the purpose. The concept of fixity contemplates a degree of permanency to the place of business not in the sense that it perpetuates but in the sense that it endures. If the setting up of the place of business is permanent establishment unless it is maintained for such period that it cannot be considered a temporary one. The other essential ingredient of the ‘permanent establishment’ is that the business is carried on through such place of business wholly or partly. The definition of the expression ‘permanent establishment’ in all the treaties contains illustration of what may be taken to mean a permanent place of business such as a place of management, a branch, an office, a factory, a workshop, a warehouse, etc. The DTA agreements also contain exception to the general definition so as to exclude the following fro the concept of permanent establishment:

• The use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise.
• The maintenance of a stock of goods or merchandize belonging to the enterprise solely for the purpose of storage or display.
• The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandize or collecting information for the enterprise.
• The maintenance of the fixed place of business solely for the purpose of carrying on, for enterprise, any other activity of a preparatory or auxiliary character.

The definition or permanent establishment, inter alia, also means a person who represents permanent establishment and who in himself represents a fixed place of business. The person may be an individual or juridical entity. However, for a foreign company the subsidiary does not constitute a permanent establishment, as both are legal entities.