With this article, we would like to explicate the concept of Foreign Companies and PE in light of Indian Income Tax Act provisions.
♠ Foreign company means a company which is not a domestic company, i.e. a company registered outside India in any other foreign country. [Section 2(23A)]
♠ The Foreign Company may be treated as Domestic Company if such company makes prescribed arrangement in India as per Rule 27.
♠ Prescribed arrangement means an arrangement to be made by a company for the declaration and payment of dividends (including dividends on preference shares) within India shall be as follows:
1. The share-register of the company for all shareholders shall be regularly maintained at its principal place of business within India, in respect of any assessment year from a date not later than the 1st day of April of such year.
2. The general meeting for passing the accounts and for declaring any dividends shall be held only at a place within India.
3. The Dividend declared, if any, shall be payable only within India to all shareholder
♠ Foreign Company is treated as Resident in India if its Control and Management is located wholly in India.
♠ Foreign Company is treated as Non-Resident in India if its Control and Management located wholly / partially Outside India.
- As per section 92F(iiia) of Income Tax Act, 1961, ‘Permanent Establishment’ includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.
- Further, as per section 90 of the Act, the Central Government has the power to enter into an agreement with other country for avoidance of double taxation or for the exchange of the information or for recovery of Income Tax under this act. These agreements are generally called DTAA agreement and may also called as Tax Treaties.
- India has one of the largest networks of tax treaties for the avoidance of double taxation and prevention of tax evasion. The country has Double Tax Avoidance Agreements (DTAAs) with over 85 countries under Section 90 of the Income Tax Act, 1961
- Also, as per section 90(2) of the Act, if the DTAA provisions are more beneficial for an assessee than the provisions of Income Tax Act, then he may follow DTAA provisions. Therefore, the provisions of DTAA will supersede the provisions of Income Tax Act to the extent they are more beneficial to the assessee.
- In these DTAA agreement, the broad definition of Permanent Establishment has been elucidated and most of the agreements has adopted the definition of OECD’s Model Tax Convention on Income and on Capital (version 2017).
- Here, we would like to briefly explain the provision of Article 5 of the said convention.
- Article 5 states that ‘PE’ means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The same as taken in section 92F(iiia) of Income Tax Act, 1961.
- Article 5 further explains that term ‘PE’ especially includes,
- place of management;
- a branch;
- an office;
- a factory;
- a workshop, and
- a mine, an oil or gas well, a quarry or any other place of extraction of natural resources
- a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months
- Where a person is acting on behalf of an enterprise and has authority to conclude contracts in the name of that enterprises in other country, then that enterprise shall be called to have a ‘PE’ in that other country.
- However, if the activity of that person is limited to the activity mentioned below exercised through fixed place of business in other country, then that enterprise shall not be said to have ‘PE’ in that country,
- the use of facilities solely for the purpose of storage, display or delivery of goodsor merchandise belonging to the enterprise;
- the maintenance of a stock of goods or merchandise belonging to the enterprisesolely for the purpose of storage, display or delivery;
- the maintenance of a stock of goods or merchandise belonging to the enterprisesolely for the purpose of processing by another enterprise;
- the maintenance of a fixed place of business solely for the purpose of purchasinggoods or merchandise or of collecting information, for the enterprise;
- the maintenance of a fixed place of business solely for the purpose of carryingon, for the enterprise, any other activity of a preparatory or auxiliary character;
- However, also, if that person is a broker, general commission agent or any other agent of an independent status, then that enterprise shall not be said to have a ‘PE’ in that country.
- To further understand the concept, we draw a comprehensive graphical representation here below,
- One more point worth noting has been mentioned in Article 5 is, the fact that one enterprise resident of one country controls or is controlled by other enterprise in other country shall not itself constitute either company a ‘PE’ of the other. That means mere fact that a company is subsidiary or holding of other company does not make either company ‘PE’ of other. An enterprise has to undergo all the test as mentioned above to be held as PE.
- In the case of Adobe Systems Incorporated vs. Assistant Director of Income Tax (2016, Delhi HC), it was held that,
“A subsidiary company is an independent tax entity and is separately taxed for its income in the country of its domicile. In the present case, Adobe India is a separate assessee and is liable to pay tax on its income. The fact that a holding company in another contracting State exercises certain control and management over a subsidiary would not render the subsidiary as a PE of the holding company. This is expressly spelt out in paragraph 6 of article 5 of the Indo-US DTAA. [Para 28]”
“A subsidiary company is a separate tax entity does not mean that it could never constitute a PE of its holding company. In certain circumstances, where the specified parameters defining PE – in the present case article 5 of the Indo-US DTAA – are met, a subsidiary would constitute a PE of its holding company. However, in determining whether the requisite parameters are met, it is necessary to bear in mind that a subsidiary is a separate legal entity and its activities, the income from which are assessed in its hands at arm’s length pricing, cannot be the sole basis for the purposes of imputing the subsidiary to be a PE of its holding company.”
- To conclude, we can say that a foreign company, non-resident in India may be taxed in India if it is operating through a Permanent Establishment in India.