Amendment of Rules for Profit attribution to Permanent Establishment
Public Consultation on the proposal for amendment of Rules for Profit
attribution to Permanent Establishment
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
(Foreign Tax and Tax Research-I)
New Delhi, dated the 18th April, 2019
Subject: Public Consultation on the proposal for amendment of Rules for Profit attribution to Permanent Establishment-reg.
Taxation of non-residents in India is governed by the provisions of the Income-tax Act, 1961 (“the Act”) and the provisions of the Double Taxation Avoidance Agreement(s) [DTAA(s)] concluded or adopted by the central government under the ‘X)wers conferred under Section 90 or 90A of the Act, respectively.
Under the Act, the income tax is charged for the assessment year in respect of the total income of the previous year of every-person. In respect of a who is a non-resident, the total income includes all income from whatever source derived which is received or deemed to be received or accrues or arises or deemed to accrue or arise in India.
The incomes that shall be deemed to accrue or arise in India are specified in Section 9 of the Act which. inter alia, provides that all income accruing or arising whether directly or indirectly, through or from any business connection in India shall be deemed to accrue or arise in India.
However, in cases where a DTAA is also applicable, taxes on business income of a non-resident can be levied to the extent the same is permissible under such agreement.
Thus, business income of a non- resident can be taxed in India if it satisfies the requisite thresholds provided under the Act as well as the threshold provided in the applicable tax treaty, by a concept of Permanent Establishment (PE). which is defined in Article 5 of Model Tax Conventions and tax treaties.
2. Under Article 7 in the Indian treaties, profits are to attributed to the PE as if it were a distinct and separate entity on the basis of the accu.nts of the PE and where such accounts are not available to enable determination of profits attributable to the PE, the profits attributable to the PE can be determined under the domestic laws. For the application of this method, the Assessing Offiær in India can resort to Rule 10 of Income- tax Rules, 1962.
3. Recognizing the significance of issues relating to attribution of profits to a permanent establishment as well as the need to bring greater clarity and predictability in the applicable tax regime, a Committee was formed to examine the existing scheme of profit attribution to PE under Article 7 of DTAAs and recommend changes in Rule 10 of the Income-tax Rules. The Committee has submitted its report (enclosed herewith) and it has been decided to seek stakeholder’s comments on the Report of the committee.
4. In this regard, suggestions/comments of the stakeholders and the general
public are invited on the following question:
a. What are your views on the recommendations of the Committee as contained in Section 11 ofthe Report? In answering this question please consider the objectives and policy rationale behind the change which have been elaborated in detail in the Report.
5. Comments and suggestions may sent electronically (in word format) at
[email protected] within 30 days of the publication of this the email address
document on website of the Income Tax Department (www.incnmetaxindia.gov.in).
Foreign Tax & Tax Research Division
Central Board of Direct Taxes