Abstract
The typical DTAA provision on permanent establishments provides a general definition and follows up with illustrations of the general definition. The intention clearly is to provide for a flexible concept that would apply even if the nature of the business changes globally. However general the definition is, it is still limiting and once we have considered in detail the definition of a permanent establishment and associated case law, we can appreciate how the idea of a permanent establishment has to grapple with the challenges of technology enabled services in contemporary times.
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Notes
- 1.
In Saroj Kumar v. I.T. Commissioner, AIR 1959 SC 1252, the Supreme Court commented on the meaning of “adventure in the nature of trade”. The taxpayer earned income as the shareholder and director of several limited liability concerns, and also as a partner in an engineering firm. The taxpayer bought and sold a plot of land, and the question was whether the sale transaction resulted in “business income”. In other words, whether the sale transaction has such characteristics as to be an adventure in the nature of trade? The revenue argued that the area of land in question—three quarters of an acre in the suburbs of Calcutta—was large enough to indicate that the assessee would not have intended to buy it for his own use and occupied (and therefore must have intended to resell it). Also the taxpayer had taken a loan to finance his purchase of the land and the revenue argued that he could not possibly paid the outstanding balance on the purchase money (thus indicating that the taxpayer always wanted to sell the plot). The Supreme Court, at para 10 of its judgement, found for the taxpayer. The Court stated that the site was not so large so as to lead to the inference that it could not have been meant to be used by him in the way of his own business or for his own residence. The taxpayer was carrying on an engineering concern, and according to the court, he may have intended, as the taxpayer himself argued, to put up a small workshop on a portion of the land to be acquired, and to build a residential house on the other portion. Another fact was pertinent: at the time he bought the land, the taxpayer’s business was doing well. The court indicated that therefore the taxpayer might have been able to raise an amount of money sufficient to construct a residential house or a workshop on the land. The court also found it pertinent (para 7) that the taxpayer was not in the business of buying and selling land. After considering all these circumstances, the court decided that the sale of the plot was not in pursuance of a venture in the nature of a trade or business. The decision turns on facts; the court looked into the economic circumstances of the taxpayer, the nature of his work and his profession. The guiding principles in this area—mentioned above—only serve as a medium for the courts to engage in an intensely factual inquiry. The law in this area is really all about how the courts weigh the facts of the case. As the courts themselves acknowledge, “no general principles or universal tests” can be laid down and “each case must be determined on the total impression created on the mind of the Court by all facts and circumstances disclosed in that particular case” (para 7). If this is unhelpful, it is not because the courts like to be vague but that the concept of a trade does not allow for precision.
- 2.
1964 Indlaw SC 254.
- 3.
Ibid, para 18.
- 4.
Ibid.
- 5.
Ibid, para 14, quoting from Abdullabhai Abdul Kadar v. Commissioner of Income-tax Bombay City (1952 22 I.T.R. 241) 1952 Indlaw MUM 2.
- 6.
Section 9(1)(i) Explanation 2(a).
- 7.
Section 9(1)(i) Explanation 2(b).
- 8.
Section 9(1)(i) Explanation 2(c).
- 9.
Section 9(1)(i) Explanation 2, first proviso.
- 10.
DIT Mumbai v. Morgan Stanley, 2007 Indlaw SC 739.
- 11.
Id paras 13 and 14.
- 12.
Id para 14.
- 13.
See VanderWolk (2007) where the author points out this anomaly with the Supreme Court decision.
- 14.
Centrica India Offshore Pvt Ltd v. CIT, (2014) 364 ITR 336.
- 15.
Id.
- 16.
(2018) 13 SCC 294.
- 17.
Ibid, para 26: “As has been noticed by us … no customer, resident or otherwise, receives any service in India from the assessees. All its customers receive services only in locations outside India. Only auxiliary operations that facilitate such services are carried out in India.”.
- 18.
Formula One World Championship Ltd. v CIT, International Taxation, (2017) 15 SCC 602.
- 19.
Ibid, para 75.
- 20.
Ibid, para 75, where the Supreme Court stated ‘From this circuit different races, including the Grand Prix is conducted, which is undoubtedly an economic/business activity.’.
- 21.
FIA is the ‘Federation Internationale de I’ Automobile’, a regulatory body that makes rules and regulations for Formula One races.
- 22.
Para 77, analysing clause 11 of the RPC.
- 23.
Id, noting clause 14 of the RPC.
- 24.
Id, noting clause 18.1 of the RPC.
- 25.
Id, noting clause 20.1 of the RPC.
- 26.
Para 79.
- 27.
(1990) 90 DTC 1834: (1990) 2 CTC 2351.
- 28.
See para 82 and the text from the High Court judgement quoted therein.
- 29.
MANU/IU/5227/2007.
- 30.
Ibid, para 10.
- 31.
Ibid, para 10.
- 32.
Ibid, paras 15, 16 ad 17.
- 33.
Ibid, paras 22 (discussing the OECD model report) and 24.
- 34.
SET Satellite v DDIT, 307 ITR 205 (2008), in particular paras 12 and 13, where the Bombay High Court discussed the Supreme Court judgment in Morgan Stanley.
- 35.
MANU/ID/0899/2018.
- 36.
Article 5(2)(k)(i). The article mentions ‘employee and other personnel’ but for the present, this chapter will not analyse the meaning and implications of ‘other personnel’ and will instead focus on the central case of employees.
- 37.
Article 5(2)(k)(ii).
Reference
VanderWolk J (2007) News analysis: Indian Supreme Court’s decision in Morgan Stanley Poses a PE Puzzle. WTD 157-7
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Nuggehalli, N. (2020). Permanent Establishment. In: International Taxation. SpringerBriefs in Law. Springer, New Delhi. https://doi.org/10.1007/978-81-322-3670-2_4
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