By CA Surekha S Ahuja
Permanent Establishment (PE) is the key gateway for taxing non-resident business profits in India under Section 5(2), Section 9(1)(i) of the Income-tax Act and Articles 5 & 7 of DTAAs. Misinterpretation exposes non-resident enterprises to tax, TDS obligations, transfer pricing scrutiny, penalties, and litigation.
This guidance note merges law, judicial interpretation, PE types, profit attribution rules, practical compliance measures, and risk mitigation frameworks for global businesses.
Universal PE Test
A PE exists only when all three pillars are satisfied:
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Permanence: Continuous presence in India; not transient.
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Place of Business: A location “at the disposal” of the foreign enterprise.
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Business Activity: Core business functions carried out through that place.
Supreme Court & HC Clarifications:
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Formula One (SC): Disposal + control + permanence = PE.
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E-Funds (SC): Outsourcing or auxiliary functions do not create PE.
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UAE Exchange (SC): Preparatory/auxiliary activities ≠ PE.
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Morgan Stanley (SC): Employee deputation may create Service PE, but ALP remuneration may neutralise attribution.
Types of PE, Judicial Support & Practical Compliance
Fixed Place PE
Definition: Physical place at disposal of foreign enterprise carrying out core business.
Judicial Support: Formula One (SC), E-Funds (SC), UAE Exchange (SC)
Planning & Compliance:
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Limit Indian presence to auxiliary functions
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No contract rights over premises
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Keep servers, IP, and revenue-generating activities offshore
Service PE
Definition: Triggered when employees render services in India beyond DTAA thresholds.
Typical Thresholds: OECD: 183 days, India-US: 90 days, India-UK: 90 days, India-Singapore: 30 days/project
Judicial Support: Centrica India Offshore (Del HC), Morgan Stanley (SC)
Planning & Compliance:
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Track onsite employee presence
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Split onsite/offshore services
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Maintain ALP remuneration
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Strategic decisions offshore
Agency PE
Definition: Indian agent habitually concludes contracts, plays principal role, or works exclusively for NR.
Judicial Support: LG Korea (Del HC), Galileo (Del HC), Amadeus (Del HC)
Planning & Compliance:
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Independent agents with multiple clients
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Marketing support only; no binding authority
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HQ approvals for contracts
Dependent Agent PE (DAPE)
Definition: Agent economically or operationally dependent on NR.
Judicial Support: Sony Mobile, E-Funds, India-US DTAA commentary
Planning & Compliance:
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Multiple principals
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Avoid stock maintenance in India
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Document independent economic existence
Construction/Installation/Assembly PE
Definition: Construction, installation, or assembly exceeding DTAA thresholds (6–12 months).
Judicial Support: Hyosung (Del HC), Norsk Hydro (AAR), Samsung Heavy Industries (Del HC)
Planning & Compliance:
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Separate offshore supply/services
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Maintain Gantt charts, site logs, project diaries
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Controlled presence of engineers
Subsidiary PE
Definition: Subsidiary may constitute PE if it acts as a “virtual projection” of NR.
Judicial Support: E-Funds (SC), Rolls Royce (Del HC)
Planning & Compliance:
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Independent governance & decision-making
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ALP pricing & functional separation
Liaison Office PE
Principle: PE arises only if LO exceeds preparatory/auxiliary activities.
Judicial Support: UAE Exchange (SC), airline/shipping cases
Safe Activities: Research, communication, promotion
Risk Activities: Contract negotiation, revenue collection, invoicing
Digital PE / Significant Economic Presence (SEP)
Definition: Digital interactions with Indian users; threshold not yet notified.
Judicial Support: E-Funds (SC), Right Florists (ITAT)
Planning & Compliance:
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Servers offshore
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Evidence of algorithmic control abroad
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Equalisation levy compliance
Server PE
Definition: Server in India under foreign control performing core business functions.
Judicial Support: OECD commentary, E-Funds (SC)
Planning & Compliance:
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Third-party hosting offshore
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Document cloud ownership and access control
Profit Attribution (Article 7 / FAR Approach)
Formula:
Profits attributable to PE = Global Profits × (FAR of Indian functions / Global FAR) − ALP remuneration to Indian affiliate
Judicial Support:
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Morgan Stanley (SC): ALP remuneration neutralises further attribution
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Set Satellite (Bom HC): Scientific attribution required
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E-Funds (SC): No PE → no attribution
Documentation Required: FAR analysis, master & local files, project logs, service deployment records.
PE Risk Mitigation Framework
Contractual Design:
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Offshore negotiation and conclusion
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“Approval by HQ mandatory” clauses
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No authority for Indian entity to bind NR
Operational Controls:
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Core IP, servers, revenue offshore
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Limit Indian roles to auxiliary/preparatory
Employee Mobility Controls:
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Track all foreign employee day counts
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Automated alerts for threshold breaches (60/90/120/180 days)
Subsidiary Governance:
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Independent board, ALP pricing, functional separation
Liaison Office Safeguards:
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Auxiliary activities only
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Avoid revenue generation
Digital & Server Controls:
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Offshore server ownership & control
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System architecture diagrams & access logs
Visual Summary — All PE Types
| PE Type | Trigger | Judicial Support | Planning Tips |
|---|---|---|---|
| Fixed Place PE | Physical location at disposal | Formula One, E-Funds, UAE Exchange | Limit presence, offshore servers |
| Service PE | Employees present > DTAA threshold | Centrica India Offshore, Morgan Stanley | Track days, offshore delivery, ALP remuneration |
| Agency PE | Agent concludes contracts | LG Korea, Galileo, Amadeus | Independent agent, HQ approvals |
| Dependent Agent PE | Agent economically dependent | Sony Mobile, E-Funds | Multiple principals, no stock maintenance |
| Construction/Installation PE | Projects exceed threshold | Hyosung, Norsk Hydro, Samsung Heavy Industries | Split contracts, logs, controlled presence |
| Subsidiary PE | Acts as virtual projection of NR | E-Funds, Rolls Royce | Functional independence, ALP pricing |
| Liaison Office PE | Only exceeds auxiliary/preparatory | UAE Exchange | Limit to research/marketing, no revenue |
| Digital/SEP PE | Digital presence / users | E-Funds, Right Florists | Offshore servers, algorithm control |
| Server PE | Server under NR control | OECD Commentary, E-Funds | Offshore hosting, access logs |
Key Takeaways for Global Businesses
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PE exists only if the foreign enterprise truly conducts business in India.
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Auxiliary/preparatory functions, offshore control, ALP remuneration, and robust documentation defend a No PE position.
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Courts consistently emphasise territoriality, disposal, functional control, and factual thresholds.
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Modern digital business models may require treaty updates; until then, judicially aligned compliance is the safest route.
This note represents the most refined, judicially integrated, and practitioner-grade guidance on PE in India, combining law, interpretation, attribution, planning, and compliance.
