Concept of PE Article 5 & as expounded in Vishakhapatnam Port trust case & Formula One world championship Limited case
The two important points arises while studying a PE. That whether the non-resident is said to have a permanent establishment in India and if exists how much profit is attributable to it. Hence assessment of permanent establishment risk is very much imperative while embarking upon any cross-border expansion of the business and trade. While establishing a branch office, liaison office etc. in India a foreign company must ensure that the transactions with the branch /liaison office should be immune from the effect of permanent establishment risk.
Permanent establishment as per Article 5.1 DTAA means a fixed place of business through which the business of the enterprise is wholly or partly carried on. The conditions as enumerated under Article 5.1 of DTAA are as follows:
- There must be a place of business.
- The place of business must be fixed.
- The business of the enterprise must be carried on through that place of business.
- Such carrying on of the business may be wholly or partly.
In view of the aforesaid, it may be concluded that the basic condition to be satisfied before a PE comes into existence is that a foreign enterprise must have a place of business in the other country. The concept of place of business envisages following:
- A facility such as office premise which is used for carrying out the business of the enterprise.
- Such facility must be at the constant disposal of the enterprise.
The concept of permanent establishment mark a dividing line between two aspects for businesses earning business income:
- First aspect is merely trading with a country and
- Second aspect is trading in a country.
Test of existence of PE: Vishakhapatnam port trust case (Andhra Pradesh High Court)
The observations of hon’ble Andhra Pradesh high court in Vishakhapatnam Port trust case are very pertinent and appreciable in understanding the concept of ‘permanent establishment. As per the judgement, “The word permanent establishment postulate the existence of substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country.”
Hon’ble Supreme court in the case of Formula One World Championship Ltd v. Commissioner of Income Tax had upheld the aforesaid test of existence of PE laid down by Andhra Pradesh high court in Vishakhapatnam Port trust case and after applying it to the facts of the case held that the Budh International Circuit (i.e.) the racing track is a fixed place where the commercial activity of conducting a Formula 1 Champion ship was carried on. The Budh International circuit was nothing but a virtual projection of the foreign enterprise (i.e. Formula One) in the soil of this country (i.e. India).
The view of Philip Baker is also very pertinent in this regard. The same was also appreciated in the Formula One case by the Apex court. As per Philip Baker, “A permanent establishment must have three characteristics: stability, productivity and dependence.” Relying on the understanding Apex court concluded that:
- Formula One holds a fixed place of business in the form of physical location, i.e. Budh International Circuit.
- The same was at the disposal of ‘formula One’.
- Formula one conducted business through such fixed place.
Please read Formula One World Championship Limited vs. CIT Supreme court case
Click here to read the case
A combined reading of sub Article (1), (2) & (3) of Article 5 abundantly clears that only that certain form or establishments are excluded from the term under article 5(3), which cannot be regarded as PE by any stretch of imagination. Article 5(3) may be regarded as a negative list. Article 5(2) uses the word “include” which means that not only the places mentioned therein may be regarded as PE but also other places may be regarded as PE. Hence the list of such PEs as enumerated under article 5(2) is not exhaustive.
To bring any establishment, which is not expressly mentioned, the requirement enumerated under article 5(1) are to be satisfied. Hence therefore twin conditions are required to be complied with:
- There must be an existence of fixed place of business.
- Through that place business of an enterprise is wholly or partly carried on.
Fixed place of business means existence of a physical location which is at the disposal of the enterprise through which business is carried on. The place would be deemed as at the disposal of the enterprise when the enterprise has a right to use the said place and has a control thereupon.
Permanent establishment may emerge in the following ways:
- Associated Permanent Establishment: There may be a permanent associated establishment. In such case PE is the part of the same of enterprise under common ownership and control may be an office, branch etc.
- Associated permanent establishment: As per Baker, this type of permanent establishment is legally separate from the enterprise, nevertheless it is dependent on the enterprise to the point of forming the PE.
- Installation, structures etc. As per Baker, this third type of PE also emerges in the course of dealing among the enterprises. For instance, a construction site may be regarded as PE.