Permanent Establishment Meaning Certificate | DTAA |

Checkout the explanation on Permanent Establishment Meaning, Certificate and relevance to Double Taxation and also International Taxation. With the onset of globalization and substantial increase in cross-border transactions, the concept of PE has gained worldwide recognition. Of late, India has witnessed a plethora of judicial verdicts on the applicability of the concept of Permanent Establishment and attribution of profits to the Permanent Establishment in India. This has given rise to the need of comprehensive understanding of the attraction and applicability of the concept in India.

Why is the concept of Permanent Establishment (‘PE’) relevant?

The concept of Permanent Establishment forms the crux of Treaty-based International Fiscal Law as Permanent Establishment is used as the base to determine the jurisdiction of taxation over a non-resident’s business activities

The expression has assumed considerable significance with globalization since economic / trading activities are spread over several tax jurisdictions.

Permanent Establishment under UN Model Convention vis-à-vis the Income-tax Act, 1961

Article 5(1) of the UN model convention states “For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.”

Under the Act, Permanent Establishment is defined only under section 92F(iiia) [in context of transfer pricing provisions] as “permanent establishment, includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.”

The definitions under the Act as well as the UN Model convention are in sync as they focus on the ‘fixed place of business’ concept. However, the definition under the Act is an inclusive definition thereby making it wider than the exhaustive definition given under the UN model convention.

Permanent Establishment under the Income-tax Act

There are no provisions under the Act which further expand on the definition under section 92F(iiia)

Section 44DA, which deals with special provisions for computing income by way of royalties etc. of non-residents relies upon the definition of Permanent Establishment under section 92F(iiia).

The comparable term to Permanent Establishment under the Indian tax law is “business connection” [Section 9(1)(i) of the Act]. There exists a distinction between ‘business connection’ and ‘Permanent Establishment’. Generally speaking, the term ‘business connection’ is wider than Permanent Establishment and hence, a ‘business connection’ may exist without a PE and absence of business connection may indicate absence of Permanent Establishment.

Concept of Permanent Establishment (PE): UN Model Convention

Since most of India’s DTAAs are based upon UN Model Convention, let us examine the concept of Permanent Establishment based on the UN Model Convention. Article 5 of the UN model convention expands on Permanent Establishment. Its structure is as follows:

Article 5 of the UN model convention expands on Permanent Establishmet

Attribution of Profits to Permanent Establishment

The Indian tax laws do not contain any detailed guidelines or regulations on the issue of profit attribution to PEs. However, as part of domestic law, certain commentaries on section 9(1) of the Act prescribe situations in which income would be deemed to accrue or arise in India only to the extent of operations carried out in India.

There is a surfeit of judgments which address the ongoing and controversial issue of profits attributable to PEs in India. The general rule in the judgments is that where a PE exists, irrespective of the type or nature of the Permanent Establishment, profits must be determined at arm’s length, and the judgments have confirmed the need for transfer pricing analysis


To sum it up, the concept of Permanent Establishment has not yet been given due recognition under the Indian Tax laws. This, coupled with the amount of subjectivity involved in the subject has led to Permanent Establishment becoming a regular ground of litigation in various Indian Courts.

Not only for the existence of PE but also on the quantum of attribution of profits to the Permanent Establishment. Needless to say, more clarity is needed under the Indian Income Tax Law to reduce unnecessary litigation and promote ease of doing business in the country