On April 18, 2019, India’s Central Board of Direct Taxes (CBDT) issued a public consultation (Notice F. No. 500/33/2017-FTD.I) on the proposed amendment of India’s rules on permanent establishment (PE) profit attribution. Public comments are due in writing within 30 days of the foregoing notice.
India’s taxation of non-residents is currently governed by the Income Tax Act, 1961 (the “Act”) and double taxation agreements (DTAs). Under the Act, income tax is charged for the assessment year in respect of total income of the previous year. For non-residents, total income includes all income from whatever source derived, which is received or deemed to be received, or accrues/arises or is deemed to accrue or arise in India. All income accruing or arising, directly or indirectly, through or from any business connection in India shall be deemed to accrue or arise in India. Business income of a non-resident can be taxed in India if it satisfies the thresholds under the Act and the threshold in the DTA under the PE Article of the treaty.
In DTAs between India and other jurisdictions, profits are attributed to the PE as if it were a separate and distinct entity based on the PE’s accounts, and where the accounts are not available, profits attributable to the PE can be determined under domestic laws.
The consultation requests feedback on recommendations by a committee commissioned by the CBDT to examine the issues related to Profit Attribution to Permanent Establishment (PE) in India and Amendment of Rule 10 of Income-tax Rules, 1962.
The committee’s recommendations include the following:
- Amend Rule 10 to provide that a non-resident, who has a business connection in India and derives sales revenue from India by a business, and some of the operations are not carried out in India, the income from such business that is attributable to the operations carried out in India and deemed to accrue or arise in India shall be determined by apportioning the profits derived from India by three equally-weighted factors of sales, employees (manpower & wages) and assets.
- The amended rules should provide an exception for enterprises whose business connection is “primarily constituted” by the existence of users beyond the prescribed threshold, or where the users in excess of the threshold exist in India. In such cases, the income from such business that is attributable to the operations carried out in India and deemed to accrue or arise in India shall be determined by apportioning the profits derived from India on the basis of four factors: sales, employees (manpower & wages), assets and users. The users should be assigned a weight of 10% in cases of low and medium user intensity, while each of the other three factors should be assigned a weight of 30%.
- The amended rules should also provide that where the business connection of the enterprise in India includes activities of an associate enterprise that is resident in India and the enterprise does not receive any payments on accounts of sales or services from any person who is resident in India [or such payments do not exceed a specified threshold] and the activities of that associated enterprise have been fully remunerated by the enterprise by an arm’s length price, no further profits will be attributable to the operation of that enterprise in India.
- Where the business connection of the enterprise in India includes activities of an associate enterprise that is resident in India and the payments received by that enterprise from sales or services from persons resident in India exceeds a specified threshold, profits attributable to the operation of that enterprise in India will be apportioned using the three factors or four factors and deducting the profits that have already been subject to tax in the hands of the associated enterprise. The employees and assets of the associated enterprise will be deemed to be employed and located in India.
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