The concept of Permanent Establishment (PE) holds a vital importance as far as international taxation is concerned. The existence or otherwise of PE of a Foreign Enterprise in the source state is a key determinant for its business taxability in the source state. Existence of a PE and the corresponding taxability has always remained a contentious issue world over. Recently, the Supreme Court held that Buddha International Circuit is a Fixed Place PE of Formula One Championship Limited.
Recently, the Bengaluru Tribunal, in the case of ABB FZ ruling, held that for constituting a Service Permanent Establishment of a Foreign Enterprise, physical presence of Employees in India is not required and even services through virtual mode i.e. through emails, video-conferencing is enough for triggering a service PE.
It is to be noted here that as per the fundamental principle of international tax a Foreign Enterprise (FE) shall constitute a PE in the source state (India in the instant case) only if Foreign Enterprise has an economic presence in India for conducting its business activities. Such economic presence could be either the physical presence ( through an office in India, visit of employees, personnel of Foreign Enterprise to India etc.) or through a Dependent Agent in India.
However, the Bengaluru Tribunal in above case held that economic presence is not required in case of Service PE.
We have tried to analyse the ruling and the principles laid down by the Honorable Tribunal in light of UN & OECD Model Convention together with the action plan by OECD on its BEPS Project and the same is published by Bloomberg Tax Planning International – Asia Pacific Focus in their September issue