The study of Permanent Establishment has emerged as intriguing and complex subject. This book serves as a complete guide for resolution of complexities involved in the concept of permanent establishment. The structure of the book is as follows: · This book opens up with ‘adaptation of Indian domestic tax laws’ to the ‘global trend’ · The advent of ‘Significant Economic Presence’ and its ramification on the changing concept on business connection has been deliberated in this book · Evolution of permanent establishment (‘PE’) in the e-world · Insights into Multilateral Conventions (‘MLI’) & OECD's position on the changing garb of PE · The book closes with the impact of changing philosophy of PE in the international tax space & in the domestic tax legislature. The contents of the book are as follows: · Introduction · Territorial nexus becomes aerial · Adaptation of Indian Domestic Laws · PE in the digital economy · PE under Data Localisation Regime · Server as PE · Modification in Agency PE definition · Modification in Independent agent definition · Preparatory or auxiliary activities · Construction PE – Journey, Abuse and Remedy · Conclusion · Annexures o Relevant Provisions of the Act o OECD Model Convention (Relevant extract) o PE Articles under various treaties o Relevant Articles of Multilateral Conventions o MLI Impact on PE Article of treaties extracted in Part III

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4. I-3
Vision Statement
“The Chamber of Tax Consultants (The Chamber) shall be a power-
-
VISION STATEMENT

5. I-5
The Chamber of Tax Consultants (The Chamber) was established in
-
around a century of webinars in the
“lockdown” period
ABOUT THE CHAMBER OF TAX
CONSULTANTS

6. -
-
About the Chamber of Tax Consultants

7. I-7
“Sometimes, Hem, things change, and they are never the same again.
This looks like one of those times. That’s life! Life moves on. And so
should we.”
Spencer Johnson, in ‘Who Moved My Cheese?’
-
and doing business through the digital world is threatening to
-
-
-
-
PRESIDENT MESSAGE

8. I-8
I do believe something very magical can happen when you read a
good book’
Anish Thacker
President Message

9. -
-
FOREWORD

10. -
Rajesh P. Shah Rajesh L. Shah
Chairman Chairman
Research and International Taxation
Publication Committee Committee
2020-21 2020-21
Foreword

11. H. Padamchand Khincha
ABOUT THE AUTHORS

12. a) high powered
b)
c
About the Authors

13. Bhaumik Goda
following books:
Compendium on International Taxation
About the Authors

14. : CA Narendrakumar J
Jain, Advocate
:
:
-
:
(a)
(b)
(c)
(d)
(e)
(f)
About the Authors

15. P.ShivanandNayak
About the Authors

16. CA Bibhuti Ram Krishna is a partner in
About the Authors

17. -
economically
ideal
-
tion (i.e.
-
AUTHORS NOTE

18. -
-
state’s tax policy
-
Authors Note

19. Authors Note

20. Managing Council 2020-21
President
Vice-President
Hon. Jt. Secretaries
Hon. Treasurer
Imm. Past President
Members
Dharan Gandhi
MANAGING COUNCIL 2020-21

21. Managing Council 2020-21

22. Research & Publications (R&P) Committee 2020-21
Chairman
Vice-Chairperson
Convenors
Past President
Advisor
Imm. Past Chairman
Mg. Council Member
Members
RESEARCH & PUBLICATIONS (R&P)
COMMITTEE 2020-21

23. Tushar Desai
Research & Publications Committee 2020-21

24. International Taxation (INT TAX) Committee 2020-21
Chairman
Vice-Chairman
Convenors
Past Presidents
Advisor Dilip Thakkar
Imm. Past Chairman
Mg. Council Member
Members
INTERNATIONAL TAXATION
(INT TAX) COMMITTEE 2020-21

25. Invitees
International Taxation Committee 2020-21

26. Page
Vision Statement I-3
About the Chamber of Tax Consultants I-5
President Message I-7
Foreword I-9
About the Authors I-11
Authors Note I-17
Managing Council 2020-21 I-21
Research & Publications (R&P) Committee 2020-21 I-23
International Taxation (INT TAX) Committee 2020-21 I-25
I. Introduction 1
II. Territorial nexus becomes aerial 7
III. Adaptations of Indian Domestic Laws 14
(A) 15
20
(C) 36
46
59
64
(D)
66
67
INDEX

27. IV. PE in digital economy 73
(A)
78
86
87
89
97
98
(C) 99
103
110
V. PE under Data Localisation Regime 117
(A) 118
121
VI. Server as PE 124
(A) 124
125
125
Disposal Test 125
127
127
129
131
(C) 135
VII. Modification in Agency PE definition 142
(A) 142
144
Index
Page

28. Commissionaire Arrangements 145
147
149
162
(C) India’s Treaties 165
(D) 169
176
186
202
VIII. Modification in Independent agent definition 206
(A) 206
Independent agent 208
215
India’s tax treaties 221
IX. Preparatory or auxiliary activities 228
(A) 228
235
(C) India’s Tax Treaties 238
(D)
245
248
X. Construction PE – Journey, Abuse and Remedy 258
(A) 258
258
258
Index
Page

29. 260
262
Abuse of existing measures 268
(C) 270
279
XI. Conclusion 292
ANNEXURES 297
Part I : Relevant provisions of the Act 297
Part II : OECD Model Convention
(Relevant extract) 310
Part III : PE Articles under various treaties 313
Part IV : Relevant Articles of Multilateral
Convention (MLI) 349
Part V : MLI Impact on PE Article of treaties
extracted in Part III 355
Index
Page

30. 1
1. Introduction
1.1. Permanence is an illusion desired by humanity in this
unfixed, ever changing world. Embedded in permanence is
the concept of endlessness in time and matter. Civilizations
and empires were created and nurtured with a dream of
being permanent. Today, only their names survive, and
rest is history. Nothing is permanent except change. Man
is now moving from externalities like the structures to
intrinsic aspects of value and behaviour, which seldom is
stable. Eventually, permanence becomes dynamic exhibiting
flexibility. Change is the modern eternal truth. Change is no
longer resisted or perceived as adverse. Change is the new
constant. Economics, politics, taxes, as in other fields of life,
have succumbed to evolution. Business establishments and
their permanence have not remained immune.
1.2. Permanent Establishment (“PE”) is an expression involving
two concepts - Permanent and Establishment. Permanence
indicates something which lasts long or is intended to last
for ever. Permanence is akin to infinity. It means everlasting.
Establishmentcouldbeunderstoodasaneconomicunitwhich
deals in goods or service. It is identifiable. Its identity is qua
a location or action. In a PE, the former (permanence) deals
with ‘time span/duration’ and the latter (establishment) with
the ‘identifiable element’.
1.3. The theorem of an establishment being geographically linked
to invite a tax liability is under increasing challenge. The era of
digital and virtual PE has set in. Powered by technology, the
evolution of business from brick and mortar to e-commerce;
market place to cloud space; physical to virtual wallets has
been fast, invasive and pervasive. The virtue of identity,
which hitherto was important for a PE, is today loosing
prominence. This is because an obscure establishment is
able to achieve and surpass what a traditional establishment
could do. PE is a manifestation of a physical presence that
Chapter 1 Introduction
SAMPLE CHAPTER

31. 2
Introduction
has been the prerequisite of a nexus for inviting tax liability
in a jurisdiction. Due to the evolving manner of conducting
business, it is possible to achieve scale without mass. The
markets, that enable the foreign enterprise to reap profits
are deprived of a legitimate share of such profits in the
form of tax. This has lead to a clamour that tax has to be
levied also, in a jurisdiction, where value is created and
where activities take place. Value is also created by users,
content and the multisided business models in the market
jurisdiction aided by digital technology. The supply side
of the factors of production are compelling the tilt for a
larger share of taxation to the market jurisdiction. Efforts are
underway whether the PE definition deserves modification
and its thresholds redefined. The portents of PE are moving
from a physical to an economic concept. The identity of PE
is changing. PE is today a “shadow being”. It denotes the
foot print of an entity in a location. It is often an alter ego
of a business establishment. This newer version of PE is
here to stay.
1.4. In the newer version, there is a visible and significant
alienation from the attribute of ‘permanence’. From the idea
of definitive existence, PE is now inkling towards a shorter
or momentary presence. The duration facet has shrunk.
Primacy is now given to quantitative aspects like revenue
and users or control and operation aspects.
1.5. With the PE being sheared off the ‘permanence’ and inherent
‘physicality’, the concept is today of a ‘taxable presence’.
This evolution of PE has made its essence to undergo a
paradigm shift. The legal framework which was framed for
thephysicallyvisibleandgeographicallyrelatable,isbecoming
consumption and revenue centric. The attempt has been to
give a new identity to the concept of PE. The attempt is to
accommodate the transformation ushered in by machine
learning and artificial intelligence. A convincing solution is
not forthcoming as yet. The clamour for reinventing (even
to the extent of discarding) the PE concept though audible
has not gained traction.
1.6. Much before such transformation, it was suggested to the
IndianGovernmentthattheconceptofPEshouldbeabandoned

32. 3
Introduction
having regard to the e-commerce revolution1
. This has not
happened; possibly because such a move would have been
too revolutionary; an idea whose time has not yet arrived.
A revisit of the concept is however in evidence.
1.7. The overhauling of the PE definition has commenced with
an attempt at identifying the chinks in its armour. It was
observed that certain common tax avoidance strategies were
used to circumvent the existing PE definition. Changes to
the scope and PE definition to address such efforts was
therefore felt to be a matter of utmost importance. The task
was undertaken as part of the BEPS Action Plan. Three issues
were identified in the Action Plan 7 for which amendments
were suggested to the PE definition. They are:
1.8. Artificial avoidance of PE status through commissionnaire
arrangements: A commissionnaire arrangement may be
loosely defined as an arrangement through which a person
sells products in a State in its own name but on behalf of
a foreign enterprise that is the owner of these products.
Through such an arrangement, a foreign enterprise is able
to sell its products in a State without technically having a
PE and without, therefore, being taxable in that State on
the profits derived from such sales. Since the person that
concludes the sales does not own the products that it sells,
that person cannot be taxed on the profits derived from
such sales and may only be taxed on the remuneration that
it receives for its services (usually a commission).
1.9. Anti-fragmentation: Large multinational enterprises (MNEs)
soughttoavoidPEstatusbyfragmentingacohesiveoperating
business into several small operations in order to argue that
each part is merely engaged in preparatory or auxiliary
activities benefiting thereby from the exceptions of Art. 5(4).
The Anti fragmentation rule prevents creation of exception
from PE status for activities that are preparatory or auxiliary
in nature when viewed in isolation but constitute entrenched
business activities in the source country when viewed on a
combined basis.
1.10. Contractsplitting:ThedefinitionofPEenvelopesconstruction
sites. It was observed that the definition of PE was abused
1
High Powered Committee on E-Commerce and Taxation | December 1999

33. 4
Introduction
by bypassing the time threshold that triggers a PE (by
splitting long term contracts into short term contracts),
and/or structuring and dividing contracts to enable them
to be considered preparatory or auxiliary in nature, thus
fitting into the general exclusions of PE that exist in most
tax treaties.
1.11. Principles of Taxation: Any attempt to tinker with the
fundamentals should pass muster of the founding principles
of taxation. A good tax policy is driven by various principles
such as2
:
Neutrality - Taxation should seek to be neutral and
equitable between forms of electronic commerce and
betweenconventionalandelectronicformsofcommerce.
Business decisions should be motivated by economic
rather than tax considerations. Taxpayers in similar
situations carrying out similar transactions should be
subject to similar levels of taxation.
Efficiency - Compliance costs for taxpayers and
administrative costs for the tax authorities should be
minimised as far as possible.
Certainty & simplicity - The tax rules should be clear
andsimpletounderstandsothattaxpayerscananticipate
the tax consequences in advance of a transaction,
including knowing when, where and how the tax is
to be accounted.
Effectiveness & Fairness - Taxation should produce the
right amount of tax at the right time. The potential for
tax evasion and avoidance should be minimised while
keeping counteracting measures proportionate to the
risks involved.
Flexibility - The systems for taxation should be flexible
and dynamic to ensure that they keep pace with
technological and commercial developments.
1.12. The change to the concept of PE is driven by the evolution
of business. The changes would take time to replace the
existing principles, settle the possible issues and evolve itself
2
Ottawa Taxation Framework Conditions – Principle Source: OECD (2015), Addressing the Tax
Challenges of the Digital Economy, Action 1 - 2015 Final Report, OECD/G20 Base Erosion and
Profit Shifting Project, OECD Publishing, Paris.

34. 5
Introduction
into the new regime. While the transformation is bound to
happen, it is essential that the emerging law continues to
abide by these fundamental canons.
1.13. The process of value creation in business has significantly
evolved, especially for some enterprises. Business structures
arethereforechanging.Thesalientcharacteristicsofbusinesses
have to be understood. These characteristics, which will
become common features of a wider number of businesses
as digitization continues, include: cross-jurisdictional scale
without mass; the heavy reliance on intangible assets,
especially intellectual property (IP); and the importance of
data, user participation and their synergies with IP3
.
1.14. Cross-jurisdictional scale without mass: Digitization has
allowedbusinessestolocatevariousstagesoftheirproduction
processes across different countries, and at the same time
access a greater number of customers around the globe.
Digitalisation allows some enterprises to be heavily involved
in the economic life of a jurisdiction without any, or any
significant physical presence, thus achieving operational local
scale without local mass (referred earlier as “scale without
mass,”).
1.15. Reliance on intangible assets, including IP: The analysis
also shows that digitized enterprises are characterised by the
growing importance of investment in intangibles, especially
IP assets which could either be owned by the business or
leased from a third party. The intense use of IP assets such
as software and algorithms supporting their platforms,
websites and many other crucial functions are central to
business models of many digitized enterprises.
1.16. Data, user participation and their synergies with IP: Data,
user participation, network effects and the provision of user-
generated content are commonly observed in the business
models of highly digitalised businesses. The benefits from
data analysis are likely to increase. With increased storage
capability and computing ability, it is increasingly common
for the collected information being linked to a specific user or
customer. The important role that user participation can play
3
https://www.oecd-ilibrary.org/docserver/9789264293083-en.pdf?expires=1557486386&id=id&accna
me=guest&checksum=E26D0C0001E556E66C1FEFEB27842CBE

35. 6
Introduction
is seen in the case of social networks, where without data,
network effects and user-generated content, the businesses
would not exist as we know them today. The degree of user
participation can be broadly divided into two categories:
active and passive user participation. [Some further details
of the above are in the chapter that follows]
1.17. Business globalization powered by technology has shrunk the
market space (not place anymore). Business today is seamless,
real-time with utmost ease of access. The encashment of this
ease of doing business is evidenced by the surge in cross-
border transactions. International taxation had to therefore
respond with a transformation (and not mere change)
which was effective and quick. The concept of PE has been
an important and inseparable constituent of International
taxation. With evolving business dynamics, the concept of
PE had to undergo a change. To comprehend this change,
a quick peep into the pages of history is inevitable. The
journey from the past to the present includes understanding
the following:
1. Indian domestic law and changes therein
2. Treaty interpretation involving:
(a) Changes to model commentary;
(b) Introduction of BEPS Action Plan; and
(c) Insertion of Multilateral Instruments.
1.18. To enable an incisive analysis of the changes the theoretical
discussion is complemented with inclusion of case studies
at the appropriate places.
1.19. This book, adhering to its title, refrains from dwelling into
the following topics:
(a) Constitutional challenges on territorial nexus
(b) General Anti-Avoidance Rules
(c) Attribution principles
(d) Transfer pricing
1.20. Havingtraversedthroughthehistoryandthetransformational
changes, the vision for tomorrow should be a natural
extrapolation of the trends and lessons.

36. Complete Guide for Resolution of Complexities Involved
in the Concept of Permanent Establishment
The study of Permanent Establishment has emerged as intriguing and complex
subject. This book serves as a complete guide for resolution of complexities in-
volved in the concept of permanent establishment.
The structure of the book is as follows:
The contents of the book are as follows:
This book opens up with ‘adaptation of Indian domestic tax laws’ to the ‘global
trend’
The advent of ‘Significant Economic Presence’ and its ramification on the changing
concept on business connection has been deliberated in this book
Evolution of permanent establishment (‘PE’) in the e-world
Insights into Multilateral Conventions (‘MLI’) & OECDs position on the changing garb
of PE
The book closes with the impact of changing philosophy of PE in the internationalThe book closes with the impact of changing philosophy of PE in the international
tax space & in the domestic tax legislature.
Introduction
Territorial nexus becomes aerial
Adaptation of Indian Domestic Laws