India, an emerging economy, is experiencing high growth in infrastructure, contract manufacturing and real estate development. Investment into these sectors has risen considerably but not without its share of tax consequences. When a foreign enterprise undertakes any work in India involving construction, assembly, installation or commissioning of any building or project or supervision of such contracts, a question arises whether these activities create a Permanent Establishment (PE) of such foreign enterprise in India. This issue assumes great significance since a PE situation may lead to corporate tax obligations, which has direct bearing on the cost of executing projects in India. Also, given that tax withholding is applicable on such transactions in India, any ambiguity over the PE situation can lead to higher tax withholding (over 42 percent) or even deferral of payments from the clients. In either case, it adversely impacts the foreign enterprise. It is settled position in law that a foreign enterprise can only be taxed on its business income if it has established a PE in India. PE generally refers to a fixed place of business. It includes a construction site and installation project provided such activities last more than the specified period. As per Article 5 of the Indo-German Double Tax Avoidance Agreement (‘Treaty’), a German enterprise will establish a PE in India if it undertakes site activities, project or connected supervisory activities for more than six months. In other words, if the activities last for six months or less, there will be no PE.
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