A permanent establishment is a treaty concept, not an Income-tax Act one: it is the threshold of presence a foreign enterprise must cross before India may tax its business profits under Article 7. A typical Article 5 gives the department four routes to it — a fixed place of business, a building site or installation project lasting beyond a stated period, the furnishing of services in India through employees, and a dependent agent who habitually concludes contracts. Each has different ingredients, the Revenue must prove the one it asserts, and the answer to one is not the answer to another.
Start with why the question is asked at all. Section 9(1)(i) deems income accruing or arising, directly or indirectly, through or from any business connection in India to accrue or arise in India. That is the domestic charge. But s.90(2) provides that where the Central Government has entered into an agreement with another country, "the provisions of this Act shall apply to the extent they are more beneficial to that assessee", and every one of India's treaties confines the taxation of business profits to profits attributable to a permanent establishment. So for a resident of a treaty country the domestic business connection is only the first question; the operative question is whether there is a permanent establishment.
The Act itself says almost nothing about what a permanent establishment is. Section 92F(iiia) defines it for the transfer pricing provisions only, and defines it inclusively: "permanent establishment" "includes a fixed place of business through which the business of the enterprise is wholly or partly carried on". The content of the concept comes from the treaty and, through the treaty, from the OECD and UN model commentaries the courts use. Permanent establishment is a treaty concept before it is a statutory one: the Act uses the term but the content of it comes from the treaty, and the definition in s.92F(iiia) is given for the transfer pricing chapter. On burden, the Supreme Court in E-Funds held that the burden of proving that a foreign assessee has a permanent establishment in India is initially on the Revenue — the word is "initially", so the burden shifts once the Revenue puts material on the record.
**Route one: a fixed place of business, Article 5(1).** The test is disposal. The premises must be at the disposal of the enterprise — it must have the right to use the place and control over it — and the enterprise's own business must be carried on through it. In Formula One the Supreme Court held that a racing circuit available to the enterprise for the days of an event was a fixed place, that a permanent establishment must show stability, productivity and dependence, and that ownership and long tenure are not required. In Hyatt International the Court went further: no exclusive or designated space is needed at all, and where the foreign enterprise appoints and supervises the general manager, sets human resource and procurement policy, controls pricing and marketing and runs the operating bank accounts through its own staff working from the Indian premises, those premises are its fixed place of business. Duration is measured as continuity of business presence in the aggregate, not by how long any individual employee stayed. Against that stands E-Funds, where the Supreme Court held that the Revenue had shown no place at the disposal of the US companies and that close association and dependence between a foreign parent and its Indian subsidiary is irrelevant to the enquiry. The line between the two is control over the foreign enterprise's own business, exercised from the Indian premises.
**Route two: a construction or installation permanent establishment.** Most treaties add a building site, construction, assembly or installation project, or supervisory activities connected with one, where it lasts more than a period stated in that treaty. The period differs from treaty to treaty and has to be read off the treaty in question; no Article 5(3) text was fetched for this note, so no figure is given here. This is the limb that catches turnkey and EPC contracts, and it is why the split of a composite contract matters: Ishikawajima-Harima allows the offshore supply component to be separated out, so that the presence in India relates only to the onshore work. Check the actual number of months in the actual treaty; it is not uniform.
**Route three: a service permanent establishment.** Many of India's treaties, including the India-US treaty, treat an enterprise as having a permanent establishment where it furnishes services within India through employees or other personnel for more than a specified number of days. The words that do the work are "within India": in E-Funds the Supreme Court held that where the customers were outside India and received the services outside India, auxiliary operations performed in India did not make out a service permanent establishment. In Morgan Stanley, already in this library, deputing employees to work in India was treated differently from sending them on stewardship visits. Secondment paperwork therefore decides more than it looks like it decides.
**Route four: a dependent agent permanent establishment.** An agent who is not of independent status becomes a permanent establishment of the enterprise if it habitually exercises an authority to conclude contracts on the enterprise's behalf, or maintains a stock of goods from which it regularly delivers, or habitually secures orders — the exact list varies by treaty. Two points recur. First, dependence is not enough: in eBay the Tribunal accepted that the Indian companies were dependent agents and still found no dependent agent permanent establishment, because they did neither of the listed things. Second, a subsidiary is not an agent merely by being a subsidiary; the Delhi High Court in the Nokia matter required evidence that the Indian company habitually concluded contracts for the foreign one, and found none.
Most treaties then take activities back out. The preparatory or auxiliary exclusion covers storage, display, purchasing, collection of information and similar activity carried on for the enterprise, and it is the usual home of a liaison office. It is also the exclusion Hyatt refused to apply, on the finding that the functions were core and essential rather than auxiliary. And nearly every treaty carries the subsidiary clause: the fact that a company resident in one State controls or is controlled by a company resident in the other does not of itself make either a permanent establishment of the other.
Existence and attribution are separate questions and should be argued separately. Once a permanent establishment is found, Article 7 taxes only the profits attributable to it, and Morgan Stanley holds that where the associated enterprise which is also the permanent establishment is remunerated at arm's length taking into account all its risk-taking functions, nothing further need be attributed. Hyatt is the reminder that this is a shield about quantum and not about existence, and that the foreign enterprise's global losses are no answer to attribution.
On the statute book going forward: income deemed to accrue or arise in India remains in section 9 of the Income-tax Act 2025, and section 90 of the 1961 Act — the provision that makes the treaty available where it is more beneficial — corresponds to section 159 of the 2025 Act. The permanent establishment concept itself continues to come from the treaty, so a change in the domestic section numbering does not change any of the above.
The permanent establishment question decides whether an Indian assessment happens at all, and it is usually raised first against the Indian payer under s.195 rather than against the foreign enterprise. Knowing which of the four routes the officer is on tells you which facts to put on record — a lease and a floor plan answer a fixed place assertion, a day count answers a service permanent establishment, a contracting trail answers an agency assertion — and stops the common mistake of answering all four with the same paragraph. It also tells you when to stop fighting existence and start fighting attribution.
I hold a Mauritius TRC. Can the department still deny me treaty relief on the capital gains?
We outsource back-office work to our Indian subsidiary. Does that give us a permanent establishment in India?
My protocol has an MFN clause and I applied the lower rate India later agreed with an OECD member. Was I entitled to?
A foreign professional worked on our matter in India but we neither briefed him nor paid him. Can we be treated as his agent and made liable for his tax?
We are a foreign company paid a technical service fee by an Indian company. Does that fee accrue in India if all our work was done abroad?
I am a foreign company on a turnkey contract. I fabricated the platform abroad and only installed it in India. Can the Department tax the offshore fabrication profit because the contract was one indivisible whole?
I am resident in India but my rubber estate and my business are in Malaysia. The treaty says that income may be taxed there. Can India tax it as well?
I canvass orders in India for foreign suppliers and pass them on for acceptance abroad. Does that give the foreign supplier a business connection here, so that I can be taxed as its agent?
Every page in this library links to what it was written from, so you can check it rather than take our word for it.