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    Double Taxation Avoidance Agreements and Permanent Establishment
The tax rates and the consequent taxation (in case of income of a foreigner) are subject to any benefits available to a non-resident investor under the provisions of any double taxation avoidance agreement (DTAA) entered into by the Government of India with the country of tax residence of such non-resident investor. If the Income Tax Act and a DTAA have conflicting provisions, the provision which is more beneficial to the taxpayer will be applicable. The list of DTAAs are available on the this link.
India has entered into Double Taxation Avoidance Agreements (DTAAs) with various other nations, e.g. Singapore (India-Singapore DTAA), or Mauritius (India-Mauritius DTAA). DTAAs essentially contain provisions by which an entity engaging in international transactions can mitigate the effect of tax liability imposed by the tax laws of multiple nations. In case of an inconsistency between tax laws and a DTAA, which one would prevail? The tax payer can opt for either the tax law provisions or DTAA provisions, whichever is more beneficial to him[1].

Key aspects of international transactions and DTAA provisions

As explained above, any DTAA typically contains provisions with respect to the following kinds of international transactions:
  • Income of foreign businesses in India (i.e. where there is a ‘permanent establishment’) – Income of foreigners operating in India attracts Indian tax laws if Indian presence qualifies as a ‘permanent establishment’. This exercise is extremely easy if the foreigner has a direct presence in India or has entered into transactions with entities that are ‘related parties’ (see later for a discussion on this).
Business profits of non-resident would be taxable under Indian law if the foreigner has a permanent establishment ("PE") in India through which it carries on its business. For this, reference must be made between the DTAA between India and the foreigner’s country.
Determination of whether a permanent establishment exists is a technical and complex exercise, and significant litigation surrounds this, but we will discuss this briefly here through the example of the India-Singapore Double Taxation Avoidance Agreement (Singapore DTAA), to explain what would constitute a PE in India.[2] Article 5 of Singapore DTAA prescribes various kinds of PEs namely:
  1. Fixed Place PE - A Fixed Place PE may be constituted if the foreign entity has a fixed place of business in India, such as an office, a branch, a sales outlet, a warehouse etc. in India.
  2. Agency PE - An agency PE may be constituted if the non-resident appoints an agent in India who signs contracts on its behalf or secures orders for such non-resident or maintains stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of such non-resident.
  3. Service PE (this clause is present in very few DTAAs of India with other nations) - a non-resident will be considered to have a PE in India if it furnishes services through employees or other personnel (Service PE):
  • For more than 90 days in a financial year,
  • For a related enterprise (more than 30 days) in a financial year.
  1. Construction PE: A building site or construction, installation or assembly project will be regarded as a PE only if it continues for a period of more than 183 days in any fiscal year in India.
If a foreign entity has a PE in India, the business profits that are attributable to such activities of the PE would be taxable in India. 
  • Royalties and technical fees - Apart from channelizing finances into the Indian business, investment transactions often involve transfer of technology, intellectual property or softwares – foreign investors may deriving income through royalties or technical fees in case of such transactions.
  • Receipt of interest by foreigners (on loans, debentures or other securities)
Capital gains (typically from sale of securities) - Exit related transactions typically attract capital gains tax and are discussed later in a separate chapter.
Section 90 of the Act
[2]Note: DTAAs ca
n reduce or mitigate tax liability but cannot impose tax liability.

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