MNC? India wants to know who calls the shots

The new test for what constitutes a permanent establishment — the Indian unit of a multinational company — has major tax implications for businesses. The new principle is ‘control’ rather than physical presence

- MONIKA YADAV

For years, whether or not a multinational company in India had to pay taxes hinged on one overarching question: Do they have a permanent establishment (PE) here? If the answer was no, the company either did not pay any taxes or would have to pay a flat tax with no examination of profit. But if a physical office existed, the company would have to file full tax returns, maintain books, undergo audits, and pay profit-based tax, making PE status one of the most contested issues in cross-border taxation in India.

Now, following a landmark ruling by the Supreme Court in July and a string of tribunal decisions involving service-based operations, India’s interpretation of what constitutes a PE is expanding. Following the ruling, involving UAE-based Hyatt International Southwest Asia, which provides hotel advisory services in India, the multinational doesn’t need to have a brick-and-mortar office and staff to be taxed for profit.

The emphasis is moving away from physical presence — offices, employees or fixed facilities — to whether a foreign company exercises meaningful control over business functions carried out in India. Who, in other words, is running the show.

Core challenge

At its heart, a PE refers to a foreign company having a business presence in India. Traditionally, this meant a fixed place of business with some ‘permanence’—an office, branch, factory or site where the company had control. But courts are increasingly emphasising a “substance over form” principle: What matters here is not what the contract says, but what actually happens on the ground, according to experts. Kunj Vaidya, partner with PwC, notes that the determination of a PE today depends on whether the foreign company has real operational involvement in India.