Amendment on Attribution of Profits to Permanent Establishment (PE) in Budget 2020

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Section 92CB of the Act provides that the determination of arm’s length price under section 92C or section 92CA shall be subject to safe harbour rules (SHR) as prescribed by the Board. For this purpose ‘safe harbour’ means circumstances in which the Income-tax authorities shall accept the transfer price declared by the assessee.

Section 92CC of the Act provides a framework for Advance Pricing Agreement (APA). APA is an agreement between a taxpayer and Income-tax authority on an appropriate ALP or transfer pricing methodology for a transaction over a fixed period of time in future.

Thus, SHR provides tax certainty for relatively smaller cases for future years on general terms, while APA provides tax certainty on case to case basis not only for future years but also for rollback years. Both SHR and the APA have been successful in reducing the litigation in determination of the ALP.

Business profit of a foreign enterprise is taxable in India as per the provisions of the Act or Double taxation avoidance agreements (DTAA), whichever is more beneficial to assessee. As per the Act or DTAA, for taxability of business profits in India, foreign enterprise must have business connection or permanent establishment (PE) in India. Once it is established that foreign enterprise has business connection or PE in India then source country is allowed to tax such foreign enterprise in respect of amount of profit attributable to PE in India.

If books of account have been prepared by the foreign enterprise, a PE in India, the profits to be attributed to such PE shall be calculated in accordance with the financial statement so prepared. However, if books of account have not been maintained, the profit attributable to the PE shall be calculated as per Rule 10 of the Income-tax Rules, 1962. Rule 10 provides very wide discretionary power to the Assessing Officer for attribution of profits to PEs which is often disputed by the assessee. This results in avoidable disputes in a number of cases.

In order to provide certainty in such cases, it has been proposed that the attribution of income in case of a non-resident person to the PE is to be covered under the provisions of the SHR and the APA. Section 92CB and section 92CC have been proposed to be amended to cover determination of profits attributable to PE, income arising from any property in India or through any asset or source of income in India or any income through the transfer of a capital asset situated in India within the scope of SHR and APA.

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