A stable tax regime is key for instilling confidence in foreign investors. Despite this, it has to be acknowledged that tax uncertainties do exist and foreign investors have had to face inflated claims, most dismissed or modified in protracted appeals, particularly concerning existence of Permanent Establishments (PE’s) and the attribution of profits.

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The interpretation of the concept of PE has undergone change over the years. Prior to the 21st century, the “business connection” clause of the Income Tax Act, 1961 was the main determinant. The modern PE interpretation began to take shape around 1999 with cases involving foreign telecom firms such as Motorola Inc., Ericsson Radio Systems, and Nokia. These companies supplied network equipment to Indian telecom operators via Indian subsidiaries that provided marketing and some support. The tax department contended that the subsidiaries constituted Dependent Agent PEs (DAPE) of the foreign parents, asserting that a portion of the equipment sales profits were taxable in India. The early 2000s saw the PE concept expanding to new business models. Amadeus and Galileo (ITAT Delhi) dealt with foreign Global Distribution System providers. The foreign company had no fixed office but had installed computer terminals/software at travel agents in India through its subsidiary. According to the tribunal, this setup created a fixed place PE (the computers at agents’ premises under the foreign company’s control) and also a dependent agent PE via the subsidiary. This was a significant evolution, asserting PEs in the digital and services context, even without a traditional office or employees in India, emphasizing that “physical presence” could mean having business apparatus or personnel in India on one’s behalf. This was later upheld by the Delhi High Court. In 2007, the ITAT found multiple forms of PE (fixed place, solicitation, and dependent agent PE) because the Indian subsidiary (RRIL) of Rolls Royce Pls (UK) was “almost a sales office” for Rolls, doing core marketing and client liaison. This broadened the PE concept to any scenario where an Indian presence was integral to revenue generation, even if sales contracts were executed abroad. For construction projects, foreign EPC companies were routinely scrutinized for “site PEs” if a project site existed beyond a certain duration. While Indian tax authorities took a broad view, the Supreme Court’s judgment in Ishikawajima-Harima (2007) ruled in favour of the taxpayer, holding that mere offshore supply in a turnkey project, unaccompanied by onshore presence, did not create a PE nor taxable business income in India, providing temporary relief to offshore suppliers.

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The 2007 judgment of the Supreme Court in DIT v. Morgan Stanley & Co. (2007) was another turning point. Morgan Stanley, a US company, had set up a back-office support subsidiary (captive BPO) in India. The Supreme Court made two important rulings: first, merely having a subsidiary’s office is not a PE of the parent if the subsidiary is carrying on its own business, emphasizing respect for separate legal entities. Second, and crucially for attribution, even if a PE is deemed (say, through a Service PE due to seconded staff), if the Indian entity’s transactions with the foreign enterprise are at arm’s length (ALP), then no further profit can be attributed to the PE. This was a taxpayer-friendly precedent, introducing a measure of certainty that foreign companies could structure Indian operations such that their Indian affiliate earns an arm’s length markup, potentially satisfying Indian taxation with that payment alone. Although was later reinforced in cases like Honda SIEL (SC 2010), subsequent lower court rulings did not uniformly apply this principle, especially in cases where the Indian presence was for marketing or sales, unlike Morgan Stanley’s support function. In fact, in the Rolls Royce case, ITAT explicitly rejected the plea that since RRIL was remunerated at arm’s length, no further profits could be attributed, citing that the UK-India treaty allowed taxing not just direct profits but also “indirect” profits attributable to PE. The judicial divergence on this issue was clear.

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Delhi High Court in e-Funds Corp. v. DIT (2017) held that a subsidiary’s premises are not automatically the foreign company’s PE unless the foreign company has the right to use that space for its own business and exercises control, refining the “place of business” test. The Supreme Court’s Formula One verdict (2017) was another high-profile case, holding that a leased race circuit constituted a fixed place PE for the foreign company thus emphasising that control and conducting business there, rather than the duration of access, was key.

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The Finance Act 2018 introduced the concept of “Significant Economic Presence”, aiming to deem a “virtual” PE for foreign digital companies exceeding certain user or revenue thresholds, even without physical presence. This reflected India’s proactive stance to ensure that digital multinationals contributing economic value in India pay taxes here.

In the case of Hyatt International, the Delhi High Court in 2021, ruled in favour of the tax department, finding a PE even without a formal office, due to substantial business operations and continuous, meaningful presence of Hyatt’s personnel in the Indian hotels. This ruling also emphasized the “separate enterprise” fiction for attribution, holding that an Indian PE must be viewed on its own, and profits can be attributed to it even if the overall enterprise had global losses, a position that directly countered the argument used in the earlier Nokia case that global loss equals zero Indian profit. The Supreme Court upheld the judgment of the Delhi High Court and reinforced the trend of Indian courts prioritizing economic reality: if significant value-creating functions happen in India. This, however, leads to an issue that has been the subject matter of a very large volume of litigation and uncertainty, viz., what profits should be attributed to such PE’s. Aggressive positions adopted by tax officials led to demands based on as high a figure as 50% (even more in some cases) attribution with most of these being reduced substantially in the subsequent appeals.

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The Niti Aayog, in its working paper on Enhancing Certainty, Transparency and Uniformity in Permanent Establishment and Profit Attribution for Foreign Investors in India, published in October 2025, analysed the evolution of jurisprudence in this subject and put forward a proposal to move to presumptive taxation for dealing with this matter. The presumptive method should be rebuttable, in that there should be an option for the taxpayer to opt-out by demonstrating lower margins. This would be in line with existing provisions of sections 44AD and 44ADA. A presumptive taxation scheme is particularly relevant in a post-BEPS environment where the shortcomings of Arms Length Pricing (“ALP”) are being acknowledged and ideas to complement or supplement ALP methods are being discussed.

The benefits that such a scheme could bring, according to the Niti Aayog, are:

• Industry Specific Presumptive Profit rates.

• Optional Regime (rebuttable presumption).

• No separate PE determination needed.

• Safe Harbour for PE attribution.

• APA for PE attribution.

• Coverage of taxation scope. That is, income offered for presumptive tax cannot be covered under any other option of the Act that may lead to higher taxation.

• Administrative simplicity

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Illustrative rates for certain industries have also been proposed in the working paper. 

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Industry/Sector

Proposed presumptive rate (on gross receipts)

Rationale

Infrastructure construction/EPC 10%

Aligns with Sec 44BBB,

Engineering services/oilfield services 10%

Aligns with Sec 44BB and extends to other engineering services,

General Services (Consultancy/Management/Software) 20%

Mirrors Sec 44BBD.

Marketing and distribution support 15%

Moderate rate between extremes and acknowledges critical role of Indian marketing operations.

Digital/E-Commerce (Online platforms, streaming, etc.) 30%

Reflects generally high profit ratios.

Telecom/Technology Equipment supply with installation 5% (supply), 20% (services portion)

Aims to avoid litigation over contract splitting.

While this scheme, if looked at favourably by the Government of India, seems a step in the right direction, there are some impediments that will have to be overcome. First and foremost will be legislative changes followed by anti-abuse provisions to ensure that there is no cherry-picking years or frequent switches from the presumptive scheme.

Whether this scheme is taken forward is something that should be followed closely and we can only hope for now that the scheme is considered in all earnestness and steps cannot to implement the scheme in order to bring about the desired level of certainty in this subject.