The concept of Permanent Establishment is one of the most important concepts in determining the tax implications of cross border transactions. Examine the significance thereof, when such transactions are governed by Doub

Double Taxation Avoidance Agreements (DTAAs) generally contain an article providing that business income is taxable in the country of residence, unless the enterprise has a permanent establishment 'PE' in the country of source, and such income can be attributed to the permanent establishment. As per section 92F(iiia) of the Income tax act, 1961, the term "Permanent Establishment" includes a fixed place of business through which the business of an enterprise is wholly or partly carried on. As per this definition, to constitute a permanent establishment, there must be a place of business which is fixed and the business of the enterprise must be carried out wholly or partly through this place. Section 9(1)(i) of the Income tax Act, 1961, requires existence of business connection for deeming business income to accrue or arise in India. DTAAs, however, provide that business income is taxable only if there is a permanent establishment in India. As per section 92(2) of the Income tax Act, 1961, the DTAA or the provisions of the Income-tax Act, 1961, whichever is more beneficial, shall apply. The PE concept is narrower than the business connection concept. Therefore, in a case where the Indian Government has entered into DTAA with a country, unless and until the PE test is satisfied, the business income would not be taxable in the source country. However, in cases not covered by DTAAs, business income attributable to business connection is taxable.