Q : Is there any mechanism laid down by Indian authorities to quantify income attribution to a permanent establishments ?


Kunj Vaidya (Partner and Leader, Transfer Pricing, PwC India)

Rule 10 of the Income Tax Rules, 1962 allows the Tax Officer to determine the income in case of non-residents when the income attributable to the India operations cannot be definitely ascertained. Accordingly, Officer could attribute income on the basis of (i) a 'reasonable' percentage of turnover; or (ii) the same proportion of total profits as the receipts accruing from the PE bear to the total receipts of the business; or (iii) other manner as the officer may deem suitable.

The CBDT Circular 5/2004 laid down that income attribution to a PE should be made as per the arm's length principle determined under the TP provisions of the Act. Even as per the tax treaties (Para 2 of Article 7 of the model Double Taxation Avoidance Agreement), the income attribution to PE corresponds to the arm's length principle referred to above.

In the Past, Tribunal [Hyundai Rotem [TS-612-ITAT-2012(DEL)]has ruled that Rule 10 cannot be invoked unless TPO points any error and rejects the TP study carried out by the taxpayer. It held a study carried out as per the detailed TP provisions and rules should be preferred over the mechanism under Rule 10, which can be resorted to only when the attributable income cannot be definitely ascertained. Where the TP study has not considered the full functional, asset and risk profile of the taxpayer, the Tribunal [Convergys Customer Management Group Inc TS-187-ITAT-2013(DEL)]has ruled that a reasonable percentage (in that case, it was held as 15%) of the retained global profits should be attributed to the PE over and above profits reported by the taxpayer in India. In the said case, the retained global profits was computed as the revenue earned from India x Global profit percentage. Hence, it would be important for taxpayers having any exposure to a PE in India to carry out a robust TP analysis supported by proper documentation and attribute profits to the PE as per the arm's length principles.

The above responses to the questions has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. PricewaterhouseCoopers Private Ltd, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences faced by anyone who have chosen to rely on the information contained in this publication or for any decision based on it. 

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