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CA Final · Direct Tax Laws & International Taxation · Fundamentals of BEPS

Zenith Optics Inc., a foreign company, sells equipment in India through Indian company Arjun Sales Pvt Ltd. Arjun's staff negotiate all material terms with Indian customers, and contracts are then signed abroad by Zenith without any material modification. Zenith's activities in India are otherwise limited to this. Under the BEPS Action 7 changes to the permanent establishment definition, what is the likely position?

A dependent agent permanent establishment may arise. Under the BEPS-revised test, an agent that habitually plays the principal role in leading to contracts that the foreign enterprise routinely concludes without material modification creates a PE. Signing contracts abroad or having a separate legal entity no longer avoids PE status.

  1. ANo permanent establishment arises, since the contracts are formally concluded outside India
  2. BNo permanent establishment arises, because Arjun is a separate legal entity
  3. CA permanent establishment arises only if Arjun has a fixed place of business belonging to Zenith
  4. DA dependent agent permanent establishment may arise, because Arjun plays the principal role leading to contracts routinely concluded without material modificationCorrect

Explanation

The revised agency PE test covers a person who habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise. This closes the commissionaire-type avoidance of PE status through signing contracts abroad. Separate legal personality and place of signing do not prevent a dependent agent PE, and a fixed place is not needed for an agency PE.

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