Permanent Establishment and Taxable Presence in India
A foreign enterprise can become taxable in India without incorporating anything. It can happen through a place, through people, through an agent, or now through customers and users alone. This guide sets out the routes, what the treaty does to each of them, and how much profit India can attribute once a presence is found.
- Two separate gates: domestic business connection, then the treaty
- Significant economic presence has bitten since AY 2022-23, not since AY 2019-20
- Service permanent establishment is a United Nations Model feature, not an OECD one
- The Supreme Court found a fixed place permanent establishment with no dedicated office in July 2025
Four numbers that shape the analysis
Two gates, in this order
Two Acts are live at once. The Income-tax Act 1961 governs FY 2025-26, the year being filed now. The Income-tax Act 2025 governs tax year 2026-27 onward. Section, rule and form numbers differ between them, so every citation below names the year and the Act. Business connection sits in section 9(9) of the Income-tax Act 2025, where the 1961 Act had it in an Explanation to section 9(1)(i). The substance carried over; the address did not.
1. Does Indian domestic law reach the income at all?
Income is deemed to accrue in India where there is a business connection in India. That includes a business carried on in India, a dependent agent, and a significant economic presence. If domestic law does not reach it, the analysis stops and no treaty is needed.
2. Does the treaty allow India to tax it?
If the enterprise is resident in a country with which India has a treaty, India can generally tax business profits only where there is a permanent establishment, and only to the extent attributable to it. The treaty applies where it is more beneficial, so it operates as a ceiling on domestic law, not as an additional charge.
3. If both, how much profit?
Attribution is a separate question from existence, and in practice it is where most of the money is. A permanent establishment found on thin facts can still carry a large attributed profit, and a well remunerated Indian affiliate can still leave something to attribute if the transfer pricing study does not capture everything it does.
Keeping the two gates separate matters, because they can give different answers. Significant economic presence is domestic law. For a non resident in a treaty country, business profits still generally require a permanent establishment before India can tax them, so significant economic presence bites hardest on residents of countries with which India has no treaty.
The dependent agent test, and why India widened it
A person acting on behalf of a non resident creates a business connection where that person habitually exercises an authority to conclude contracts, or habitually plays the principal role leading to the conclusion of contracts; or habitually maintains a stock of goods in India from which deliveries are regularly made; or habitually secures orders in India mainly or wholly for the non resident. A broker or commission agent of independent status acting in the ordinary course of business is excluded, but that independence is lost where the agent works mainly or wholly for the non resident or its group.
The principal role limb is the language that came out of the international base erosion work on artificial avoidance of permanent establishment status. The reason India put it into domestic law in 2018 is worth understanding, because it explains something about how these two bodies of law interact.
The amendment was made so the treaty change would work, not the other way round
India's treaties had already been modified by the Multilateral Instrument to widen the agency test. But a taxpayer may take whichever of the Act and the treaty is more beneficial. Because Indian domestic law was narrower than the modified treaty, the narrower domestic rule prevailed and the treaty change was ineffective. India widened domestic law so that the treaty modification would actually bite. Most write ups present the 2018 amendment as India adopting an international standard, which gets the mechanism backwards.
The 'habitually secures orders' limb is not in the OECD Model. It is an Indian and United Nations Model feature, and it is one of several places where Indian practice reaches further than a reader familiar with OECD material will expect.
Significant economic presence, and its three dates
A non resident has a significant economic presence in India where transactions in goods, services or property with any person in India exceed a prescribed amount of payments in the year, or where business is solicited systematically and continuously from, or there is interaction with, a prescribed number of users in India. It applies irrespective of whether the agreement was entered into in India, whether the non resident has a residence or place of business in India, or whether any services are rendered in India.
The thresholds are Rs 2 crore of aggregate payments and three lakh users. They were prescribed in 2021 and carried into the Income-tax Rules 2026 at the same figures.
| Date | What happened | Effect |
|---|---|---|
| AY 2019-20 | The provision was inserted by the Finance Act 2018 | None. No thresholds had been prescribed, so it was inoperative |
| 1 April 2022 | The provision was substituted by the Finance Act 2020 | Operative |
| AY 2022-23 | The thresholds were actually prescribed | This is when significant economic presence began to bite |
| Tax year 2026-27 | Carried into section 9(9)(d) of the Income-tax Act 2025, with thresholds re-notified in the Income-tax Rules 2026 | Unchanged in substance and unchanged in amount |
A great deal of published Indian content states that significant economic presence applied from AY 2019-20 or from FY 2021-22. Both are wrong. It bites from AY 2022-23.
This is now the main digital nexus rule, because the alternative has gone
Until recently, significant economic presence and the equalisation levy were described as parallel regimes for taxing digital business. Both equalisation levies have since been withdrawn, the second with effect from 1 April 2025, so significant economic presence is what is left, subject to treaty relief. Content presenting the two as alternatives is out of date. There is more on the levy on the cross border payments guide.
Four kinds of permanent establishment, and where India differs
Fixed place
A fixed place of business through which the business is wholly or partly carried on. Two conditions: the place must be at the disposal of the enterprise, and the business must be carried on through it. A permanent establishment shows stability, productivity and a degree of independence. Exclusive possession is not required.
Service
Furnishing services through employees or other personnel where the activity continues beyond a stated number of days in a twelve month period. This is not in the OECD Model at all. It is a United Nations Model feature, at 183 days there, and India negotiates it into its treaties routinely and frequently at a much lower figure.
Agency
A dependent agent concluding contracts or playing the principal role leading to their conclusion, maintaining a stock for delivery, or securing orders wholly or almost wholly for the enterprise. An agent of independent status is excluded until its activities are devoted wholly or almost wholly to that one enterprise.
Construction
A building site or construction, installation or assembly project lasting beyond a threshold. The OECD Model sets twelve months. The United Nations Model sets six. Indian treaties commonly sit at or below the United Nations figure; the treaty with the United States is at 120 days.
The divergence to state plainly
Guides routinely describe service permanent establishment as the international standard. It is not in the OECD Model article. Anyone advising from OECD material alone will systematically understate Indian exposure, because the most common way a foreign group creates a presence in India is by sending people, and that is precisely the route the OECD Model does not address.
Day counts differ by treaty and several Indian treaties run two limbs with different counts, a shorter one for services to a related enterprise. There is no substitute for reading the actual article in the actual treaty.
And why it did not do it to every treaty
India deposited its instrument of ratification on 25 June 2019 and the Multilateral Instrument entered into force for India on 1 October 2019. It modifies existing treaties without renegotiating them, but only where both parties to a given treaty adopted the same provision. That is the point most commonly missed.
India adopted the principal purposes test, under which a treaty benefit is denied where obtaining it was one of the principal purposes of an arrangement; the widened agency article; the specific activity exemptions on Option A, meaning every listed exemption is subject to an overarching preparatory or auxiliary condition, together with an anti fragmentation rule; and the closely related enterprises definition at more than fifty per cent beneficial interest.
On treaty abuse, India accepted the principal purposes test as an interim measure and also elected the simplified limitation on benefits provision, stating that it would rather negotiate a limitation on benefits clause bilaterally where it can. Whether the simplified limitation on benefits actually applies to a given treaty depends on what the other country chose, and a number of Indian treaties carry the principal purposes test alone as a result.
A worked counter-example
India's own published synthesised text for the treaty with Slovenia carries the agency and specific activity modifications. The synthesised text for the treaty with Canada carries the principal purposes test but no modification to the permanent establishment article at all. India adopting an article does not mean your treaty changed. A reader who assumes otherwise will reach the wrong answer on a Canadian counterparty.
How to check your own treaty
Start with the synthesised text for that treaty published by the Income Tax Department, where one exists. Read it as a reading aid only: each document states expressly that the authentic legal texts of the agreement and the Instrument take precedence. Where no synthesised text exists, the two countries' positions have to be matched article by article.
And check the effect date, not the force date
The date the Instrument entered into force for India is not the date it takes effect for any particular treaty. Effect depends on when it entered into force for the other country, and it differs between withholding taxes and other taxes. There is no single date on which the Instrument became effective in India.
India did not opt into Part VI of the Instrument, the part that provides mandatory binding arbitration. Arbitration applies to a treaty only where both countries opted in, so a treaty partner that did opt in does not bring it into its treaty with India. It matters, because the absence of arbitration means a mutual agreement procedure that does not resolve simply does not resolve. That is covered on the disputes guide.
Five decisions, and one of them has moved the line
| Decision | Year | What it held |
|---|---|---|
| Morgan Stanley | 2007 | A captive back office performing preparatory or auxiliary support was not a fixed place permanent establishment, and stewardship activity by the customer was not either. But a service permanent establishment did arise from deputation, where the non resident's own employees worked in India while it retained the employment relationship. On attribution, where the Indian affiliate is remunerated at arm's length taking account of all risk taking functions, nothing further is left to attribute |
| Formula One | 2017 | A fixed place permanent establishment was found. Exclusive possession is not essential; temporary or shared use of space is enough provided business is carried on through it. Short duration of access is not determinative on its own |
| E-Funds | 2017 | No fixed place, service or agency permanent establishment. Assigning or sub-contracting work to an Indian subsidiary is not a factor, and reducing cost by moving operations to an Indian subsidiary does not by itself create one. A mutual agreement procedure outcome for earlier years does not bind later years |
| Samsung Heavy Industries | 2020 | A Mumbai project office was not a permanent establishment because it did not carry on the core business; it acted as a liaison between the enterprise and its customer. The burden of proving a permanent establishment is initially on the revenue |
| Hyatt International | 2025 | A fixed place permanent establishment was found with no dedicated office space. Pervasive and enforceable control over an Indian operation's strategic, operational and financial dimensions, over a twenty year agreement, satisfied stability, productivity and dependence. Once continuity of business operations is established, the intermittent presence of a particular employee is immaterial. Profit may be attributed even where the enterprise as a whole is loss making |
Samsung Heavy is often shorthanded as 'a project office is not a permanent establishment'. The holding is narrower and fact driven: that project office did not carry on the core business. What transfers is the core business test and the burden of proof, not a categorical rule.
Why Hyatt changes the practical advice
Two defences that used to work now do not. 'We have no office in India' is answered by a decision that found a permanent establishment without one. 'No individual stayed long enough' is answered by a decision that held day counting of individuals immaterial once the business operations are continuous. And 'the group made a loss globally' is answered by a holding that a permanent establishment is conceived as an independent taxable entity whose profit does not depend on the enterprise's global financials. Any advice whose case list stops at 2020 is a decision out of date.
Exchange control permission is not a tax clearance
Setting up one of these requires permission under the exchange control rules, normally through an authorised dealer bank and in some cases from the Reserve Bank directly. That permission tells you what the office may do. It tells you nothing about whether the office is a permanent establishment, and the two questions are decided independently and by different authorities.
| Office | Exchange control position | Tax position |
|---|---|---|
| Liaison office | Eligibility requires a profit making track record in the immediately preceding three financial years and net worth of at least USD 50,000. Permitted to represent the parent, promote export and import, facilitate collaboration and act as a communication channel. Expressly prohibited from commercial, trading or industrial activity and from earning income in India. Validity three years, two for certain sectors | Confined to its permitted activities it will generally fall within the preparatory or auxiliary exclusion. That exclusion is not a label: under the Instrument's Option A, which India adopted, every specific activity exemption is subject to an overarching preparatory or auxiliary test, with an anti fragmentation rule on top |
| Branch office | Profit making track record in the immediately preceding five financial years and net worth of at least USD 100,000. Permitted export and import, professional or consultancy services, research, technical collaboration, agency representation, and information technology and software development | Carries on the enterprise's business in India, so will ordinarily be a permanent establishment, taxed on a net basis at foreign company rates |
| Project office | General permission where the project has the necessary regulatory clearances and is funded by inward remittance, by a bilateral or multilateral financing agency, or by a term loan from an Indian bank or financial institution | Fact dependent. Samsung Heavy held a project office not to be a permanent establishment where it did not carry on the core business, but that is a finding on those facts rather than a rule |
The exchange control eligibility figures are from the Reserve Bank's master direction as last updated in May 2021. The integration of the tax column is a reasoned synthesis rather than a proposition lifted from a single source, and each case turns on what the office actually does.
The failure mode
A liaison office that quietly starts negotiating, quoting or collecting creates two problems at once: a contravention of the exchange control permission, and, independently, a permanent establishment. After Hyatt, the absence of a dedicated office is no longer an answer to the second. If you are still at the stage of choosing between these, the setup decision is covered on our India Entry pages.
Attribution, and the formula that never arrived
Where the income of a non resident arising through a business connection in India cannot be definitely ascertained, the officer may compute it at a reasonable percentage of turnover, or on the proportion Indian receipts bear to total receipts, or in such other manner as the officer deems suitable. That rule was Rule 10 under the old Rules and is Rule 9 of the Income-tax Rules 2026, carried over word for word.
In 2019 the Board published a committee report proposing a formulary approach and invited comments. Nothing was ever notified. The proof is in the carry over above: when the entire rulebook was re-notified in March 2026, the natural moment to implement a seven year old proposal, the three method text was reproduced unchanged. A good deal of published content describes that formula as though it were law, or as though it were pending. It is neither.
The arm's length ceiling, and its condition
Where an Indian affiliate constituting a permanent establishment is remunerated on an arm's length basis taking account of all risk taking functions, nothing further is left to attribute. That holds only where the transfer pricing analysis actually reflects the functions performed and risks assumed. Where it does not, further profit is attributed for the uncompensated functions. Morgan Stanley is regularly cited as a flat rule; the judgment expressly conditions it.
Global losses are no defence
Profit attribution to an Indian permanent establishment is permissible even where the foreign enterprise as a whole is loss making. A permanent establishment is conceived as an independent taxable entity and the source country's taxing right does not depend on the enterprise's global financials. That is the 2025 Hyatt holding, and it closes a defence that was frequently run.
The practical consequence of putting these two together is that the transfer pricing study for the Indian affiliate is doing double duty. It is the transfer pricing file, and it is the attribution defence. A study that describes the Indian entity as a low risk service provider while the facts show it doing more than that weakens both at once. That is covered on transfer pricing compliance.
Questions foreign groups ask about Indian presence
We have no office and no employees in India. Can we still have a permanent establishment?
Yes, on three separate routes. Through an agent who habitually plays the principal role leading to contracts. Through significant economic presence, if you cross Rs 2 crore of payments or three lakh users, though a treaty will usually require a permanent establishment before business profits can be taxed. And, after Hyatt, through control over an Indian operation exercised continuously, without a dedicated office.
Our engineers visit India for short trips. Does that create one?
It depends on the aggregate days in a twelve month period under your treaty's service clause, and on whether the activity is continuous. Hyatt held that once continuity of business operations is established, the intermittent presence of any particular employee is immaterial, so counting individual passports is not the whole answer it used to be.
Does a subsidiary make the parent taxable in India?
Not by itself. E-Funds held that assigning or sub-contracting work to an Indian subsidiary is not a factor, and that reducing cost by moving operations to one does not create a fixed place permanent establishment. What creates exposure is the parent doing something in India through the subsidiary's people or premises, which is a question of fact rather than of shareholding.
We sell software to Indian customers online. Are we taxable?
Two separate questions. Whether the payment is royalty is answered largely by the Supreme Court decision on shrink wrapped software, covered on the cross border payments guide. Whether you have a presence is answered by significant economic presence and then by the treaty. You can cross the domestic threshold and still not be taxable on business profits if your treaty requires a permanent establishment and you have none.
How do we know what our treaty says after the Multilateral Instrument?
Read the synthesised text for that treaty published by the Income Tax Department, and treat it as a reading aid rather than as the law: the documents say so themselves. Where there is no synthesised text, the two countries' positions have to be matched article by article. Do not assume that because India adopted a provision, your treaty carries it.
If a permanent establishment is found, how bad is it?
It depends far more on attribution than on the finding. A permanent establishment with a well documented, genuinely arm's length Indian affiliate behind it may attract little further profit. One where the study understates what India does can attract a great deal, for every open year, with interest.
Where to go next
Where this connects
The transfer pricing study that supports your Indian affiliate is also your attribution defence, on transfer pricing compliance. Whether a payment to the foreign enterprise is chargeable in the first place is on cross border payments. And a permanent establishment dispute usually arrives as a draft assessment order with a thirty day clock on it, which is disputes.
Where to go next
International Taxation
Back to the main page: what we do, how an engagement runs, and how to reach us.
Transfer Pricing Compliance and Documentation
What you have to file and keep when you deal with a related party abroad: the accountant's report that has no threshold at all, the Local File, the Master File that catches far more Indian subsidiaries than people expect, country by country reporting, and the safe harbour that was rewritten this year.
Withholding Tax on Cross Border Payments and Treaty Relief
The payer's problem: deciding whether a payment abroad is chargeable to Indian tax at all, at what rate, what the treaty does to that rate, and what paperwork has to exist before the money leaves. Form 10F, Form 15CA and Form 15CB have all been renumbered.
Cross Border Structuring, Repatriation and Foreign Tax Credit
The outbound side: putting money into a foreign subsidiary under the 2022 overseas investment rules, claiming credit for tax paid abroad, getting profit back to India or out to a foreign parent, and the three rules that constrain how you structure it.
International Tax Disputes and How They Are Resolved
What happens when the department disagrees: the transfer pricing assessment cycle, the Dispute Resolution Panel and its thirty day window, the appeal ladder, mutual agreement procedure between two governments, advance pricing agreements as a way of avoiding the argument entirely, and where the global minimum tax stands for an Indian group.
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Position as at 19 September 2026. Reviewed every six months.
This page is general information, not professional advice. Cross-border tax in India is in the middle of the largest transition it has had in sixty years. The Income-tax Act 2025 replaced the Income-tax Act 1961 on 1 April 2026 and renumbered every section; the Income-tax Rules 2026 replaced the 1962 Rules on the same day and renumbered every rule and every form. The 1961 Act still governs the return being filed for FY 2025-26. That means almost every figure and citation has two correct answers depending on the year you are asking about, and a great deal of published material, including material updated this year, gives only one of them. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.