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Non-Resident Taxation Series | June 2026
A Permanent Establishment is the threshold that determines when India can tax a foreign enterprise’s business profits. Below it, India has no right. Above it, India taxes the attributable profits. This article explains the PE definition under Section 173(c), what creates and does not create a PE, the banking PE rule under Section 9(5)(b), income attribution, and the fund management exception under Section 9(12).
Non-Resident Taxation Series – fiscalzenith.com
You are reading Article 9: Permanent Establishment: Section 173(c).
Also in this series: Residential Status – Section 6 | Scope of Income – Section 5 | Deemed Income – Section 9 | Tax Rates – Sections 207 to 217 | TDS on Non-Residents | DTAA – Section 159 | NRI Provisions | Representative Assesse and Agent | ITR Filing
Also in this series: Residential Status – Section 6 | Scope of Income – Section 5 | Deemed Income – Section 9 | Tax Rates – Sections 207 to 217 | TDS on Non-Residents | DTAA – Section 159 | NRI Provisions | Representative Assesse and Agent | ITR Filing
Table of Contents
- The PE Concept in Simple Terms
- Definition: Section 173(c)
- What Creates a PE
- What Does NOT Create a PE
- How PE Features in the Income Tax Act 2025Interest by Indian PE, specified fund attribution, Section 9(5)(b)
- Income Attribution to a PE
- Fund Management Exception: Section 9(12)
- PE in the Context of DTAAs
- Practical Compliance Checklist
- Frequently Asked Questions
Section 173(c)
The domestic law definition of PE: a fixed place of business through which the business of the enterprise is wholly or partly carried on.
Section 9(5)(b)
Interest paid by an Indian PE of a non-resident bank to its head office is deemed to arise in India. The PE is treated as separate and independent from the non-resident bank.
Section 9(12)
Fund management activity by an eligible fund manager in India does NOT create a business connection or Indian residency for the offshore fund. Conditions in Schedule I apply.
DTAA
DTAA PE definitions may differ from Section 173(c). The more beneficial definition for the taxpayer applies under the treaty override rule in Section 159(4).
Part IThe PE Concept in Simple Terms
When a foreign company starts doing business in India, at what point does India get the right to tax its business profits?
The answer is: when a Permanent Establishment (PE) is created in India.
PE is the international tax threshold concept. It separates preparatory or auxiliary activities, which do not give India taxing rights, from substantive business operations, which do. Once a PE exists, India can tax the profits attributable to it.
Part IIDefinition: Section 173(c)
Section 173(c) of the Income Tax Act, 2025 defines “permanent establishment” as: a fixed place of business through which the business of the enterprise is wholly or partly carried on.
This definition appears in Section 173, which provides definitions for the purposes of Sections 161, 162, 163, 165, 171, and 172 (the transfer pricing and international transaction provisions). It is also cross-referenced in Section 9(5)(b)(iii) for the banking PE interest provision and in Section 210(2) for specified fund income attribution.
Three elements must be present:
- Fixed place: a specific, geographically stable location, not a moving or transient operation
- Place of business: the enterprise actually carries out business there, not merely storage or display
- Through which business is carried on: the foreign enterprise’s actual business activity happens at or through that place
Part IIIWhat Creates a PE
| Situation | PE? | Type |
|---|---|---|
| Foreign company opens a branch office in Mumbai and conducts sales from it | Yes | Fixed place PE |
| Foreign company has a factory in Pune manufacturing goods for India | Yes | Fixed place PE |
| Foreign company’s dependent agent in India habitually concludes contracts on its behalf | Yes | Dependent agent PE |
| Foreign company’s employees present in India for 9 months on a construction project (exceeding DTAA threshold) | Likely yes | Construction site PE |
| Foreign company’s senior executives permanently based in India making all key business decisions | Likely yes | Management PE / POEM risk |
Part IVWhat Does NOT Create a PE
Under India’s DTAAs and domestic law, the following generally do not create a PE:
- Maintaining a fixed place solely for purchasing goods or collecting information for the enterprise
- Maintaining a fixed place solely for preparatory or auxiliary activities
- Using a warehouse in India only for storage or display of goods
- Working through an independent agent acting in the ordinary course of their own business (corresponding to the independent agent protection in Section 306(2))
Part VHow PE Features in the Income Tax Act 2025
Interest Payable by Indian PE of Non-Resident Bank: Section 9(5)(b)
When a non-resident bank has a PE in India (such as a foreign bank branch), and that PE pays interest to the head office or another branch outside India, that interest is deemed to arise in India under Section 9(5)(b) and is separately taxable.
The Indian PE is treated as a person separate and independent from the non-resident bank of which it is a PE [Section 9(5)(b)(ii)(A)]. The PE has its own income, its own tax computation, and its own TDS obligations.
Example: Barclays has a branch in Mumbai (its Indian PE). The Mumbai branch borrows Rs. 500 crore from the London head office at 5% per annum. The interest paid by the Mumbai branch to London is deemed to arise in India under Section 9(5)(b). It is taxable in the hands of Barclays as income arising in India, separately from any other Indian income.
Specified Fund Attribution: Section 210(2)
For specified funds taxable under Section 210, the special rates apply only to income attributable to units held by non-residents who are NOT a PE in India. If a non-resident holds units through a PE in India, that PE’s income is taxed under the regular business income provisions, not the special Section 210 rates.
Part VIIncome Attribution to a PE
When a foreign company has a PE in India, India taxes only the profits attributable to that PE, not the foreign company’s global profits. Under Section 9(9)(f), only the income reasonably attributable to Indian operations is deemed to arise in India.
Methods of attribution used in practice include:
- Direct method: Separate books for the PE showing revenues and costs attributable to Indian activities
- Indirect method: Allocating a portion of global profits based on revenue, assets, or headcount in India
Part VIIFund Management Exception: Section 9(12)
Section 9(12)(a) states: fund management activity carried out by an eligible investment fund through an eligible fund manager acting on behalf of the fund shall NOT constitute a business connection in India of that fund.
Section 9(12)(b) further states: the fund shall not be treated as resident in India under Section 6 merely because the eligible fund manager is situated in India.
IFSC relaxation [Section 9(12)(f)]: The Central Government may, by notification, relax one or more Schedule I conditions for an eligible investment fund and its eligible fund manager if the eligible fund manager is located in an International Financial Services Centre and has commenced operations on or before 31st March 2030.
Part VIIIPE in the Context of DTAAs
The Section 173(c) domestic definition of PE may differ from the PE definition in a specific DTAA. In such cases, the DTAA definition governs for the purpose of determining whether a PE exists and whether India has the right to tax the business profits. Under the treaty override rule in Section 159(4), the more beneficial position for the taxpayer always applies.
Most of India’s DTAAs follow the OECD Model or UN Model definition of PE, which includes:
- Fixed place of business PE
- Construction site PE (with time thresholds, typically 6 or 12 months depending on the treaty)
- Service PE (when employees are present in India for a specified period providing services)
- Dependent agent PE (mirroring the Section 9(9)(b) concept)
If your foreign company employees visit India regularly
- Track the duration and nature of activities carefully. If visits exceed DTAA time thresholds for a service PE or construction PE, an Indian PE may be created. Assess whether taxable income should be attributed to it and whether Indian returns should be filed.
If you are a foreign bank with a branch in India
- Your Indian branch is a PE. Interest paid by the Indian branch to the head office is deemed to arise in India under Section 9(5)(b) and is separately taxable. Ensure this is reflected in the branch’s Indian tax returns.
If you are an offshore fund with India-based portfolio managers
- Check whether the fund and manager qualify as “eligible” under Schedule I of the Act for the Section 9(12) exception. If eligible, no business connection arises. If not eligible, the position needs legal review.
- If you are located in an IFSC and commenced operations before 31st March 2030, you may qualify for relaxed conditions under Section 9(12)(f).
If you have a dependent agent in India concluding contracts for you
- A dependent agent PE exists under Section 9(9)(b)(i). Indian profits attributable to that agent’s activities are taxable in India. Consider restructuring to an independent agent basis if PE creation is a concern, ensuring the restructured arrangement reflects genuine commercial independence.
Wrapping Up
The Permanent Establishment concept is the threshold that determines when India can tax a foreign enterprise’s business profits. Below the PE threshold, India has no right. Above it, India taxes the attributable profits. Section 173(c) provides the baseline domestic definition. DTAA definitions override or supplement it, always in the direction more beneficial to the taxpayer. Manage PE exposure proactively: track employee days, structure agent arrangements carefully, and ensure offshore funds meet Schedule I conditions if you rely on the Section 9(12) exception.
Frequently Asked Questions
It depends on the India-US DTAA definition of a service PE. The India-US DTAA contains a service PE article that triggers a PE when employees are present in India for more than 90 days in any 12-month period providing services. If your employees are in India for 8 months (approximately 240 days) providing training services, a service PE likely exists. The income attributable to those activities is taxable in India. You should file an Indian tax return and compute the taxable income attributable to the Indian PE.
A server farm is a physical, fixed location used for your business. Under the basic Section 173(c) definition and most DTAA PE articles, a server farm can constitute a PE if it is used to carry on the core business of the enterprise (for example, hosting an e-commerce platform that generates sales). If it is used purely for preparatory or auxiliary activities, such as data storage or backup, it may fall within the PE exclusions. The analysis depends on whether the server farm’s function is core to the business or merely auxiliary. Get a PE analysis done by a tax advisor before structuring significant India data centre operations.
Disclaimer: For informational and educational purposes only. Based on the Income Tax Act 2025 (30 of 2025), Income Tax Rules 2026, and provisions as amended by the Finance Act 2026, current as of June 2026. Does not constitute legal or tax advice.
