“attribution of profits to PE”
The decision most relied on for attribution of profits to PE is Set Satellite Pte Ltd. v. CIT (307 ITR 205), cited in 96 judgments on BharatTax.
Leading authorities on attribution of profits to PE
If a Dependent Agency Permanent Establishment (DAPE) is remunerated at arm's length based on transfer pricing principles, no further profits can be attributed to the foreign enterprise. The principles of profit attribution under DTAA Article 7 are pari-materia to Section 9(1)(i) of the Income Tax Act.
The profits of a Permanent Establishment (PE) must be determined on the basis of what an independent enterprise would derive, using the Transactional Net Margin Method (TNMM) for profit attribution. When applying TNMM, the operating profit from an international transaction should be compared with the operating profit margin of comparables.
Once a transfer pricing analysis has been undertaken in respect of an Indian associated enterprise (AE), nothing further needs to be attributed to it as a Permanent Establishment (PE), as this would extinguish the need for attribution of additional profits to the alleged PE.
Profits arising from the sale of sub-assemblies and intermediary services should not be attributed to a Permanent Establishment (PE) at an ad-hoc rate if the facts of the appellant's case are different from those in Rolls Royce PLC. Attributing profits to a PE requires careful consideration of the specific transactions and activities.
Profits attributable to a Permanent Establishment (PE) in India can be conservatively estimated, such as by applying a percentage of global profits to Indian sales, when the PE's activities in India are minimal.
A dependent agent can create a permanent establishment (PE) in India, and profits attributable to that PE can be taxed in India.
The Income Tax Appellate Tribunal (ITAT) determined that no further profit can be attributed to a permanent establishment (PE) if the transaction between the assessee and another entity has already been found to be at arm's length.
Even if a Permanent Establishment (PE) exists in India, no further profit can be attributed to a foreign enterprise once the arm's length principle has been satisfied.