Permanent Establishment

Submitted to:
Mr. Vishnu Kumar
Assistant Faculty
Faculty of Law

Submitted by:
Permanika Chuckal
VIIth Semester
201275

Damodaram Sanjivayya National Law University

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ACKNOWLEDGMENT

I would like to express my special appreciation and thanks to my advisor Mr.Vishnu Kumar ,
who have been a tremendous mentor for me. I would like to thank you for encouraging my
research, advice for the research has been priceless.
I would extend my thanks to the University Authorities, for providing me with is opportunity
to submit my project. I am indebted to all those who have helped me in developing this
project for their suggestion and guidance.

Permanika Chuckal
201275

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Table of Contents
Research Methodology.

Chapter I: Introduction.

Chapter II: Permanent Establishment: The Concept.

Chapter III: A Closer Look At The Concept: Examining article 5 of UN Model Convention.
10
Chapter 3.1: Basic Definition.

10

Chapter 3.2: Illustrations.

12

Chapter 3.3: Specific Inclusion.

13

Chapter 3.4: Preparatory and Auxiliary Services.

14

Chapter 3.5: Dependent Agent As Permanent Establishment.

15

Chapter 3.6: Subsidiary Company as Permanent Establishment.

16

Chapter IV: Expanding The Concept: Ministry of Finance v. Phillip Morris.

17

Chapter V: Feasibility And Viability of Permanent Establishment: Is It Outdated?. 19

Chapter VI: Conclusion.

22

Bibliography.

23

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Research Methodology
Aims and objectives:
This Project attempts to give a holistic picture of the concept of permanent establishment-the
cardinal basis of all the double taxation avoidance agreements. This paper also seeks to study
the impact of rapid technological advancements on the traditional understanding of the
concept.
Scope and Limitations:
This paper, making the UN Model Convention as a primary reference point, indulges into an
all pervasive analysis of the concept. Not only the concept has been explained at length in the
following pages but the controversial judgments and divergent views regarding various
aspects, especially in relation to enlarging the ambit of the concept have been included in the
paper.
Few of the limitations that the researcher had to face while writing the present paper were
relating to non-availability of certain original judgments and dearth of relevant legal material
in the Indian journals so as to contextualise the study in a better manner.
Research Questions:
I have attempted to answer the following questions in the present paper:

What is the relevance of the concept of permanent establishment?

What does the term permanent establishment involve within its fold?

How viable and feasible is the concept in the internet age?

Style of Writing:
This paper has both descriptive as well analytical style of writing.
Mode of Citation:
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A uniform mode of citation is followed throughout the project.

The articles in the present paper have been cited in the following manner:
Name of the Author, Name of the article, Vol. No., (Issue No.-if applicable) Name of the
Journal Page no. (starting) (year), Page No. (Not applicable for certain articles taken from
websites).
Books in the present paper have been cited in this manner:
Name of the author (or Editor), Title of the Book, (Place of Publication: Publishing Co., Year),
Vol. No.(if applicable), Page No..
Sources of Data:
Primary sources in the form of legislations, model convention, and treaties and the secondary
sources in the form of articles and books have been used to answer the various research
questions.

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Chapter I: Introduction
Increasingly becoming globalised world, where the manta of liberalisation is chanted by
every nation-state on the globe, is marked by the increased economic interdependence. No
economy exists in isolation and hence the national policies affecting the same are moulded so
as to protect and maximise the economic interest at international front. In such a global
village, it is common to find companies making cross border investments. Given the huge
stakes involved, companies which have acquired the distinction of being the vehicle of
business, prefer to make a sound investment decision and take into consideration all aspects
of investment. The financial management of a multinational enterprise is called upon to
consider on a variety of factors which may not be relevant for domestic business. It is
believed that tax considerations are a major factor in making the financial decisions. 1 Any
international investment gives rise to at least two potential tax claims: that of the parent
country and that of the host country. Since the cumulative taxation of the same income by
both countries is likely to be antithetical to the idea of international trade and deterrent to
foreign trade2, hence the idea of double taxation avoidance agreement arose.
Double taxation in its strict legal sense means taxing the same property or the subject matter
twice, for the same purpose, for the same period and in the same territory and by the same
government or authority.3 Hence, in strict sense, taxing of income by two different countries
will not really constitute double taxation. However in popular sense, when two countries
exercise the jurisdiction over the same property and tax it, there would be double
taxation.Various countries over a period of time have developed three different principles of
taxation i.e jurisdictional principle, source principle and nationality principle, which if
applied to international business would create havoc.
1 Y Hadari, Tax Treaties And Their Role In The Financial Planning of The Multinational
Enterprise, Vol.20, American Journal of Comparative Law 111 (1972), p.112
2 Union of India v. Azadi Bachao Andolan, MANU/SC/0784/2003
3 S K Das v. Town Area Committee [1990]183 ITR 401
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Hence the need arose to explore avenues to avoid the instances of double taxation. The relief
to incidence of taxing the same income twice is generally provided in any one of the
following forms4- Double Taxation Relief; or Double Taxation Avoidance; or Unilateral
Relief. In the modern world the second method is resorted to by the most countries.
Section 90 of the Income Tax Act, 1961 authorises the Government of India to enter into
agreements with other countries for granting relief in respect of income on which tax is
payable.Double Taxation Avoidance Agreements entered into are in the exercise of delegated
legislation. If a tax liability is imposed under the Act, it may be negated or reduced by
resorting to an agreement made under section 90. However in case of difference between the
provisions of the Act and the agreement, it has been held that the provisions of the latter shall
prevail.5 This position was reiterated by the Central Board of Direct Taxes.
The DTAAs in every case deal with the differing items of income and the treatment to be
given to the same in the matter of taxing or exempting it. In the context of business profits,
the liability to income tax arises only if the non-resident has a permanent establishment in
India and mere business connection without a permanent establishment would not attract
liability to tax in India.

4 A Gadi, et.al. Double Taxation and Permanent Establishment, Vol.43, Indian Journal of International
Law 729 (2003), pp. 733-734 .

5 Section 90 of Income Tax Act, 1961.

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Chapter II: Permanent Establishment: The Concept

Permanent establishment is one of the cardinal bases of all the DTAAs. All tax treaties are
unanimous in insisting on levy of a tax on foreign enterprise only if it has a permanent
establishment. Seetharam Reddy and Jagannadha Rao JJ had stated that the Permanent
Establishment postulates the existence of a substantial element of an enduring or permanent
nature of a foreign enterprise in another country which can be attributed to a fixed place of
business in that country.6It should be of such a nature that it would amount to virtual
projection of foreign enterprise of one country into the soil of another country.
It must categorically be stated at this juncture that the expression permanent establishment
is not used anywhere in the Act. Also, the definition of permanent establishment is not
universal. To determine the precise nature of the term one needs to peruse the relevant
agreement. However in practice the term has a universal meaning. This is because all the
agreements are based on UN or OECD model conventions.7
The rationale for adopting the concept of permanent establishment is that it is required mainly
to help determine the right of a contracting state to another contracting States enterprise.8

6 CIT v. Vishakapatanam Port Trust [1983]144 ITR 146.

7There also exist other models such as such as the U.S.A. Convention and the Andean Model. But
they are not followed as widely as the other two
8 P Gopinath, Importance of Permanent Establishments and Business Connection To Double Taxation
Avoidance Agreements, Vol.129, Taxman 133 (2003), p137.

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Chapter III: A Closer Look At The Concept: Examining article 5 of UN Model

Convention
Article 5 of the UN Model Convention defines Permanent Establishment. 9 It is an exhaustive
definition.
Chapter 3.1- Basic Definition
It provides basic definition to the concept of permanent establishment which is later on
further elaborated with inclusions and exceptions. This defines permanent establishment as
a fixed place of business through which the business of an enterprise is wholly or partly
carried on. This definition, as is apparent, has three basic requirements. Firstly, there must be
a place of business. Secondly the same must be fixed. And thirdly the business of the
enterprise must be carried on through this fixed place of business.

Fixed

The word fixed implies that there must be a link between the place of business and a
particular geographical point. From this follows that the Permanent Establishment can be
deemed to exist only if the place of business has a certain degree of permanency. If the place
of business was not set up merely for a temporary purpose, it can constitute Permanent
establishment despite the fact that in practice it existed only for a short period of time due to
the special nature of the activity carried out or for other reasons.10
One of the controversies that have arisen in this regard is whether a moving vessel would
constitute permanent establishment. It was held that on a bare reading of the provision
denotes that Permanent Establishment does not include a moving vessel. More so due to the
peculiar facts of the instant case where the vessel was in India only for 2.5 months it was held
that it was neither of enduring continuity nor could it be said that there was a virtual
projection of the assessee into the soil of India. However when the same question had arisen
in the matter of Advance Ruling Petition No.24 of 1996 11, it was held that the permanent
establishment does not refer to an everlasting or eternal place of residence. Also, it was
9 Article 5 of the OECD convention is substantially the same
10 D Patel, Basic Concepts of Double Taxation Avoidance Agreements, Vol.108, Taxman 1 (2000), p.4.

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observed in this case that the term permanent is a relative term and is used in
contradistinction to a fleeting, transitory, and temporary. It was held that there was no reason
as to why a diving vessel could not be considered to be a fixed place of business.

Place of Business

A place though normally denotes to a particular portion of space, however in the context of
permanent establishment it is used to define establishment. 12 Place of business includes any
premises, facilities or installation used for carrying on the permanent establishments
business. A place of business can exist even without premises being available or required for
carrying on the business of the enterprise, but simply has a certain amount of space at its
disposal. Whether the premises are owned or rented is irrelevant. One test that is often used
for the determination of place of business is that of the power of disposal. If a fixed place of
business is owned by an enterprise but placed at the disposal of a third party for the use of the
third party, then a permanent establishment is not taken to exist. However if the enterprise
leases out the premises to a senior staff member, etc., who uses it for carrying on the
business, then a permanent establishment is not taken to exist. If a customer however allows
an enterprise the use of premises for planning and supervising a particular assignment or to
perform a specific piece of work there, it does not constitute a permanent establishment.
However intangible rights such as patent ownership or claims for accounts or right to
participate in management etc. do not constitute a permanent establishment.13

Business of the Enterprise

11 [1999]104 Taxman 377.

12 A Gadi, et.al. Double Taxation and Permanent Establishment, Vol.43, Indian Journal of International
Law 729 (2003), p.741.
13 K Vogel, Double Tax Conventions: A Commentary on the OECD, UN and US Model Conventions for the
Avoidance of Double Taxation on Income and Capital (London: Kluwer International Ltd., 1997), 285.

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The carrying out of business through the fixed place of business is the next ingredient
of this definition. Business is generally carried out by an employer and personnel
(employees, other dependent agents etc.). However a permanent establishment can
exist even if business is predominantly carried out through automatic equipment and
personnel only set-up, operate, control and maintain the machines. But if an enterprise
only sets up the machines and then further leases them to another enterprise, a
permanent establishment doesnt exist. But if the enterprise sets up the machines and
a dependent agent does the rest, a permanent establishment may exist.14
In other words, the carrying on of business of an enterprise must involve the following:

The activity must be exercised in an independent manner.

It must consist of repetition of well defined actions.

It must have an economic character, i.e. its object must be to earn profits.

The business of the permanent establishment need not be the same as that of the enterprise
whose PE it is. It should serve the overall business interests of the enterprise in some manner.
Chapter 3.2: Illustrations
This paragraph enlists a number of instances, which are prima facie permanent
establishments.15
A bare reading of the paragraph would disclose that the place of management is used
differently than the office. This implies that both are not identical.
A place of management is a place from where the business of the whole or part of the
enterprise is conducted. If the business is conducted from more than one place, then there can
be more than one place of management. Decisions taken at a place of management must be of
14 P Gopinath, Importance of Permanent Establishments and Business Connection To Double Taxation
Avoidance Agreements, Vol.129, Taxman 133 (2003), 142.
15 It reads as -The term permanent establishment includes especially: (a) A place of management; (b) A
branch; (c) An office; (d) A factory; (e) A workshop; (f) A mine, an oil or gas well, a quarry or any other place of
extraction of natural resources.

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significance of the entire enterprise- Occasional shareholders meetings are not sufficient to
constitute a permanent establishment. In a sole proprietorship, which is domiciled in one
country but entirely managed in another, the residence of the proprietor can be the place of
management and, therefore, the permanent establishment.16
An office, on the other hand, is a place used to look after the administrative side of the
business and does not require any particular independence or organization. Where the
domestic law of a country does not envisage any difference between an office and a place of
management, any one of it can be deleted from the bilateral conventions entered into by that
country. Sales promotion centres designed to assist travelling salesmen will normally be
offices within the meaning expressed by Model Commentary.
A branch is a legally dependent segment of an enterprise; while it may have a degree of
independence from an economic and commercial viewpoint, and its activities are not of an
auxiliary or preparatory nature. A branch is supposed to have a separate organization and
keep separate records and books. It should be able to continue to exist independently without
any major organizational changes.17
Chapter 3.3: Specific Inclusion
This paragraph covers a broader range of activities than Article 5, paragraph 3, of the OECD
Model Convention, which states, A building site or construction or installation project
constitutes a permanent establishment only if it lasts more than twelve months. In addition
to the term installation project used in the OECD Model Convention, subparagraph 3(a) of
the UN Model Convention includes an assembly project as well as supervisory activities
in connection with a building site, a construction, installation or assembly project. Another
difference is that while the OECD Model Convention provides that a site or project is a
permanent establishment only if it lasts more than twelve months, the United Nations Model
Convention reduces the minimum duration to six months.

16 P Gopinath, Importance of Permanent Establishments and Business Connection To Double

Taxation Avoidance Agreements, Vol.129, Taxman 133 (2003), pp142-143.
17 P Gopinath, Importance of Permanent Establishments and Business Connection To Double Taxation
Avoidance Agreements, Vol.129, Taxman 133 (2003), pp142-143.

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Article 5, deals with the furnishing of services, including consultancy services, which are not
covered specifically in the OECD Model Convention in connection with the concept of
permanent establishment. It is believed that management and consultancy services should be
covered because the provision of such services in developing countries by corporations of
industrialized countries often involves very large sums of money.
Chapter 3.4: Preparatory and Auxiliary Services
Noteworthy are the opening words of the paragraph which are, notwithstanding the preceding
provisions of this article. This paragraph excludes some establishments from its scope despite
the fact that they may satisfy the requirements of the earlier paragraphs so as to constitute
permanent establishment. Here the UN Model convention is at variance with that of the
OECD as it deletes the word delivery from paragraph 4 (a) & 4 (b).
The word delivery is deleted because the presence of a stock of goods for prompt delivery
facilitates sales of the product and thereby the earning of profit in the host country by the
enterprise having the facility.18
Clause (e) & (f) of the paragraph make it abundantly clear that the exceptions contained in
the paragraph are of auxiliary and preparatory nature.
In the opinion of the researcher the rationale for such a paragraph providing for exceptions in
the form of preparatory and auxiliary services is discount those activities which do not really
contribute for the profit earning.
It is often difficult to distinguish between activities which have a preparatory or auxiliary
character and those which have not. The decisive criterion is whether or not the activity of the
fixed place of business in itself forms an essential and significant part of the activity of the
enterprise as a whole. There exists no universal yardstick. Each individual case will have to
be examined on its own merits. In any case, a fixed place of business whose general purpose
is one which is identical to the general purpose of the whole enterprise, does not exercise a
preparatory or auxiliary activity.19
18 Para 17 of UN Model Commentary on Article 5.

19 Para 24 of OECD Model Commentary on Article 5.

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Chapter 3.5 :Dependent Agent As Permanent Establishment

This paragraph gives the State the right to tax if the person acting for the enterprise is a
dependent agent on satisfaction of various other requirements. Dependent agents, who may
be individuals or companies, generally are a permanent establishment of the enterprise if they
carry out on behalf of such enterprise one of the activities that would constitute a permanent
establishment under this Model if such enterprise carried out such activity itself.
Who can be treated as dependant agent? Again, there is no full proof test that exists, yet
following guidelines would be helpful in determining the same.

Only those persons who with in the scope of their authority or the nature of their
activity involve the enterprise to a particular extent in business activities in the State
concerned, can be regarded as dependant agents.20

A dependent agent is a permanent establishment only if the agents authority is used

repeatedly and not merely in isolated cases.

The agent concerned must be dependent on the enterprise he represents, i.e. he should
be bound to follow directions issued to him by the enterprise.

The phrase authority to conclude contracts in the name of the enterprise does not
confine the application of the paragraph to an agent who enters into contracts literally
in the name of the enterprise; the paragraph applies equally to an agent who concludes
contracts which are binding on the enterprise even if those contracts are not actually
in the name of the enterprise.21

The paragraph categorically states that the independent agents are excluded out of its
purview.The test of differentiation between the dependant and independent agent is based on
whether the agent is personally and economically dependant on the enterprise. Personal
independence arises when the agent is in the business of performing operations for an
20 K. Srinivasan, Guide to Double Taxation Avoidance Agreements (New Delhi: Vidhi Publishing Ltd., 1998),
p. 155.

21 Para 32 of OECD Model Commentary on Art.5.

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enterprise on his own responsibility and is not ordinarily subject to the instructions of the non
resident enterprise except in the case of specific enterprise.22
Chapter 3.6: Subsidiary Company as Permanent Establishment
This paragraph states that mere factum of existence of a subsidiary company in a state of
another company which is resident of another state does not make either a permanent
establishment. This is based on the principle that for the purposes of taxation, a subsidiary is
an independent legal entity. The commentary on OECD mentions that even the fact that the
trade or business carried on by the subsidiary company is managed by the parent company
does not constitute the subsidiary company a permanent establishment of the parent company.
However as per Authority of Advance Rulings in India, for ascertaining the position in this
regard, the exact working of the subsidiary, the correspondence between the subsidiary and
the principal and the modes of their functioning and operation would have to be examined in
toto. As per this ruling the quantum of work done, the services rendered the contracts
undertaken for outsiders will have to be examined to determine whether a subsidiary is an
agent having independent status or not. This is a clear deviation from the OECD commentary
on the issue.23

Chapter IV: Expanding The Concept: Ministry of Finance v. Phillip Morris

Model treaties serve as indicators of the current international tax rules are the foundation of
most double taxation agreements currently in existence. Hence any interpretation given to
their provisions becomes relevant to all the legal systems of countries having such DTAAs.

22 K Vogel, Double Tax Conventions: A Commentary on the OECD, UN and US Model Conventions for the
Avoidance of Double Taxation on Income and Capital (London: Kluwer International Ltd., 1997), 257-58.

23 Para 32 of UN Model Commentary on Article 5 reiterates the same position.

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The Italian Supreme Court in the matter of Ministry of Finance (Tax Office) v. Philip Morris
GmbH24 laid down the following principles for determination of Permanent Establishment
which have become the subject of world-wide debate on the issue and which in turn widen
the traditional understanding of the concept25:
I) a joint stock company having its legal seat in Italy may take on the role of a multiple
permanent establishment of foreign companies belonging to the same group and pursuing a
common strategy. In such a case, in order to ascertain whether or not the activity carried out
by the national company is an auxiliary or preparatory activity, the reconstruction thereof
must be global and make reference to the group programme considered as a whole;
II) the supervision or control of the proper performance of a contract between a resident
entity and a non-resident entity cannot be consideredin principleauxiliary, within the
meaning of art 5(4) of the OECD Model Convention and art 5(3)(e) of the treaty of 18
October 1989 between Italy and Germany regarding double taxation ;
III) the participation of representatives or officers of a national structure in a phase of the
conclusion of contracts between a foreign company and another resident entity can fall within
the concept of the authority to conclude contracts in the name of the company, even without
any power of representation;
IV) the entrusting of the management of business transactions to a national structure by a
company which is not based in Italy, gives rise to the acquisition, by that structure, of the
status of a permanent establishment for the purposes of income tax, even if it concerns a
certain area of business;
V) the verification of the requisites of a permanent establishment, including those of
dependence and of participation in the conclusion of contracts, must not only be conducted
from the formal standpoint, but also and above allfrom a substantial standpoint.

24 4 Intl Tax L. Rep. 903.

25 M Muizelaar, Adding Smoke To The Fire: Ministry Of Finance (Tax Office) v. Philip Morris Gmbh And
The Expanding Concept Of Permanent Establishment, Vol.18, Emory International Law Review 211 (2004).

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In this case Philip Morris GmbH (the PMG Co) had entered into distribution agreements with
the Italian state monopoly (AAMS) for the sale of cigarettes in Italy. Under the agreements,
the PMG Co could appoint a representative in Italy to visit warehouses and sales outlets and
accordingly it appointed Intertaba Spa (IS Co). PMG Co was assessed to direct taxes as well
as VAT on the contention that IS Co constituted a PE of the PMG Co due to its role in the
negotiations between PMG Co and AAMS.26
In its observations, the court stressed on the aspect that the IS Co transactions with PMG Co
and other group companies, had been so structured as to avoid IS Co being regarded as a
permanent establishment in Italy.
Here, the court by widening the gamut for such determination has made an attempt to
reconcile old definitions to new commercial realities. However, these principles do not
simplify the matter; in fact they could potentially lead to more confusion in the fact-finding
process. Fixed place of business or dependent-agent relationship are the prerequisites for the
domestic entity to be regarded as a permanent establishment of the foreign parent.27
Thus, rendering of management services or participating in negotiations cannot, on a standalone basis, be the grounds for holding the domestic entity a PE of its foreign parent.

Chapter V: Feasibility And Viability of Permanent Establishment: Is It Outdated?

The concept of permanent establishment is based on a requirement that an enterprise have a
sufficient presence through which it conducts business in the source country before it can
become subject to taxation by that country. The concept of permanent establishment
envisaged under model conventions can be reduced to requiring a fixed place of business, or
the ongoing conduction of business for a period of time within the foreign country, with few
exceptions.
26 4 Intl Tax L. Rep. 903.
27 S Khan, et.al., PE: For Better or Worse, available at,www.nishithdesai.com/ecotimes/archives/PE_for_best_or_worse-Oct12-2002 (visited on 3rd September, 2005).

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This traditional understanding of the concept was developed in the wake of World War II.This
understanding has come under serious challenges in the new era where internet reigns as a
quick and exhaustive medium of communication. The primary taxation problem that
transactions in cyber space pose relates to feasibility of physical presence test. Nether of the
model conventions nor any of the treaties give clear answer to the issue of whether a Web site
or computer server, through which e-commerce transactions are conducted between a nonresident vendor and contracting states customers, constitutes a permanent establishment
under a tax treaty.
According to the OECD commentary, an Internet web site does not in itself constitute a
permanent establishment. The OECD reasons that an Internet site is composed of software
and data, not tangible property, and therefore cannot be considered a place of business to
lead to inclusion as a permanent establishment. However, a server may rise to the level of a
permanent establishment because it is tangible property requiring a physical location, and its
location can be a fixed place of business, regardless of whether the server is owned or
leased by the business operating the server. The presence of business personnel at the location
of the server is not necessary to create a permanent establishment. If the server is not at the
disposal of the business, but rather is operated by a web provider, it should not constitute a
permanent establishment because the business has no control over the server and it is not a
place of business of the enterprise.28
On the issue of servers constituting permanent establishment, there exists a differing
argument advanced by U.S. Department of the Treasury. The Treasury does not believe
servers should be classified as permanent establishments for taxation purposes. The reason
advanced is that computer servers can easily be located anywhere in the world, and that its
users are indifferent to its location. Further, a server is often not significantly involved in the
creation of income so as to be considered in determining whether a U.S. trade or business
exists. The Treasury also feared that foreign persons would simply locate their servers
outside of the United States, since their location is unimportant from a business standpoint.29

28 M Perkins, OECD Revises Commentary On E-Business And Permanent Establishments, Vol.

12, Journal of International Taxation 50 (2001).
29 S K Duke, E-Commerce And The Taxation Doctrine Of Permanent Establishment In The United States
And China, Vol.14, Journal of Translational Law and Policy 275 (2005).

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OECD does not consider internet service providers (ISPs) to constitute permanent
establishments. Because ISPs are typically not authorized to contract on behalf of businesses
operating through their networks, they therefore constitute independent agents, which are
often demonstrated by ISPs hosting the web sites of multiple businesses.
German Pipeline Case in Perspective
The issue here was whether a pipeline, used for transporting liquid products, this being the
main business of the assessee, can constitute a PE for purposes of the tax treaty between the
Netherlands and Germany and for purposes of the net worth tax in Germany? 30
It was decided by the court that the pipeline was not only firmly connected, but was attached
to the ground in a particularly solid way so as to be included within the ambit of fixed. The
Court held that the pipeline was more than a temporary installation and that it was also meant
to serve the activities of the business. Also and importantly was held that personnel are not
necessary in all cases, especially when facilities work fully automatically, people need not
carry on business activities in the Permanent Establishment. It is sufficient that people
work with it.
This decision which laid down the principle that a Permanent Establishment can be
constituted by an automatic equipment even in the absence of employees to man such
equipment leads to the conclusion that telecommunication companies and internet service
providers which have hired cables or have their own servers in the foreign state without any
corresponding human intervention have a permanent establishment in such a state.31

30 ] Facts of the case were as follows- The assessee, Netherlands BV had a business of transporting oil and oil
products. It owned a pipeline system under the territory of the Netherlands and Germany, through which it used
to deliver its oil and oil products to customers. About 200 km. of one of the pipeline routes was situated in
Germany. These stations ran automatically no permanent staff was employed for their maintenance. After
1982, the pressure required for propelling the oil through this route was produced entirely by a pumping station
in the Netherlands, as a pumping station and a pipeline route in Germany were shut down and sold, in June
1982. A computer at the pumping station controlled the operation of the pipeline. All of the assessees technical
and administrative personnel were employed in the Netherlands. The assessee never had its own staff in
Germany: upkeep and repairs there were carried out by contract firms. The German tax authorities assessed the
Netherlands BV for net worth tax on the property in Germany, for the years beginning in 1986. The BV
challenged the assessment before the competent court on the grounds of a breach of law. The Tax Court decided
in favour of the tax authorities. The BV then appealed to the Federal Tax Court. The Federal Ministry of Finance
joined the proceedings, arguing that, not only the German part of the pipeline still in operation but also the
pumping station, which had been inactive since 1982, ought to be included in calculating the taxable base for net
worth tax. See, www.geocities.com/WallStreet/District/1137/pipeline.html, (visited on 4th September, 2005).

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Chapter VI: Conclusion

The concept of permanent establishment lies at the heart of any Double Taxation Avoidance
agreements. This concept provides a via-media through which states can tax non-residents for
the income derived from their states. Almost all the DTAAs define the concept in a similar
rather identical manner which makes the interpretations given to any of the provisions
relating to the concept relevant to all the countries having such agreements. If viewed in this
light the german pipeline case and the case of phillip morris mark the beginning of
emergence of a new concept along with the moves to accommodate challenges posed by
internet revolution which though exists within the broad paradigm of old concept yet marks a
break away from the traditional understanding of the same.

31 I Paul, Permanent Establishment in E-Commerce Scenario An Analysis In The Background of The IndoUS, Indo-UK and Indo-Mauritius Double Taxation Avoidance Agreements, Vol.116, Taxman 1 (2001), p.9; See
also, M.H. Lampe, Commentary on the Pipeline Decision, available
at,www.geocities.com/WallStreet/District/1137/ pipe.comm.html (visited on 4th September, 2005).

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Bibliography
Primary Sources
International Instruments/treaties

Indo-Mauritious Taxation Avoidance Agreement.

Indo-UK Taxation Avoidance Agreement.

Indo-US Double Taxation Avoidance Agreement.

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CBDT Circular No. 333, dated 2nd April, 1982.

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Advance Ruling Petition No.24 of 1996 [1999]104 Taxman 377.

CIT v. Vishakapatanam Port Trust [1983]144 ITR 146.

Dy. CIT v. Subsea Offshore Ltd. [1998] ITD 296.

Ministry of Finance (Tax Office) v. Philip Morris GmbH 4 Intl Tax L. Rep. 903.

S K Das v. Town Area Committee [1990]183 ITR 401.

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K Vogel, Double Tax Conventions: A Commentary on the OECD, UN and US Model

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K. Srinivasan, Guide to Double Taxation Avoidance Agreements (New Delhi: Vidhi

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S Iyengar, Law of Income Tax (New Delhi: Bharat Law House, 1996).

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A Gadi, et.al. Double Taxation and Permanent Establishment, Vol.43, Indian

Journal of International Law 729 (2003).

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Patel,

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Vol.108, Taxman 1 (2000).

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M.H.

Lampe,

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Pipeline

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at,

www.geocities.com/WallStreet/District/1137/ pipe.comm.html (visited on 4th September,

2005).

S Khan, et.al, PE: For Better or Worse, available at,www.nishithdesai.com/eco-

times/archives/PE_for_best_or_worse-Oct12-2002 (visited on 3rd September, 2005).

www.geocities.com/WallStreet/District/1137/pipeline.html, (visited on 4th September,

2005).

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