Entire law on what constitutes a “Permanent Establishment” and “Business Connection” explained

As regards a “permanent establishment”, various factors have to be taken into account to decide a Fixed place PE which inter alia includes a right of disposal over the premises. No strait jacket formula applicable to all cases can be laid down. Generally the establishment must belong to the Employer and involve an element of ownership, management and authority over the establishment. In other words the taxpayer must have the element of ownership, management and authority over the establishment. As regards a “business connection”, the essential features may be summed up as follows: (a) a real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities within India; (b) such relation shall contribute, directly or indirectly, to the earning of income by the non-resident in his business; (c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of ‘business connection’ in India. Apart from the fact that requirements of Expln. 2, referred to above, are satisfied, the facts of the instant case would also fulfill the aforementioned essential features of business connection

The theory of precedents does not have strict application to the AAR. It is bound only by the decisions of the Supreme Court. The decisions of High Courts have only persuasive value. The AAR is not subordinate to any High Court for even Article 227 of the Constitution to apply and there are grave doubts whether the jurisdiction under Article 226 will be attracted to the AAR. While the AAR should be slow in disagreeing with propositions of law laid down in earlier rulings, it should not be deterred from taking a contrary view if it is convinced that the earlier view is not correct

U/s 82 of the Companies Act, shares in a company is moveable property transferable in the manner provided by its Articles of Association. The applicant has not shown the gift was authorized by its Articles. It is difficult to imagine the Articles of Association of a company providing for gifting away of the assets in the form of shares in another company by what is attempted to be described as oral gift. A “gift” by one company to another company of shares in a public company appears to be strange, unless it be one which has been set up for some purpose. The revenue’s contention that the purpose of the gift is to avoid tax and s. 56(2)(viia) is not far-fetched. Also, s. 47(i) & (iii) appear to apply to gifts by individuals and HUFs and not by companies. The Authority has the right & the duty to consider the reality of the transaction and genuineness of the transaction, in addition to its validity. When such transactions are entered into involving substantial assets the applicant has to prove to the hilt the factum, genuineness and validity of the transaction, the right to enter into the transaction and the bona fides of the transaction. To postulate that a corporation can give away its assets free to another even orally can only be aiding dubious attempts at avoidance of tax payable under the Act. The AO is in a batter position to make a proper enquiry into the question of the genuineness and validity of the transaction. Hence, a ruling is declined

A “permanent establishment” is something which enables a non-resident to carry on a part of its whole business in a particular country. The Aramex group could not have done business in India without a presence in India. This presence in India can be achieved through an independent entity or through a subsidiary. If the entity is an independent & uncontrolled entity, then there is no PE if the requirements in Article 5(2) of the DTAC are not satisfied. However, if a 100% subsidiary is created for the purpose of attending to the business of the group, the subsidiary must be taken to be a PE of the group in India applying common sense

Though in Ishikawajima–Harima 288 ITR 408 (SC), Hyundai Heavy Industries 291 ITR 482 (SC) & Hyosung Corp 341 ITR 18 (AAR), it was held that that a composite contract was capable of being dissected and it was open to the assessee to raise the contention that parts of the contract should be treated separately for the purpose of deciding whether income from the performance of that part of the contract arose onshore or offshore and that part of the income attributable to offshore transaction cannot be taxed in India, this is no longer good law in view of the larger bench decision in Vodafone International Holdings where it was held that the transaction has to be looked at as a whole and not by adopting a dissecting approach. The basic principle in interpretation of a contract is to read it as a whole and to construe all its terms in the context of the object sought to be achieved. Reading parts of the contract as imposing distinct obligations is not the proper way to understand a composite contract