Direct Taxation

April 2025

Introduction

by Anjali Darak

Manager - Direct Tax

The article will provide foreign companies with a comprehensive guide to understanding and mitigating Permanent Establishment (PE) risks in India to avoid unintended tax liabilities. It will explore the concept of PE, common scenarios where foreign businesses could inadvertently trigger PE exposure, and practical steps to safeguard against such risks.

Coming to this month’s Taxation Times, here’s what we have:

An article on Understanding the New Tax Regime for Startups: Opportunities and Challenges.
Case Laws from various courts & jurisdictions.
Tax Compliance Calendar – April 2025;
Circulars & Notifications – March 2025;
Tax News from around the world

We hope that you find this month’s edition of the Taxation Times useful. In case you have any feedback or need us to include any information to make this issue more informative, please feel free to write to us at info@uja.in

Happy New Year!
Happy Reading!

Best Regards,
UJA Tax Team

PE Risk in India: How Foreign Companies Can Safeguard Against Unintended Tax Liabilities

Permanent Establishment (PE) is a critical concept in International Taxation, as it determines whether a foreign entity’s business activities in India trigger tax liabilities. Given the growing global business footprint and India’s complex tax landscape, foreign companies must remain vigilant to avoid unintended tax exposure. In this article, we explore how foreign companies can safeguard against PE risk in India and mitigate potential tax liabilities.

What is Permanent Establishment (PE)?

A Permanent Establishment (PE) refers to a fixed place of business or a dependent agent in India through which the business of a foreign enterprise is carried out. The presence of a PE in India can result in the foreign company becoming liable for Indian taxes on income derived from Indian sources.

Two main types of PE could expose a company to tax risk in India:

Fixed Place PE:
A physical location in India where business activities are conducted (e.g., an office, factory, or workshop).
Dependent Agent PE:
An agent or representative who has the authority to conclude contracts on behalf of the foreign enterprise, thereby creating a PE.

How Does PE Risk Arise in India?

Foreign companies can inadvertently create a PE in India in several ways:

Establishing a Fixed Place of Business:
If a foreign company operates an office, warehouse, or factory in India for more than a limited period (typically six months or more), it could create a fixed place PE. Even a “temporary” office could be deemed a PE depending on the nature of activities carried out.
Dependent Agent Activities:
If a foreign company’s agent in India habitually negotiates or concludes contracts on its behalf, it may create a PE. This could include situations where an agent is entrusted with significant powers that go beyond marketing or soliciting business.
Independent Agents and Risk:
An independent agent, by law, is not supposed to create a PE. However, if the agent is acting predominantly on behalf of the foreign company and enters into contracts for the company in India, it may still trigger PE risk.
Virtual Presence and Digital Economy:
With businesses increasingly operating online, even digital or virtual operations may create PE exposure. For example, a foreign company providing services in India via digital platforms may inadvertently create a PE, depending on the level of control, the nature of the digital activities, and the physical presence in India.

Steps for Foreign Companies to Safeguard Against PE Risk

Clear Documentation of Activities:
One of the first lines of defense against PE risk is maintaining thorough documentation of the foreign company’s activities in India. This includes contracts, project agreements, and records of business activities. Foreign companies should clearly define the scope of operations in India and ensure that their employees and agents do not exceed those boundaries.
Structuring Operations to Avoid PE:
Foreign companies should carefully structure their operations to avoid establishing a fixed place PE. This could mean:
Using short-term leases for offices or facilities.
Ensuring that business activities do not exceed the permissible duration of stay.
Ensuring that business activities are conducted through independent agents rather than dependent agents.
Independence of Agents:
Foreign companies must ensure that agents operating in India are truly independent. They should avoid giving agents authority to negotiate or conclude contracts on their behalf. The agent’s role should be limited to activities like marketing, and they should not be involved in making binding decisions or signing contracts for the foreign company.
Consulting Tax Treaties and DTAAs:
India has a network of Double Taxation Avoidance Agreements (DTAAs) with several countries. These treaties provide exemptions or relief from double taxation and can offer clearer definitions and exemptions for PE risk. Foreign companies should thoroughly analyze these agreements before structuring their business operations in India.
Regular Tax Reviews and Compliance:
To stay on top of changing tax regulations, foreign companies should periodically review their operations with Indian tax advisors. Keeping track of updates in Indian tax laws, especially as they pertain to the OECD’s Base Erosion and Profit Shifting (BEPS) guidelines, is essential for avoiding unintended tax liabilities.
Technology and E-commerce Considerations:
As more companies shift to digital models, foreign companies must assess whether their virtual operations and digital services create a PE risk in India. For example, foreign e-commerce companies or service providers may inadvertently create a PE by providing goods or services to Indian residents. Companies should carefully monitor where and how business activities are conducted online and ensure that any virtual presence is compliant with India’s tax laws.
Avoiding Fixed Place PE Through Outsourcing:
Foreign companies can mitigate PE risk by outsourcing activities like warehousing, distribution, or assembly to independent third parties in India. This ensures that the foreign company’s direct presence in India remains limited, reducing the likelihood of establishing a PE.
Use of Regional Headquarter (RHQ) or Liaison Offices:
Foreign companies can operate in India through liaison offices or regional headquarter (RHQ) structures, which do not constitute a PE as long as the activities remain strictly limited to promotion, market research, or coordination. However, these offices should not engage in profit-generating activities.

Case Study: Foreign Consulting Firm’s PE Risk in India

Consider a foreign consulting firm that sends employees to India for a short-term project, but those employees interact with clients, perform services, and supervise work in India. If this activity continues for a substantial period or involves establishing an office space in India, the consulting firm could inadvertently create a PE and be taxed on the income generated from these activities.

To avoid this risk, the consulting firm should ensure that its Indian operations are temporary, with no permanent office established, and its employees’ activities do not extend beyond advisory and non-transactional work.

Conclusion

PE risk in India is a complex issue that requires careful consideration and strategic planning for foreign companies. By understanding the nuances of PE definitions, closely monitoring their activities in India, and structuring their operations to avoid triggering tax liabilities, foreign businesses can safeguard themselves from unintended tax consequences. Proactive consultation with tax advisors, regular compliance checks, and alignment with India’s tax treaties will ensure that companies continue to operate smoothly without falling into PE risk traps.

Staying informed about Indian tax laws and seeking expert advice is essential for navigating this risk, particularly in light of the evolving digital economy and cross-border business activities.

Case Laws

DATE: March 11, 2025

[2025] 172 taxmann.com 368 (Delhi) HIGH COURT OF DELHI Vodafone Mobile Services Ltd. v. Deputy Commissioner of Income-tax

Section 37(1) and Section 36(1)(iii) of the Income-tax Act, 1961

Fact I :

The assessee company was engaged in providing telecommunication services. The assessee entered into a lease agreement with owners of various office spaces to set up cell site towers. As per the assessee, it was obliged to restore the site to its original condition at the expiry of the lease period. The assessee had capitalized certain sums on account of the asset reconstruction cost (ARC) obligation, which represented the estimated cost likely to be incurred at the network sites and office premises in order to restore them to their original condition at the end of the lease period. The assessee had claimed depreciation in this respect.
The Assessing Officer disallowed the said provision holding that it was not in the nature of an ascertained liability.
The Tribunal took the view that depreciation could have been claimed only if a cost had in fact been incurred. It upheld the order of the Assessing Officer.

Held I:

Business expenditure – Allowability of (ARC Cost) – Assessment year 2009-10 – Whether usage of expression “laid out” and “expended” in Section 37(1) are indicative of that section not being confined to immediate expenditure but also factoring for situations where an amount may be set apart for a determined or specified objective – Held, yes – Assessee-company, engaged in providing telecommunication services, entered into lease agreement with owners of various office spaces for setting up of cell site tower – As it was obliged to restore site to its original condition at expiry of lease period, it had capitalized certain sums on account of asset reconstruction cost (ARC) obligation which represented estimated cost likely to be incurred at network sites and office premises in order to restore them to their original condition and claimed deduction for same under section 37(1) – Assessing Officer disallowed said provision holding that it was not in nature of an ascertained liability – Whether obligation to repair and restore formed core of contractual obligation which stood placed upon assessee and assessee was, therefore, entitled to provision for such an expense provided it was considered probable and could be quantified on basis of a reasonable estimation – Held, yes – Whether phrase “if any damage is caused” in lease agreement did not transform ARC obligation into a contingent liability as obligation to restore leased premises was a present obligation arising from a past event (lease agreement), making it probable and measurable under AS-29 – Held, yes – Whether since AS-29 allows provisions if a liability is probable and can be reliably estimated, provisioning for ARC qualified prescriptions of AS 29 and assessee was, thus, justified in accounting for same – Held, yes [Paras 8, 22, 31, 32,33, 34 to 40]

In Favour of: The Assessee

Fact II:

The assessee company was engaged in providing telecommunication services. It had claimed a deduction on interest paid on capital borrowed for the installation of new cell site towers.
The Assessing Officer found that the above was in addition to fixed assets disclosed to be INR 12828 million as an item distinct from CWIP which was shown separately. He held that since CWIP would not qualify the requirement of “extension of existing business”, as that phrase existed in the proviso to section 36(1)(iii) at the relevant time, the interest was liable to be disallowed.
The Tribunal held that the investment in CWIP was made out of interest free funds available with the assessee itself and thus not entirely on the basis of capital borrowed to make such an investment. It upheld the order of the Assessing Officer.

Held II:

Interest on borrowed capital (Illustrations) – Assessment year 2009-10 – Assessee-company engaged in providing telecommunication services, had claimed deduction of interest paid in respect of capital borrowed for installation of new cell site towers – Assessing Officer disallowed same on ground that capital work-in-progress (CWIP) would not qualify as an ‘extension of existing business’ as stood in proviso to section 36(1)(iii) at relevant time –Tribunal upheld order passed by Assessing Officer but noted that material as existing was insufficient to enable it to render a conclusive finding on this score and Tribunal ultimately held that in order to ascertain true character of “common pool of funds” and extent to which secured loans formed part thereof, matter would be liable to be remitted for consideration of Assessing Officer – Whether since identifiable line between borrowed capital and utilisation of interest free funds which were available in hands of assessee became blurred, and since cell sites could have either been works in progress or completely constructed, matter be remanded to Assessing Officer and scope of remand would necessarily entail Assessing Officer not only examining aspects pertaining to a common pool of funds but also whether cell sites had been actually brought into use – Held, yes [Paras 16 70, 76, and 79]
In Favour of: Matter remanded

[2025] 172 taxmann.com 142 (Mumbai - Trib.) IN THE ITAT MUMBAI BENCH 'F' Shah Rukh Khan v. Deputy Commissioner of Income-tax

Reference: Section 147 of the Income-tax Act, 1961

Income escaping assessment – General (Validity of proceedings) – The assessment year 2012-13 – Whether where reassessment proceedings were initiated four years after the end of relevant assessment year on re-appraisal of facts already available on record, said proceedings were not in conformity with provisions of section 147 – Held, yes – Whether where there was not even a mention of any new or tangible material which formed the basis to believe that income chargeable to tax had escaped assessment during year under consideration, impugned reassessment proceedings were bad in law – Held, yes [Paras 15 and 16]

Facts:

The assessee filed its original return of income on 29-9-2012 declaring a total income of Rs. 83.42 crores. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) and section 142(1) along with a questionnaire were issued and served on the assessee.
The Assessing Officer, vide order dated 16-3-2015 passed under section 143(3), assessed the total income of the assessee at Rs. 84.18 crores, after making certain additions/disallowances. Subsequently, after the expiry of 4 years from the end of the relevant assessment year, notice under section 148 was issued on 31-3-2019. It was alleged that Red Chillies Entertainment Pvt. Lid. (RECPL) (wherein the assessee was a Director and hold 50% shares) had paid artiste remuneration to the assessee of Rs. 10 Cr. for the film Raone which was routed through Winford Production Ltd.(WPL) (United Kingdom-based Line producer). RECPL paid Rs. 10 crore to WPL after deducting TDS of Rs. 1 crore which ultimately paid Rs. 7.60 Crore to the assessee after deducting FEU (UK Tax deduction) of Rs. 1.40 Crore. The assessee offered this amount as income earned in the UK and paid additional tax in the UK of Rs. 2,70,17,977. This was evident that such an arrangement of payment has caused revenue loss to the government of India.
In response to the aforesaid notice, the assessee filed his return of income on 29-4-2019. The Assessing Officer, vide order dated 30-12-2019 passed under section 143(3) read with section 147, assessed the total income of the assessee at Rs. 84.18 crores, after completely denying the claim made under section 90.
On appeal, the Commissioner (Appeals) dismissed the ground so raised by the assessee.

Held:

In the present case, the return of income filed by the assessee was selected for scrutiny and assessment was concluded vide order passed under section 143(3). However, after the expiry of 4 years from the end of the relevant assessment year, notice under section 148 was issued to the assessee. While initiating the reassessment proceedings, the Assessing Officer recorded reasons for reopening the assessment. [Para 9]
As per the assessee, in the aforesaid reasons recorded by the Assessing Officer there is no allegation of any failure on the part of the assessee to disclose truly and fully all material facts, which is a paramount condition for invoking reassessment proceedings under section 147, after expiry of 4 years from the end of the relevant assessment year, in case where an assessment under section 143(3) has been made. [Para 10]
At this stage, it is relevant to analyse the provisions of the proviso to section 147, as it stood during the year under consideration. [Para 11]
Thus, as per the proviso to section 147, in a case where the assessment was completed under section 143(3), reassessment under section 147 can be done after the expiry of 4 years from the end of the relevant assessment year, only if income has escaped assessment (i) due to failure on the part of the assessee to make a return under section 139 or in response to the notice issued under section 142(1) or section 148; or (ii) due to failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. In the present case, from the facts, it is evident that the assessment was completed in the case of the assessee under section 143(3). Further, notice under section 148 was issued on 31-3-2019 i.e. beyond a period of 4 years from the end of the relevant assessment year i.e. 2012-13. Therefore, it needs to be examined whether the conditions prescribed in the proviso to section 147 are satisfied in the present case. There is no dispute that a return of income was filed by the assessee under section 139(1). Further, from the perusal of the reasons recorded for reopening the assessment, as noted above, it is found that there is not even an allegation by the Assessing Officer that income chargeable to tax has escaped assessment due to failure on the part of the assessee to disclose fully and truly all material facts. [Para 12]
From the perusal of the order disposing of the assessee’s objections against the reopening of the assessment, it is found that it was for the first time there was any whisper of the allegation that there was a gross failure on the part of the assessee to disclose all the material facts fully and truly. Therefore, it is ostensible that the reasons recorded while initiating the reassessment proceedings were completely silent as regards the allegation that income chargeable to tax has escaped assessment due to failure on the part of the assessee to disclose fully and truly all material facts and vide order disposing of the assessee’s objections, the Assessing Officer tried to improve upon the reasons by making the allegation, which is completely impermissible. [Para 13]
From the perusal of the reasons recorded while initiating the reassessment proceedings, as noted in the foregoing paragraph, it is further found that there is not even a mention of any new or tangible material that formed the basis to believe that income chargeable to tax has escaped assessment during the year under consideration. It is found that the entire edifice of the impugned reassessment proceedings is based on the perusal of case records which were already considered during the scrutiny assessment proceedings concluded under section 143(3). This aspect is further evident from the order passed under section 143(3) read with section 147, wherein the Assessing Officer completely denied the claim made under section 90, after noting that partial relief was granted to the assessee vide order dated 16-3-2015 passed under section 143(3). In the present case, there were neither any fresh facts nor some information regarding the facts previously disclosed, which came to the possession of the Assessing Officer after the conclusion of the scrutiny assessment proceedings, and the entire reassessment proceedings were initiated on a reappraisal of facts already available on record. [Para 15]
Therefore, in view of the facts and circumstances of the present case, legal position, and judicial pronouncement as noted above, the reassessment proceedings initiated by the Assessing Officer, in the present case, are bad in law on more than one count and are not in conformity with the provisions of section 147. Therefore, the same is quashed. Consequently, the assessment order passed under section 143(3) read with section 147 is also quashed. [Para 16]
In Favour of: The Assessee

Circulars and Notifications March 2025

Circulars / Orders

SECTION 192 OF THE INCOME-TAX ACT, 1961 - DEDUCTION AT SOURCE - SALARY - CLARIFICATION ON INCOME-TAX DEDUCTION FROM SALARIES DURING FINANCIAL YEAR 2024-25 UNDER SECTION 192

Reference is invited to Circular No. 24/2022, dated 7-12-2022, whereby the rates of deduction of income tax from the payment of income under the head “Salaries” under section 192 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), during the financial year 2022-23, were intimated. The said Circular also explained certain related provisions of the Act and Income-tax Rules, 1962 (hereinafter referred to as ‘the Rules’).

The present Circular contains the amendments made vide the Finance (No. 2) Act of 2024, finance (No. 1) Act of 2024, and Finance Act of 2023 in respect of rates of deduction of income tax from the payment of income under the head “Salaries” under section 192 of the Act. Where no amendments have been made by the above-referred Acts, in such cases, the above-mentioned Circular No. 24 of 2022 shall continue to be applicable for F.Y. 2024-25. The relevant Acts, Rules, Forms, and Notifications are available at the website of the Income Tax Department- www.incometaxindia.gov.in.

Amendments made vide the Finance (No. 2) Act of 2024, Finance (No. 1) Act of 2024, and Finance Act of 2023 in respect of rates of deduction of income-tax from the payment of income under the head “Salaries” under section 102 of the Income-tax Act, 1961, during the financial year 2024-25

CIRCULAR NO. 3/2025 [F. NO. 275/107/2024-IT(B)], DATED 20-2-2025

Press Release

CBDT issues clarification on Circular 01/2025

Circular No. 01/2025 dated 21.01.2025 was issued in the form of guidance to provide clarity and certainty on the application of the Principal Purpose Test (PPT) provision under India’s Double Taxation Avoidance Agreements (DTAAs). In respect of this Circular, it is clarified that: 1. The Circular seeks to provide guidance on the application of the PPT provision under India’s DTAAs, wherein such a provision exists. Therefore, this Circular shall apply to the PPT provision in only those Indian DTAAs wherein such a provision exists. 2. The Circular is not intended to interfere or interact with any other provision of the Indian DTAAs, including such provisions that may be invoked for examination of treaty entitlement or denial of treaty benefits, other than the PPT. 3. The Circular is not intended to interfere or interact with anti-abuse rules under the domestic law, such as General Anti-Abuse Rule (GAAR) and Specific Anti-Abuse Rules (SAAR), and Judicial Anti-Abuse Rules (JAAR) reflected in or resulting from judicial interpretations. Such rules shall continue to operate independently. 4. This clarification does not introduce any new legal interpretation but reaffirms that the Circular applies only to the PPT without affecting other provisions of the Income-tax Act. The Government remains committed to ensuring consistency in tax law interpretation while upholding the existing legal framework.

PRESS RELEASE, DATED 15th March, 2025

Notifications

SECTION 10(46) OF THE INCOME-TAX ACT, 1961 – EXEMPTIONS – STATUTORY BODY/AUTHORITY/BOARD/COMMISSION – NOTIFIED BODY OR AUTHORITY

In exercise of the powers conferred by clause (46) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies for the purposes of the said clause, ‘The Delhi Building and Other Construction Workers Welfare Board’ (PAN: AAAJT1846R), a Board established by Government of National Capital Territory of Delhi, in respect of the following specified income arising to that Board, namely:—

(a)	Cess received;
(b)	Registration & Renewal fee received/collected from the Building and other Construction Workers; and
(c)	Interest on bank deposits.

 This notification shall be effective subject to the conditions that The Delhi Building and Other Contraction Workers Welfare Board—

(a)	shall not engage in any commercial activity;
(b)	activities and the nature of the specified income shall remain unchanged throughout the financial years; and
(c)	shall file a return of income in accordance with the provision of clause (g) of sub-section (4C) of section 139 of the Income-tax Act, 1961.

3. This notification shall be deemed to have been applied for the assessment years 2012-13, 2013-14, and 2014- 15 relevant to the financial years 2011-12, 2012-13 and 2013-14.

NOTIFICATION S.O. 1099(E) [NO. 18 /2025 F. NO. 196/46/2012-ITA-I], DATED 6-3-2025

Tax Calender: April 2025

10th April 2025

For F.Y. 2024-25 (A.Y. 2025-26) Income Tax return e-Filing Start Date.

30th April 2025

Due date for deposit of Tax deducted/collected for the month of March, However, all sum deducted/collected by an office of the government shall be paid to the credit of the Central Government on the same day where tax is paid without production of an Income-tax Challan
Due date for furnishing of challan-cum-statement in respect of tax deducted under section 194-IA/ 194-IB/ 194M/ 194S in the month of March, 2025

Tax News from Around the World

High-Profile Tax Evasion Case in the U.S. Defense Sector:
Douglas Edelman, a prominent defense contractor, was apprehended in Spain for allegedly evading taxes on $350 million of income. After making billions from U.S. military contracts post-9/11, Edelman failed to file U.S. tax returns and attempted to conceal assets through his French wife. This case underscores the complexities and legal risks associated with international tax evasion.

Global Minimum Tax Rate Implementation Updates:

Switzerland has approved a constitutional amendment to implement the OECD’s global minimum tax rate, with the Federal Council authorized to enforce it through ordinances starting January 1, 2024. This reform aims to align Switzerland with international tax standards and address concerns about tax competition

UK’s Position Amidst Global Trade Tariff Disputes:
The UK has largely remained passive in recent global trade tariff disputes, choosing not to impose retaliatory tariffs even as the EU and U.S. clash over steel tariffs. This strategic restraint considers the potential harm to domestic consumers and the UK’s limited influence on the U.S. market. However, neutrality may become challenging if the U.S. imposes reciprocal tariffs affecting various UK sectors.