When a foreign company establishes a permanent establishment (PE) in India, the question is whether the company will be liable to be taxed in India, besides its PE.

In this matter, some confusion has been created by a recent judgment of the Bombay Tribunal in the case of Set Satellite (106 ITD 175). The tribunal held that the foreign company and its PE are two distinct taxable units.

The former is a hypothetical establishment, the taxability of which is on the basis of the revenues of the activities of the foreign company attributable to the PE. The second taxable unit is the PE itself, but taxability is only in respect of the income of the PE.

However, in a recent case of Hyundai Heavy Industries Co Ltd (291 ITR 482), the Supreme Court has clarified that “under the Act, the taxable unit is a foreign company and not its branch or PE in India. A non-resident assessee may have several incomes accruing or arising to it in India or outside India but so far as taxability under Section 5(2) is concerned, it is restricted to incomes which accrue or arise or are deemed to accrue or arise in India. The scope of this deeming fiction is mentioned in Section 9 of the Act.

Therefore, as far as the income accruing or arising in India, income which accrues or arises to a foreign enterprise in India can be only such portion of income accruing or arising to such foreign enterprise as is attributable to its business carried out in India.”

It is, therefore, important to know that under the Act, while the taxable subject is the foreign enterprise, it is taxable only in respect of the income including business profits, which accrues or arises to that foreign enterprise in India.

In the case of Hyundai (supra), the issue for consideration was that in a turnkey project, when the foreign company had supplied the equipment from abroad, but had also installed and commissioned the same in India through its PE, whether foreign company’s income from off-shore supplies will also be taxed in India in addition to the income of the PE in India. In other words, whether foreign company and PE would be taxed as two separate and distinct taxable entities or not.

The Supreme Court held that the foreign company and its PE cannot be taxed as two separate entities. Further, “in terms of paragraph 1 of article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the PE would have earned if it was a wholly independent enterprise.

Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the PE in India) and even if we assume that the supplies were an integral part, still no part of profits on such supplies can be attributed to the independent PE unless it is established by the department that the supplies were not at arm’s length price.”

In view of the above, it is now absolutely clear and certain that even in turnkey projects, offshore supplies will remain outside the tax net in India unless the foreign supplier has a PE in India and offshore supplies are attributed to that PE.

Below is all the information for you to easily calculate Income tax slab for financial year 2007-2008 assessment year 2008-2009 as per the Indian Income Tax Department publications.

Taxable income slab (Rs.) Rate (%)
1,10,000 (individuals other than women/senior citizens) NIL
1,45,000 (for women) NIL
1,85,000 (for senior citizens) NIL
1,10,001 - 1,50,000 10%
1,50,001 - 2,50,000 20%
2,50,001 upwards 30%
10,00,000 upwards 30%*

* A surcharge of 10% on income tax is levied where taxable income exceeds Rs. 1 million which makes it effective 33% including surcharge

For individuals resident woman {not being a senior citizen (who is of 65 years or more at anytime during the previous year)}
Net income range income tax rate

Upto 145000 nil
145000 to 150000 10% of (TI-145000) + 3% education cess
150000 to 250000 500+20% of (TI-150000) +3% education cess
250000 to 1000000 20500+30% of (TI- 250000) +3% education cess
above 1000000 245500+30%of (TI-1000000) +10% of income tax Surcharge + 3% of
income tax and surcharge

For resident senior citizen (who is of 65 years or more at anytime during the previous year)

upto 195000 nil
195001 to 250000 20% of (TI-195000)+3% edu cess
250001 to 1000000 11000+30% of (TI- 250000)+3% edu cess
above 1000000 236000+30% of (TI- 1000000)+10% sc +3% edu cess

For any other individual, every HUF/AOP/BOI/Artificial juridical person

upto 110000 nil
110000 to 150000 10%of (TI - 110000)+3% ec
150001 to 250000 4000+20% of (TI-150000)+3% ec
250001 to 1000000 24000+30% of(TI- 250000)+3%ec
above 1000000 249000+30% of (TI-1000000)+10% sc+3%ec

* ec Education Cess
* sc Surcharge
* TI Toal Income

Individuals-other than senior citizens and ladies

Up to 110000- No Tax
110001 to 150000-10%
150001to250000-20%
250001and above-30%
Ladies other than Senior Citizens
Up to 145000-No Tax
145001 to 150000-10%
150001to250000-20%
250001and above-30%
Senior Citizens
Up to 195000-No tax
195001to250000-20%
250001and above-30%
Investment u/s 80C eligible for deduction from income-Rs.100000