Fixed place permanent establishment can arise from demarcated warehouse space, with profits computed on a separate enterprise basis.

A demarcated space in a customs bonded warehouse can constitute a fixed place permanent establishment when it has a distinct situs, sufficient permanence, and is operationally integrated with the non-resident enterprise's sales activities in India. Ownership and day-to-day operation by an independent service provider do not, by themselves, negate permanent establishment status where the space is allocated for the enterprise's goods, inventory control, security, and inspection rights. Once a permanent establishment exists, profits attributable to it must be computed on a separate and distinct enterprise basis under the treaty, with deductions allowed for payments to the warehouse or logistics provider and other relevant business expenses.

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Issues: (i) Whether the demarcated space in the customs bonded warehouse operated by an independent service provider constituted a permanent establishment of the non-resident enterprise in India under Article 5(1) of the treaty. (ii) Whether, once such permanent establishment existed, any further income was attributable to it and how the profits were to be computed under Article 7 of the treaty.

Issue (i): Whether the demarcated space in the customs bonded warehouse operated by an independent service provider constituted a permanent establishment of the non-resident enterprise in India under Article 5(1) of the treaty.

Analysis: A fixed place of business requires a distinct and identifiable situs with a degree of permanence through which business is carried on. The fact that the warehouse was owned and operated by the service provider did not prevent the space earmarked for the enterprise's goods and operations from being treated as the enterprise's own fixed place of business. The agreement showed allocated storage space, racks, inventory control, electronic data exchange, security requirements, and a limited right of entry for inspection and related activities, all of which established that the warehouse functioned as the focal point of the enterprise's sales operations in India. Outsourcing the operational work to the service provider did not negate the existence of a fixed place PE.

Conclusion: Yes. The enterprise had a permanent establishment in India under Article 5(1) of the treaty.

Issue (ii): Whether, once such permanent establishment existed, any further income was attributable to it and how the profits were to be computed under Article 7 of the treaty.

Analysis: Under Article 7, profits attributable to a permanent establishment must be computed on the basis that the permanent establishment is a separate and distinct enterprise dealing wholly independently with the head office. In making that computation, expenses incurred for the business of the permanent establishment, including amounts paid to the warehouse or logistics service provider and other related expenses, are deductible in accordance with the treaty framework.

Conclusion: The profits attributable to the permanent establishment are to be computed on a separate enterprise basis after deducting the amounts paid to the service provider and other relevant expenses.

Final Conclusion: The non-resident enterprise was held to have a fixed place permanent establishment in India through the demarcated warehouse space, and the income attributable to that permanent establishment was required to be computed under the treaty's attribution rules after allowing appropriate deductions.

Ratio Decidendi: A demarcated and operationally integrated warehouse space used as the focal point of business activities can constitute a fixed place permanent establishment even when owned and operated by an independent service provider, and profits attributable to that permanent establishment must be computed as those of a separate and independent enterprise.

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