TaxTMI 
TaxTMI 
TaxTMI 
From POEM to PE: Understanding the Nexus of Business Connection, Dependent Agents, and MLI Challenges in Cross-Border Taxation
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....rom POEM to PE: Understanding the Nexus of Business Connection, Dependent Agents, and MLI Challenges in Cross-Border Taxation<br>By: - Shivam Agrawal<br>Income Tax<br>Dated:- 6-8-2025<br>Introduction In Indian taxation, establishing a nexus-the link between the taxpayer (assessee) and the source of income-is fundamental. India's Income-tax Act, 1961, applies its reach whenever either the residential status of the assessee or the source of income connects to India. On one axis sits POEM (Place of Effective Management), determining corporate residency; on the other sits PE (Permanent Establishment) and Business Connection, determining source-based taxation. Recent multilateral reforms under t....
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....he MLI have tightened agency-based PE rules. Meanwhile, Significant Economic Presence (SEP), hardware CapEx/OpEx, and the characterisation of software payments (royalty vs. FTS) create further layers. This article unpacks: * Nexus: Connecting factors-residence & source. * Residential Status & POEM. * Section 9 & Business Connection (dependent vs. independent agents). * SEP thresholds & CapEx/OpEx supply. * PE post-MLI & example of foreign company with both agent types. * Overseas Branch of Indian Company: residency, PE in host state, cross-border service billing. * Royalty vs. FTS: "make available" clause, SC ruling, UN vs. OECD models, India-US DTAA nuances. * Action Points for c....
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....ompliance and risk management. 1. Nexus: Connecting Factors & Pillars of Taxation Under Section 5, a person's total income includes amounts that are "received or deemed to be received in India," or that "accrue or arise or are deemed to accrue or arise in India". Section 6 classifies a person as resident, resident but not ordinarily resident, or non-resident, based on physical presence and other criteria. * Resident: Taxed on global income. * Non-resident: Taxed only on India-sourced or deemed income. Both the assessee (residential status) and the income (source) must connect to India to levy tax. 2. Residential Status & Place of Effective Management (POEM) A foreign comp....
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....any becomes an Indian tax resident if its POEM is in India-i.e., where key management and commercial decisions are made. * CBDT Circular 6/2017: For companies with turnover = 50 crore and active business abroad, majority board meetings held outside India presume POEM overseas. * Once resident, a company's global profits are taxable in India, making business connection tests moot. 3. Section 9 & Business Connection Section 9(1)(i) deems income taxable if "accruing or arising, whether directly or indirectly, through or from any business connection in India." * Explanation 1 defines business connection to include: * Operations in India generating income. * Dependent....
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.... agents habitually concluding or playing a principal role in contracts, maintaining stock, or securing orders in India. * Explanation 1(b) excludes activities limited to purchasing goods in India for export. A business connection requires a real, intimate link between foreign operations and Indian activities that contribute to income. 4. Significant Economic Presence (SEP) & Hardware Supply Explanation 2A deems SEP to create a business connection if a non-resident: * Transacts in goods, services, or property with any person in India. * Systematically solicits or engages Indian users digitally. SEP Thresholds: * 2 crore of India-related receipts. * 3 lakh Indian users per year....
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..... 4.1 CapEx vs. OpEx Hardware Supply Aspect CapEx Supply OpEx Supply Nature One-time purchase of capital goods (e.g., servers) Recurring lease/service fees (managed services) SEP Trigger Sale value > 2 crore triggers SEP Cumulative payments > 2 crore trigger SEP Export Proc. Excluded if solely procurement for export Excluded if limited to export procurement Example: A U.S. vendor sells 3 crore of servers to an Indian datacentre SEP arises; profits on that sale are deemed taxable in India. Procurement solely for export (parts for overseas assembly) remains exempt. 5. Permanent Establishment, Agents & MLI Dependent Agent PE under treaties arises when an agent in India "habitually concludes contracts" or "plays a pri....
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....ncipal role" leading to contracts for the enterprise. Independent agents, acting in their own business, do not create PE. The MLI (BEPS Action 7) broadens dependent-agent PE and adds anti-fragmentation rules to curb splitting activities solely to avoid PE. Example: A German software firm uses: * An independent distributor for marketing (no PE), and * A dependent sales rep who negotiates and signs client contracts in India. * Only revenues from deals closed by the dependent rep form a PE, taxable in India; other sales remain offshore. 6. Overseas Branch of an Indian Company 6.1 Residential Status An overseas branch is not a separate legal resident; the Indian parent rema....
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....ins a resident regardless of branch location. 6.2 PE & Taxation Overseas The branch, as a fixed place of business, constitutes a PE in the host country under Article 5(1) of most DTAAs; its profits are taxable there. 6.3 Vendor Services to Overseas Branch A foreign vendor supplying services to the branch has: * Business connection/PE only in the branch's host country. * No PE/business connection in India if services are rendered and utilised overseas. 6.4 Onsite Project Facilitation * The overseas branch's facilitation services for Indian-headquartered clients are: * Taxable in the host country via PE. * The Indian parent, as a resident, is taxed on global inc....
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....ome; it can claim foreign tax credit under the DTAA or unilateral relief to avoid double taxation. 7. Royalty vs. Fees for Technical Services (FTS) & Software Taxability 7.1 Definitions (Section 9) * Royalty (Section 9(1)(vi)): Consideration for * Transfer/use of rights in copyright, patent, trademark, design, know-how, or similar property. * Use or right to use industrial, commercial, or scientific equipment. * FTS (Section 9(1)(vii)): Consideration for managerial, technical, or consultancy services, including provision of technical personnel. 7.2 Meaning of "Make Available" Under the OECD Model and India-US DTAA, FTS is taxable only if the service provider "makes available" techn....
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....ical knowledge or know-how that enables the recipient to operate independently. * Established Law: * BOC Sri & EAC rulings emphasize that mere use of software or equipment without transferring substantive know-how does not satisfy "make available." * The service must impart intellectual property, methods, or processes. 7.3 India-US DTAA Nuances * Royalty & FTS: Taxable at 15% in India. * "Make available" applies strictly to FTS-services must convey technical ability or design to the recipient. 7.4 Hardware OpEx: Royalty or Not? * Domestic Law: Equipment lease can qualify as royalty (use of scientific equipment). * DTAA Position: Most treaties, including India-US, do not treat hardware lea....
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....sing as royalty unless bundled with technology transfer (i.e., "make available" is met). * Conclusion: Standalone hardware OpEx (leasing servers) without technology transfer is not royalty and is taxed as business profits via PE if one exists. 7.5 Supreme Court Ruling: ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED Versus THE COMMISSIONER OF INCOME TAX & ANR. - 2021 (3) TMI 138 - Supreme Court Payments for off-the-shelf software imports do not transfer copyright and thus are not royalty under Section 9(1)(vi) or DTAA; no TDS obligation arises. 8. Action Points for Cross-Border Transactions * Determine Residency & POEM * Document key management decisions and board minutes. ....
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....* For foreign companies, ensure turnover and board-meeting thresholds are met to avoid unintended POEM in India. * Assess SEP & Business Connection * Track India-related receipts and user interactions against 2 cr/3 lakh thresholds. * Obtain a No-SEP declaration from the vendor when only export procurement or marginal digital activity is involved. * Map Agent Roles * Maintain functional analyses of all agents. * Secure No-PE declarations for independent agents; confirm absence of contract-concluding powers for overseas branches or subsidiaries. * Document Software & Hardware Arrangements * For software imports, archive End-User License Agreements to show absence of copyright transfer.....
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.... * For hardware OpEx, separate service vs. equipment lease components; confirm no "make-available" technology transfer. * Secure Tax Residency Certificates & Forms * Collect TRC + Form 10F from foreign entities to claim DTAA benefits. * Maintain copies of relevant DTAA articles and CBDT notifications. * Review MLI & Treaty Updates * Monitor MLI implementation in bilateral treaties. * Adjust dependent-agent and fragmentation analyses accordingly. * PE Risk Mitigation * Use Section 195(2) advance rulings to clarify TDS obligations. * Apply DTAA profit-attribution principles if PE exists; claim foreign tax credit in India. Conclusion India's tax framework interlinks residency ....
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....(POEM) and source (Business Connection/SEP/PE) under the umbrella of nexus. The MLI has tightened agency-based PE tests, while overseas branch structures, hardware CapEx/OpEx, and software licensing demand careful mapping to Indian and host-state rules. By following the action points above-comprehensive documentation, robust functional analysis, and strategic DTAA utilization-businesses can navigate these complexities and mitigate the risk of unintended taxation.<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....