As per most of the Double Taxation Avoidance Agreements (hereinafter referred as ‘DTAA’) signed by India, the concept of the term ‘permanent establishment’ (hereinafter referred as ‘PE’) is recognized under Article 5 (1) to mean a fixed place of business through which the business of the enterprise is wholly or partly carried on. Further, as per such DTAAs, the income of a foreign enterprise generated in India can be taxed by the Indian government if the said foreign enterprise has a PE in India.
What constitutes a PE?
Article 5 (2) of most of the DTAAs entered by India provides an inclusive but not exhaustive list of what constitutes a PE. However, this concept needs to be understood in substance. As per the Andhra Pradesh High Court, a PE postulates the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country.
Mere existence of subsidiary in India:
Merely because a foreign company has a subsidiary in India, it is not a satisfactory proof to form a permanent establishment of the foreign parent company in India under the provisions of the DTAA. The operations of both the foreign company and its subsidiary should be scrutinized to ascertain whether there exists a permanent establishment of the foreign company in India. It needs to be evaluated whether the subsidiary is carrying on the business of the foreign parent company in India.
Further, the Supreme Court of India has recently laid down that in cases where the subsidiary is performing the support services which is consequently enabling the foreign parent company to render services to its client abroad, it is not a sufficient proof that a PE of the foreign company exists in India.
Also, if a foreign company has a subsidiary company in India, however, does not have any right to use the premises registered in the name of the subsidiary company and the income of the subsidiary company is also determined on its income calculated at arm’s length price, then subsidiary company cannot be said to have formed a permanent establishment of the foreign company in India. 
Residence of a Company:
The Finance Act, 2016, amended Section 6 of the Income Tax Act, 1961, to declare the two criteria to decide whether a company is resident in India. It says that a company shall be said to be resident in India in a previous year if it is an Indian company or if place of effective management (hereinafter referred to as ‘POEM’), in that year, is in India. The explanation to this section further reads that POEM means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.
It should be noted that the Ministry of Finance has emphasized that these guidelines were not intended to cover foreign companies or to tax their global income, merely on the ground of presence of Permanent Establishment or Business connection in India.
It should be noted that the formation of a permanent establishment of a foreign company through its subsidiary shall depend not only on its existence or even a defined set of parameters but on the commercial arrangement between the two entities as a whole. Further, it should be noted that the activities performed by the subsidiary are of vital importance. It needs to be evaluated whether the subsidiary company is carrying on activities which constitute core activities of the foreign parent company or is carrying on activities for its own business.
 Commissioner of Income-Tax vs. Visakhapatnam Port Trust, 1983 144 ITR 146 AP.
 DDIT vs. Daimler Chrysler AG, 2010-TII-99-ITAT-Mum-INTL.
 Asstt. Director of Income Tax-I, New Delhi vs. M/s E-Funds IT Solution Inc. [Civil Appeal No(s). 6082/2015],
Section 6 of the Income Tax Act, 1961