India Proposes to Transform PE and Profit Attribution Rules

After decades of litigation-driven uncertainty, India has finally proposed a clear, statute-based framework that offers a methodology for attributing profits to the operations conducted by the foreign companies in India. National Institution for Transforming India Aayog, Tax Policy Working Paper Series-I, Enhancing Certainty, Transparency, and Uniformity in Permanent Establishment and Profit Attribution for Foreign Investors in India (Oct. 2025). Over the years, India’s broadening PE definitions and jurisprudence have moved beyond physical presence to include virtual and service presence. Inconsistent approaches to PE rules and profit attribution have resulted in prolonged disputes, often lasting six to 12-plus years, causing significant compliance costs and tax risks for multinational enterprises.

Such legal uncertainty has imposed real economic costs with the resulting contingent tax exposure often influencing board decisions and affecting investment flow. The proposed reform aims to address these challenges by moving the focus from judicial interpretation to a structured legislative and policy framework. The proposal’s core message emphasizes predictability: Taxation rules should be grounded in statute rather than emanating from prolonged litigation.

Supreme Court Cases

India’s framework for taxing cross-border business presence has largely evolved through landmark judicial decisions. Key Supreme Court rulings have progressively expanded the PE definition from physical offices to short-term facilities and virtual or service-based presence, emphasizing substance over form. DIT (Int taxation) v Morgan Stanley & Co. Inc. [(2007) 292 ITR 416 (SC)] (providing back office support operations in India did not create a PE in India).; Formula One World Championship Ltd. [394 ITR 80 (SC)] (racing event established PE notwithstanding relatively short duration of racing event); e-Funds Corp. v. CIT [(2017) 396 ITR 122 (SC)] (providing back office support operations does not constitute a PE in India); Hyatt Int’l Southwest Asia Ltd. [TS-954-SC-2025] (substantive control of hotel operations through oversight agreements established PE in India).

None of these rulings provided a clear or consistent methodology for attributing profits once a PE was established.

Why the Current System Falters

The present framework is based on §9(1)(i) of the Income Tax Act and Rule 10 of the Income Tax Rules (1962). Section 9(1)(i) of the ITA outlines what income constitutes accruing or arising in India through any business connection or significant economic presence in India.

Rule 10 allows the assessing officer to attribute profits on “any reasonable basis” without prescribing a specific formula or objective standard. This discretion has led to inconsistent assessments and frequent controversy. The Indian Central Board of Direct Taxes Committee on Profit Attribution in its 2019 draft report noted that such uncertainty weakens investor confidence. Central Board of Direct Taxes (CBDT), Report of the Committee on Profit Attribution to Permanent Establishments (Apr. 18, 2019).

India rejects the OECD’s Authorized OECD Approach (AOA) under Article 7 of the Model Convention that attributes profits to the PE emphasizing arm’s length principles based on function asset risk (FAR) analysis by relying solely on supply-side factors.

India prefers a mixed approach combining supply-side and demand-side factors. In the absence of explicit guidelines, tax officers use varying methods across cases, including FAR analysis, global profit ratios, or ad-hoc apportionment under Rule 10. Meanwhile, the scope of nexus has expanded faster than the available method for profit quantification, resulting in exposure to double taxation and prolonged disputes.

What NITI Aayog Proposes

The working paper released by NITI Aayog, India’s central government policy think tank reporting directly to the prime minister’s office, introduces a framework designed to reduce disputes and improve predictability.

The proposed framework, presented for consideration of the Ministry of Finance in consultation with industry and stakeholders, recommends an optional presumptive taxation scheme (OPTS) for foreign enterprises with industry-specific profit rates deemed as taxable. The scheme aims to resolve PE profit attribution issues by defining a fair profit rate for taxation to provide certainty to both the taxpayer and tax authorities.

The OPTS proposes the following key features:

• Industry-specific fixed profit margins based on gross receipts earned in India.
  
  • 10% for infrastructure construction/ Engineering, Procurement, and Construction (EPC);
  • 10% for engineering services/oilfield services;
  • 5% (supply portion) and 20% (services portion) for telecom/technology equipment supply with installation;
  • 30% of gross revenue from Indian users for digital/e-commerce (online platforms, streaming, etc.);
  • 20% of gross fees for General Services (consultancy, management, software); and
  • 15% of gross revenue from India for marketing and distribution support.
• Optional regime (rebuttable presumption) for the taxpayer. Foreign company could opt into the regime for a financial year and declare income at the prescribed rate. If the company believes its actual profit is lower, it could opt out and file regular financial statements with supporting documentation. This flexibility aligns with India’s tax treaties and the principle of taxing only real income.
• No separate PE determination needed (safe harbor). Foreign company may opt for presumptive taxation for a particular activity (tax authorities would not separately litigate the existence of a PE for that activity).
• Safe harbor for PE attribution. The framework would explicitly notify that transfer pricing principles would be used for determining profits attributable to a PE. This shift aims to adhere with the separate entity approach in determining profits attributable to a PE, obviate traditional FAR analysis in each case, enhance predictability, reduce disputes, and align with India’s commitments under global BEPS reforms while fostering increased foreign investment. If enacted effectively, this approach could significantly improve India’s investment climate by providing MNEs with a transparent and administrable tax regime that better reflects market realities.

Once a taxpayer chooses the OPTS route, the existence of a PE relating to that activity shouldn’t be litigated separately. The model would reduce the number of cases that depend on interpreting complex factual tests under Article 5 of tax treaties and aims to balance taxpayer certainty with revenue assurance, creating a shared incentive for compliance. The features mirror domestic presumptive provisions applicable to non-residents such as §44B, §44BB, §44BBA, §44BBB, §44BBC and §44BBD of the Income Tax Act (1961).

If implemented, the proposal would represent a significant change, replacing subjective, case-by-case assessments under Rule 10 with a formula-driven, easier to apply, mechanism. However, it also requires careful calibration of rates, safeguards against abuse, and transparent administrative guidance.

The rates are provisional and require periodic expert review to align with economic reality and ensure continued relevance. Without those elements, predictability risks being undermined by renewed discretion.

Policy Rationale and Global Context

The working paper builds on a long-standing tax policy debate in India and internationally, especially at the OECD. India’s proposal interacts directly with existing significant economic presence rules, broadening nexus beyond physical presence to capture digital and service-based business models. The core objective is to align India’s regulatory framework with global norms while preserving its right to tax profits generated from local market participation.

The OPTS also resonates with global reforms under the OECD’s Pillar One, aiming to shift profits toward market jurisdictions for digital and consumer-facing businesses.

If implemented effectively, India’s framework could serve as a template for other developing economies facing similar challenges. Its success will hinge on execution, legislative clarity, and international acceptance as consistent with treaty standards.

Risks and Preconditions

The success of the proposed framework depends on effective implementation. Before that, legislative clarity is essential, the Income Tax Act or concomitant rules must define eligibility, opt-in/opt-out procedures, reasonable sector-wise profit margins, and consistency with India’s tax treaties to ensure uniform application.

Administrative readiness is another key requirement. Tax officers will need clear guidance and training to apply the rules consistently. The CBDT may need to issue binding instructions and integrate the OPTS option with advance pricing agreement framework, so foreign investors can seek advance certainty.

Transparency in setting and adjusting presumptive rates must be maintained. If rates are perceived as arbitrary or politically influenced, investor confidence will suffer. To prevent regime “cherry-picking”, India also will need anti-abuse provisions such as a minimum lock-in period or restrictions on frequent opt-in/opt-out switching.

From Litigation to Design

The working paper signals a major shift in India’s tax policy mindset by moving the debate on PE from unpredictable judicial interpretation to clear, rule-based administration. If executed with legislative clarity and operational consistency, the OPTS could significantly improve India’s reputation as a predictable tax jurisdiction.

This reform wouldn’t signify a retreat from India’s source-based taxing rights. Instead, it seeks to make those rights workable through transparent and objective rules.

The approach aligns India with the global trends of taxing profits where economic market and users reside. The critical challenge ahead lies in translating this policy vision into practice. Coherent legislation, clear administrative guidance, and treaty consistency will be essential if this is to become a global model rather than a missed opportunity.

The proposal currently awaits detailed evaluation by India’s MoF, which will decide whether the proposal transitions from policy working paper to law. Most importantly, this proposal is a nudge to the MoF to also provide finality to its 2019 draft report on profit attribution.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Kuldeep Sharma is senior adviser, Praneeth Narahari is the global transfer pricing and structuring advisory leader, and Rishabh Agarwal is the corporate structuring advisory leader at GTPN in India.

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