The tax treaties which India has signed with various countries invariably contain a provision that if a foreign enterprise has a permanent establishment (PE) in India, the profits attributable to the Indian PE will be liable to tax in India.

The term PE principally means a fixed place of business. The tax treaties also contain various provisions which create a deeming fiction whereby, even in cases where there is no fixed place of business, the enterprise is still deemed to have a PE.

For example, when a foreign enterprise operates through a dependent agent (and the dependent agent satisfies the tests laid down in the treaty), the foreign enterprise shall be deemed to have a PE in India.

In a recent case of Set Satellite (106 ITD 175), the Mumbai Tribunal discussed the issue of PE through dependent agent. In this case, the assessee was a foreign company having a dependent agent (DA) in India. It had remunerated the agent on an arms length basis for the services rendered by the agent.

As regards its tax liability in India, the assessee submitted that having remunerated the agent on an arms length basis and the agent having offered said payment for taxation, no further profits of the assessee could be taxed in India.

After lengthy arguments and considering a host of cases, the Hon'ble Tribunal observed that the Dependent Agent Permanent Establishment (DAPE) and DA has to be treated as two distinct taxable units.

The former is a hypothetical establishment, 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 DA itself, but taxability is only in respect of the remuneration of the DA.

The order of the Tribunal does take into account the contrary views of many learned authors including Phillip Baker, Prof Roy Rohtagi and Prof David R Davies. The order also considers the report of the International Fiscal Associations 2006 Congress at Amsterdam, which unambiguously shows that taxing the DA and DAPE separately would be against the law that exists today.

However, the Hon'ble Tribunal has relied on an OECD report, which supports taxing of DA and DAPE separately. The Hon'ble Tribunal has rejected the argument that OECD report is yet to be implemented and when implemented, changes will have to be made in the tax treaties. The Hon'ble Tribunal has also taken note of the fact that two schools of thought exist on the subject.

Referring to the IFA report, it was observed: "The above observations clearly show that there is a widely held school of thought, even amongst the tax advisors who tend to take liberal interpretations in favour of the taxpayers, and who easily outnumber and outweigh neutral members in bodies like IFA that there has to be profit attributed to the DAPE over and above the arm's length fees paid to the DA."

There is absolutely no doubt that the order of the Hon'ble Tribunal is thought-provoking which can only be written after a very thorough study of the subject. The order in fact is like a brilliant research paper.

But, unfortunately, the judgement is not based on the law that exists today: it is a reflection of the Hon'ble members' personal opinion based on their thoughts on what the law should be. How can this case be decided against the assessee when, as per the Tribunal itself, two views are possible and in fact the majority is in favour of assessee?