Permanent Establishment In E-Commerce Situations : 

We now discuss different situations which arise in an e-commerce environment and consider whether these situations would constitute a permanent establishment.
Situation 1 – Existence of a website on host country soil: A website may be defined as a set of web documents belonging to a particular organisation. It consists of data and programmes in digitised form which is stored on a server of the internet service provider. On the other hand, a permanent establishment, as the name itself suggests, is a fixed place of some permanence from where a business is carried on. Therefore, the existence of a website,
itself, would not constitute a permanent establishment.

Situation 2 – Server on host country soil: A server is a system which carries out activities initiated by an end-user’s computer. The question whether a server can be considered as a permanent establishment is more complicated. It is possible that the enterprise that operates the server may be different from the enterprise that carries on business through the website. The use of a particular internet service provider (ISP) does not give website owner the right of control over the server’s operation. The server’s location is not at that enterprise’s disposal. The server could easily be removed to other locations. In such a situation, the server’s location cannot be considered to be the place of business.

On the other hand, if the enterprise itself owns or leases and operates the server, and the computer equipment is fixed, and business is carried on through the server, it could be construed to be a permanent establishment. Therefore what is essential to be considered in this issue, is not merely whether a server exists or host country soil, but also what the values as well as extent of its operations are. As the permanent establishment concept deals not only with permanence and a geographical link with the host soil, but also with the actual carrying on of the business, the values and extent of the operations carried out by the server becomes important. We now consider separately the above points.

Nature of operation – The nature of operations could have a very wide range. The range could profess from being a mere provider of information, to being a forwarding address to acting as a warehouse for digitised goods, to contributing directly to productivity and value creation, thereby realising profits. In a situation where the server acts as a mere provider of information it cannot be considered to be a permanent establishment. At the other end, where it contributes to productivity, the server will become a permanent establishment for distinctions which falls in between there two entrances, it would be necessary to go to the next step of examining the extent of operations.

Extent of operations- In the extent of operations, as well, there could be a wide range of activities. A server could be simply located on host country soil with skeletal support services, or it could be a server with multiple services, or it could be a server which carries on the complete set of operations. In the last situation, there would clearly be a permanent establishment.

Situation 3 – Server functioning as agent: It is possible that a server on host country soil could be construed to be a dependent agent of the foreign enterprise. Such a situation will apply in the case of ‘Smart’ servers. ‘Smart’ servers are programmed to not only provide information but also to take and process orders from persons who make a ‘hit’ ’n the website. Such a server has the power to contract on behalf of the foreign enterprise and habitually exercises this power. It is possible to argue that since such a server is a dependent agent of the foreign enterprise, it may be considered to be a permanent establishment. However, a contrary and more logical view would be that the website together with the server that hosts it can only constitute the medium through which orders are placed. The time acceptance of the order is not done by the machine itself but by the person or corporation which inserted into the machine a programme capable of performing these tasks . Therefore, the website and the server would not constitute a permanent establishment.

According to the principles of international taxation, business income cannot be taxed on Host State soil, unless there is a permanent establishment in the Host State. If there is such a permanent establishment, then the only income which the Host State is entitled to tax is the income attributable to the permanent establishment. Such attributable income is determined by imagining the permanent establishment to be an ent ity independent of the foreign enterprise, and dealing with the foreign enterprise at arm’s length price. The issue therefore translates to one of determining the transfer price between the foreign enterprise and permanent establishment, and rewriting the transaction between the two, at arm’s length.