The Indian Government has recently issued a public consultation report in relation to profit attribution to Permanent Establishment in India, inviting comments from stakeholders by the mid of this month. This report suggests a three-factor apportionment approach, by assigning an equal weight to sales, manpower (i.e. employees and wages) and assets. As per the Report, this represents a combination of both demand and supply related factors, thereby allocating profits derived from India, partly to the jurisdiction where sales take place (driven by consumers and market), and partly where factors of production are located or where supply related activities are conducted.
The report further mentions that for business models in which users significantly contribute to the profits, they should also be taken into consideration in addition to the three criteria mentioned above. Also, the report mentions that the profits derived from Indian operations has to be determined by applying global operating margin to India sales or 2% of revenue, whichever is higher. This Report seems to be in divergence with the OECD approach that lays emphasis on transfer pricing analysis based on detailed Functions, Assets & Risks analysis, while attributing profits to a PE.
The PwC India news alert is attached for reference.