Regardingattribution to a permanent establishment, there are two different approach, oneadopted by the OECD model so-called the capital and labor export neutrality(CLEN) approach as opposed to a capital and labor import neutrality (CLIN)approach of the U.N. model. CLEN is a concept by which an investor hasneutrality, he pays the same total tax regardless of whether he earns theincome from a domestic or foreign source.
On the other hand, CLIN is a conceptof neutrality by which capital funds originating in various jurisdictionsshould compete at equal terms in the capital markets if any country, therein givingevery nation a right to tax equally any income earned within its territory1. The force of attraction rule can be seen as anextensive application of CLIN of the U.N. model, in which the rule has beenretained to support source-based taxation2. The intentof the rule is to prevent avoidance of profit that should be attributed to thePE through tax structuring. The force of attraction rule was justified by theview that when an enterprise established a permanent establishment, it hadbrought itself under the other state’s taxing jurisdiction to an extent whichwas qualitatively different from the invisible or casual presence ofenterprises without a permanent establishment3.Moreover, the similar sales or business activities approach of the rule are considereda guide to identify the business transaction for the purpose of attribution.
4 India is a country that underscores source-basedtaxation in the ITA, which give the right to tax non-residents who has thebusiness within India. Under the Indian domestic law, it mainly focuses on theconcept of business connection which is broader than the concept of permanentestablishment. Moreover, if we take a look at ITA, the provisions of section 9,we will see that the income derived from technical service by non-resident issubject to tax in India so long as they are utilized in India. This provisionis reaffirmed through the amendment of the Finance Act, 2010, that the servicesneed not to be rendered through permanent establishment and need not berendered in India to be taxable. Any income derived by non-resident that has anIndian connection will be taxed by India. This amendment along with anotheramendment clarifies the position of India’s source-based approach.
Hence, it might be concluded that the term like “indirectlyattributable” in the treaties invite the force of attraction rule, that is, topromote source-based taxation. Since Indiahas a very stringent source-based taxation, non-resident might try to avoid thebroad nature of tax authorities by establishing permanent establishment inIndia. From this point of view, the upheld in Linklaters is justified sincethis seem to be the only logical intent of the governments in negotiating thetreaty.1Charles E. McLure, Hans-Werner Sinn, and Peggy B.
Musgrave, “Influence of TaxDifferentials on International Competitiveness,” Proceedings of the VIII MunichSymposium on International Taxation (Kluwer Law and Taxation Publishers 1990).2Eric Kemmeren, Principle of Origin in Tax Conventions: A Rethinking of Models92 (Pijnenburg 2001).3Arvid Skaar, Permanent Establishment: Erosion of a Tax Treaty Principle (KluwerLaw Int’l, 1995).4Michael Kobetsky, International Taxation of Permanent Establishments (CambridgeTax Law Series 2011).