What Is the Force of Attraction Rule?
The Force of Attraction Rule is a treaty provision under which, once a foreign enterprise has a permanent establishment (PE) in India, India can tax not only the profits the PE itself earns but also the profits from certain other sales or business activity the foreign enterprise carries on directly in India — even where that activity never passes through the PE. It is not a rule of Indian domestic law in its own right. It exists only where a specific Double Taxation Avoidance Agreement (DTAA) writes it into its business-profits article, and its scope depends entirely on that treaty's wording.
The rule sits inside Article 7 (Business Profits) of a DTAA — the article that governs how much of a foreign enterprise's profit India may tax once a PE exists. Most modern Indian DTAAs do not carry the rule at all; a smaller group of older treaties, including the one with the United States, carry it in a narrow, "limited" form. Whether it applies to a given foreign company depends on which country's treaty is in play, so the treaty text has to be read directly rather than assumed.
How the Rule Works
Article 7(1) of a DTAA typically opens with the baseline rule: the profits of a foreign enterprise are taxable only in its home state, unless it carries on business in India through a PE, in which case India may tax "so much of them as is attributable to that permanent establishment." A treaty with the Force of Attraction Rule adds two further limbs to that same paragraph, pulling in profits the PE never touched. The India-USA DTAA, Article 7(1), is the clearest example in India's treaty network:
"...the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment."
Limb (a) is the ordinary attribution rule — profits the PE itself generated. Limbs (b) and (c) are the force-of-attraction limbs: they extend India's taxing right to (b) direct sales into India of goods or merchandise of the same or similar kind as those the PE sells, and (c) other business activities of the same or similar kind as those the PE carries on — regardless of whether the PE had any part in that sale or activity. A US company that sells machinery through an Indian branch, and separately sells the same category of machinery directly to an unrelated Indian buyer with no branch involvement, can have both streams of profit drawn into the branch's Indian tax base under this clause.
This "same or similar kind" formulation comes from the UN Model Double Taxation Convention, whose own Article 7(1) carries the two limbs at (b) ("sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment") and (c) ("other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment"). The OECD Model does not contain them. The UN Commentary on Article 7 draws the contrast directly: "Under the OECD Model Convention, only profits attributable to the permanent establishment may be taxed in the source country. The United Nations Model Convention amplifies this attribution principle by a limited force of attraction rule, which permits the enterprise, once it carries out business through a permanent establishment in the source country, to be taxed on some business profits in that country arising from transactions by the enterprise in the source country, but not through the permanent establishment." Because the UN Model was drafted with capital-importing countries such as India in mind, those limbs found their way into a number of India's older DTAAs, negotiated when the UN Model was the starting point for talks.
The same Commentary fixes an outer boundary that is easy to overlook: "the force of attraction rule is limited to business profits covered by Article 7 and does not extend to income from capital (dividends, interest and royalties) covered by other treaty provisions." Dividend, interest and royalty income is governed by its own articles and is not swept in by the rule.
Not Every DTAA Has It
Many of India's DTAAs contain no force-of-attraction language at all and tax only the profits actually attributable to the PE. The India-Thailand DTAA is a direct illustration — its Article 7(1) reads:
"...the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment."
There is no limb (b) or (c). Under this treaty, a Thai enterprise with an Indian PE is taxed in India only on the profit the PE itself earns; direct sales it makes into India outside the PE's involvement stay outside India's taxing right under the treaty. The same pattern — attribution only, no force of attraction — is the common one across India's treaty network: Article 7(1) of India's DTAAs with the UAE, China, the Netherlands and Mauritius likewise limits the source State to profits attributable to the permanent establishment. The only way to know which pattern a given country's treaty follows is to read that treaty's own Article 7(1).
Domestic Law Does Not Have a Force of Attraction Rule
Where no DTAA applies — or for a country with no treaty at all — India's own domestic law follows the narrower attribution approach, not force of attraction. Business connection income is dealt with in section 9(2)(c) of the Income-tax Act, 2025 (section 9(1)(i) of the Income-tax Act, 1961), and section 9(9)(f)(i) of the Income-tax Act, 2025 supplies the limiting principle:
"...only the income which is reasonably attributable to— (i) operations carried out in India, when all operations of the business are not carried out in India... shall be deemed to accrue or arise in India from any business connection."
In other words, the default position under Indian domestic law is attribution to Indian operations, not attraction of unconnected sales. A foreign enterprise can end up more exposed under a treaty with a force-of-attraction clause than it would be under domestic law alone — which matters because DTAA relief under section 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961) applies only where the treaty is more beneficial than the Act. A foreign company facing a limited force-of-attraction treaty is not automatically stuck with the wider treaty result — the comparison between the Act's attribution-only rule and the treaty's broader rule has to be made provision by provision before assuming which one governs a given stream of profit.
Why It Matters for Foreign Companies and Investors
- PE risk does not stop at the PE's own transactions. A company with an Indian branch or dependent agent that also sells the same category of goods directly into India — through a separate distributor, an e-commerce channel, or a direct contract with an Indian buyer — needs to check whether its treaty's Article 7(1) would attract that separate revenue stream into the PE's Indian tax base.
- The rule turns on treaty text, not on economic substance. Two foreign enterprises with identical Indian operations can face very different outcomes purely because one operates under a treaty with force-of-attraction limbs and the other does not.
- It reinforces the case for a subsidiary over informal PE exposure. Where a treaty carries the rule, direct India-facing sales that a foreign head office assumed were untouched by its Indian branch can still be pulled into Indian tax. Structuring India-facing sales through a properly incorporated Indian subsidiary — a separate taxpayer — avoids the question entirely, since force of attraction only reaches the profits of the non-resident enterprise itself, not a separate Indian company's own income.
- Check the specific treaty before assuming exposure either way. Neither "my treaty has a PE article" nor "the OECD dropped force of attraction" is enough — the only reliable check is the wording of Article 7(1) in the specific DTAA in force for that country.
Frequently Asked Questions
Does every Indian DTAA contain a Force of Attraction Rule?
No. It appears only in specific treaties that write it into their business-profits article, such as the India-USA DTAA's Article 7(1)(b) and (c). Many of India's DTAAs, including the one with Thailand, tax only the profit actually attributable to the permanent establishment and contain no force-of-attraction limb at all. The treaty text has to be checked directly.
Is India's own domestic law a force-of-attraction regime?
No. Section 9(9)(f)(i) of the Income-tax Act, 2025 limits business-connection income to what is "reasonably attributable to... operations carried out in India" — an attribution rule, not a force-of-attraction rule. Force of attraction, where it exists at all for a foreign enterprise, comes from the applicable DTAA's Article 7, not from the Act.
Does the rule apply only to sales of goods, or also to services?
Where present, it typically has two limbs: sales in India of goods or merchandise of the same or similar kind as those sold through the PE, and other business activities carried on in India of the same or similar kind as those the PE carries on. Both limbs require the outside activity to match the kind of business the PE itself conducts — an unrelated line of business the PE does not touch falls outside even a force-of-attraction clause.
Can a foreign company simply rely on the Income-tax Act instead of a treaty with a broader rule?
DTAA relief under section 159(4) of the Income-tax Act, 2025 (section 90(2) of the Income-tax Act, 1961) applies only to the extent the treaty is more beneficial than the Act. Because domestic law follows attribution only, a foreign enterprise facing a force-of-attraction treaty provision should have that specific comparison — Act versus treaty, on that stream of profit — checked rather than assuming either source automatically governs.
Why does the rule matter for a foreign company setting up in India?
A foreign enterprise that creates a PE in India — a branch, a dependent agent, a service PE — and separately sells similar goods or services directly into India can find that separate revenue drawn into the PE's Indian tax base if its treaty carries the rule. This is one more reason many foreign investors route India-facing sales through a properly incorporated Indian subsidiary rather than operating through a branch or agent alongside direct sales.
See also: Permanent Establishment, DTAA, and Foreign Company.
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