India: Ruling on permanent establishment, profit attribution and royalty taxation

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

India: Ruling on permanent establishment, profit attribution and royalty taxation

nayak.jpg

jain.jpg

Rajendra Nayak


Aastha Jain

Convergys Customer Management Group (Convergys), a US tax resident, was engaged in providing information technology enabled customer management services by utilising advanced information system capabilities, human resource management skills and industry experience. Convergys had a subsidiary in India, IndCo, which provided back office support services to it on a principal-to-principal basis. Certain employees of Convergys frequently visited the premises of IndCo to provide supervision, direction and control over its business operations.

Further, Convergys availed a packaged application software which was used by various group companies, including IndCo and a proportion of the licence cost of software was cross charged by Convergys to IndCo.

Similarly, certain link charges were incurred by Convergys in relation with using leased lines (undersea cables) for communication with customers, and a proportion of the cost was cross charged to IndCo. The Delhi Income Tax Appellate Tribunal adjudicated on whether Convergys constituted a permanent establishment (PE) in India, attribution of profits to such PE, taxability of software payments and link charges as "royalty" under the India-US double taxation avoidance agreement (DTAA).

The Tribunal observed that IndCo was a projection of Convergys's business in India as it operated under the control and guidance of Convergys without assuming any significant risks by itself.

Further, Convergys's employees worked in key positions such as country head, managing director of IndCo, and they had a fixed place at their disposal in IndCo's premises. Accordingly, Convergys had a fixed place PE in India.

On attribution of profits to such PE, it was acknowledged that since IndCo was remunerated based on a transfer pricing analysis, no further profits could be attributed to the PE. However, the Tribunal thereafter adopted a formulary apportionment approach for attribution of residual profits to the PE.

On the issues under royalty taxation, the Tribunal relied on an earlier ruling of the Delhi High Court in the case of Ericsson AB [343 ITR 470] and observed that the consideration paid for the software would amount to acquisition of a copyrighted article and not a copyright in the software. Further, link changes were paid for availing a service from the telecom service providers by Convergys / Ind Co.

It did not have any control or possession over the equipment used in the process which primarily rested with the service provider. It was held that payments made by IndCo for software and link charges do not constitute royalty under the provisions of the DTAA. Further, such payments were in the nature of reimbursement of expenses and hence, not taxable in the hands of Convergys.

Rajendra Nayak (rajendra.nayak@in.ey.com) and Aastha Jain (aastha.jain@in.ey.com)

Ernst & Young

Tel: +91 80 4027 5275

Website: www.ey.com/india

more across site & shared bottom lb ros

More from across our site

Thanks to operational slickness and sheer force of will, A&M Tax will continue hoovering up talent across the globe
Setu Kamal became the first practising barrister to be added to the UK’s tax avoidance promoter list; in other news, UHY expanded its network in Canada
US President Donald Trump’s tariffs may get thrown out by courts in the future and taxpayers should already be planning for that possibility, BDO’s Dustin Stamper tells ITR
Awards
ITR is delighted to reveal the first shortlisted nominees for the Middle East Tax Awards
The firm has appointed Deloitte’s former tax leader for Thailand to lead the new operation, which builds on considerable Asian investment in recent months
The Donald Trump administration could use legislation from 1930 if the Supreme Court blocks its tariffs; in other news, China has updated its VAT refund procedures
Braun gives ITR an exclusive insight into WTS Digital’s UK launch of its AI product, which can free up more than 1,500 hours per month by reducing routine tasks
Long tells ITR about her varied role, why curiosity is a key characteristic for the tax professional, and what she’d be doing if she wasn’t working in tax
The choice facing governments is not whether to adopt AI in taxation, but how to do so in a way that upholds the principles of tax fairness, writes Neil Kelley
As ITR’s client data reveals discontent with German tax advisers’ cost management, Grant Thornton’s local TP head insists it’s a two-way street
Gift this article