All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

India: Delhi High Court rules on constitution of permanent establishment in outsourcing arrangements

rajendra.jpg

jain.jpg

Rajendra Nayak


Aastha Jain

E Funds Corporation and E Funds IT Solutions Inc., residents of USA (US Co), were engaged in the business of electronic payments, ATM management, decision support and risk management. E Fund India, an Indian company (I Co) and an indirect wholly owned subsidiary of US Co, provided back-office support and data entry operations to US Co. The Delhi High Court adjudicated on whether a permanent establishment (PE) was created in India for US Co under India-USA tax treaty. The court observed that a subsidiary is an independent legal entity and its mere existence does not make it a PE of parent company. Factors like US Co and I Co were closely connected, I Co was dependent on US Co for earning income, intangibles were provided by US Co free of cost, US Co were deriving economic benefit by sub-contracting work/ services to I Co are not relevant for deciding on whether US Co had a PE in India. A subsidiary can become a PE of the holding company under the same circumstances where the conclusion is reached for unrelated companies. It was held that US Co had no "right to use" the premises of I Co. Even if the core activities of US Co were outsourced to I Co under sub-contract arrangement, with I Co bearing limited risk, it would not constitute a fixed place PE of US Co.

US Co had sent certain personnel to work with I Co to ensure confidentiality and quality of services provided by I Co. Such functions performed to protect the interest of US Co were stewardship services and no service PE arises from such services. Further, employees of I Co may not be considered as employees or other personnel for US Co. Any other interpretation would lead to irrational results that every subsidiary which engages an employee would always become a PE of the controlling foreign parent company. Further, since employees of I Co were not rendering any services on behalf of US Co, service PE was not constituted in India.

It was held that rendering of services to a third party by I Co on behalf of US Co would not, by itself, lead to I Co becoming a dependent agent PE. I Co did not satisfy the conditions of dependent agent PE under the tax treaty. As no PE of US Co was found to exist, no profits could be taxed in India and no income of I Co could be attributed to or taxed in the hands of US Co.

Globalisation has led many multinational enterprises to outsource business process and information technology services to affiliates in India. This decision provides guidance on issues as well as factors relevant for making a determination of PE in India in such business arrangements.

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

EY

Tel: +91 80 6727 5275

Website: www.ey.com/india

more across site & bottom lb ros

More from across our site

The UN may be set to assume a global role in tax policy that would rival the OECD, while automakers lobby the US to change its tax rules on Chinese materials.
Companies including Valentino and EveryMatrix say the early adoption of EU public CbCR rules could boost transparency of local and foreign MNEs, despite the short notice.
ITR invites tax firms, in-house teams, and tax professionals to make submissions for the 2023 ITR Tax Awards in Asia-Pacific, Europe Middle East & Africa, and the Americas.
Tax authorities and customs are failing multinationals by creating uncertainty with contradictory assessment and guidance, say in-house tax directors.
The CJEU said the General Court erred in law when it ruled that both companies benefitted from Italian state aid.
An OECD report reveals multinationals have continued to shift profits to low-tax jurisdictions, reinforcing the case for strong multilateral action in response.
The UK government announced plans to increase taxes on oil and gas profits, while the Irish government considers its next move on tax reform.
War and COVID have highlighted companies’ unpreparedness to deal with sudden geo-political changes, say TP specialists.
A source who has seen the draft law said it brings clarity on intangibles and other areas of TP including tax planning.
Tax consultants say companies must not ignore financial transactions in their TP policies as authorities, particularly in the UK, become more demanding.