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

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: 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 & shared bottom lb ros

More from across our site

Canadian Prime Minister Mark Carney and US President Donald Trump have agreed that the countries will look to conclude a deal by July 21, 2025
The firm’s lack of transparency regarding its tax leaks scandal should see the ban extended beyond June 30, senators Deborah O’Neill and Barbara Pocock tell ITR
Despite posing significant administrative hurdles, digital services taxes remain ‘the best way forward’ for emerging economies, says Neil Kelley, COO of Ascoria
A ‘joint understanding’ among G7 countries that ‘defends American interests’ is set to be announced, Scott Bessent claimed
The ‘big four’ firm’s inaugural annual report unveiled a sharp drop in profits for 2024; in other news, Baker McKenzie and Perkins Coie expanded their US tax benches
Representatives from the two countries focused on TP as they met this week to evaluate progress under a previously signed agreement – it is understood
The UK accountancy firm’s transfer pricing lead tells ITR about his expat lifestyle, taking risks, and what makes tax cool
Dolphin Drilling intends to discuss the final liability amount and manner of settlement with HM Revenue and Customs
Winning the case against the 20% VAT imposition was always going to be an uphill challenge for the claimants, UK tax advisers argue
A ‘paradigm shift’ in Chile’s tax enforcement requires compliance architecture built on proactive governance, strategic documentation and active monitoring of judicial developments
Gift this article