India’s Supreme Court reasserted the principles of a fixed-place permanent establishment (PE) as well as clarifying India’s position on service PEs and agency PEs in a ruling on October 24 2017. The court held that a foreign company merely having a subsidiary in India, or outsourcing business to this subsidiary, does not automatically constitute a PE.
The case concerned two American companies, e-Funds Corporation and e-Funds IT Solutions Group Inc., and looked at whether these had a PE in Delhi under a fixed-place PE, a service PE or an agency PE.
The ruling is regarded as very significant on the subject of PEs.
“The most important take away is that mere outsourcing of contract/activity to an Indian entity for foreign non-residents will not lead to formation of a PE of a non-resident in India,” said Sagar Wagh, manager of international tax and transfer pricing services at EY in Mumbai.
The ruling is also likely to help decrease the amount of tax litigation for foreign companies that have support offices in India. The decision will have a significant impact especially on the IT/information technology-enabled services sectors where delivery centres are located in India, Girish Vanvari, partner and head of tax at KPMG in Mumbai, told TP Week.
Although this is good news for businesses in terms of providing more certainty related to PEs, it needs to be interpreted together with other Supreme Court decisions.
The Supreme Court stated three characteristics, stability, productivity and dependence, as mandatory for the existence of a PE.
To test the existence of a PE, foreign entities should review their Indian operations to ensure they do not meet the criteria for a fixed-place PE and that they do not control the premises for purposes of their business.
“The foreign entities should also ensure that no services are furnished within India through their employees or other personnel, i.e. all the customers should receive services only in locations outside India. Further, if employees of foreign entity are deputed to an Indian entity, such employees should work under the control and supervision of the Indian entity. The Indian entity should also not be authorised to or exercise any authority to conclude contracts on behalf of the foreign entity,” Vanvari said.
Case background
The case relies on the principles stated in the Formula One ruling, where the Supreme Court held that the racing company’s international circuit constitutes a fixed place of business.
“In the case of Formula One World Championship Ltd., the Supreme Court, after setting out Article 5 of the tax treaty, held that place of business qualifies only if the place ‘is at disposal’ of the enterprise. The place will be treated as ‘at the disposal’ of the enterprise when the enterprise has right to use the said place and has control thereupon,” Vanvari said.
But while the Formula One case ended unfavourably for the taxpayer, e-Funds did not meet the criteria for a fixed place of business.
The dispute began when the Indian tax authority said the e-Funds had a fixed-place PE in Delhi, where they carried out their own business, and that this attracted Article 5 of the India-US double taxation avoidance agreement of 1990. This meant the companies had to pay tax from what they earned from the fixed-place PE.
The companies challenged the decision both before the Commissioner of Income Tax (Appeals), the Income Tax Appellate Tribunal and the High Court, but the tax authority then appealed, taking the case to the Supreme Court.
With regards to a service PE, the Supreme Court observed that under Article 5(2)(l), an enterprise must furnish services within India through employees or other personnel in order to have a PE. The company e-Funds India only rendered support services in order to facilitate the US company’s service rendering, and none of its customers had received services in India. With regards to an agency PE, the Supreme Court found that e-Funds India was not authorised to conclude contracts on behalf of the US company.
With the singing of the OECD’s multilateral instrument, or MLI, in June, India is also moving towards aligning with an international concept of PE and BEPS Action 7 and artificial avoidance of PE.
