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Supreme Court reaffirms Permanent Establishment of companies procuring services from Indian subsidiaries or group companies Download as PDF

01-12-2017

Introduction

The Delhi High Court (“HC”) in the matter of Director of Income Tax, New Delhi v. M/s E-Funds IT Solutions Inc.1 had prescribed exhaustive criteria that must be fulfilled for a Permanent Establishment (“PE”) to be constituted in India. On October 24, 20162, the Supreme Court (“SC”) upheld this decision of the HC to reaffirm that under the provisions of the US-India Double Taxation Avoidance Agreement (“DTAA”), a PE is not created by mere rendition of support services by an Indian subsidiary to its US parent company.

Background

E-Funds Corporation (“E-Funds US”), a US incorporated company, is engaged in the business of ATM management and e-payment management services. E-Funds US along with E-Funds IT Solutions Inc. (“E-Funds Inc.”) entered into contracts with their clients in US for providing certain services. These contracts were assigned for execution to EFunds International India Private Limited (“E-Funds India”), which is located in India and is an indirect subsidiary of the E-Funds US. Pursuant to this assignment of contracts, E-Funds India provided services for E-Funds US and E-Funds Inc., which enabled them to further provide services to their clients based in the US. They also deputed two employees to E-Funds India. Further, E-Funds US undertook marketing activities for EFunds India, which did not bear any significant rise in the overall services.

Given the above, Indian Tax Authorities held that E-Funds India was carrying on the business for E-Funds US and E-Funds Inc. and accordingly regarded it as their a fixed place PE in India. Consequently, tax was sought to be recovered on the income attributable to E-Funds US and E-Funds Inc. which was not included in the income earned by E-Funds India. Tax Authorities also treated the deputed employees as employees of E-Funds India and further held that there existed a service PE as well in the given circumstances. However, the HC overruled the stand of the Tax Authorities and held that E-Funds India was not a PE of the two US companies. Aggrieved by the HC order, the Tax Authorities appealed to the SC.

Issues before the SC

  1. Whether E-Funds India constitute a fixed place PE of E-Funds US and E-Funds Inc.?
  2. Whether presence of deputed employees constitute a service PE of the two US companies in India?
  3. Whether admissions made under the course of Mutual Agreement Procedure (“MAP”) under the DTAA can be used to justify the existence of a PE?

Decision

The SC reaffirmed the decision of the HC and held:

Fixed Place PE: The SC observed that for creation of a fixed place PE, a foreign company must hold the place in India at its “disposal” i.e., it must have the right to use the place and have control over its premises for their business. However, a subsidiary of a foreign company that merely carries on business in source State does not by itself create a PE. In this case, E-Funds India is only a back office that provides support services to E-Funds US and E-Funds Inc. It also does not provide services to any clients in India. Therefore, the SC upheld that under the provisions of the DTAA, EFunds India does not constitute a fixed place PE in India for the two US companies.

Service PE: The SC observed that if the deputed employees were providing any services to the clients of the two US companies in India, then it would amount to the creation of a service PE under the DTAA. However, no customers of E-Funds US or E-Funds Inc. were located in India and the work undertaken by E-Funds India was merely auxiliary operations to facilitate the providing of services by E-Funds US and E-Funds Inc. to their clients located in the US. As such, the SC held that no service PE was created in the given scenario.

Admissions under the MAP: Article 24 under the DTAA contains the MAP, pursuant to which the Indian and US authorities had initiated proceedings and came to an agreement with respect to the attribution of profits between the two US companies and E-Funds India. Indian Tax Authorities sought to defend their case on the basis of admissions made in past under MAP. SC held that the MAP agreement terms were case and time specific and as such a statement contained therein for a specific year could not be applied indefinitely in the years to follow.

Analysis

The SC ruling provides a clear perspective on existence of PE of foreign companies engaged in procuring services from Indian companies for their clients located outside India under the provisions of international tax treaties. It is hoped that this decision will put to rest the aggressive stance taken by the Indian tax authorities with respect to determination of what constitutes PE in India in such cases where personnel deputed by foreign companies are in India to facilitate such services and will thus provide the much needed relief for inbound outsourcing business models.

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1 [2014] 364 ITR (Delhi)

2 Additional Director of Income Tax v. E-Funds IT Solutions Inc., Order dated October 24, 2017 in Civil Appeal 6082 of 2015


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