The Supreme Court of India has held that Outsourcing of Services by a US company to Indian company doesn’t constitute Permanent Establishment (PE).
The two judge bench comprising of Justice R.F. Nariman and Justice Sanjay Kishan Kaul held so while restoring the appeal allowed by High court of New Delhi in favour of assesse.
The assessee’s are the companies in the USA and were resident of the said property. They were assessed and taxed based on their global income in USA. Both e-Fund Inc. and e-Fund Corp. are the subsidiary of IDLX Corporation was almost a 100% shareholder of e-Funds International India Private Limited, a company incorporated and resident of India. Both the companies have entered into international transactions with e-Fund India. It is the contention of the Revenue that income of the two assessee’s were attributable to India because the two assessee’s had PE in India and should be taxed in India, irrespective of whether the said assesse had paid taxes in USA.
The appeals from the Income Tax Appellate Tribunal (ITAT) by the assessee were allowed by the High Court, whereas cross-appeals by the department were rejected.
The Apex Court has upheld the High Court view and said that, “it is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business. There is, in fact, no specific finding in the assessment order or the appellate orders that applying the aforesaid tests, any fixed place of business has been put at the disposal of these companies. The assessing officer, CIT (Appeals) and the ITAT have essentially adopted a fundamentally erroneous approach in saying that they were contracting with a 100% subsidiary and were outsourcing business to such subsidiary, which resulted in the creation of a PE”.
The Court also observed that, “no part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment is, therefore, correct on this score”.
“Article 42.31 of the OECD Commentary does not mean that services need not be rendered by the foreign assessees in India. If any customer is rendered a service in India, whether resident in India or outside India, a “service PE” would be established in India. As has been noticed by us hereinabove, no customer, resident or otherwise, receives any service in India from the assessees. All its customers receive services only in locations outside India. Only auxiliary operations that facilitate such services are carried out in India. This being so, it is not necessary to advert to the other ground namely, that “other personnel” would cover personnel employed by the Indian company as well, and that the US companies through such personnel are furnishing services in India. This being the case, it is clear that as the very first part of Article 5(2)(l) is not attracted, the question of going to any other part of the said Article does not arise”, the Court also observed.
While dismissing the appeal the Apex Court observed that, “no permanent establishment in India can possibly be said to exist on the facts of the present case, we do not deem it necessary to go into the cross-appeals that were filed before the High Court, which were dismissed by the High Court agreeing with the ITAT that the calculation of the ITAT would lead to nil taxation. This point would not arise in view of our decision on the facts of the present case. It is, therefore, unnecessary to go into this aspect of the matter”.
Read the full text of the Judgment below.
