SC offers relief to MNCs over India outsourcing biz tax

The Supreme Court in a recent judgment has ruled that the outsourcing of work to India by multinational companies (MNCs) per se would not give rise to any permanent establishment (PE) in the country and, hence, the global income of these MNCs attributable to this back-office work cannot be taxed in India.

The judgment will have repercussions for taxing outsourcing businesses as well as subsidiaries of MNCs.

The apex court upheld the ruling of the Delhi High Court and rejected the contention of the revenue department in this regard.

The case relates to taxation matters relating to two US-based companies e-Fund Corporation (e-Fund Corp) and e-Fund IT Solutions Group Inc (e-Fund Inc). These companies have paid taxes on their global income in the US.

e-Fund Corp is a holding company with almost a 100 per cent stake in IDLX Corporation, another company based in the US. IDLX Corporation holds almost a 100 per cent stake in IDLX International BV, based in the Netherlands. IDLX International BV, in turn, has a 100 per cent stake in IDLX Holding BV, which holds a 100 per cent stake in e-Funds International India Private Ltd. | The judgment is a landmark in a series of permanent establishment (PE) cases The Supreme Court had earlier this year ruled that Formula One World Championship Ltd had a PE in the Buddh International Circuit, the venue of the Indian Grand Prix, and as such all India sourced business income of the

IDLX International BV is also a holding company having almost a 100 per cent stake in e-Fund Inc.

The contention of the revenue department was that the income of eFund Corp and e-Fund Inc was attributable to India because the two | company was taxable in India In 2007, the SC had ruled in the case of revenue department versus Morgan Stanley that the outsourcing of services, such as back-office operations to a captive service provider would not per se create a PE of the parent in India assessees had a PE in India. This means that their income should be taxed in India, irrespective of whether they had paid taxes in the US. The case relates roughly to assessment years 2000-01 to 2002-03 and 2004-05 to 2007-08.

Separately, the income earned by e- Fund India was taxed in India. As such, the revenue department said that the balance or differential amount — income attributable to e-Fund Corp and e-Fund Inc not included in the income earned and taxed in the hands of e-Fund India — should be taxed in India.

The Income Tax Appellate Tribunal (ITAT), Delhi, had upheld the position of the revenue department. But, the Delhi High Court had rejected both the revenue department’s plea and the ITAT order.

The Supreme Court held that no part of the main business and revenue-earning activity of the two American companies was carried on through a fixed business place in India.

It also said the Indian company only rendered support services, which enabled the assessees, in turn, to offer services to their clients abroad.

The court said: “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.”

The High Court had given the opinion that a holding company or a subsidiary company by itself cannot constitute a PE.

Abhishek Goenka of PwC India said: “The decision reiterates the internationally accepted principles that a subsidiary company carrying on its own business does not by itself create a PE for its foreign holding company.”