India: Court Ruling Outsourced Services to Non-Resident Company Not PE
Article 5 of the India-US Income Tax Treaty indicates that services provided in India will constitute a permanent establishment (PE) in India. However, on October 24, 2017, the Supreme Court of India gave its decision in ADIT v. E-Funds IT Solution Inc. (C.A. 6082/2015) indicating that outsourced work to a taxpayer’s subsidiary in India does not constitute PE in India for the taxpayer.
In this case, the taxpayer was a US resident and provided IT services with certain support services outsourced to an Indian subsidiary. Local tax authorities argued that the Indian subsidiary was considered a PE of the taxpayer as that the taxpayer was rendering services using local employees of the subsidiary.
However, the case was made indicating that the taxpayer’s main revenue-driving business activity was not carried out through a fixed place of business in India, and the support services provided by the subsidiary were ancillary in nature. As only auxiliary operations were carried on in India that facilitate the taxpayer’s services (provided from the US), it was determined that none of the taxpayer's customers were receiving services "within" India and, as such, the service did not constitute a PE.