(2018) 399 ITR 34 (SC)
Income deemed to accrue or arise in India; double taxation relief
No. A permanent establishment requires a fixed place at the foreign enterprise's disposal through which it carries on its own business. Close commercial dependence between group companies does not by itself create one.
Does outsourcing work to an Indian group company, which is remunerated at arm's length, create a permanent establishment of the foreign entity in India?
Two US companies carried on business in data processing and electronic payment services for customers outside India. They had an Indian subsidiary which performed back-office and support functions for them, including data processing and software development, and which was remunerated on a cost-plus basis that had been accepted as being at arm's length in the transfer pricing assessment. The Revenue contended that the Indian subsidiary's premises and personnel constituted a fixed place permanent establishment of the US companies, and alternatively a service permanent establishment and a dependent agent permanent establishment, and sought to attribute profits accordingly.
The Tribunal found a permanent establishment on certain grounds. The Delhi High Court reversed in substantial part, holding that no permanent establishment existed. The Revenue appealed to the Supreme Court.
For the assessee
The Indian subsidiary carried on its own business of providing services to the US companies and was fully remunerated for it at arm's length. The US companies had no place at their disposal in India and carried on no business of their own through the subsidiary's premises. Dependence of the subsidiary on group business does not convert its premises into the parent's place of business.
For the Revenue
The Indian company existed solely to service the US companies, was assigned business by them, used their software and hardware, and was economically wholly dependent on them. Its employees effectively carried on the US companies' business, and its premises amounted to a fixed place of the US companies in India.
The Court held that the enquiry must focus on whether the foreign enterprise carried on its own business through a place at its disposal in India. It found that the Indian subsidiary was performing its own contracted activity — rendering services to the US companies — and was compensated for doing so. The fact that it depended on the group for its business, that assets or software were made available to it, or that the arrangement was close and continuous, did not convert the subsidiary's premises into a place of business of the US companies. The Court emphasised that a subsidiary is a distinct legal entity, and that the existence of a parent-subsidiary relationship does not create a permanent establishment. On the service permanent establishment limb, it held that the requirement is that the foreign enterprise furnish services in India through employees or other personnel, and there was no finding that the US companies' own employees had rendered services in India in the relevant sense. On the agency limb, it held that the subsidiary had no authority to conclude contracts on behalf of the US companies and did not habitually do so. The Court also observed that where the Indian entity is remunerated at arm's length for the functions it performs, nothing further remains to be attributed even if a permanent establishment were found.
Central to the Indian outsourcing and global capability centre model, and still the answer under Section 9 where the Revenue seeks to find a permanent establishment in a captive subsidiary that is separately remunerated at arm's length. The final observation on attribution is frequently as important as the finding on existence.