(2007) 292 ITR 416 (SC)
Income deemed to accrue or arise in India; double taxation relief
Outsourcing to a captive performing support functions does not create a fixed place or agency permanent establishment, though deputation of the parent's employees can create a service permanent establishment. Where the captive is remunerated at arm's length, nothing further is attributable.
Does a captive back-office subsidiary create a permanent establishment of its foreign parent, and if so, what further profits may be attributed once the subsidiary is remunerated at arm's length?
A United States investment bank outsourced certain back-office and support functions — data processing, research support and account reconciliation — to its Indian group company, which was remunerated on a cost-plus basis. The US entity also deputed some of its own personnel to India as stewards to protect its interests and monitor quality, and seconded others who worked under the Indian company's control. The question arose whether these arrangements created a permanent establishment in India and, if so, what profits were attributable to it.
The matter came to the Supreme Court from the Authority for Advance Rulings, and was decided together with issues concerning the attribution of profits where transfer pricing had already been applied.
For the assessee
The Indian company performs its own business of providing support services and is separately compensated at arm's length. The US entity has no place at its disposal and conducts no business of its own through the Indian premises. Stewardship activity undertaken to protect its own interest as a customer does not amount to carrying on business in India.
For the Revenue
The Indian entity works exclusively for the group, using its systems and performing functions integral to the parent's business, and the presence of the parent's personnel in India reinforces the connection. A permanent establishment exists and a share of the global profits attributable to the Indian operations should be taxed.
The Court addressed the three limbs separately. On fixed place, it held that the Indian company carried on its own business of rendering outsourced services and the US entity had no premises at its disposal through which it conducted business, so no fixed place permanent establishment arose from the outsourcing itself. On agency, it held that the Indian company had no authority to conclude contracts binding the parent and did not habitually do so. On service permanent establishment, the Court drew an important distinction: employees deputed purely as stewards, to protect the parent's interest in the quality of work done for it, do not render services to the Indian entity and do not create a permanent establishment; but employees seconded to work under the Indian entity's control, contributing to its operations, can constitute a service permanent establishment because the parent is thereby furnishing services in India through personnel. On attribution, the Court held that where the associated enterprise has been remunerated at an arm's length price that properly reflects the functions performed, assets used and risks assumed, the transfer pricing analysis exhausts the profits attributable to the permanent establishment and nothing further falls to be taxed.
Central to India's outsourcing and global capability centre model under Sections 9 and 159 of the IT Act 2025. The attribution holding is the more valuable half in practice: it means a robust transfer pricing position operates as a defence on attribution even where a permanent establishment is found. Read with E-Funds on existence and Samsung Heavy Industries on the burden of proof.