Multinational enterprises often outsource back-office support operations to their captive subsidiaries in India. Additionally, foreign parent companies second their employees to provide guidance to the Indian subsidiary in the provision of back-office functions. A contentious question has for some time arisen, however. Should such arrangements constitute a fixed place Permanent Establishment (PE), a service PE or a Dependant Agent PE (DAPE) for the foreign company in India?

In the 2007 case of Morgan Stanley[i], the Supreme Court (SC), while dealing with the issue of PE, held that back office functions performed by the Indian subsidiary were preparatory and auxiliary in nature and, therefore, did not constitute a fixed place PE. The SC also held that if the foreign company had deputed its employees to the Indian company to render stewardship services, then no service PE would be constituted in India.

In contrast, however, in the case of Centrica Offshore[ii] in 2014, the Delhi High Court (Del HC), held that if the terms of employment of the employees seconded to India continued to be controlled by the foreign company, it would be regarded as having constituted a service PE in India.

In the ensuing paragraphs, we discuss the recent decision of the SC in the instant case of e-Funds Corporation and its implications for resolving this long-standing issue.

Continue Reading Outsourcing of Back Office Support Functions Does Not Create a Permanent Establishment

The Income Tax Act, 1961 (IT Act) contains several provisions to prevent tax evasion. One such provision seeks to tax loans and advances made to shareholders by a closely held company as deemed dividends in the hands of the shareholders. This is intended to prevent tax evasion in situations where closely held companies distribute accumulated profit as loans or advances which are not chargeable to tax under the IT Act, instead of distributing it as dividends which is chargeable to tax under the IT Act. However, the said provision of deemed dividend is attracted subject to the satisfaction of the following conditions:

Continue Reading Supreme Court Rules: Deemed Dividends Are Taxable Only in the Hands of Shareholders

Permanent Establishment (PE) is a significant feature of bilateral tax treaties and is a key threshold adopted by source countries to tax profits earned by non-resident entities from the business activities carried out by the non-resident in the source country.

A ‘Fixed Place PE’ relates to a non-resident entity having a fixed place of business in the source country. But certain tax treaties also provide for a ‘Service PE’. A Service PE is established if: (i) the non-resident delivers services for longer than the prescribed threshold; and (ii) the said services are furnished in the source country through the employees or other personnel of the non-resident.

Traditionally, a Service PE required the physical presence of employees of the non-resident in the source country. However, in the present digital economy, this understanding is being challenged as more and more jurisdictions are doing away with this requirement.

The governments of Saudi Arabia and Israel, for example, have passed internal guidelines that suggest a non-resident would have a Service PE if it furnished services, including consultancy services, through employees or other personnel who are offshore and not physically present in the Source State. This would only be the case, however, if the activities continue (for the same or connected projects) within the Source State for more than 183 days in any 12-month period.

Continue Reading Service PE Does Not Require Physical Presence of Employees