SC Ruling on Taxing Foreign Companies

What is the issue?

• The Supreme Court has recently ruled that the income of two US companies in India cannot be taxed in India.
• This has again raised the demand for clarity on identifying and defining the nature of Permanent Establishments (PE).

What is a Permanent Establishment?

• A PE is a fixed place of business, wholly or partly carried out by a foreign enterprise operating in India.
• It could be a branch office, a place of management, a factory, a warehouse, a workshop etc.
• The complexity is that the definition of PE differs in each tax treaty and the identification of PE itself is a controversial area.
• The concept of PE determines the taxability of a foreign company in India.
• Usually, foreign companies get tax concession under Double Taxation Avoidance Treaties, and they pay taxes in their home countries.
• But if they have PEs in India, they should pay taxes for the income they have created in India i.e. profits that are attributable to the PE.

What is the recent case?

• The case relates 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% stake in IDLX Corporation, another company based in the US.
• IDLX Holding BV holds a 100% stake in e-Funds International India Private Ltd.
• IDLX International BV is also a holding company having almost a 100% stake in e-Fund Inc.
• The revenue department has held that the income of e-Fund Corp and e-Fund Inc was attributable to India as the two assesses 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 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.

What is the judgement?

• The Supreme Court has held that no part of the main business and revenue-earning activity was carried on through a fixed business place in India.
• The Indian company only rendered support services, which enabled the assesses, in turn, to offer services to their clients abroad.
• Thus the outsourcing of work to India by MNCs in itself would not give rise to a fixed place permanent establishment (PE).
• The High Court had also earlier said that a holding company or a subsidiary company by itself cannot constitute a PE.
• Consequently, the global income of these MNCs attributable to this back-office work cannot be taxed in India.
• The judgment will perceivably have repercussions for taxing outsourcing businesses as well as subsidiaries of MNCs.

Source: Business Standard