HC ruling to restrict I-T dept from taxing global MNCs' income

Providing relief to the information technology and information technology-enabled services sector, the high court here has ruled Indian subsidiaries providing back-end services to foreign parent companies cannot be considered their permanent establishments in India if these conduct business at arm's length.

The verdict will prevent authorities from taxing a part of the parent company's income by attributing it to the Indian subsidiary. Permanent establishments representing a fixed place of business of a foreign company are taxed at 40 per cent (along with surcharge), while other subsidiaries conducting business at arm's length are taxed at 30 per cent (plus surcharge).

"It is a significant and welcome ruling for the outsourcing industry. The ruling emphasises unless it is factually proved the Indian group entity is acting on behalf of its foreign parent or is really representing its foreign parent in India, it cannot be regarded as its PE (permanent establishment). Proper factual evaluation of the dealing and the business model is necessary," said Sanjay Sanghvi, partner at law firm Khaitan & Co.

The judgment related to a case of international transactions between e-Fund Corp and e-Fund Inc incorporated in the US and e-Fund India, their subsidiary here. The subsidiary catered to back-office operations related to automated teller machine management services, electronic payments, decision-support services, risk management and professional services rendered by its parent.

The court ruled e-Fund India wouldn't be deemed as PE of the US parent because it had no fixed place of business in India through which its business was wholly or partly conducted. Also, the parent company had no right to use any of the premises belonging to e-Fund India. The court rejected the revenue department's argument that employees of foreign enterprises involved in domestic operations amounted to service PE of foreign enterprises, saying mere indirect control didn't amount to a PE.

"For long, the revenue department has been taking a view that all contract manufacturers are PEs of foreign companies. They were trying to get a slice of global profit of these companies. This is one of most important rulings on international taxation in the history of Indian tax jurisprudence, having a huge beneficial impact on taxpayers," said Rahul Mitra, partner, PricewaterhouseCoopers.