India's GCCs too big to bill lightly: Backend hubs face tax claims

India has become a go-to destination for many foreign companies looking to set up back offices or tech hubs — formally known as global capability centres (GCCs). These centres handle information technology (IT) services, finance, customer support, software development, and more, primarily for parent companies based in the US, Europe, or elsewhere.

 

Recently, at an event hosted by the Confederation of Indian Industry, Finance Minister Nirmala Sitharaman said: “There are about 1,800 GCCs in India, employing nearly 2.16 million professionals. The compound annual growth rate has been 11 per cent over the past five years. And this number of 2.16 million is expected to rise to 2.8 million by 2030.”

 

But as these centres have grown — not just in size but also in scope — the Indian tax department has begun to take a closer look, according to experts.

 

The big question: Are these companies paying their fair share of taxes in India? That question has triggered a series of tax disputes between foreign firms and Indian authorities.

 

The tug-of-profit

 

Most foreign companies compensate their Indian units using a method called ‘cost-plus’, which means reimbursing all local expenses (salaries, rent, etc) and taking a small profit margin — typically 10-15 per cent.

 

“Indian tax authorities argue that since a large portion of the actual work — whether it’s IT support, backend processing, or analytics — is carried out in India by Indian employees, the country deserves a bigger share of the global profits. That’s why they challenge the traditional cost-plus model,” says Sandeep Bhalla, partner at Dhruva Advisors.

 

But companies counter that strategic decisions, client relationships, intellectual property (IP), and risk-taking remain anchored at their global headquarters. “They argue the real value is created outside India, and that local units shouldn’t be taxed as if they control the entire business,” Bhalla adds.

 

According to Harshit Khurana, associate partner at Lakshmikumaran & Sridharan, the core issue is how these Indian units are classified. “If they’re seen as routine service providers, they get a modest margin. But if they’re deemed to be creating value or IP, it opens them up to a much heavier tax bill.”

 

This argument ties into the legal concept of ‘permanent establishment’, which refers to a fixed place of business through which a foreign company operates in another country, triggering tax liability. Permanent establishment can be triggered by a physical office, employees working consistently, or a dependent agent regularly finalising contracts on the company’s behalf.

 

“If Indian teams are effectively controlling key decisions or acting on behalf of the parent company, it could be considered a permanent establishment, bringing much more of the company’s global income into India’s tax net. But proving that isn’t easy. Courts have held that having a large team isn’t enough: control and risk must also sit in India for it to count,” Bhalla explains.

 

Several multinationals with GCCs in India are currently facing transfer pricing audits. While many names remain confidential, tax experts point to active cases involving Deloitte, IBM, and Salesforce.

 

Emails sent to these companies went unanswered until the time of going to press.

 

“One of the biggest flashpoints is IP ownership,” Khurana says. “For example, in e-commerce, companies claim software IP is owned by the overseas entity. But if decision-makers are based in India, the tax office argues that India deserves a larger slice of the profits.”

 

“Disputes often stem from how the company and its services are characterised. Back-office work is sometimes equated with high-end analytics firms. That mismatch is fomenting litigation,” Khurana adds.

 

In some cases, Indian subsidiaries are being classified as dependent agents for their foreign parents, especially when they’re negotiating deals or interfacing directly with clients. That adds another layer to the permanent establishment debate.

 

Safe harbour, rough waters

 

In March, the government raised the cap for international transactions eligible under safe harbour rules from ₹200 crore to ₹300 crore. The idea was to give mid-sized companies a way to avoid disputes by accepting prefixed profit margins. But many larger GCCs remain excluded.

 

“The prescribed profit margins under safe harbour are high — 17 per cent or more. Most companies operate at 10–15 per cent. So they either don’t qualify or find it unviable,” says Ved Jain, tax expert and former president of the Institute of Chartered Accountants of India.

 

A senior finance ministry official says the safe harbour rules were designed for GCCs engaged in relatively simple, low-risk functions. “The real challenge is with large multinationals whose GCCs in India now handle complex, high-value work. This is a growing concern that needs policy clarity,” he says.

 

While advance pricing agreements (APAs) offer predictability, many companies shy away from them because the process is expensive, time-consuming, and demands extensive disclosures. “So businesses often opt for quicker fixes to avoid drawn-out litigation,” the official adds.

 

There’s an urgent need to update the tax framework to reflect the evolving role of GCCs. “While transfer pricing disputes are more common, the root cause is how these centres are categorised. Existing rules need to acknowledge their shifting functional profile,” the official says.

 

An email sent to the finance ministry also went unanswered until the time of going to press.

 

Fighting fires with fine print

 

When disputes arise, companies generally choose between two paths:

 

·         Litigation: Contesting the tax demand in tribunals or courts

 

·         Agreements: Settling through mechanisms like APAs or the mutual agreement procedure (MAP)

 

There are two main reasons companies hesitate to pursue APAs.

 

First, APAs are based on the current business model, but many GCCs evolve rapidly. What’s true today might not be true in two years. That makes long-term certainty elusive.

 

Second, APA proceedings take time — usually two to three years. Meanwhile, tax assessments run in parallel. “So companies bear the burden of APA filings and still have to defend their case before the transfer pricing officer. That dual strain makes the APA route less appealing for many, who then prefer to directly face assessments rather than get locked into a lengthy APA process,” Khurana explains.

 

MAP is used when two countries — say, India and the US — disagree over tax treatment. Government negotiators resolve the issue to prevent double taxation.

 

“MAP works well for India–US disputes. It saves time and avoids endless appeals. But it has limits. It can’t resolve permanent establishment or deemed transactions, and once a tribunal issues a ruling, the MAP option is off the table,” Bhalla says.

 

Jain suggests the government could explore a presumptive taxation model to address the rising number of GCC-related disputes.

 

“Such a presumptive tax regime could streamline compliance and offer certainty to companies running captive operations in India, many of whom are caught in prolonged litigation,” he says.

 

According to Bhalla, the dispute resolution panel mechanism also needs strengthening, with clear and consistent guidelines to deal with the increasingly complex and evolving functions of GCCs. “The safe harbour framework needs a strategic overhaul, especially higher turnover and margin thresholds, so that more companies can benefit from its certainty,” he says.