Mere outsourcing business to Indian subsidiary do not constitute Permanent Establishment within the meaning of Double Taxation Avoidance Agreement – Supreme Court
ABCAUS Case Law Citation:
ABCAUS 2105 (2017) (10) SC
The Hon’ble Supreme Court of India in a recent judgment has laid down that outsourcing of services by a US based company to Indian company would not constitute Permanent Establishment (PE). A division bench of the Apex Court upheld the decision of Delhi High court which was pronounced in favour of the assesse.
The Hon’ble Supreme Court concurred with the view taken by Delhi High Court that,
“it is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business. There is, in fact, no specific finding in the assessment order or the appellate orders that applying the aforesaid tests, any fixed place of business has been put at the disposal of these companies. The assessing officer, CIT (Appeals) and the ITAT have essentially adopted a fundamentally erroneous approach in saying that they were contracting with a 100% subsidiary and were outsourcing business to such subsidiary, which resulted in the creation of a PE”.
The Court observed that,
“no part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment is, therefore, correct on this score”.
The appeal of the Revenue was dismissed by the bench comprising of Justice R.F. Nariman and Justice Sanjay Kishan Kaul observing that,
“no permanent establishment in India can possibly be said to exist on the facts of the present case, we do not deem it necessary to go into the cross-appeals that were filed before the High Court, which were dismissed by the High Court agreeing with the ITAT that the calculation of the ITAT would lead to nil taxation. This point would not arise in view of our decision on the facts of the present case. It is, therefore, unnecessary to go into this aspect of the matter”.
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