Delhi ITAT rules on constitution of PE in case of outsourcing of services to an Indian affiliate and on attribution of profits to such a PE

Court: Delhi Income Tax Appellate Tribunal

Citation: eFunds Corporation and eFunds IT Solutions Inc.

Brief :The ITAT held that the relationship of the Taxpayers with their Indian subsidiary to whom the Taxpayers had sub contracted/assigned provision of software development and call center services, resulted in a permanent establishment (PE) of the Taxpayers in India under the India-USA Double Taxation Avoidance Agreement (DTAA). The ITAT held that a PE was constituted on account of activities of the subsidiary which effectively resulted in the Taxpayers carrying on their business in India.

The ITAT, subject to some adjustments, broadly upheld the approach adopted by the Indian Tax Authority of attributing profits to the PE by allocating the global profits based on a proportion of Indian assets to global assets. The ITAT also held that the conclusions reached in a Mutual Agreement Procedure (MAP) for a particular financial year could form the basis for the Tax Authority to reach a conclusion for other years, if there are no differences in facts for the years.

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