We outsource back-office work to our Indian subsidiary. Does that give us a permanent establishment in India?
No, not by itself. The Revenue must prove that a fixed place in India was at the disposal of the foreign company and that the foreign company carried on its own business through it. Close association between parent and subsidiary, and the fact that the Indian company depends on the group for its work, do not answer that question, and the functions-assets-risks analysis borrowed from transfer pricing is not the test for whether a fixed place permanent establishment exists.
Decided by the Supreme Court (Supreme Court of India — R.F. Nariman and Sanjay Kishan Kaul, JJ; the judgment was delivered by Nariman J. Civil Appeal Nos. 6082 to 6085, 6087 to 6097, 6099, 6100 to 6104 of 2015, 2962 of 2016 and 16958 of 2017) on 2017-10-24, reported as [2017] 86 taxmann.com 240 (SC); [2017] 251 Taxman 280 (SC); [2017] 399 ITR 34 (SC); (2018) 13 SCC 294. It bears on section 9, section 90, section 90(1), section 90(2), section 92CA, section Article 5, section Article 7, section Article 27 of the Income Tax Act 1961, in Assessment & Scrutiny and Residence & Treaty Benefit matters.
This is the answer to the most common Indian permanent establishment assertion: that a captive Indian service company doing work for its overseas group is the group's presence in India. The decision puts the burden on the Revenue, keeps the three treaty limbs separate, and refuses to let a transfer pricing functional analysis stand in for the disposal test. Read with Hyatt, it marks the line: doing work for the foreign principal is not enough; taking control of the principal's own business from Indian premises is.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
The assessees were two companies incorporated and resident in the United States, e-Funds Corporation (assessment years 2000-01 to 2002-03 and 2004-05 to 2007-08) and e-Funds IT Solutions Group Inc. (assessment years 2000-01 to 2002-03 and 2005-06 to 2007-08), both assessed and taxed on their global income in the United States. Their four business verticals were ATM management services, electronic payment management, decision support and risk management, and global outsourcing and professional services. The Indian company, e-Funds International India Private Limited, was reached through a chain of holdings — e-Funds Corp held IDLX Corporation, which held IDLX International BV in the Netherlands, which held IDLX Holding BV, which held e-Funds India. e-Funds India provided back-office, call centre, software development and support services; the ATM networks, software platforms and information technology infrastructure were all located outside India, and no customer of the US companies was in India. The Transfer Pricing Officer, by an order dated 22 February 2006, drew no adverse inference on the arm's length price of the international transactions. The Assessing Officer, the Commissioner (Appeals) and the Tribunal held that the US companies had a permanent establishment in India; the Delhi High Court allowed the assessees' appeals and rejected the Revenue's cross-appeals, and the Revenue came to the Supreme Court.
There was no fixed place permanent establishment, no service permanent establishment and no agency permanent establishment, and the Revenue's appeals were dismissed with no order as to costs (para 30). On the fixed place limb, there must be a fixed place of business in India at the disposal of the US companies through which they carry on their own business, and there was no such finding at any stage; treating the contracting with and outsourcing of work to a wholly owned subsidiary as itself creating a permanent establishment was a fundamentally erroneous approach (para 12). On the service limb under Article 5(2)(l), a service permanent establishment arises where a customer is rendered a service in India, whether that customer is resident in India or outside it; here no customer received any service in India and only auxiliary operations facilitating those services were carried out in India, so the first part of the Article was not attracted and the rest of it did not arise (para 20). On the agency limb, which had been given up before the Tribunal, it had never been the Revenue's case that e-Funds India was authorised to or exercised any authority to conclude contracts for the US companies, and no factual foundation for Article 5(4) had been laid (para 21). The Court also held, following DIT v. Morgan Stanley, that because the arm's length principle had been satisfied on the Transfer Pricing Officer's order, no further profits would be attributable even if a permanent establishment did exist (para 22); that the mutual agreement procedure resolution of 23 April 2007 could not be treated as a precedent for subsequent years (para 27); and that the argument for an adverse inference from non-disclosure of documents could not be entertained, never having been raised below (para 28). The burden of proving that a foreign assessee has a permanent establishment in India is initially on the Revenue (para 10).
The Court began from the statutory footing: the Income-tax Act, and s.90 in particular, does not speak of a permanent establishment, which is a creature only of the treaty; by Article 7(1) the business income of a US company is taxable only in the United States unless it has a permanent establishment in India, and the burden of proving one is initially on the Revenue (para 10). On the fixed place limb it took the meaning of 'fixed place of business' to be no longer res integra, setting out at length its own decision in Formula One World Championship Ltd. — the principal test is that the premises be at the disposal of the enterprise, ownership or tenancy being unnecessary but mere access being insufficient, together with the passages from Philip Baker, Klaus Vogel and the OECD Commentary that judgment collected (para 11). Applying that, it found no finding anywhere that a fixed place had been put at the disposal of the US companies, and held the approach below — that contracting with and outsourcing to a wholly owned subsidiary created a permanent establishment — fundamentally erroneous (para 12). It then set out and agreed with the High Court's reasoning that close association between e-Funds India and the assessees, e-Funds India's dependence on them for its earnings, the level of risk it bore, the cost-plus basis of its remuneration and a functions-performed, assets-used and risks-assumed analysis are all beside the point on the fixed place question, and that a subsidiary does not become a location permanent establishment merely because there are cross transactions with the foreign principal or because the foreign entities saved expenditure by moving back office work to India (paras 12-13). Reliance on the group's US Securities and Exchange Commission Form 10K report was misplaced because that report and its consolidated statements speak of the group worldwide (para 14). On the service limb it read Article 5(2)(l) as directed to the delivery of services to customers, so that auxiliary operations performed in India while every customer received the service abroad did not qualify (para 20). On attribution it applied Morgan Stanley: where an associated enterprise that also constitutes a permanent establishment has been remunerated on an arm's length basis taking account of its risk-taking functions, nothing further is left to attribute (para 22). On the mutual agreement procedure it accepted paragraph 3.6 of the OECD Manual, that competent authority agreements are case and time specific and are not precedents for later years, noting the United States Treasury's own letter of 7 May 2007 recording that the agreement was reached to avoid double taxation and not on the technical merits, and that the determination was not binding on subsequent years (paras 25-27).
Thus, 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.
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Handle my notice → Ask a CA on WhatsAppNo, not by itself. The Revenue must prove that a fixed place in India was at the disposal of the foreign company and that the foreign company carried on its own business through it. Close association between parent and subsidiary, and the fact that the Indian company depends on the group for its work, do not answer that question, and the functions-assets-risks analysis borrowed from transfer pricing is not the test for whether a fixed place permanent establishment exists. This was decided by the Supreme Court (Supreme Court of India — R.F. Nariman and Sanjay Kishan Kaul, JJ; the judgment was delivered by Nariman J. Civil Appeal Nos. 6082 to 6085, 6087 to 6097, 6099, 6100 to 6104 of 2015, 2962 of 2016 and 16958 of 2017) and bears on section 9, section 90, section 90(1), section 90(2), section 92CA, section Article 5, section Article 7, section Article 27 of the Income Tax Act 1961. It is reported as [2017] 86 taxmann.com 240 (SC); [2017] 251 Taxman 280 (SC); [2017] 399 ITR 34 (SC); (2018) 13 SCC 294. This is the answer to the most common Indian permanent establishment assertion: that a captive Indian service company doing work for its overseas group is the group's presence in India. The decision puts the burden on the Revenue, keeps the three treaty limbs separate, and refuses to let a transfer pricing functional analysis stand in for the disposal test. Read with Hyatt, it marks the line: doing work for the foreign principal is not enough; taking control of the principal's own business from Indian premises is. If it applies to you, the first step is this: Ask the Revenue to identify the fixed place said to be at the disposal of the foreign company, and to show what business of the foreign company was carried on there.
The assessees were two companies incorporated and resident in the United States, e-Funds Corporation (assessment years 2000-01 to 2002-03 and 2004-05 to 2007-08) and e-Funds IT Solutions Group Inc. (assessment years 2000-01 to 2002-03 and 2005-06 to 2007-08), both assessed and taxed on their global income in the United States. Their four business verticals were ATM management services, electronic payment management, decision support and risk management, and global outsourcing and professional services. The Indian company, e-Funds International India Private Limited, was reached through a chain of holdings — e-Funds Corp held IDLX Corporation, which held IDLX International BV in the Netherlands, which held IDLX Holding BV, which held e-Funds India. e-Funds India provided back-office, call centre, software development and support services; the ATM networks, software platforms and information technology infrastructure were all located outside India, and no customer of the US companies was in India. The Transfer Pricing Officer, by an order dated 22 February 2006, drew no adverse inference on the arm's length price of the international transactions. The Assessing Officer, the Commissioner (Appeals) and the Tribunal held that the US companies had a permanent establishment in India; the Delhi High Court allowed the assessees' appeals and rejected the Revenue's cross-appeals, and the Revenue came to the Supreme Court. The matter was decided on 2017-10-24 by the Supreme Court (Supreme Court of India — R.F. Nariman and Sanjay Kishan Kaul, JJ; the judgment was delivered by Nariman J. Civil Appeal Nos. 6082 to 6085, 6087 to 6097, 6099, 6100 to 6104 of 2015, 2962 of 2016 and 16958 of 2017). On those facts the Supreme Court held as follows. There was no fixed place permanent establishment, no service permanent establishment and no agency permanent establishment, and the Revenue's appeals were dismissed with no order as to costs (para 30). On the fixed place limb, there must be a fixed place of business in India at the disposal of the US companies through which they carry on their own business, and there was no such finding at any stage; treating the contracting with and outsourcing of work to a wholly owned subsidiary as itself creating a permanent establishment was a fundamentally erroneous approach (para 12). On the service limb under Article 5(2)(l), a service permanent establishment arises where a customer is rendered a service in India, whether that customer is resident in India or outside it; here no customer received any service in India and only auxiliary operations facilitating those services were carried out in India, so the first part of the Article was not attracted and the rest of it did not arise (para 20). On the agency limb, which had been given up before the Tribunal, it had never been the Revenue's case that e-Funds India was authorised to or exercised any authority to conclude contracts for the US companies, and no factual foundation for Article 5(4) had been laid (para 21). The Court also held, following DIT v. Morgan Stanley, that because the arm's length principle had been satisfied on the Transfer Pricing Officer's order, no further profits would be attributable even if a permanent establishment did exist (para 22); that the mutual agreement procedure resolution of 23 April 2007 could not be treated as a precedent for subsequent years (para 27); and that the argument for an adverse inference from non-disclosure of documents could not be entertained, never having been raised below (para 28). The burden of proving that a foreign assessee has a permanent establishment in India is initially on the Revenue (para 10).
The Court began from the statutory footing: the Income-tax Act, and s.90 in particular, does not speak of a permanent establishment, which is a creature only of the treaty; by Article 7(1) the business income of a US company is taxable only in the United States unless it has a permanent establishment in India, and the burden of proving one is initially on the Revenue (para 10). On the fixed place limb it took the meaning of 'fixed place of business' to be no longer res integra, setting out at length its own decision in Formula One World Championship Ltd. — the principal test is that the premises be at the disposal of the enterprise, ownership or tenancy being unnecessary but mere access being insufficient, together with the passages from Philip Baker, Klaus Vogel and the OECD Commentary that judgment collected (para 11). Applying that, it found no finding anywhere that a fixed place had been put at the disposal of the US companies, and held the approach below — that contracting with and outsourcing to a wholly owned subsidiary created a permanent establishment — fundamentally erroneous (para 12). It then set out and agreed with the High Court's reasoning that close association between e-Funds India and the assessees, e-Funds India's dependence on them for its earnings, the level of risk it bore, the cost-plus basis of its remuneration and a functions-performed, assets-used and risks-assumed analysis are all beside the point on the fixed place question, and that a subsidiary does not become a location permanent establishment merely because there are cross transactions with the foreign principal or because the foreign entities saved expenditure by moving back office work to India (paras 12-13). Reliance on the group's US Securities and Exchange Commission Form 10K report was misplaced because that report and its consolidated statements speak of the group worldwide (para 14). On the service limb it read Article 5(2)(l) as directed to the delivery of services to customers, so that auxiliary operations performed in India while every customer received the service abroad did not qualify (para 20). On attribution it applied Morgan Stanley: where an associated enterprise that also constitutes a permanent establishment has been remunerated on an arm's length basis taking account of its risk-taking functions, nothing further is left to attribute (para 22). On the mutual agreement procedure it accepted paragraph 3.6 of the OECD Manual, that competent authority agreements are case and time specific and are not precedents for later years, noting the United States Treasury's own letter of 7 May 2007 recording that the agreement was reached to avoid double taxation and not on the technical merits, and that the determination was not binding on subsequent years (paras 25-27). In the words reproduced by the source cited on this page: "Thus, 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 decision followed or applied Formula One World Championship Ltd. v. CIT (International Taxation) [2017] 394 ITR 80 / 80 taxmann.com 347 (SC); DIT v. Morgan Stanley & Co. Inc. [2007] 292 ITR 416 / 162 Taxman 165 (SC).
It was decided by the Supreme Court on 2017-10-24 and is reported as [2017] 86 taxmann.com 240 (SC); [2017] 251 Taxman 280 (SC); [2017] 399 ITR 34 (SC); (2018) 13 SCC 294. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 9, section 90, section 90(1), section 90(2), section 92CA, section Article 5, section Article 7, section Article 27, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. There was no fixed place permanent establishment, no service permanent establishment and no agency permanent establishment, and the Revenue's appeals were dismissed with no order as to costs (para 30). On the fixed place limb, there must be a fixed place of business in India at the disposal of the US companies through which they carry on their own business, and there was no such finding at any stage; treating the contracting with and outsourcing of work to a wholly owned subsidiary as itself creating a permanent establishment was a fundamentally erroneous approach (para 12). On the service limb under Article 5(2)(l), a service permanent establishment arises where a customer is rendered a service in India, whether that customer is resident in India or outside it; here no customer received any service in India and only auxiliary operations facilitating those services were carried out in India, so the first part of the Article was not attracted and the rest of it did not arise (para 20). On the agency limb, which had been given up before the Tribunal, it had never been the Revenue's case that e-Funds India was authorised to or exercised any authority to conclude contracts for the US companies, and no factual foundation for Article 5(4) had been laid (para 21). The Court also held, following DIT v. Morgan Stanley, that because the arm's length principle had been satisfied on the Transfer Pricing Officer's order, no further profits would be attributable even if a permanent establishment did exist (para 22); that the mutual agreement procedure resolution of 23 April 2007 could not be treated as a precedent for subsequent years (para 27); and that the argument for an adverse inference from non-disclosure of documents could not be entertained, never having been raised below (para 28). The burden of proving that a foreign assessee has a permanent establishment in India is initially on the Revenue (para 10). It arises in Assessment & Scrutiny and Residence & Treaty Benefit matters, on section 9, section 90, section 90(1), section 90(2), section 92CA, section Article 5, section Article 7, section Article 27 of the Income Tax Act 1961, and was decided by Supreme Court of India — R.F. Nariman and Sanjay Kishan Kaul, JJ; the judgment was delivered by Nariman J. Civil Appeal Nos. 6082 to 6085, 6087 to 6097, 6099, 6100 to 6104 of 2015, 2962 of 2016 and 16958 of 2017. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Deal with the three limbs separately in the reply — fixed place, service PE and agency PE — because each has different ingredients and the department usually argues them as one. For the service PE limb, establish where the customers were and where the services were received, since services must be furnished within India. For the agency limb, put on record that the Indian company has no authority to conclude contracts for the foreign company, and keep the contracting trail to prove it. Do not concede a permanent establishment because the transfer pricing study describes the Indian company as bearing limited risk; that analysis is not the location test.
Still good law. Considered by the Supreme Court in Hyatt International Southwest Asia Ltd. v. Additional Director of Income-tax [2025] 176 taxmann.com 783 (SC) / [2025] 478 ITR 238 (SC), decided 24 July 2025, which distinguished it rather than doubting it: at para 20 that Court held reliance on this decision wholly misplaced because here the Indian subsidiary merely provided back-office support and was compensated on an arm's length basis with no involvement in core business functions, whereas in Hyatt the hotel itself was the situs of the foreign enterprise's primary business operations, carried out under its direct supervision. No later decision applying or following this judgment was located, so it is recorded as good law on the strength of that express treatment by a later Bench, not on the strength of a following citation. This decision affirmed Director of Income-tax v. E-Funds IT Solution [2014] 42 taxmann.com 50 (Delhi). No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment was read in full. The sentence previously quoted here — that close association and dependence between the US company and the Indian companies is irrelevant — was a digest headnote and does not appear in the judgment in that form; the nearest thing to it is a passage of the Delhi High Court's judgment which the Supreme Court set out at its para 12 and agreed with at para 13. Two limits on the decision as authority. The agency permanent establishment point was given up before the Tribunal and was dealt with only for completeness (para 21), so the case decides nothing contested on Article 5(4). And the Court's alternative holding on attribution — that once the Indian associate has been remunerated at arm's length nothing further is attributable — rests on the Transfer Pricing Officer's order of 22 February 2006 accepting the declared price, so it does not help a taxpayer whose transfer pricing has been adjusted. The decision answers the existence of a permanent establishment on the facts found and on where the burden lay, which the Court put initially on the Revenue (para 10). It does not tell you what evidence would have discharged that burden, beyond that a specific finding that a fixed place was at the enterprise's disposal is required. It does not decide the agency limb on contested facts. And it does not settle what happens where the Indian associate's remuneration is not accepted as arm's length — the Court's attribution holding assumes it was. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
There was no fixed place permanent establishment, no service permanent establishment and no agency permanent establishment, and the Revenue's appeals were dismissed with no order as to costs (para 30). On the fixed place limb, there must be a fixed place of business in India at the disposal of the US companies through which they carry on their own business, and there was no such finding at any stage; treating the contracting with and outsourcing of work to a wholly owned subsidiary as itself creating a permanent establishment was a fundamentally erroneous approach (para 12). On the service limb under Article 5(2)(l), a service permanent establishment arises where a customer is rendered a service in India, whether that customer is resident in India or outside it; here no customer received any service in India and only auxiliary operations facilitating those services were carried out in India, so the first part of the Article was not attracted and the rest of it did not arise (para 20). On the agency limb, which had been given up before the Tribunal, it had never been the Revenue's case that e-Funds India was authorised to or exercised any authority to conclude contracts for the US companies, and no factual foundation for Article 5(4) had been laid (para 21). The Court also held, following DIT v. Morgan Stanley, that because the arm's length principle had been satisfied on the Transfer Pricing Officer's order, no further profits would be attributable even if a permanent establishment did exist (para 22); that the mutual agreement procedure resolution of 23 April 2007 could not be treated as a precedent for subsequent years (para 27); and that the argument for an adverse inference from non-disclosure of documents could not be entertained, never having been raised below (para 28). The burden of proving that a foreign assessee has a permanent establishment in India is initially on the Revenue (para 10).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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