Indian High Court rules against contract service provider constituting India PE of foreign principal

Tax Controversy & Dispute Resolution ()
The Indian Revenue authorities have been trying to allege that contract service providers operating in India, whether providing IT, ITeS, BPO, contract manufacturing or toll manufacturing services, on a standalone basis or by themselves, constitute permanent establishments (PEs) of their foreign principal companies. This allegation is directed towards creating taxable income, which is over and above the income being generated by the contract services providers, and is despite the fact that their operations are being undertaken on a principal-to-principal basis.

In this backdrop, the Indian High Court’s ruling in the case of e-Funds Corporation, USA and e-Funds IT Solutions Group, Inc., USA (hereinafter collectively referred to as ‘e-Funds USA’ or ‘the foreign companies’) comes as a silver lining. The foreign companies were engaged in providing IT and IT enabled services, in respect of which back office contract services were performed by e-Funds International India Private Limited (e-Funds India) for the foreign companies, under a ‘cost-plus’ remuneration model. Overturning the decision of the Indian Income-tax Appellate Tribunal (the Tribunal), the High Court (HC) has ruled in favour of e-Funds USA and against the formation of any PEs, whatsoever, of the foreign companies in India.