EXL Service.com deemed not to have a PE in India

by | Dec 26, 2023

Last week, in the EXL Service.Com, Inc. case, the Delhi Income-tax Appellate Tribunal (Tribunal) followed the Supreme Court’s rulings in the Formula One and E-Funds cases and, inter alia, held that a US taxpayer does not have a fixed place permanent establishment (PE), a Service PE or a Dependent Agent PE in India merely because it owns 100% of the Indian subsidiary’s share capital.  Further, as a major shareholder, the US taxpayer had a legal right to nominate a director on the board of its subsidiary, which does not mean that the US taxpayer has its place of management in India.

The Tribunal noted that the US taxpayer had only entered into a works contract with its Indian subsidiary, and core activities such as strategy development, sales, marketing, key management functions, contract negotiation, and customer relationship management were handled by the US taxpayer from outside India.

This is a welcome ruling as PE and profit attribution is a major source of pain for foreign multinationals operating in India.  In order to avoid a potential PE risk, MNCs should undertake a risk-based assessment on what constitutes control, back-office functions and core income generating activities. 

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