INTERNET LAW - Do Outsourcing Companies Constitute Permanent Establishment in India?
INTERNET LAW - Do Outsourcing Companies Constitute Permanent Establishment in India? June, 05th 2008 Supreme Court of India ruled on the issue of whether foreign companies with business process outsourcing companies in India were deemed to have permanent establishment for taxation purposes. European and United States companies are increasingly opting for business process outsourcing companies (BPO) in India. Reduction on production costs is the main reason for this corporate shift. Besides, India is an English speaker nation with high quality professionals in information technology and accounting. It is fair to say that India is to corporate services as China is to manufacturing. Thus far since India follows the corporate establishment principles for taxation purposes, the obvious question for any foreign company is what is my company’s tax liability for BPOs in India? Are those BPOs creating permanent establishment for my foreign company? These questions were answered by the India Supreme Court ruling in DIT v. Morgan Stanley & Co. Even though the ruling on DIT v. Morgan Stanley and Co., [(2007) 292 ITR 416 (SC)] is rendered for the specific facts the case posted, this Indian Supreme Court decision is extremely important for any foreign company holding BPOs in India. This case rules on how Indian tax authorities may tax BPO companies and whether BPO companies constitute permanent establishment.