Taxation Law

ADIT v. E-Funds IT Solution Inc.

[2017] 86 taxmann.com 240 (SC); (2018) 13 SCC 294

Facts

E-Funds Corporation and E-Funds IT Solutions were companies resident in the United States.
Their group provided electronic-payment processing, ATM-management, software and related services to customers outside India.
E-Funds India was an indirectly owned Indian subsidiary.
The Indian company provided back-office and information-technology-enabled services to the American companies.
The transactions between the Indian company and the American entities were subject to transfer-pricing assessment.
The Revenue argued that the American companies had:
a fixed-place PE through E-Funds India’s premises;
a service PE through employees present in India;
an agency PE through the Indian subsidiary.
The Delhi High Court rejected the Revenue’s case.
The Revenue appealed to the Supreme Court.

The initial burden of proving a foreign enterprise’s PE lies on the Revenue.
A fixed-place PE requires:
a specific place in India;
that place to be at the foreign enterprise’s disposal;
the foreign enterprise to carry on its own business through that place.
A subsidiary does not become the parent’s PE merely because:
it is wholly owned;
it provides services exclusively or substantially to the parent;
the parent saves costs by outsourcing work to it.
A service PE requires treaty conditions concerning services performed through employees or personnel in India.
An agency PE requires the agent to perform the functions expressly described in the treaty.

E-Funds India carried on its own service business from its Indian premises.
The Revenue did not identify any particular office or facility which the US companies could use at their own discretion.
The Indian premises were used to perform contractual services for the US companies, not as a location from which the US companies themselves conducted their foreign customer business.
The fact that the subsidiary’s services were commercially important did not satisfy the disposal test.
The group’s:
ATM networks;
software infrastructure;
customer-facing systems;
principal business assets were located outside India.
For service PE, the Revenue relied on two employees who were present in India during one year.
However, the evidence did not establish that they were performing the US companies’ customer services from India.
Their functions and reporting relationships had not been properly determined.
Mere stewardship, quality control or protection of the parent’s interest would not automatically create a service PE.
The Revenue also failed to prove an agency PE.
E-Funds India did not:
habitually conclude contracts for the US companies;
maintain stock for delivery;
habitually secure orders within the treaty provision.
A previous mutual-agreement settlement for different assessment years did not bind the parties for all later years because the settlement itself stated that it was not precedential.

The Supreme Court dismissed the Revenue’s appeals.
It held that the US companies had:
no fixed-place PE;
no proven service PE;
no agency PE in India.
The Indian subsidiary’s premises were not at the disposal of the American companies.
The judgment confirms that ownership and close commercial integration with an Indian subsidiary are not substitutes for satisfying the specific treaty tests.