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Potential Permanent Establishment Exposure in India for Foreign Companies
The Delhi Income-tax Appellate Tribunal has delivered an important ruling on a case where the provision of services to customers outside India that are made via its Indian subsidiary would result in a business connection under the Income-tax Act, 1961 and a Permanent Establishment under Article 5 of India-USA tax treaty. Taxand India discusses the background facts to the case and the effect this ruling will have on future transactions especially for company subsidiaries based in India.
This decision of the Tribunal has the potential of re-opening the debate on the tax implications for foreign companies engaged in providing IT / ITes enabled services to customers located outside India through an Indian BPO/ KPO subsidiary. This aspect was dealt with in two administrative circulars issued by the Central Board of Direct Taxes in 2004, and to a large extent the ruling of the Supreme Court in the case of Morgan Stanley had laid down the principles. Thus, foreign companies would do well to consider the following aspects to examine potential permanent establishment exposures in India.
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