Assistant Director of Income Tax v. M/s E-Funds Solution Inc.

Quick Summary

The Supreme Court said no Fixed Place PE existed for the US E-Funds group in India. E-Funds India only gave support services. The foreign companies did not control a fixed business place in India, nor shift core business here. Since dealings were at arm’s length and E-Funds India already paid tax on its profits, no extra profit was attributable to the foreign companies.

Issues

1. Is E-Funds India a Fixed Place PE of the foreign E-Funds entities?
2. If a PE exists, should any profits be attributed when all transactions are at arm’s length price (ALP)?

Rules

• Fixed Place PE test: (i) a fixed place of business in India; and (ii) control/use of that place by the foreign enterprise for its business.
• Support services alone do not create a PE under Article 5 of the DTAA.
• Article 7 (Business Profits): Profits are taxable in India only if attributable to a PE; ALP dealings restrict further attribution.

Arguments

• No Fixed Place PE: The foreign companies did not control a fixed place of business in India.
• Support ≠ Core: E-Funds India performed support services, not the foreign enterprise’s primary economic functions.
• ALP Shield: With arm’s length pricing and E-Funds India already taxed on its profits, no extra profit could be attributed to the foreign entities.

Ratio Decidendi

A Fixed Place PE needs a fixed place plus control and use of that place by the foreign enterprise for its business. Outsourcing support functions to an Indian affiliate does not satisfy this. Where ALP is followed and taxed, no further attribution arises to the foreign enterprise.

Why It Matters

• Gives a clean test for Fixed Place PE in outsourcing models.
• Confirms support services do not shift core business to India.
• Sets strong guidance on ALP-based attribution under Article 7.

Key Takeaways

• Fixed + Control: Both elements are mandatory for a Fixed Place PE.
• Support ≠ PE: Back-office functions alone do not create a PE.
• ALP matters: If ALP is proven and taxed in India, no extra profits for the foreign enterprise.

Mnemonic + 3-Step Hook

Mnemonic: “Fix & Control, or No Toll.”

1. Find FIX: Is there a fixed place of business in India?
2. Check CONTROL: Does the foreign company control and use it for core work?
3. See ALP: If ALP is followed, extra attribution generally stops.

IRAC Outline

Issue: Whether E-Funds India created a Fixed Place PE for the US entities and whether profits should be attributed.

Rule: Article 5 requires a fixed place plus control/use by the foreign enterprise; support services alone do not equal PE. Article 7 attribution depends on PE and ALP.

Application: Only support was in India; no foreign control over a fixed business place; ALP followed; India taxed E-Funds India.

Conclusion: No Fixed Place PE; no further profit attribution to the foreign companies.

Glossary

Fixed Place PE

A taxable presence from a fixed business location in the source country, controlled and used by the foreign enterprise.

Arm’s Length Price (ALP)

Price that unrelated parties would have charged under similar conditions.

Article 5 (DTAA)

Defines Permanent Establishment, including fixed place and agency forms.

Article 7 (DTAA)

Taxation of business profits attributable to a PE in the source country.

FAQs

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