Facts of the Case

The Revenue filed three appeals challenging a common order of the Income Tax Appellate Tribunal dated 20.12.2023 relating to Assessment Years 2003-04, 2004-05 and 2006-07. The respondent-assessee, EXL Service.com Inc. (now EXL Service.com LLC), is a company incorporated in Delaware, USA, engaged in providing business process outsourcing solutions including transaction processing and internet/voice-based customer care services to clients located outside India. The assessee entered into a service agreement with its Indian subsidiary, EXL India, under which the Indian entity provided back-office and customer support services on a cost-plus basis. The Assessing Officer held that the assessee had a Permanent Establishment in India and attributed profits accordingly. The Tribunal allowed the assessee’s appeals, holding that no PE existed in India. Aggrieved, the Revenue approached the High Court.

Issues Involved

Whether the respondent-assessee had a fixed place PE, service PE or dependent agency PE in India under Article 5 of the India-USA DTAA, whether profits could be attributed to India where transactions with the Indian subsidiary were at arm’s length, and whether the Tribunal erred in applying Supreme Court precedents such as eFunds IT Solution and Morgan Stanley.

Appellant’s Arguments

The Revenue contended that the entire core business was effectively carried out in India through EXL India, that employees of the Indian entity undertook substantial functions, and that common management and signing of agreements indicated control by the US entity. It was argued that the Indian premises were at the disposal of the assessee and that an agency PE existed since contracts were effectively concluded through India.

Respondent’s Arguments

The assessee submitted that all core revenue-generating activities such as strategy, marketing, contract negotiation, customer relationship management and risk assumption were performed outside India. It was argued that EXL India merely provided support services, had no authority to conclude contracts, and that its premises were never at the disposal of the US entity. The assessee relied heavily on the Supreme Court judgments in DIT v. eFunds IT Solution & Ors. and DIT v. Morgan Stanley & Co. Inc., submitting that transactions were accepted to be at arm’s length and therefore no further profit attribution was permissible.

Court Order / Findings

The Delhi High Court examined the detailed factual findings recorded by the Tribunal and noted that the Tribunal had undertaken an exhaustive comparison with the facts considered by the Supreme Court in eFunds IT Solution. The Court held that there was no material to show that the Indian subsidiary’s premises were at the disposal of the assessee or that the assessee carried on its own business through such premises. The Court further held that there was no service PE as no services were furnished by the assessee within India to any customers, and no agency PE as EXL India had no authority to conclude contracts on behalf of the assessee. The Court accepted the Tribunal’s finding that the Indian entity was remunerated at arm’s length, and following Morgan Stanley, held that no further profits could be attributed even otherwise. The Court found no perversity in the Tribunal’s conclusions.

Important Clarification

The Court clarified that mere outsourcing of work to an Indian subsidiary, even where the subsidiary is wholly owned, does not by itself constitute a Permanent Establishment. Where the Indian entity performs only preparatory or auxiliary support services at arm’s length and has no authority to conclude contracts, no PE can be said to exist under the India-USA DTAA.

Final Outcome

All the appeals filed by the Revenue were dismissed. The findings of the Income Tax Appellate Tribunal holding that EXL Service.com Inc. did not have a fixed place PE, service PE or agency PE in India, and that no profits were attributable to India, were upheld.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769502911_COMMISSIONEROFINCOMETAXINTERNATIONALTAX1NEWDELHIVsEXLSERVICE.COMINCPRESENTLYKNOWNASEXLSERVICECOMLLC.pdf

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