F.No.
500/67/2003-FTD
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
....
New Delhi dated the January 2, 2004
To,
All Chief Commissioners/Directors General of Income-tax
Subject: Taxation of Business Process Outsourcing Units in India.
....
A
non-resident or a foreign company is treated as having a permanent establishment
or business connection in India under Article 5 the of Double Taxation Avoidance
Agreements or under Section 9 of the Income-tax Act, 1961, if the said
non-resident or foreign company carries on business in India through a branch,
sales office etc., or through an agent (other than an independent agent) who
habitually exercises an authority to conclude contracts, or regularly delivers
goods or merchandise, or habitually secures orders in India, on behalf of the
non-resident principal. In such a case, the profits of the non-resident or
foreign company attributable to the business activities carried out in India
becomes taxable under the Income-tax Act, 1961.
During the last decade or so India
has seen a steady growth of outsourcing of business processes by non-residents
or foreign companies to IT-enabled entities in India. Such entities are either
branches or associated concerns of the foreign enterprise or an independent
Indian enterprise. Their activities range from mere procurement of orders for
sale of goods or provision of services and answering sales related queries, to
the provision itself of services like software maintenance service, debt
collection service, software development service, credit card / mobile telephone
related service etc. In some cases the entire or major portion of the revenue
generating activities of the non-resident enterprise is performed by the BPO
(Business Process Outsourcing) unit in India. The extent to which global profits
of a non-resident enterprise is to be attributed to the activities of the BPO
unit in India in these various circumstances, has been under consideration in
the Board.
The manner and extent of such
attribution of profits will evidently depend on the facts of each case and the
nature of services rendered by the BPO unit, and the same has to be determined
in accordance with the provisions of the treaty applicable and the domestic law.
The Board is, however, of the view that in a case where a non-resident, carrying
on manufacture and sale of goods or merchandise or provision of services outside
India, outsources some of its incidental activities viz. conclusion of contracts
and procurement of orders (which enable the core activities to be carried on
abroad) to an IT-enabled entity in India, which constitutes a permanent
establishment of the non-resident principal, then the insignificant profit which
is difficult to determine and attributable to the conclusion of such contracts
or procurement of such orders can be considered to be embedded in the income of
the permanent establishment taxable in India, if the price charged in respect of
the above services by the permanent establishment is an arm’s length / fair
market price. In such a situation, therefore, no income shall separately accrue
or arise or be deemed to accrue or arise to the non-resident principal in India.
An example of such services by an
IT enabled entity in India could be a case where a foreign company manufacturing
computers abroad and also selling such computers to customers abroad, engages or
sets up a call centre in India to procure orders from or conclude contracts with
customers abroad and also to answer sales related queries on telephone. In such
a case, no income shall accrue or arise or be deemed to accrue or arise to the
non-resident in India, apart from the income of the call centre. Similarly,
where a foreign insurance company insuring risks in countries other than India
appoints or sets up a call centre in India to attend to calls from customers
outside India regarding acquisition of new insurance policy or revision of
existing policy, to disseminate relevant information and accept insurance
proposals from the customers, while actual policy issuance as well as collection
of premium is done outside India by the foreign insurance company, no profits of
the non-resident shall be taxable in India, apart from the income of the call
centre if the charges paid to the call centre for its services are at arm’s
length / fair market price. Another example of such services could be the case
of a foreign credit card company issuing credit cards to customers living in
countries other than India, which appoints or sets up a call centre in India to
attend to calls from customers outside India seeking to acquire a new credit
card, disseminate relevant information and accept the request for issue of a
credit card from the customer, while the actual card issuance, the delivery of
the card and collection of charges are being done outside India by the foreign
credit card company, and the charges paid to the Indian call centre for its
services are at arm’s length / fair market price.
On the other hand, where a
non-resident or a foreign company outsources the whole or part of its core
revenue generating business activities to an IT-enabled entity in India, such as
the services of a travel agent, software developer, software maintenance,
investment consultant, debt collection service etc. and the IT-enabled entity in
India renders the services either directly to the customers abroad or through
the non-resident principal, a considerable portion of the profits derived by the
non-resident or the foreign company from its customers abroad would certainly be
attributable to the activities performed by the IT enabled entity in India. If
such entity constitutes a permanent establishment of the non-resident or foreign
company in India, such attributed profits would be taxable under the Income-tax
Act, 1961 in accordance with the provisions of the relevant tax treaty.
The contents of this circular may be brought to the notice of all officers in your region.
Yours faithfully,
(Sandeep Goel)
Officer on Special Duty (FT & TR)-I
Central Board of Direct Taxes
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