Delhi High Court Ruling Expected To Provide Tax Clarity On Foreign Expats Working For Indian Subsidiaries
A mere transfer of employees from an offshore office to India will not lead to higher tax liabilities for global enterprises under the international tax law concept of permanent establishment.
The Delhi High Court is slated to give tax clarity to multinational companies sending foreign expats to temporarily work for their Indian subsidiaries.
In a case involving Korean conglomerate Samsung Electronics and its wholly owned Indian subsidiaries, the high court has held that as long as the foreign expats are not engaged in furthering the core business activities of the global arm, a tax liability in India under the concept of a permanent establishment, or PE, will not arise.
“Overseas companies may now incline towards the transfer of foreign expats to India for carrying out expert functions. This would have substantial cost savings, an exchange of best business practices, and assist in market expansion and localisation,” Rahul Charkha, partner at Economic Laws Practice, told NDTV Profit.
On the other hand, the Indian companies would gain access to a skilled workforce and technology, thereby leading to an increase in business opportunities, Charkha added.
The concept of PE—a creation of international tax and treaty law—is defined as a fixed place of business through which the business of the enterprise is wholly or partly carried on.
If profits are attributable to a PE of a foreign entity, the tax rates are higher, said Dhruv Janssen-Sanghavi, founder at Janssen-Sanghavi & Associates.
From a revenue perspective, the profits are taxable at the rate of 25 or 30% depending on the Indian subsidiary's revenues. If, however, a PE is found to exist, the same amount of profits is taxed at a rate of 40% for the relevant tax years.
Ipsita Agarwalla, a leader at Nishith Desai Associates, said that the Karnataka High Court decided a similar case in 2022 in the case of Flipkart, wherein it was ruled that salary costs reimbursed to Walmart USA’s transferred employees should not be subject to withholding tax in India.
Experts believe that if the tax department files an appeal before the Supreme Court, it is unlikely they will get a ruling in their favour, as the Delhi High Court’s ruling in the matter is a detailed and exhaustive one.
Importance Of Clear Documentation
The high court held that Samsung Electronics’ foreign expats were not discharging functions or performing activities connected with the global enterprise.
It said that their placement in India was done with the objective of facilitating the activities of Samsung India Electronics. “Collection of market information, collation of data for development of products, market trend studies, or exchange of information would not meet the qualifying benchmarks of a PE,” it said.
In essence, as long as the expats are engaged by the Indian subsidiaries, carrying out activities for the Indian subsidiaries, and there is no nexus with the business of the overseas parent or generation of income by the overseas parent through these employees in India, the overseas parent would not constitute a PE in India.
Experts say that the power of watertight documentation in such cases should not be underestimated.
Interactions between group entities have been a pain point for many conglomerates on account of inefficient documentation, Janssen-Sanghavi said.
Companies should have clear documentation of all transactions that occur between group entities. Not only does this make it easier for tax authorities to understand the facts better, but it also results in some tax benefits in some cases, he added.
Charkha remarked that the agreement between the overseas parent, Indian subsidiary, and the deputed employee must be draughted diligently. Factoring in the roles and responsibilities of not just the employee but also the companies is essential for determining the control exercised over the employees.
