Authority's ruling

The Authority for Advance Rulings recently determined that a foreign company's server constituted a permanent establishment in India, and that profits attributable to it would therefore be taxable in India.(1)


AREVA T&D India Ltd was a subsidiary of AREVA T&D SAS France, a global player in the design, engineering, manufacture and supply of electric equipment. The French company was proposing to enter into an IT sharing services agreement with the applicant, in order to provide technology support services. The support services would include:

  • a worldwide network for data transfer between all group companies, which would connect to all of the French company's global applications, as well as for intranet and internet traffic; and
  • a messaging system for all email communication between subsidiaries, vendors and customers.

The consideration payable for the services rendered would comprise both direct and indirect costs, including expenses paid to third parties. The applicant approached the Authority for Advance Rulings to determine the taxability of the services rendered by the French company and its consequential tax withholding obligation.

Authority's ruling

Permanent establishment
The authority ruled that payments made under the IT agreement were not in the nature of reimbursements. Furthermore, it stated that the existence of a computer server could be equated to the existence of a permanent establishment within a jurisdiction. The IT agreement stated that wide area networks and the Lotus Notes application would be provided; therefore, some hardware was to be utilised. The equipment, whether owned or hired by the French company, would be at the disposal of the French company, thus satisfying another of the tests for the existence of a permanent establishment.

The authority therefore concluded that, on completion of the agreement, the French company would have formed a permanent establishment in India and profits attributable to it would therefore be taxable in India.

The provision of support services by the French company would itself make technical knowledge and experience available to the applicant. In this regard, the authority held that the information technology relating to the design, engineering, manufacture and supply of electric equipment to assist in the transmission and distribution of power, the commissioning and servicing of transmission and the distribution system was provided for use in running the applicant's business.

Furthermore, by the time the agreement ended, the applicant's employees would be equipped to implement these systems on their own, without reference to the French company. Thus, the services rendered were in the nature of fees for technical services. As the applicant has a permanent establishment in India, the income by way of fees for technical services would be taxed under Section 44DA of the Income Tax Act.


The authority has reiterated that the existence of a computer server amounts to a permanent establishment in India. In addition, in order to conclude that a non-resident has a permanent establishment in India, the test of disposal must be satisfied. The authority's ruling, although applicable only to this case, is relevant to all foreign companies that have computer servers or hardware in India. Such entities should analyse their business activities in detail to determine whether a permanent establishment exists in India, in order to avoid future disputes with the department.

Situations may arise in which a company's servers are located in India, and work in respect of updating the servers and website (and other incidental work) is undertaken outside India. These servers are generally located in India in order to facilitate searches by Indian users. In such situations, it must be determined whether the existence of servers installed for the limited purpose of search constitutes a permanent establishment of the foreign company in India.

For further information on this topic please contact Ranjeet Mahtani at Economic Laws Practice by telephone (+91 22 6636 7000), fax (+91 22 6636 7172) or email ([email protected]).


(1) AREVA T&D India Limited, AAR (876/2010).