The Central Board of Direct Taxes issued a circular on Monday clarifying the tax treatment of business process outsourcing (BPO) units in India.
The circular, dated August 9, explains that the non-resident entity or the foreign company will be liable to tax in India only if there is a business connection between the overseas entity and the Indian entity, in other words, if the Indian operation is a permanently establishment of the overseas entity.
A non-resident or a foreign company is treated as having a Permanent Establishment in India under the terms of the relevant double taxation avoidance agreements (DTAA) if it carries on business through a branch, sales office or agent. Under these DTAAs, the portion of the foreign firm’s profits generated by the permanent establishment in India become taxable.
As a result of the new guidance, the CBDT has withdrawn the circular distributed in January 2004 which caused much controversy in the IT outsourcing industry with its proposal to separate and tax core activities performed in India.
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