UK: Business Process Outsourcing to India – Current Understanding

Last Updated: 6 May 2004

In recent months the growing phenomenon of off-shore outsourcing – particularly to India – has featured in many news headlines. One of the key factors underlying the decision to outsource off-shore is cost and India has rapidly captured a significant share of the US and European market for off-shore outsourcing, particularly for business process outsourcing ("BPO"), on the basis of low cost high quality services. However, a recent tax circular may be about to change things.

On 2 January 2004 the Indian Central Board of Direct Taxes ("CBDT") issued Circular No. 1/2004 which seeks to tax the earnings of foreign companies attributable to the outsourcing of "core" activities. Already there have been reports of multinational corporations revisiting plans to outsource call centres and other activities to India.

Under Indian tax rules, a non-resident or foreign company is taxable in India on the profits of its business activities where the company has a business connection in India or has a "permanent establishment" in India under article 5 of the United Kingdom/India double taxation treaty. The difficulty with the CBDT circular is that its language creates confusion by implying that outsourcing activities, the majority of which would not give rise to a "permanent establishment" under the India/UK tax treaty, might well be subject to additional tax as if a permanent establishment had been created. The Indian government has sought to allay fears and to reassure multi-nationals with investments in India, and those considering investing, by stating that the CBDT circular was no more than a clarification of the existing law.

In his Interim Budget on 3 February 2004 the Indian Finance Minister, Jaswant Singh, stated that the earnings of foreign companies derived from BPO activities in India would be exempt from taxation in India if the BPO activities were "ancillary and auxiliary" in nature. However, he stated that the Indian government’s view was that companies who outsource their core business activities to India will be liable to Indian tax on such activities on the basis that such activity creates a permanent establishment.

The difficulty with the "clarification" lies in determining what constitutes an "ancillary and auxiliary" rather than a "core" activity. Some guidance is offered by the CBDT circular. If a non-resident company is engaged in the manufacture and sale of goods or merchandise, or the provision of services, outside India and it outsources activities - such as the conclusion of contracts which enable the core activities to be carried on abroad - to an IT-enabled entity in India, the use of the Indian entity is likely to create a permanent establishment for the non-resident company in India. Profits then attributable to the conclusion of such contracts would form part of the income of the permanent establishment and would be taxable as such in India. It is important to note that the tax only arises where the permanent establishment has charged an arm’s length (a fair market price) to the non-resident company for the services that it has rendered. Consequently the non-resident company would not be subject to taxes in respect of its non-Indian activities.

Examples of the activities that should benefit from this clarification and which, according to the CBDT circular should not be subject to tax in India include:

Procurement and Sales Call Centres:

A foreign company manufacturing and selling items abroad, engaging or setting up a call centre in India to procure orders from or conclude contracts with customers abroad and also to answer sales related queries on the telephone.

Insurance Company Call Centres:

A foreign insurance company insuring risks in countries other than India appointing or setting up a call centre in India to attend to calls from customers outside India in relation to the acquisition of new insurance policies or revision of existing policies and providing relevant information and accepting insurance proposals from customers. Actual policy issuance, as well as premium collection, is done by the non-resident company outside India.

Foreign Credit Card Company Call Centres:

A foreign credit card company issuing credit cards to customers living outside India, appointing or setting up a call centre in India to deal with calls from overseas customers seeking to acquire a new credit card, providing relevant information and accepting requests for the issue of a credit card. Actual issue of the credit card, and collection of charges, is done by the non-resident company outside India.

While the position is now clearer where the activities that are outsourced are similar to those listed in the examples above, there is still a substantial grey area as to what services can be outsourced without establishing a taxable presence in India. Until the promised further clarification of what activities will be considered ancillary and auxiliary, there is likely to be uncertainty over the tax consequences outside these limited examples. The key question is whether, under Indian law, the presence in India constitutes a permanent establishment. The CBDT circular notes that it is of particular relevance whether it is the whole or merely part of the non-resident company’s core revenue generating business activities that are outsourced to an IT-enabled entity in India (such as the services of a travel agent, software developer, software maintenance business, investment consultant, debt collection service etc.). Where the IT-enabled entity in India renders the services either directly to the non-resident company’s customers abroad, or through the non-resident company, a considerable portion of the profits derived by the non-resident company from its customers abroad could, in the CBDT’s view, be taxable in India.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions