GCCs In India: Tax Questions MNCs Should Not Overlook

In brief

The article discusses the tax-related issues concerning Permanent Establishment (PE) and transfer pricing for Global Capability Centers (GCCs) in India that multinational corporations (MNCs) should be aware of.

Introduction

Global Capability Centres (‘GCCs’) have become an important part of multinational enterprises’ (‘MNCs’) India strategy, evolving from captive support centres into hubs for technology, analytics, finance, procurement, R&D and other higher-value functions.

These risks typically arise because, as GCCs scale, the line between support functions and core business functions can become less clear. Increased overseas involvement, functional reporting to global stakeholders, India-based participation in decision-making, visits by foreign personnel and growing responsibility for high-value activities may make the tax profile more complex.

These developments may create Indian income-tax exposure, particularly around permanent establishment (‘PE’) and transfer pricing, and may call for periodic review as the operating model evolves.

PE related issues for GCCs in India

One of the key issues which arises while setting up GCC’s in India is whether the activities carried out in India will lead to constitution of PE of the overseas entity in India as per the relevant tax treaty. If a PE is alleged or constituted, profits attributable to it may become taxable in India in the hands of foreign enterprise, along with related filing, withholding, audit and compliance obligations.

In the GCC context, examination of fixed place PE, service PE and dependent agent PE becomes relevant.

A fixed place PE issue may arise where the premises or infrastructure of the Indian GCC are viewed as being at the disposal of the overseas enterprise and the overseas enterprise’s business is carried on through that place. This risk may be heightened where overseas personnel have regular access to the GCC premises, use them as a business base, or exercise significant control over Indian operations. Activities such as recruitment of key personnel, implementation of group policies, supervision of finance or procurement, and operational reporting may be relevant in examining whether the Indian premises are effectively being used by the foreign enterprise. (see Hyatt International Southwest Asia Ltd vs. ADIT Civil Appeal No. 9766 to 9773 of 2025 (SC))

Service PE evaluation becomes relevant where employees or other personnel of the foreign entity visit India and furnish services beyond the threshold prescribed in the applicable treaty (for instance 90 days in US, UK and Singapore where services provided to independent parties). The issue becomes graver where the services are furnished to associated enterprise. In such cases, generally a lower threshold is prescribed in the tax treaties (for instance 1 day in US, 30 days in UK and Singapore tax treaty). Visits to India for transition support, training, project implementation, project management or troubleshooting may therefore need to be tracked carefully, including the number of days, purpose of visit, reporting lines and nature of activities performed in India.

The key aspect to be analysed is whether the visit by overseas personnel qualifies as a service rendered by overseas entity and if yes, which days should be counted for the purpose of computing the threshold for service PE. In some cases, where employees of overseas entity visit India for quality control purposes only, a position can be taken that the activity does not qualify as a service and resultantly, no service PE implication shall arise. (Refer Morgan Stanley & Co [2007] 162 Taxman 165 (SC))

Dependent agent PE risk arise where Indian personnel habitually conclude contracts, secure orders, negotiate key commercial terms or play the principal role leading to contract conclusion for the foreign enterprise. This may be particularly relevant for GCCs involved in sales support, procurement, vendor management, customer engagement or contracting support. Even if contracts are formally signed outside India, the substance of negotiations and the role of Indian personnel may be scrutinised. (see Daikin Industries Ltd. v. ACIT (2018) 94 taxmann.com 299 (ITAT) (Delhi))

Secondment arrangements also merit careful review. Where overseas employees are deputed to India, the analysis may consider who controls their work, bears their costs, supervises them and benefits from their activities. Also, how far lien is retained over the seconded employment post completion of secondment period. Insufficiently documented secondments may give rise to PE, withholding tax and indirect tax questions. Post the recent judgment of Delhi High Court in the case of Ernst And Young U.S. LLP [TS-903-HC-2026(DEL)], the secondment arrangements where lien over employment is retained by the overseas entity may face heightened scrutiny. The purpose of secondment and the rights retained by the overseas entity during the secondment are important to assess the risks in India.

Transfer Pricing related issues for GCCs in India

Transfer pricing is central to the tax profile of GCCs because most centres provide services to associated enterprises. The Indian entity is commonly remunerated on a cost-plus or similar model. The key question is whether the remuneration appropriately reflects the functions performed, assets employed and risks assumed. A model suitable for routine support work may require reconsideration once the GCC undertakes product development, analytics, strategic procurement, high-end finance or IP-related activities.

Another area is the alignment between contracts and conduct. Inter-company agreements may describe the GCC as a limited-risk service provider, but the actual conduct could suggest otherwise. If Indian employees control project roadmaps, manage customer deliverables, negotiate vendor terms, develop valuable intangibles or exercise budgetary authority, the stated characterisation may be questioned. Relevant documentation may include delegation matrices, reporting structures, project records and evidence of offshore decision-making where appropriate.

IP development is another sensitive area. Many GCCs now support software development, product engineering, artificial intelligence, data analytics and other innovation-led work. MNCs may need to examine who owns the intangibles, who controls development activity, who bears development risk and whether Indian teams perform contract R&D or contribute more substantively to value creation. Remuneration for DEMPE-related functions i.e. Development, Enhancement, Maintenance, Protection and Exploitation of intangibles may therefore need careful evaluation.

Comparable selection may also require periodic review. Routine business process outsourcing comparables may not suit high-end or specialised GCCs. The benchmarking should ideally reflect the GCC’s actual functions during the relevant year. Also, in light of the new safe harbour rules introduced for IT services, it is important to evaluate if the GCCs qualify for the same or not.

Inter-company charges, cost allocations, reimbursements, management fees, licence fees and cross-charges may also invite review. In practice, questions often arise around the benefit test, allocation basis, absence of duplication, commercial necessity and withholding tax treatment. Documentation gaps in this area can lead to disputes or adjustments.

Final remarks

For MNCs, the way forward may be to view GCC tax risk as part of the design and governance of the operating model, rather than as a year-end compliance exercise. As the Indian centre scales, periodic reviews may help assess whether changes in functions, reporting lines, employee mobility, decision-making processes and inter-company arrangements continue to align with the intended tax position.

A proactive approach may also help businesses identify potential pressure points before they are tested in audit or controversy. This could include maintaining appropriate documentation for positions adopted under income tax and transfer pricing and assessing whether any areas require more detailed review or external validation.

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.