Wednesday, July 11, 2007

Indian Supreme Court ruling boosts India’s outsourcing sector

by Vipin Agnihotri

Indian Supreme Court in a landmark judgment ruled that foreign firms would not have to pay tax on their global income earned from business related to their outsourcing arms or units if these are conducted at existing market prices.

The apex court decision came in a case involving Morgan Stanley’s business process outsourcing unit in India, in which Indian revenue officials had earlier served notice stating that the firm should pay taxes on its global income. According to the significant verdict, the income-tax department could not tax the global earnings of investment banker Morgan Stanley attributable
to its Indian holding Morgan Stanley Advantage Service (MSAS), which provided back-office support to the parent firm.

In an earlier decision by a tax tribunal, Morgan Stanley was exempted on the grounds that the back-office unit was not a permanent enterprise of the parent company in India. The Authority of Advance Ruling had said Morgan Stanley’s global earnings were not taxable in India since the firm paid an “arm’s length” (a price at which two unrelated parties would agree to a transaction) price to its Indian subsidiary.

In addition, the Supreme Court noted in its judgment that the activities of MSAS did not constitute a permanent establishment. Nevertheless, it further conceded that owing to the deputation of employees from Morgan Stanley to MSAS, the subsidiary holding could be considered a service permanent establishment [PE].

Reacting over the judgment, tax experts have opined that despite the ruling, the concept of a service PE might need greater clarity. According to the reports, the Indian government is expected to review and clarify the definition of ‘permanent establishment’ (PE) for purposes of transfer pricing. As a matter of fact, the latest ruling will surely have far-reaching implications not particularly in terms of captive BPOs but also other sectors.

 

 

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