Multinational companies that outsource services to India sighed with relief in July after the Supreme Court found that Morgan Stanley did not have to pay tax in India for income earned from its business process outsourcing unit.
The court found Morgan Stanley Advantage Services did not qualify as a permanent establishment of the parent company because it was carrying out back-office work and its transactions with the US parent company were done at market prices, WebCPA noted.
Had the court determined that the unit was a permanent establishment, it would have been liable for taxes of 42%. As long as there is an “arm’s length” deal and no preferential pricing, however, the court found no tax liability.
The landmark ruling is expected to boost the prospects of the business process outsourcing industry in India.
IT industry body NASSCOM said in July the ruling was very positive for the BPO sector, as it settled significant taxation issues.
NASSCOM had suggested the Ministry of Finance consider creating an Advance Pricing Mechanism procedure that would allow taxpayers to disclose all relevant facts to tax authorities and obtain a binding ruling on the tax consequences.
