New Delhi: The Supreme Court has rejected the income-tax department’s request to revisit its critical July 2007 judgement on taxing the Indian back offices of foreign companies.
In its July 2007 ruling, the Supreme Court had declared that US investment bank Morgan Stanley would not have to pay tax in India on global income earned on account of the firm’s captive back office unit in India.
At that time, industry analysts had said that the ruling would have a bearing on about 110 captive offices that serve global parent companies, including Standard Chartered Bank and Fidelity Investments, out of India.
Advocate Jay Savla of Savla and Associates that represented Morgan Stanley in this matter confirmed that the petition filed by the income-tax department seeking a review of the earlier judgement was dismissed by the Supreme Court on Thursday.
“The judgement has now achieved finality. The law laid down earlier by the court will hold good and there will be no more doubts in this matter,” he said. Judges decide review petitions internally without a public hearing and notices are send to initiate review process or not on their discretion.
The income-tax department had filed the review petition in October 2007 as it felt the Supreme Court’s July 2007 original ruling overlooked some nuances of the issue and that it could set a wrong precedent.
Captive back offices often show up as cost centres in a company’s books and the only way to tax them is to tax that portion of a company’s profits arising on account of them.
If the income-tax department is able to prove that the captive unit has made a contribution, Indian revenue authorities can raise a tax claim on that part of the parent’s global profits that can be traced back to its Indian operations.
“A very important principle laid down has been reaffirmed,” said Ketan Dalal, executive director at audit and consulting firm PricewaterhouseCoopers. Dalal is a columnist for Mint.
The income-tax department had asked the court to revisit its July judgement as it felt even an arm’s length relationship (between the foreign entity and the domestic captive unit) cannot absolve a foreign entity from potential permanent establishment (PE) exposure, said Dalal.
If a domestic captive unit of a foreign entity is deemed to be a permanent establishment (PE), it gives the income-tax department the right to lay a tax claim on the profits of the foreign entity that can be traced back to its captive unit. As the court has rejected the petition, the government can’t lay a claim to anything beyond arm’s length pricing relationship between the two.