The threat of taxation continues to hang over the local back-office operations of foreign companies with India’s income tax (I-T) department filing a review petition earlier in the week in the Supreme Court urging it to revisit its own decision in July.
In that decision, the court had said US investment bank Morgan Stanley would not have to pay tax in India on global income earned by it on account of the firm’s captive back-office here.
The review petition said the July decision “appears to be an error on the face of the record” as it did not consider the factors that suggest Morgan Stanley’s Indian subsidiary Morgan Stanley Advantage Services Pvt. Ltd’s (MSAS) contributed to profits of the parent firm.
Therefore, the income-tax department has a claim on the profits of the US parent to the extent of the Indian subsidiary’s contribution, the review petition said.
Officials at MSAS could not be reached for comment late on Friday evening when an executive at an audit firm said such a petition had been filed. An email sent to the firm’s corporate communications executive in Hong Kong remained unanswered because it was sent after business hours. Officials at the tax department, too, could not be reached.
Mint had earlier, on 9 August, reported that the government planned to file a review petition. A review petition goes to the same set of judges who gave the original decision, and it means that the litigant (the income-tax department in this case) is trying to bring to their notice the fact that a certain point or set of points have not been taken into account by the court, a New Delhi-based lawyer, who did not wish to be identified, had said then.
The Supreme Court’s July decision upheld Morgan Stanley’s contention that its Indian subsidiary performed a support role to its main operation in the form of a back office, and the Indian tax authorities could not lay tax claims to the profits earned by the US parent.
The court concluded that MSAS had an arm’s length relationship with its parent and the tax had to be levied on the service fee charged by the Indian subsidiary only. “It (income-tax department) has asked for a review (of the court’s decision that effectively said) that arm’s length neutralizes the permanent establishment (tax trigger)...,” said Ketan Dalal, executive director, PricewaterhouseCoopers, an audit and consulting firm.
Tax can be levied only on a permanent establishment, or a fixed place of business through which the business of a multinational firm is carried out. The court’s July decision said since the relation between Morgan Stanley and its back-office here was at an “arm’s length”, the multinational investment bank itself could not be considered a permanent establishment here.
The income-tax department’s review petition stems from the concern that the decision could have an adverse impact on its attempt to levy taxes on the contribution of Indian subsidiaries to the profits of their multinational parents.
This is a critical issue at a time when multinationals are increasingly outsourcing work to India. The outcome of the review plea will have a bearing on the more than 100 back offices of multinationals (or captive business process outsourcing units as they are called) that operate here and serve firms including Standard Chartered Bank, Fidelity Investments and ABN Amro.
In July, industry and tax experts had estimated a tax liability of Rs1,200 crore on such back office firms if the court ruled in favour of the tax department.