Review of tax exemption to MNCs’ captive BPOs

Review of tax exemption to MNCs’ captive BPOs


New Delhi:The Income Tax department has moved the Supreme Court against its earlier judgement exempting captive BPO units of foreign firms from tax in the country.

Seeking quashing of the court’s July 9 order on a case involving Morgan Stanley’s captive BPO firm Morgan Stanley Advantage Services, the department submitted that MSAS was carrying out core business activities for the parent and not just back office operations.

The court had earlier upheld the Authority for Advance Ruling (AAR) order that MSAS was not a permanent establishment (PE) as it was performing only back office operations in India and cannot be taxed under PE rules.

Challenging the judgement, the department submitted that the norm that profits of multinationals’ operations in the country had to be taxed only on arm’s length payment (market price) to the captive entity cannot absolve them from payment of tax on other transactions.

The remuneration at market price to BPOs and the taxability on the profits of foreign companies were different from each other, it said, adding: “...arm’s length payment to the service provider cannot extinguish the taxability of the profits of the foreign principle.

“A proposition to such effect in the impugned judgement goes against the internationally accepted principles on attribution of profits to the PE."

The department contended that “the Supreme Court grossly erred in holding that the business activities carried out by MSAS were back office operations."