The Supreme Court on Monday ruled that the captive business process outsourcing (BPOs) of foreign companies operating in India could not be taxed, if saved by Double Tax Avoidance Agreement.
The ruling — on a petition filed by Morgan Stanley Advantages Services (MSAS), the Indian arm of the US-based investment bank Morgan Stanley and Company — is likely to give a fillip to outsourcing activities in India.
Deciding on the appeals from both parties, the Income Tax Department and Morgan Stanley and Company, a bench of Justices Arijit Pasayat and S.H. Kapadia held that the Indian arm of the US financial major was not liable to be taxed in India. However, the bench clarified that the transfer pricing for the service rendered by the Indian subsidiary should be at the arm’s length distance.
As regards the income attributable to the Indian subsidiary, the court held that “the Transactional Net Margin Method was the appropriate method for determination of the arm’s length price in respect of transaction between MSCo (Morgan Stanley and Company) and MSAS”.
{{/usCountry}}As regards the income attributable to the Indian subsidiary, the court held that “the Transactional Net Margin Method was the appropriate method for determination of the arm’s length price in respect of transaction between MSCo (Morgan Stanley and Company) and MSAS”.
{{/usCountry}}The court accepted as correct the computation of the remuneration based on cost plus mark-up worked out at 29 per cent on the operating costs of MSAS, which was also accepted by the Assessing Officer and the Transfer Pricing Officer in 2006.
“The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise,” the court said.
It added: “Therefore, the department has to determine income, expense or cost allocations having regard to arm’s length prices to decide the applicability of the transfer pricing regulations.”