Captive BPOs of MNCs not liable to pay tax in India: SC

Captive BPOs of MNCs not liable to pay tax in India: SC

New Delhi, July 9 (PTI): In a major relief to foreign firms operating in India, the Supreme Court today held that their captive BPOs are not liable to be taxed in the country if they are billing the subsidiaries on an "arms length" basis or without giving any preference.

The judgement came on a case between US investment bank Morgan Stanley and income tax department. The department had said that outsourcing activities by Morgan Stanley Advantage Services (MSAS), the firm's Indian arm, must pay tax in India.

A bench headed by Justice S H Kapadia said MSAS was not a permanent establishment (PE) as it was performing only back office operations in India and cannot be taxed under PE rules, and upheld an order of Authority for Advance Ruling (AAR).

"There was no agency PE as the PE in India had no authority to enter into or conclude the contracts. The contracts would be entered in the US. The implementation of those contracts only to the extent of back office functions would be carried out in India," the bench said.

The apex court ruling is likely to benefit foreign companies like GE, HSBC, Standard Chartered Bank which outsource back office functions to their Indian units. Foreign companies operating in India pay tax at a rate of about 42 per cent and the judgement establishes that income of subsidiaries on work done for parent companies was not taxable.

Tax consultant Mukesh Butani, partner, BMR & Associates, said it was a big relief for captive BPOs as the apex court had ruled on two important principles.

"One, stewardship activity does not constitute a PE. Second, if the Indian BPO is remunerated on arm's length basis, no further income of MNC can be attributed to India," he said.