INDIA BUSINESS WORLD - FEBRUARY 2006
THE MONTH THAT WAS

Foreign companies outsourcing BPO and KPO work to Indian arms can breathe easy about their tax liability here. In its judgement given to US investment bank Morgan Stanley, the Authority For Advance Ruling (AAR) has held that the company's captive BPO in India is not its permanent establishment (PE). This means the income of the parent company will not be liable to tax here.

Morgan Stanley has a captive BPO in India — Morgan Stanley Advantage Services — which provides support services such as IT support, account reconciliation, research, etc. If Indian tax authorities were to hold that such activities would tantamount to a PE, the profits attributable to the PE will be taxable in India at the rate of 41% in the hands of the foreign entity. But, AAR has ruled that no PE comes into existence if the activities are “contractually outsourced”.Normally an entity becomes a PE if it has a fixed place of business or is a dependent agent .

AAR has ruled that MSAS will be regarded as a PE if the parent company were to send some of its employees to India on deputation for a period of more than 90 days. However, even if PE comes into existence, no further profits of Morgan Stanley will be liable to tax in India if the price paid to is at arm's length .