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Revenue dept moves SC on Morgan Stanley judgment
October, 26th 2007
The Income-tax Department on Tuesday moved Supreme Court seeking review of its judgment in the Morgan Stanley case.

The revenue department, in its petition prepared by additional solicitor general Mohan Parasaran, has sought to tax the profits of MNC operations in India on the ground that a mere arms length payment (market price) to the captive entity cannot absolve them of tax liability. The remuneration at market price to the BPOs and the taxiblity on the profits of foreign companies are two different things, said the revenue department seeking setting aside the apex courts July 9 verdict in the case of US investment bank Morgan Stanleys captive BPO

The Supreme Court had ruled that foreign companies would not be at risk of being taxed in India as long as it was compensating its outsourcing unit on an arms length basis (same payment to the Indian entity as it would to an outside agency).

It is respectfully submitted that arms length payment to the service provider cannot extinguish the taxibility of the profits of the foreign principal. A proposition to such effect in the impugned judgement (Mogan Stanley BPO case) goes against the internationally accepted principles on attribution of profits to the PE, said revenue in its 162-page review petition, which includes annexures as well.
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