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Decision on taxability of BPO units likely to be made soon
November, 16th 2006

The issue of taxation of business process outsourcing (BPO) units in the country may be resolved soon. The appeals by both the income tax (I-T) department and Morgan Stanley have been listed for hearing in the Supreme Court (SC) on Friday.

The issue assumes significance for BPO outfits of multinational companies in the country. Any decision either way will settle the question of taxability of the BPO outfits. The verdict in this case will have large ramifications for the fast growing services sector, in which India has a leadership position globally. For any MNC, that sets up an offshore unit, a presence in India has become almost mandatory.

The appeal to the SC arose after the Authority for Advance Ruling (AAR) said that the outsourcing carried by Morgans Indian subsidiary did not constitute a permanent establishment. This ruling meant that the company would not have to pay corporate tax in India on a portion of its profit, provided that the BPO and the overseas parent did not violate fair pricing norms or arms length pricing.

The income tax departments special leave petition contests the ruling given by the AAR on - Morgan Stanley Advantage Services (MSAS), a captive BPO in India - which provides support services to IT and research.

On its part, Morgan Stanley also filed a cross appeal in the SC against the ruling. The court has issued notices to both the parties in the case.

The AAR, is a quasi-judicial body, set up to give opinion to guide companies on their potential tax liabilities. The relief for Morgan Stanley meant that other BPOs could quote the same judgement.

Specifically, the court will decide whether the appeals of both the parties are admissible or not. If any of the appeals of any of the parties or both the parties is admitted, the court would also fix a date for hearing.

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