The income tax department in its written submission to the Supreme Court said that the determining test for taxing global incomes of MNCs should be based on terms of the agreement between the foreign entities and their business process outsourcing units for which FAR (functions performed, assets used, risks taken) analysis should be considered.
Whether a foreign company chooses to do business through a subsidiary or a branch is merely a question of its business model which cannot be considered for the determination of its permanent establishment (PE) status or taxability of its profits in India, the revenue department said.
The apex court is to give its verdict on an appeal filed by the income tax department, which has challenged the findings of the authority for advanced rulings (AAR) to the effect that the US investment bank, Morgan Stanley was not liable for taxation in India as its transactions with its outsourcing unit, Morgan Stanley Advantage Services (MSAS), were at arms length.
The IT department is seeking a slice of the global income of the US-based MNC on the plea that its Indian outsourcing unit constitutes a PE. A detailed study of all the 17 services being performed by the MSAS would clearly reveal that these are core and integral functions of MS. It is being done in India by MSAS on behalf of MS, said the written submissions. According to an April 2005 agreement, MSAS is to render 17 services to the foreign entity.
The IT department has said, agent is interacting regularly with third parties and subcontractors for acquisition of various software, information and database on behalf of its parent bank Morgan Stanley. The proprietary rights on such materials vests with MS only. Thus the agent MSAS is concluding contracts on behalf of MS in India. The activities of the agent are not confined to this only as it has many other activities including processing and analysis of data.
Against this background, MS has an agency PE in India. The various activities performed in India are core and integral activities of the business of MS. It, therefore, cannot be said to be preparatory or auxiliary activities in nature, said I-T department.
On the assets used aspects as a determining factor for taxing purposes, the government said that there is another requirement for constituting a PE and that is of the enterprise having a place of disposal and carrying out of business activities from that place.
On the risks taken aspect, the revenue department said, MSAS does not take any significant risk in India. The MS takes all the risks of idle capacity of employees, space, etc. It utilises its intellectual properties provided to MSAS.