Another tax demand looms before multinational Companies (MNCs) that have no subsidiaries in India. In a landmark case, the Uttarakhand High Court has ruled that foreign Companies should include the surcharge on income tax while computing their liability in India. The ruling will apply even to those Companies from countries with which India has a double-tax avoidance pact or agreement.

Tax experts feel the ruling has reopened the debate on the effective tax liability of MNCs. An Income-Tax Appellate Tribunal (I-TAT) in Mumbai had accepted a plea by the Bank of America that the company would not have to add the surcharge to its tax liability. Under the Indian Income-Tax Act, a foreign corporate assessee pays a 40% rate of tax, plus a 10% surcharge.

The ruling, however, will not impact MNCs present in India through subsidiaries or joint ventures; they are treated at par with domestic Companies and are taxed at 30%. The high court decision comes in a case concerning the tax liability of an American non-resident company, Arthusa Offshore Company.

Tax disputes over offshore Companies have been in the limelight the past couple of years. The tax status of Morgan Stanleys BPO arm is now being heard as a special leave petition in the Supreme Court. Courts are also hearing arguments over the tax liability arising from the buyout of Hutch by Vodafone in India.

In the case before the Uttarakhand High Court, Arthusa had offered to pay tax at 60% of its income for the assessment year 1994-95, citing the Indo-US double-taxation agreement. But the I-T department says it should pay 72.5%. The company is likely to appeal to the Supreme Court within 120 days.

Reacting to the order, PricewaterhouseCoopers executive director Sanjiv Kumar Chaudhary told FE, The view of the I-TAT, New Delhi, was better and it settled the issue of the rate of tax for such Companies. Mukesh Butani, partner, BMR& Associates, agrees: Ordinarily, when the rate of tax is calculated under a double-tax avoidance agreement, it is all inclusive.

The rate was reduced to 65% by the Commissioner of Income-Tax (Appeals) as well as by a tax tribunal. But the HC overturned their decisions, saying they had erred in law by holding that the assessee was not liable to pay tax beyond 60%. The order passed by the assessing officer holding that the assessee is liable to pay tax at the rate of 65% is upheld, the court ruled.