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I-T may ask Morgan Stanley arm to file return
July, 20th 2007
The Income-Tax (I-T) department proposes to ask US-based Morgan Stanley and Company to file its income-tax returns in India following the recent Supreme Court judgement.
 
The apex court has upheld the treatment of its business process outsourcing hub, Morgan Stanley Advantage Services (MSAS), as a service permanent establishment (PE).
 
According to an I-T department source, tax authorities may issue a notice if the returns are not filed within a weeks time after the formal communication is sent to the company. The returns will be useful in analysing the tax implications from the transfer pricing angle.
 
The source added that treatment of a BPO outfit as a service PE gives rise to various risks, if the contract fails.
 
Further, the department would also like to see whether the arms length treatment has been maintained on payments to employees on deputation from the overseas office.
 
The department is of the view that transfer pricing issues arising out of treatment of BPOs as service PEs have implications for other BPOs owned by foreign companies and such cases may also be opened for further scrutiny.
 
Allaying doubts over taxation of BPOs floated by foreign entities, the Supreme Court, in its landmark judgement, has stated that income of the foreign companies could not be taxed by the tax authorities by attributing it to BPO operations based out of India.
 
However, a foreign company can avoid paying tax in India, if it is compensating the outsourcing unit on an arms length basis.
 
In its judgement, the Supreme Court upheld the judgement of the Authority for Advance Rulings, which had stated that MSAS did not constitute a permanent establishment.
 
 
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