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Sony tax litigation outcome: The case & its effects
September, 26th 2008

The landmark Sony judgment from the Bombay High Court offers clarity on permanent establishment taxation - but will the battle now shift to the transfer pricing arena. We examine the case and its consequences.

Recently foreign companies in India had cause for much cheer. A judgment by the Mumbai High Court in favour on Sony Entertainment Television said that as long as appropriate arms length remuneration has been paid to the Indian permanent establishment, no further profits can be attributed to this Indian entity and nothing else is liable to tax.

This judgement reinforces an earlier Supreme Court judgment in the case of Morgan Stanley BPO and brings some much needed clarity on the permanent establishment front But does this open up other avenues for tax litigation?

Here are some tax experts thinking aloud on this case and its consequences.

Uday Ved, Head -Tax & Regulatory Services, KPMG says, It has clearly relied on Morgan Stanley but saying that once there is an arms length remuneration given to the Indian entity there is no further tax and interesting there was a very old circular of CBDT, circular 23 of 1969 where CBDT has examined the issue if there was an agent in India, compensated on arms length basis, was there any further liability? CBDT held through the circular that it extinguishes further tax liability. That was always law of the land.

Mukesh Butani, Managing Partner, BMR & Company says, I think the most important question that will arise for the SC, should the revenue decide to appeal, would be, are you supposed to take into consideration the new OECD model convention, and Indias affirmation of those aspects, or are you supposed to deliver the judgment based on the current interpretation of the law based on the board circular. My view is that the latter is more likely that the former. But its too soon to say anything at this point in time.

Pranav Sayta, Partner, E&Y says, Its a circular which has been in force since 1969 at a time when there were not so many international transactions especially in the service space. The OECD interpretation on taxation was probably not available. So I am not too sure given all the background, whether there will be some amount of thinking as to whether that circular will hold true today.

Ajay Gupta, Head- Tax Practice, FoxMandal Consulting says, Arms length price principle has not been established and tax department can go to on say that arms length pricing is not according to justifications given by foreign entity. So that grey area still remains after the judgment.

M Lakshminarayanan, National Director- Tax, Deloitte says, Wherever there is arms length price determined by the entities under the transfer price regulations, they will review that arms length price and try to see whether they can get additional mileage by saying this is not arms length, and the extra would be brought to tax.

Sayta says, The revenue authorities below as of now would be far more considerate in their orders given the interpretation thats been taken. If the judgment is overturned by the Supreme Court then it would be different. But until that happens this means far more relief for foreign companies.

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