India Gives Multinationals a Tax Break

The Indian Supreme Court yesterday ruled that firms based overseas do not have to pay taxes on income generated by their Indian operations, if the income is generated at market prices.

Multinational banks and other corporations have increasingly set up such operations as call centers in India. The Supreme Court agreed with a lower court ruling in a case involving investment bank Morgan Stanley that its outsourced operations in India cannot be defined as permanent establishments, so the income can’t be taxed. The court ruled that the multinationals must pay market rates for deals conducted in India to benefit from the no-tax ruling.

The court said that the market rate, or “arms length”, price paid by firms like Morgan Stanley must reflect all the costs and risks taken on by its outsourced unit.
 
Sudia Kapadia, a partner with international consultant KPMG, told Forbes.com the decision removes any questions about India’s tax treatment of outsourced operations.

“There’s absolute clarity with the Supreme Court ruling,” said Kapadia. “If these [multinational] firms can demonstrate they have arrangements at arm’s length with their captive units, no further questions should rise.”