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SC's Morgan Stanley verdict’s still a maze

The Supreme Court’s verdict in the case of investment banker Morgan Stanley has generated more confusion than before.

, TNN|
Jul 23, 2007, 05.00 AM IST
MUMBAI: The Supreme Court’s verdict in the case of investment banker Morgan Stanley has generated more confusion than before. The verdict was believed to have resolved a long-standing debate over the taxability of the MNC’s operations in the country, but many experts now think otherwise.

The apex court said if the MNC paid the Indian agent (permanent establishment in tax parlance) at arm’s length price, it should not be subjected to further taxation. Now, the confusion is over an April 2007 verdict in a similar case of Sony Entertainment Television (SET) by the Income Tax Appellate Tribunal (ITAT), which stood for taxing such operations even if the parent company had paid its Indian agent (PE) at arm’s length price. A set of tax professionals think the two cases are similar in nature and hence, the decision of the Supreme Court overrules the order of ITAT, which is at best a quasi-judicial body.

But the I-T department and many tax professionals think both cases are different. Therefore, the Supreme Court verdict does not overrule the ITAT decision on SET. The ITAT, in case of SET, held that the PE could still be subjected to tax in India even if it has been paid at arm’s length price by the parent company.

Talking to ET, a senior tax professional, familiar with the SET case, said: “There is an inconsistency in the two judgements. On almost similar facts, the SC and ITAT have given contradictory verdicts.” He said the only option for SET is to move the high court. “The SC judgement cannot prevail over the ITAT verdict on SET. Both are two different cases,” a senior officer in the I-T department said.

STAR TV, Citibank, American Express and DHL have similar issues and cases pending before ITAT. The ongoing debate over the two decisions has a bearing on the tax burden on these entities. “Morgan Stanley’s ruling is right in its own way. And the SET ruling by Mumbai ITAT is also right. In case of Morgan Stanley, the issue was primarily on the compensation related to Morgan Stanley’s back-office operations. In case of SET, the functions are larger than agency functions and hence the compensation should be attributed to functions performed by the PE.

The arm’s length price relates to the functions performed and the risk assumed is a litmus test for determining further attribution of profits,” said Deloitte & Haskins tax partner KR Shekhar. “The SC verdict does not overrule the ITAT decision on SET because in both cases, the facts are different,” said senior chartered accountant TP Ostwal.
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