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For the first-time a judgment that could have far reaching effect on the BPO industry, the Income Tax Appellate Tribunal (ITAT) has announced that foreign companies having local agents with Permanent Establishment (PE) in India will have to pay taxes.
The concept of PE is one of the most difficult issues that international tax treaty laws have to deal with. That is because a foreign companys profits are taxable in a country only if the enterprise is a PE, through which business is carried out.
With this order though, income earned by foreign companies in India will be taxed if the foreign company has paid the Indian agent on the basis of equal footing. Under the terms of this principle, the prices paid to a foreign companies agent would be the same as they would have been, had the parties to the transaction not been related to each other.
While this new ruling will bring in at least Rs.200 crore in form of tax from the entertainment industry, but it will be the BPO business that will come under the scanner as IT officials train their guns on this sector. "None of the foreign companies in the BPO space that have Indian agents are filing returns in India. IT department are proposing to send out notices to such companies under section 163 of the I-T Act to file returns in India on the basis of the recent order," sources said.
It is likely that representatives from the BPO business may insist on government to categorically evince when the Arms Length pricing has been adhered to, the tax liability of the foreign company in India is does not exist. The order was passed on account of a case that was filed by Sony Entertainment Television (SET), the parent company of Sony Entertainment Television. SET is in the business of broadcasting and uplinking of television channels. It appointed an Indian company as an agent to market ad space on its behalf for a commission during assessment year 1999-2000.
While filing returns, SET argued that it is not taxable in India as it did not have a PE as defined by a tax treaty between India and Singapore. The stand was adopted because SET pointed out it had compensated the agent on the Arms Length principle.
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