labels: economy - general
Overseas profits of MNCs need not be taxed in India: SC news
07 June 2007

The Supreme Court has ruled that the profits arising out of overseas operations of MNCs need not be taxed in India. CNBC-TV18.

According to the Supreme Court ruling, only permanent establishments are to be taxed and profits arising from overseas operations will not be attributable to the Indian arm. It will also treat Indian permanent establishment of foreign companies as a separate profit centre for tax calculation.

This is a landmark ruling by the Supreme Court in favour of Hyundai Heavy Industries that might also benefit foreign companies, especially banks. Banks like Citibank and ABN AMRO could now pay less tax.

The Supreme Court has held, in the case of Hyundai Heavy Industries, that profits from operations outside India are not taxable in India.

The Income Tax department had argued that Hyundai had a permanent establishment in India. Hence, some part of its global profits could be attributed to its Indian operations and should be taxed in India.

But the Supreme Court has made it clear that only the part of the profit that can be attributed to the foreign companies'' Indian operations can be taxed.

A two-judge bench comprising Justice Kapadia and Justice Reddy rejected the theory of two separate assessments - one for the foreign company and another for its Indian permanent establishment.

The ruling goes against a 2005 ruling bu ITAT, Kolkata, in the case of ABN AMRO some years ago. The ITAT had disallowed tax deduction for interest payments made by ABN AMRO India to its foreign head office. Tax experts say the Supreme Court ruling might undo the ITAT damage.

Ketan Dalal, executive director, PwC, said, "It is a positive for banking companies, who can now claim deduction for interest payments made to their foreign HO, which was disallowed by ITAT."

The court also laid down a mechanism to tax foreign companies. It said profits of foreign firms arising in India must be determined by treating the Indian permanent establishment as a separate profit centre and that would constitute the profit of the foreign enterprise.

This ruling re-affirms the principle laid down by ITAT members, Pramod Kumar and Madhavi Devi, in the case of Dresdner Bank a year ago.

 


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Overseas profits of MNCs need not be taxed in India: SC