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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