The Hindu Business Line : Morgan Stanley verdict leaves ‘economic nexus’ open to interpretation

Chennai, July 14The Morgan Stanley decision is a setback to the Revenue department’s desire to seek strict source-based interpretation for taxability of non-residents’ income, says Mr Mukesh Butani, Tax Practice Leader and Partner, BMR & Associates, a consulting firm.

“A recent decision of the Mumbai Tribunal in the case of Sony Entertainment seems to have been (partially) overruled as result of this decision,” he adds. “However, it is important to observe that Sony’s decision was in the context of dependent agent PE.” Mr Butani is of the view that the verdict, by being a silent reaffirmation of the administrative guidance and circulars issued by the Central Board of Direct Taxes (CBDT) with respect to arm’s length compensation to captive BPOs, is “a welcome relief to IT and ITES captive operations”.

Since the court has reinforced the principle of transfer pricing and hence, arm’s length concept, he reminds that to the extent transfer pricing analysis does not adequately reflect the functions performed and risks assumed, such situations would warrant income attribution to the PE. “Though the court has made a couple of references to ‘economic nexus’ being an important feature for income attribution, there is no reasoned explanation in the order.”

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