Petronet consortium co contests AAR decision

PUNE: The government has challenged a verdict given by the Authority for Advance Ruling (AAR) to the US-based investment bank Morgan Stanley in the Supreme Court. An MNC — Japan’s Ishikawajima-Harima Heavy Industries — too has taken recourse to the same route in a different and separate case ahead of the government.

Ishikawajima — a partner in the Petronet consortium — moved the apex court contesting AAR’s ruling that it is liable to pay tax in India on profits earned from a composite contract including supply of off-shore equipment. The case has been heard and the judgement is awaited, said official sources.

The AAR is a quasi-judicial body and its rulings are normally binding on both the tax payer and the income tax department. However, two major, but separate cases are now pending before the SC. In one case, the government has filed a Special Leave Petition challenging AAR’s ruling that Morgan Stanley’s captive BPO in India does not constitute a permanent establishment (PE) or a fixed place of business.

If it were a PE, then Morgan Stanley would be liable to pay tax in India on a portion of its global income attributable to the activity of its PE. The ruling had been given a year ago.

In the other case, Ishikawajima is understood to have contested some of the grounds of AAR’s ruling that broadly held that the activity carried on in India constituted a PE. So the company is liable to pay tax in India on so much of the profit as is reasonably attributable to the operations in India. The verdict in this case was earlier than the Morgan Stanley ruling.

“The advance ruling mechanism was meant to achieve certainty in intricate tax issues and to avoid litigation. By filing petitions with the Supreme Court, the objective may not be fully achieved,” said Samir Gandhi, tax partner, Deloittee Haskins and Sells.