India’s Supreme Court found that Morgan Stanley did not have to pay tax in that country for income earned from its business process outsourcing unit, giving multinational companies a lift in their outsourcing arrangements.

The court found that the captive unit, Morgan Stanley Advantage Services Ltd., did not qualify as a “permanent establishment” of the parent company as long as its transactions with the parent company occurred at market prices and the unit was only carrying out back-office operations.

If the unit had been a permanent establishment, it would have been liable for a tax of 42 percent. As long as there is an “arm’s length” deal and no preferential pricing, however, the court found no tax liability.

The landmark ruling is expected to boost the prospects of the business process outsourcing industry in India.

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