LexM/S. DIT (INTERNATIONAL TAXATION), MUMBAI versus M/S. MORGAN STANLEY & CO.
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A
MIS. DIT (INTERNATIONAL TAXATION), MUMBAI
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v.
MIS. MORGAN STANLEY & CO.
JULY 9, 2007
B
[DR. ARIJIT PASA YAT AND S.H. KAPADIA, JJ.]
Income Tax Act, 1961:
c
Section 92-lnterniitional transaction-Computation of income from-
Arm's length price-Relevance of-Methods to determine-Authority for
Advanced Ruling (AAR)-Permanant Establishment (PE)-Projits attributable
to-Morgan Stanley & Co. (MSC) has three main lines of business, namely,
securities investments management, investment banking and credit services-
MSCO had set up a captive Business Process Out sourcing (BPO) in India,
D namely, Morgan Stanley Advantage Services (MSAS)-MSCo accordingly
made an application seeking an Advance Ruling as to whether it was having
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a permanent Establishment (PE) in India and, if so, the amount of Income
attributable to such PE-AAR held that MSCo could not be regarded as
having a fixed place of business PE; that MSAS could not be regarded as
E an agency PE; and that the applicant would be regarded, as having a PE
in India only if it were to send some of its employees to India as stewards
or as deputationists in the employment of MSAS-Validity of-Held: AAR was
right in ruling that MSAS would be a Service PE in India, though only on
account of the services to be performed by the deputationists deployed by
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MSCo and not on account of stewardship activities-The transactional net
margin method (TNMM) was appropriate for determination of arm's length
price in respect of transaction between MSCo and MSAS-In the case of
MSCo and MSAS, the remuneration was rightly fixed at a margin of 29%
worked out on the basis of Cost plus Method_:. Therefore, the Department has
to determine income, expense or cost allocations having regard to arm's
G length prices to decide the applicability of the transfer pricing regulations-
Economic nexus is an important aspect of the principle of Attribution of
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Profits-Income Tax Rules, 1962 Rr_ JOA to JOE-Double Tax Avoidance
'
Agreement, Articles 5 and 7.
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if
52
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DIT (INTERNATIONAL TAXATION), MUMBAI v. MORGAN STANLEY II< CO.
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The respondent-company is one of the world's largest diversifying A
financial services companies. It has three main lines of business, namely,
securities investment managements investment banking and credit services.
Morgan Stanley and Company ('MSCo') is an investment bank engaged in
the business of providing financial advisory services, corporate lending and
securities underwritting.
B
One of the group companies of the respondent-company, namely, Morgan
Stanley Advantages Services Pvt. Ltd. ('MSAS') entered into an agreement
for providing certain support services to MSCo. MSCo accordingly made an
application seeking an Advance Ruling as to whether it was having a
Permanent Establishment (PE) in India under Article 5(1) of the Double Tax
Avoidance Agreement ('OT AA') on account of the services rendered by MSAS c
under the Services Agreement entered into by MSAS with the applicant and,
if so, the amount of income attributable to such PE.
The Authority for Advance Ruling(' AAR') held that the applicant could
not be regarded as having a fixed place of business PE under Article 5(1) of D
the DT AA; that MSAS could not be regarded as an agency PE under Article
5(4) of the DTAA; and that the applicant would be regarded as having a PE in
India under Article 5(2) (1) only if it were to send some of its employees to
India as stewards or as deputationists in the employment of MSAS. Hence
the appeal.
E
Allowing the appeal in part, the Court
HELD: 1. The question which arises for consideration in the present
case is the nature of activities performed by stewards and deputationists
deployed by Morgan Stanley and Company ('MSCo') to work in India as
F
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employees of Morgan Stanley Advantages Services Pvt Ltd. ('MSAS'). Under
Article 5(2)(1) of the Double Tax Avoida11ce Agreement ('DTAA') furnishing
of services through the fixed place in India can constitute a Permanent
Establishment (PE). The Authority for Advance Ruling ('AAR') in the
impugned ruling has held that the stewards and deputationists are proposed
to be sent by MSCo from U.S. According to the AAR there is a Oow of service G
from the MSCo to the MSAS when the former deputes its own employees to
work in India in MSAS. Therefore, according to the AAR the service
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Agreement between MSCo and MSAS would fall under Article 5(2)(1) andExcerpt shown. Read the full judgment & AI analysis in Lexace.