MSAS not a PE of Morgan Stanley, holds SC

New Delhi, July 9 (UNI) The Supreme Court today upheld a ruling of Authority for Advance Ruling (AAR) holding that Morgan Stanley Advantages Services Private Limited (MSAS) is not a Permanent Enterprises (PE) under article 5(1) of DTAA and can only be regarded as service PE in India under article 5(2)(1).

By implication, US-based Morgan Stanley will not have to pay tax for the activities of its subsidiary MSAS in India.

The ruling was delivered by a Division Bench comprising Justices Arijit Pasayat and S H Kapadia while partly allowing the petitions of Department of Income Tax (International Taxations), Mumbai and M/s Morgan Stanley and Company (MSCo) regarding the controversy on Double Tax Avoidance Agreement (DTAA) between India and the United States.

The apex court, however, made it clear that MSAS would be a service PE in India only on account of the services to be performed by the employees on deputation deployed by the MSCo and not an account of stewardship activities.

The court also held that ''with regard to the income attributable to the PE (MSAS), we hold that the transactional net margin method was the appropriate method for determination of the arm's length price in respect of transaction between MSCo and MSAS. We accept as correct the computation of the remuneration based on cost plus mark up worked out as 29 per cent on the operating cost of MSAS.'' ''This position is also accepted by the assisting officer in his order dated December 29, 2006 (after the impugned ruling) and also by the transfer pricing officer wide order dated September 22, 2006,'' the court held.

The treaty between the two countries either advocate application of arm's length principle or provide a mechanism to avoid double taxation on income.

The basic questions raised by MSCo in its application before AAR was whether the applicant was having a PE in India under article 5(1) of DTAA on account of the services rendered by MSAS under the services agreement dated April 14, 2005 entered into by MSAS with the applicant and if so the amount of the income attributable to such PE.

The AAR in its impunged ruling dated February 13, 2006 held the applicant cannot be regarded as having as fixed place of business under article 5(1) of DTAA and that MSAS cannot be regarded as an agency under article 5(4).

The AAR also held the applicant would be regarded as having a PE in India if it were to send some of its employees to India as stewards or on deputation on the rolls of MSAS.

The Department of Income Tax (International Taxation) had MSAS should be considered a PE of the MSCo in India as the latter has a fixed place of business in India (Mumbai) and the former proposes to carry out its operations in India through MSAS.

''With regard to attributing further profit to the PE of MSCo where the transaction between two are held to be at arm's length, we hold the ruling is correct in principle provided that an associated enterprise (that also constitute a PE) is remunerated on the arm's length bases taking into account all the risk taking functions of the multinational enterprises,'' the court said in its 49-page ruling.

UNI