2006 (2) TMI 77 - AAR - Income Tax

Court Rules MSAS Not a PE; PE for Stewardship Activities; Arm's Length Price Determination Rejected

Morgan Stanley and Co., In re

The court held that MSAS is not a Permanent Establishment (PE) of the applicant under Article 5(1) of the Treaty and not an agency PE under Article 5(4). ... Non-resident company - leading investment Bank having a number of group companies in various parts of the world - provides financial advisory services, corporate lending and securities underwriting by various divisions – One of the group companies is a Morgan Stanley Advantage Services Private Limited ('MSAS') which is incorporated in India and is set up by the Morgan Stanley Group – held that MSAS is not the PE of the applicant in India & MSAS would not constitute an agency PE of the applicant Issues Involved:1. Permanent Establishment (PE) in India under Article 5 of the Treaty.2. Agency PE under Article 5(4) of the Treaty.3. PE in India due to stewardship activities.4. PE in India due to deputation of employees.5. Most appropriate method for determining arm's length price.6. Mark-up of 29% meeting the arm's length test.7. Attribution of further income to PE if remunerated at arm's length.8. Appropriate profit attributable to PE based on margin on total operating cost.Detailed Analysis:1. Permanent Establishment (PE) in India under Article 5 of the Treaty:The applicant, a non-resident company incorporated in the USA, sought clarification on whether it would be considered as having a PE in India due to services rendered by MSAS. The business of the applicant is not carried out through the fixed place of business of MSAS. The services provided by MSAS, although useful to the applicant, do not amount to the applicant carrying on its business through MSAS. Consequently, MSAS is not considered a PE of the applicant under Article 5(1) of the Treaty.2. Agency PE under Article 5(4) of the Treaty:For MSAS to be considered an agency PE, it must act on behalf of the applicant and habitually exercise authority to conclude contracts or secure orders for the applicant. The agreement between the applicant and MSAS does not create an agency relationship, and MSAS does not have the authority to conclude contracts on behalf of the applicant. Therefore, MSAS is not regarded as an agency PE under Article 5(4) of the Treaty.3. PE in India due to stewardship activities:The applicant proposed sending employees to India for stewardship activities. The employees would ensure that MSAS adheres to the quality benchmarks of the Morgan Stanley Group. Since these activities would continue for more than 90 days, MSAS would be regarded as a PE of the applicant under Article 5(2)(l) of the Treaty.4. PE in India due to deputation of employees:The applicant also proposed sending employees on deputation to work under the control and supervision of MSAS. As these employees would be in India for more than 90 days, MSAS would be considered a PE of the applicant under Article 5(2)(l) of the Treaty.5. Most appropriate method for determining arm's length price:The applicant sought a ruling on whether the Transactional Net Margin Method (TNMM) is the most appropriate method for determining the arm's length price for transactions between the applicant and MSAS. The Authority rejected this question under the first proviso to Section 245R(2) of the Act, as it involves the determination of the fair market value of property and the question was already pending before the income-tax authority.6. Mark-up of 29% meeting the arm's length test:The question of whether a 29% mark-up using TNMM meets the arm's length test was also rejected under the same proviso, as it involves the determination of fair market value and was pending before the income-tax authority.7. Attribution of further income to PE if remunerated at arm's length:As long as MSAS, being the PE of the applicant in India, is remunerated for its services at arm's length by the applicant/Morgan group and all its actual income is brought to tax, no further income can be attributed to the PE of the applicant.8. Appropriate profit attributable to PE based on margin on total operating cost:The first part of this question is consequential to the ruling on the PE issue. The second part, which is the real question, is an alternate formulation of the question regarding the most appropriate method for determining the arm's length price. Since the question on the method was rejected, no ruling was given on this question.Conclusion:1. MSAS is not a PE of the applicant under Article 5(1).2. MSAS is not an agency PE under Article 5(4).3. MSAS would be a PE under Article 5(2)(l) for stewardship activities beyond 90 days.4. MSAS would be a PE under Article 5(2)(l) for deputation of employees beyond 90 days.5. The question on the most appropriate method for determining arm's length price is rejected.6. The question on the 29% mark-up meeting the arm's length test is rejected.7. No further income can be attributed to the PE if remunerated at arm's length.8. No ruling on profit attributable to PE based on margin on total operating cost.