AI Drafter 
TaxTMI 
TaxTMI 
2006 (2) TMI 77
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....derwriting. The diverse activities of the applicant are undertaken 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 to support the Group Member's front office and infrastructure unit functions in their global operations for providing support services. MSAS is a wholly owned subsidiary of Morgan Stanley International Holdings Inc., (U.S.) in which 80% shares are held by Morgan Stanley U.S. and 20% shares are held by Morgan Stanley International Corporated US which is a wholly owned subsidiary of Morgan Stanley, US. MSAS renders support services such as IT support, account reconciliation, research etc. Under an agreement dated 1.12.2003, the applicant has out-sourced support services specified in Schedule-II thereto as amended from time to time. MSAS does not undertake the important revenue generating functions of the applicant nor does it bear any significant market risk with respect to its transactions with the applicant. The client's interaction is done entirely by the employees/personnel of the applicant. The applicant proposes....
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....he average margin earned by the comparable companies providing similar services is worked out to 28.33% and under the existing arrangement MSAS charges the applicant a margin of 29% on the costs it incurs. 2. The Government of the United States of America and the Government of the Republic of India concluded a convention on avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income on 18th December, 1990 (hereinafter referred to as "Treaty"). 3. On the above mentioned facts, the applicant sought advance rulings of the Authority on the following questions:- Whether on the facts and in the circumstances of the case, Morgan Stanley & Co. incorporated ("the Applicant") would be regarded as having a Permanent Establishment ("PE") in India under the provisions of Article 5 of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to taxes on Income and Capital Gains entered into between the Government of the Republic of India and the Government of the United States of America (hereinafter referred to as the "Treaty"), and specifically:- (a) Whether the Applicant would be regarded as havin....
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....nd 5 for the purpose of pronouncing advance rulings under sub-section(4) thereof and calling upon the applicant to explain as to why question nos. 2 and 3 should not be rejected in view of proviso(ii) to Section 245R(2) of the Act. In response to the said order, the applicant has submitted that it has a right to seek advance rulings on question 2 and 3 and that proviso(ii) of section 245R(2) of the Act prohibits the Authority from allowing an application where the question raised involves determination of fair market value of any property and as the determination of either the arm's length price or the fair market value of services does not involve determination of fair market value of the property, the said proviso is not attracted. Question no. 2, submits the applicant, merely relates to the choice of the method adopted to determine the arm's length price and therefore a ruling on the most appropriate method to be used for determining arm's length price based on the provisions of Section 92C of the Act read with Rules 10B and 10C of the Income-tax Rules, 1962 (for short "the Rules"), does not amount to valuation of the property. It is, further, submitted that in....
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....e Services Private Limited ("MSAS") under the Services Agreement dated April 14, 2005 entered into by it with the Applicant ("Agreement")? " It may be pointed out at the outset that question nos. 1(e) and 3 are dropped; question no. 4 is consequential to the ruling on question no. 1 and the first part of question no. 5 is the premise for the second part which is in fact the real question and is nothing but an alternate formulation of question nos. 2 and 3 7. We shall enter upon the discussion on the first question. It contains 4 sub-questions which can conveniently be dealt with together. Mr. Desai, learned counsel for the applicant has made oral submissions and filed as many as 7 written submissions. He has argued that the applicant has no fixed place of business in India through which it can be said to carry on its business. The premises of MSAS in India is being used for carrying on the business of MSAS and not of the applicant. The applicant, it is submitted, has outsourced certain activities to MSAS under the agreement dated December 1, 2003 (amended agreement dated 14.4.2003) and that the applicant does not carry out its business either wholly or....
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.... applicant nor does it secure orders in India wholly or almost wholly for the applicant. Much argument is also addressed to show that MSAS is independent of the applicant and it would not be correct to say that MSAS is a mere projection of the applicant. Mr. Chopra, learned counsel representing the Commissioner, contends that MSAS obtained registration with the Software Technology Park of India for its business units at Mumbai and Bangalore and claimed exemption on the ground of exporting software u/s. 10A of the Act. MSAS provides services- Research Support, Quantitative Modeling and Account Reconciliation- to the applicant and its associated enterprises. MSAS performs essential and significant activities of the Morgan Stanley, which are crucial and critical for the business being carried on by the applicant as well as the other group companies, the development of computer software including customized electronic data or product or computer programme are also of critical relevance for the applicant and the group. It is on the basis of the material research support, data analysis etc. that the applicant formulates its business strategy and ensures, inter alia, that profits in th....
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....Stanley customers exclusively, strictly following Morgan Stanley procedures, policies and practices. The applicant along with other Morgan Stanley entities would be in a position to exert a decisive influence on the business of the MSAS who would be working under direct control and supervision and subject to the instructions of Morgan Stanley group. The applicant and the other two Morgan Stanley entities provide customers material which include hardware, intellectual property rights, software or data licenses. There is, thus, no independent existence of business of MSAS except as dependent agent of the applicant. The applicant and the other Morgan Stanley entities would depute staff to MSAS which would work for more than 90 days in a year and thus exercise direct control and supervision over the activities of MSAS, which would constitute service PE in India under article 5(2)(l) of the Treaty. Though clause 21.5 says that the agreement does not make one party the agent of the other party, what is material is the substance of the agreement which clearly shows that MSAS is merely a dependent agent. Further, the contention that MSAS does not have any authority ....
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....entioned State a Stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in that State on behalf of the enterprise have contributed to the sale of the goods or merchandise; or he habitually secures orders in the first mentioned State, wholly or almost wholly for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph. A careful reading of article 5 would show that para 1 thereof applies where an enterprise carries on business, whether wholly or partly, through a fix....
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....entioned state wholly or almost wholly for the enterprise. It is seen that para 5 contains an exclusionary clause which says that an enterprise of a contracting State shall not be deemed to have a permanent establishment in the other contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status provided that such agents are acting in the ordinary course of business. Nonetheless when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, he shall not be considered as an agent of an independent status within the meaning of those paragraphs. It will be useful to refer to the rulings in the following cases:- In re (AAR/611/2003)2, the applicant, a UK company was carrying on business in derivatives in other countries. With a view to expand its business to invest in the Indian stock market it got registered with SEBI as a FII and obtained permission of RBI. It invested in derivative trading operat....
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....y to conclude contracts on behalf of the enterprise and the activities are not limited to the purchase of goods or merchandise for the enterprise; or (b) though he acts without authority, he habitually maintains a stock of goods or merchandise from which he regularly delivers them on behalf of the enterprise; or (c) he habitually secures orders for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same control, as that enterprise". In re (AAR/542/2001)3, an American company and an Indian company formed a partnership. They jointly entered into a venture with another Indian company- the applicant. The American company was engaged in the business of international transportation services and its partner Indian company was a general sales agent for and on behalf of international and domestic airline companies of India. These companies and some other companies formed an international group of companies which were engaged in the business of international transportation services using common international logo. The applicant entered into an agreement of international transportation services with the American company for movem....
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....tion of the business. Under the agreement, XYZ was to make available executive personnel for development of general management, finance and purchasing etc. Payment of annual fee to XYZ was agreed for that purpose. On the question, whether XYZ had a permanent establishment in India, it was held: "Even assuming that the inclusion clause should be interpreted "against the background" of the general definition contained in paragraph 1 and bears some analogy to it, all that could be said was that sporadic or isolated activities of the kind referred to in clause (1) would not be sufficient to constitute a permanent establishment and that there should be some degree of "continuity" or "durability" and a framework against which the services were rendered. That kind of framework and degree of stability and continuity was present here. It must be held, therefore, that XYZ had a permanent establishment in India within the meaning of clause (1) of article 5(2)". 9. On the facts stated above, MSAS entered into a service agreement on 14th April, 2005 with (i) M/s Morgan Stanley & Co. International Ltd., UK, (ii) M/s Morgan Stanley & Co. Incorporated USA and (iii) Morgan S....
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.... Members by assisting in market data gathering for corporates, performing standard data collection and statistical analysis, supporting with power-point document products, reconciling swap/stock bookings etc. EFSD: The EFSD of the Applicant provides values added services to Hedge Funds and earns revenue through securities lending and from acting as a 'Prime Broker'. These value added services include providing account and record reconciliation services. EFSD, within MSAS, mainly provides support to EFSDs of the Group Members in the form of portfolio accounting & reconciliation services. FID: The FID of the Applicant is involved in fixed income broking and trading in fixed income instruments (e.g. commercial papers, government securities etc.). The research reports generated by the FID are not sold to clients but are made available free of cost to them as a part of a value added services to the clients. The FID within MSAS supports various FIDs of the Group Members in their research reports by gathering and organizing financial data, maintaining and managing databases, entering customer details into e-Trading web tool, updating changes in client details....
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.... assists in code of conduct implementation for new hires, assists in the monitoring of firm positions on securities across Asia, monitoring and surveillance of employee trading transactions in outside brokerage accounts that have been approved by the firm, monitoring and surveillance of employee trading transactions in Morgan Stanley Group accounts, assisting in the development of policies and procedures to assist the Applicant and its staff to observe the relevant regulations in regards to significant holdings, code of conduct and employee trading and developing IT functions to improve and better enable monitoring functions. MSAS assists Human Resources ("HR") by providing data entry services for HR applications, assistance in maintaining personnel files, providing data entry services for the firm-wide directory, performing daily, weekly and monthly data audits, data entry services in connection and temporary ID requests and status change requests, processing new hire paperwork, assisting in employee background check verifications, assisting in employee self service data entry, assisting in the handling of report requests and weekly temporary staff verifications. For t....
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....s activities of the applicant, the agreement and the support services provided by MSAS outlined above and considered the submissions of Mr. Desai and Mr. Chopra. We are of the view that it is not for this Authority to pronounce upon the validity of the agreement of service. We proceed on the footing that it is a valid agreement in law. MSAS develops computer software including customized electronic data or product or computer programs which are of critical relevance for the various divisions of the applicant like equity research, fixed income division, equity financing service division and investment banking division, etc. It would be providing research report, data analysis and industry specific analysis, company specific analysis, earning models of companies as an on-going process so as to help various divisions of the applicant to formulate their business strategies and ensure inter alia that profits in the share portfolio and fixed income portfolio of the customers are enhanced and further that diverse business operations in the various divisions of the applicant embracing the entire gamut of financial services are carried out with optimum results. MSAS ....
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....has the liberty to share the information with any member of the Morgan group. All this would show that the applicant would be in a position to exercise close control and supervision on the working of MSAS. Further these features in the agreement vividly bring out that the business of MSAS is inextricably linked with the business of the applicant and other two entities of the Morgan Stanley group so as to make activities of MSAS projection of Morgan Group. We have noticed above the requirements of article 5(1) of the treaty; namely, first, there should be a fixed place of business and secondly the business of the enterprise should be carried on wholly or partly through that place. The place of business of the MSAS is no doubt a fixed place but there is nothing to show that the business of the applicant, noted above, is carried on through the place of business of MSAS. We are not persuaded to accede to the contention that rendering of the aforementioned services by MSAS to the applicant and other group companies which may be usefully utilized by them in running their business amounts to carrying on business through the fixed place of business of MSAS. In a case where an Indi....
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....t. An "agent" works for another in accordance with his authority while dealing with third parties". In a recent ruling In re AAR. 542 of 2001 (supra 3), the Authority has again considered the distinction between the 'agent' and the 'contractor' and has held that though contractor is independent of any control or interference and is only bound to produce the specified result as per the contract, the agent has to exercise his authority in accordance with the lawful instructions given to him by his principal but he is also not subject in his exercise to the direct control or supervision of the principal. On the facts stated above, we are inclined to accept the contention of Mr. Chopra that the service agreement between the applicant and MSAS clearly proves that the latter is carrying on activities in India on behalf of the applicant and that the functions and the activities of MSAS are wholly and exclusively dependent on the applicant both legally and economically as is evident from the fact that for the year 2003-04, the entire revenue of Rs.19.23crore was received from Morgan Stanley Group only; there was no revenue from any independent party though it is sta....
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....or on deputation basis for more than 90 days. Nowhere it is stated by the applicant that they would be working with MSAS for less than 90 days. What is sought to be clarified is that employees are not yet sent. It hardly makes any difference because advance ruling is given on the basis of the agreement, which postulates sending of employees on deputation. Mr. Desai has emphasized that the staff would be working for the applicant only. We are unable to accede. It may be that the benefit of services of the staff would enure to the applicant but it would not be the same as working for the applicant. In our day-to-day experience it is noticed that the benefits of labour of employees of companies manufacturing consumer products are enjoyed by the public, but it cannot be said that the employees are working for the public; they are employees of the companies and working for their employers. Once employees are sent by the applicant on deputation for stewardship activities they would be actively involved in the key managerial activities of MSAS as has been pointed out above. It follows that the ingredients of para 2(l) of article 5 are satisfied and therefore, MSAS would ....
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....applicant falling in sub-clause (iii) of clause (b) of Section 245N] or any court; (ii) involves determination of fair market value of any property; (iii) relates to a transaction or issue which is designed prima facie for the avoidance of income-tax [except in the case of a resident applicant falling in sub-clause (iii) of clause (b) of section 245N] We shall advert to the first proviso presently. The second proviso of sub-section (2) of Section 245N of the Act enjoins that before rejection of the application an opportunity of being heard shall be given to the applicant and it is in compliance with this proviso that the notice to show cause was given to the applicant. The third proviso requires that the reasons for such rejection shall be given in the order. The second and the third proviso of sub-section (2) of Section 245N of the Act are not relevant for the present discussion. Clauses (i) and (ii) of the first proviso are relevant. Though the notice mentions only clause (ii) which prohibits the Authority from allowing an application where the question involves determination of fair market value of any property, the parties have referred to and argu....
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....e return including the amount of arrears in his return will preclude him from approaching the authority for a ruling. It is clear it does not. In the first place, there is no pending dispute between the applicant and the income-tax Department because the return has been processed under Section 143(1) and the refund as prayed for by the applicant has been granted". A perusal of the above passage shows that the Court was considering whether the assessee's act of filing the return including the amount of arrears in his return would preclude him from approaching the authority for a ruling. Having recorded the reply in the negative, the Court pointed out that no dispute was pending between the applicant and the Income-tax Department and that the return had already been processed and the refund prayed for by the applicant had been granted. This does not advance the case of the applicant. Reliance is also placed on the following passages from the 'Hand book on Advance Rulings8" which reads as follows:- "….. unless there is any indication in the notice or some other material to show that the issue of this notice was in such circumstances as to show that the questions posed....
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....ortion of the said instructions which read as under:- "Instruction No.3 of 2003, 261 ITR (St.) 0051 F.No.500/19/2003-FTD Government of India Ministry of Finance Department of Revenue (Foreign Tax Division) New Delhi, the 20th May, 2003 To All Chief Commissioners of Income Tax All Directors Generals of Income Tax Sub: Computation of income from international transaction having regard to arm's length price - Section 92 of the income-tax Act - Reference to Transfer Pricing Officer and his role -Regarding. The provisions relating to transfer price contained in Sections 92 to 92F of the Income-tax Act having come into force w.e.f. assessment year 2002-03. In terms of provisions, income from an international transaction is to be computed having regard to Arm's length price between the associated enterprises. Further, in terms of Section 92CA, a Transfer Pricing Officer, on a reference received from the Assessing Officer, is required to determine Arm's length price of an international transaction by an order and the Assessing Officer is required to compute the income having regard to the price so determined by the TPO. The notification regar....
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....the basis of these details whether a reference is considered necessary. No detailed inquiries are needed at this stage and the assessing officer should not embark upon scrutinizing the correctness or otherwise of the price of the international transaction at this stage. In the initial years of implementation of these provisions and pending development of adequate database, it would be appropriate if a small number of cases are selected for scrutiny of transfer price and these are dealt with effectively. CBDT, therefore, have decided that wherever the aggregate value of international transaction exceeds Rs.5 crore, the case should be picked up for scrutiny and the reference under section 92CA be made to the TPO. If there are more than one transaction with an associated enterprises or there are transactions with more than one associated enterprises the aggregate value of which exceeds Rs.5 crores, the transactions should be referred to the TPO. Before making reference to the TPO, the AO has to seek approval of the Commissioner/Director as contemplated under the Act. Under the provisions of Section 92CA reference is in relation to the international transaction. Hence all t....
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....rore; it cannot but be said that by virtue of above mentioned instruction of CBDT, particularly in view of letter of DIT Transfer Pricing dated 15.4.2005, the question of determination of arm's length price by the TPO in terms of Section 92C of the Act had already arisen in the mind of and is pending before AO who has no option but to follow the instructions of CBDT and direction of DIT. We are, therefore, of the view that on the ground that CIT granted approval two days after filing of the application by the applicant in AAR, it cannot be validly contended that the question of determination of arm's length price is not pending before the AO who is as much as income tax authority as TPO. If this be the position, clause (i) of the first proviso will apply and the application in so far as it relates to question no. (2), has to be rejected. In view of the conclusion arrived at by us on clause (i) of the first proviso, it is inessential to dilate on clause (ii) of the said proviso. However as the learned counsel for the parties argued this aspect, we shall briefly refer to it. Now adverting to clause (ii) of the proviso, it is necessary to analyse question no. 2. This....
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....xhaustive. It takes in its fold a transaction between two or more associated enterprises either or both of whom are non-residents, not only in the nature of purchase, sale or lease of tangible or intangible property but also provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises. The contention of Mr. Desai that the services cannot be treated as tangible and intangible property ignores the definition of the meaning of international transaction in section 92B of the Act which covers services that are subject matter of the agreement. We have already discussed above that under the agreement MSAS has not only to provide Research Support, Quantitative Modeling and Account Reconciliation but also hand over deliverables which include hardware, intellectual property, software etc. which are goods to the applicant and its associated enterprises. It follows that both tangible properties as well as services are required to be valued. Even assuming that the services are not within the mischief of first proviso to sub-section(2) of Section 245R of th....
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.... State through a permanent establishment situated therein so much of the profits of the enterprise as is attributable to that permanent establishment, may be taxed. The requirement of the profits being through permanent establishment, is also contained in clauses (b) and (c) of para 1 of article 7 of the Treaty. When transactions of shares, derivatives etc. are carried on in India by the applicant dehors MSAS, the same do not appear to be taxable under the Treaty. We hasten to add that our rejection of the contention of Mr. Chopra should not be understood as giving ruling on the aforesaid proposition since it is not the subject matter of the question. Now, turning to question no. 5 the first part of question, " in the event the Applicant is deemed to have a PE in India as result of sending employees to India or due to deputation of employees to MSAS, whether given the function which would be performed and risks that could be undertaken by such a PE" is the premise which is consequential to the ruling on question no. 1(c) & (d); the second part of question which states "would a remuneration based on a margin on total ope....