Morgan Stanley has service Permanent Establishment in India: SC

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Morgan Stanley has service Permanent Establishment in India: SC

AIT News Network

NEW DELHI. Vide a landmark ruling AIT-2007-246-SC dated 9^th July affecting tax liability of MNCs and BPOs; SC has ruled that the Authority for Advance Ruling was right in ruling that Morgan Stanley Advantages Services Pvt. Ltd would be a service Permanent Establishment in India.

According to Mr. Samir Gandhi, Top Transfer Pricing Expert & Partner of Deloitte Haskins & Sells, Taxation of outsourcing units including the determination of "arm's length price" has become contentious in the recent past at India. This critically depends on functions performed, assets deployed and risks assumed. It is imperative to appreciate the economics of the 'outsourced services' for resolving the intricate tax issues peculiar to outsourcing".

"Outsourcing represents a great opportunity for India. It is therefore necessary that tax issues and concerns are addressed promptly to facilitate the smooth flow of business. One can consider remove uncertainties in the positions and approaches and introduce "safe harbour" provisions (e.g. Australia & Mexico) for ensuring certainty and avoiding controversies & litigation. "It will be of assistance if the CBDT also issues administrative rulings on certain aspects and nuances".

adds Mr. Samir Gandhi.

SC has ruled as under:

To conclude, we hold that the AAR was right in ruling that MSAS would be a Service PE in India under Article 5(2)(1), though only on account of the services to be performed by the deputationists deployed by MSCo and not on account of stewardship activities. As regards 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 at 29% on the operating costs of MSAS. This position is also accepted by the Assessing Officer in his order dated 29.12.2006 (after the impugned ruling) and also by the transfer pricing officer vide order dated 22.9.06. As regards attribution of further profits to the PE of MSCo where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the PE. The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the PE for those functions/risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to the service provider (MSAS in this case) fully represents the value of the profit attributable to his service. In this connection, the Department has also to examine whether the PE has obtained services from the multinational enterprise at lower than the arm's length cost? Therefore, the Department has to determine income, expense or cost allocations having regard to arm's length prices to decide the applicability of the transfer pricing regulations. Economic nexus is an important aspect of the principle of Attribution of Profits.
In the light of what is stated above, the impugned ruling by AAR stands modified to the extent indicated hereinabove. Accordingly, both the civil appeals filed by the applicant (MSCo) and by the Department are partly allowed with no order as to costs.

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