SUPREME COURT ON MORGAN STANLEY: RELIEF FOR BPOs, ROOM FOR TAXMEN

Nagendra Goel*

The Supreme Court of India recently pronounced its judgment in the case, DIT (Mumbai) v. Morgan Stanley & Co., by a bench headed by Hon’ble Justice Arijit Pasayat and Hon’ble Justice S H Kapadia.

The court has held that MSAS (Morgan Stanley Advantage Services) was not a PE (Permanent Establishment) as it was performing only back office operations in India and could not be taxed under PE rules. Having said so, the Supreme Court has upheld the ruling of the AAR (Authority on Advance Ruling) but has limited it to ‘Stewardship’.

The Supreme Court has categorically distinguished between Stewardship and Deputation and has stated that as far as deputation by Morgan Stanley (MS & Co.) is concerned its Indian arm i.e. MSAS was a service permanent establishment.

Under the Indo-US tax treaty, if a US company renders services within India through its personnel for specified period, the US Company will have a service PE in India. Stewardship activities mainly involved supervision of the operations of the company (Indian) mainly for ensuring quality control and risk mitigation control which is to benefit the US Company. As the above is different from rendering services, stewardship does not result in PE of the parent company in India whereas deputation of personnel by the non-resident company creates a service PE in India for the non-resident.

The Supreme Court has also observed that “economic nexus is an important aspect of the principle of attribution of profits”. The Supreme Court also held that the “situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise”.

Under the transfer pricing laws, international transactions with associated enterprises are required to be at arm’s length. The revenue department has to determine income, expenses or cost allocations having regard to arm’s length prices to decide the applicability of the transfer pricing regulations, to ensure it is transfer pricing compliant and there is no shifting of profits outside India.

A field wide open for further litigation has been left open, as even if the transactions between principal and associate enterprises has been taxed at arm’s length, department could still attribute further profits to PE, not covered in the transfer pricing method, because of the court’s stand on the economic nexus being an important aspect of the principle of attribution of profits.

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* The writer is a Supreme Court Advocate and also a qualified Chartered Accountant.