M/S DIT (International Taxation), Mumbai v. M/S Morgan Stanley & Co. Inc

The court in the present case discusses the concept of permanent establishment and its impact on international taxation. The judgment further includes discussions of several important aspects of international tax law.
CITATIONCivil Appeal No. 2915 of 2007
COURTSupreme Court of India
JUDGES/CORAMJustice Arijit Pasayat and Justice S.H. Kapadia
DATE OF JUDGEMENT09.07.2007

Introduction

In the current global scenario the international business entities have extended their business worldwide and they have made their presence by establishing their own subsidiaries or group entities from which they have business arrangement. In these situations foreign companies are facing issue with respect to the deputation of employees resulting into Permanent Establishment (PE) in India. The Supreme Court’s judgementin Morgan Stanley marked history in the field of international taxation.

Facts

The facts of the case are as follows: The assesse (Morgan Stanley International Incorporated) was a tax resident of USA. The taxpayer’s primary activity was to provide support services to various subsidiaries all over the world including India. The taxpayer had entered into an agreement with an Indian company for providing support services. The assesse had seconded its five employees to India to render their services to the Indian companies under supervision and control of the Board of Directors of the Indian companies. The salary of said employees was paid by the assesse-company after deducting of tax at source (TDS) under Section 192 of the Act. Subsequently, the entire salary paid by the assesse had been reimbursed by the Indian companies to the assesse. The assesse claimed that since the payment received was on account of reimbursement of expenses, it was not taxable in India as there was no element of income involved in it.

ISSUES

The main issue in the case was: whether MS Co. has a ‘permanent establishment’ PE in India under the terms of article 5 of the India-U.S. tax treaty, and if so, whether the payment of arm’s-length remuneration by MS Co. to MSAS extinguishes its tax liability in India.

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Arguments on behalf of the parties

The assessee’s main contention was that, it has not rendered any services to the Indian companies, but has merely deputed its employees to the Indian company on the condition that they will be working under the supervision and control of the Indian company. As per the terms of secondment letter and understanding, the assesse would pay salary to these expatriates and same amount would be reimbursed to the assesse.  In support of this contention reliance was placed on the decision of ITAT, Mumbai Special Bench in the case of Mahindra & Mahindra Ltd v. Dy. CIT.[1]

It was argued that by deputing employees to the Indian Companies, the assesse has not rendered any service nor has made available any kind of technical knowledge, experience, and skill, know how etc. These employees deputed to the India, were under direct control and supervision of the Indian company and it cannot be said that the assesse company has rendered any direct or indirect services to the Indian company through employee.

Summary of court decision and judgment

The tribunal observed that the seconded employees are the real employees of the taxpayer who have come to India to render services, and once they render service, they constitute Service PE in India. Accordingly, the assessing officer was directed to compute the payment strictly under the Business profit of tax treaty and not under Article 12 of the tax treaty. The Assessing Officer opined that the payment received by the assesse for rendering the services through its employees was taxable in India as per article 12(4) of DTAA, being in the nature of ‘fees for included services’ (FIS). Accordingly, he added the entire amount of reimbursement of salary to assesse’s taxable income.

The Supreme Court concluded that the US company did not have a PE in India on most accounts, except that if personnel are deputed to India, then the deputees are likely to constitute a ‘service PE’ in India. In this case, the court examined the consequences of Morgan Stanley sending personnel to India (i.e., the Mumbai Company) on stewardship and deputation and concluded that as regards stewardship, no ‘service PE’ will exist, whereas deputation will result in a ‘service PE’.

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Analysis

In my opinion the judgment is a positive addition to the plethora of international tax decisions pronounced by the Indian courts over the past few years. It clearly recognizes that the mere presence of a fixed place of business is not enough; it is important to examine whose business is being carried out through such a fixed place. The Supreme Court has reiterated the principle that the fact that two enterprises are related should not, in itself, lead to an inference that a PE exists. The Court also observed that the definition of a PE under Article 5 of the treaty is exhaustive in nature.

Conclusion

The Supreme Court’s decision is important for reasons that extend beyond the facts of this particular case, as the judgment includes discussions of several important aspects of international tax law.


[1] [2009] 313 ITR (AT) 263.