The Hindu Business Line : Morgan Stanley verdict leaves 'economic nexus' open to interpretation

CHENNAI: The Morgan Stanley decision is a setback to the Revenue department's desire to seek strict source-based interpretation for taxability of non-residents' income, says BMR & Associates, a consulting firm, in a communiqué addressed to Business Line.

The verdict, by the apex court, in this case was that since Morgan Stanley Advantage Services Private limited (MSAS) was rendering back office operations (in India) such functions were 'preparatory and auxiliary' in nature; and that no fixed place of bus iness was constituted under Article 5 of the India-US tax treaty (or double taxation avoidance agreement).

MSAS was not concluding any contracts on behalf of MSCo (Morgan Stanley and Co Inc, US, a group company), and so it was not an 'agency PE' in India, said the court, affirming an earlier ruling by the AAR (Authority for Advance Rulings), which the taxman had challenged at the Supreme Court.

However, a minor victory of sorts for the Department was that the Court held the secondment of MSCo employees to MSAS made the latter a 'service PE' of the former in India.

"A recent decision of the Mumbai Tribunal in the case of Sony Entertainment seems to have been (partially) overruled as result of this decision," states BMR. "However, it is important to observe that Sony's decision was in the context of dependent agent PE."

The firm is of the view that the verdict is a silent reaffirmation of the administrative guidance and circulars issued by the Central Board of Direct Taxes (CBDT) with respect to arm's length compensation to captive BPOs. "This is indeed a welcome relief to IT and ITES captive operations."

Since the Court has reinforced the principle of transfer pricing and hence, arm's length concept, BMR reminds that to the extent transfer pricing analysis does not adequately reflect the functions performed and risks assumed, such situations would warran t income attribution to the PE. "Though the court has made a couple of references to 'economic nexus' being an important feature for income attribution, there is no reasoned explanation in the order."

D.Murali

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