IN RE: MORGAN STANLEY AND CO. Vs. STATE

JUDGEMENT

(1.) THE applicant in this application, under Section 245Q(1) of the IT Act, 1961 (for short "the Act"), is a non -resident company; it was incorporated in the United States of America (USA) under the General Corporate Law of the State of Delaware and it is a tax resident of USA. In attachment 2, applicant is described as "Morgan Stanley & Co., US" and is shown as wholly owned subsidiary of Morgan Stanley, US. It is a leading investment Bank having a number of group companies in various parts of the world. The applicant, inter alia, provides financial advisory services, corporate lending and securities underwriting. The diverse activities of the applicant are undertaken by various divisions. One of the group companies is a Morgan Stanley Advantage Services (P) Ltd. ("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., (US) in which 80 per cent shares are held by Morgan Stanley US and 20 per cent 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 income -tax support, account reconciliation, research, etc. Under an agreement dt. 1st Dec, 2003, the applicant has outsourced 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 to send its staff to India for stewardship activities and other similar activities to ensure that the high standards of quality are met as Morgan Stanley group entities are to be satisfied that the services received by them from other group companies meet the Morgan Stanley standards. Like any other customer, the applicant has to undertake certain stewardship and similar activities such as briefing MSAS on the standard of services expected, acquainting the staff on various aspects of the functions by conducting briefing sessions for effective transitioning of various functions and providing basic guidance so that services provided meet the overall global value benchmarks of the Morgan Stanley Group. The stewardship activities include monitoring the overall outsourcing operations at MSAS. Firm management and infrastructure personnel travel to India for a very short -term to ensure that the establishment and operations of MSAS proceed without any material exposure from the investors' perspectives but they are not involved in any day -to -day management or other specific services to or for MSAS. The applicant's staff is also sent on deputation on the request of MSAS for periods ranging between several months to a couple of years to work under its control and supervision. From an employment contract perspective, the staff will continue to be employed or engaged and their salaries and fees will be directly paid by the applicant. MSAS is required to reimburse the compensation cost to the applicant with no profit element. The consideration paid to MSAS by the applicant for the services rendered will be the sum of the costs and a mark -up of a certain percentage of the costs as agreed upon between the parties. The term 'costs' is defined in Schedule 3 of the agreement to include direct and indirect costs incurred by MSAS in providing the services, including all costs relating to under -utilization of capacity, such as idle time cost of employees, rent for vacant space, etc. MSAS shall allocate indirect costs amongst the customers on a reasonable basis. For the financial year 2003 -04, M/s Ernst & Young (P) Ltd. has conducted a transfer pricing study for MSAS. The Transactional Net Margin Method (TNMM) was selected as the most appropriate method with operating profit margin being the profit level indicator in respect of services rendered by MSAS to the applicant. The average margin earned by the comparable companies providing similar services is worked out to 28.33 per cent and under the existing arrangement MSAS charges the applicant a margin of 29 per cent 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 Dec, 1990 (hereinafter referred to as "Treaty").

(3.) BASED on the facts and in the circumstances of the case, even in the event MSAS constitutes a PE of the applicant in India, as long as MSAS is remunerated for its services at arm's length, whether any further income can be attributed in the hands of the PE of the applicant ?