The Supreme Court on Monday held that global investment banker Morgan Stanley was not liable to pay any extra taxes since it had compensated local subsidiary Morgan Stanley Advantage Service (MSAS) at arms-length.
The issue was at the core of a dispute whether the activities of an MNC?s captive BPO constituted a permanent establishment (PE) or, a fixed place
for doing business in India.
Significantly, the court ruled that MSAS was not a PE, as it performed only back-office
operations.
If the subsidiary were seen as a PE, the global profits of Morgan Stanley attributable to MSAS would have been taxed at about 41%.
A bench, headed by Justice SH Kapadia, said, ?The transactional net margin method (net profit margin realised by the enterprise from a comparable uncontrolled transaction) was the appropriate method for determination of the arm’s-length price in respect of transaction between Morgan Stanley and MSAS.?
The court said, ?There was no agency PE as the PE in India had no authority to enter into or conclude contracts. The contracts would be entered (into) in the US. The implementation of those contracts only to the extent of back-office functions would be carried out in India.?
The court, however, partly allowed the income-tax department’s appeal and said Morgan Stanley does have a PE in India due to the services performed by officials deputed by Morgan Stanley.
Mukesh Butani, partner, international tax and transfer pricing, BMR & Co, said, ?The judgement has reiterated the principles of transfer pricing.?
