India Clarifies Permanent Establishment Rules For Foreign-Owned Subsidiaries

by Lorys Charalambous, for LawAndTax-News.com, Cyprus

14 June 2006

India's Authority For Advance Income Tax Rulings has said that Morgan Stanley would have a permanent establishment in India if it sent its employees to local subsidiary Morgan Stanley Advantage Services Private Limited (MSAS) for periods of more than 90 days.

The hearing arose in the context of a transfer pricing Advance Ruling application. Morgan Stanley outsources administrative work to its Indian subsidiary, which invoices them back to its parent at a mark-up of 29%. 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%.

MSAS reimburses Morgan Stanley the compensation costs of its delegated managerial staff, without mark-up.

Morgan Stanley asked the Authority to rule on whether its arrangements with MSAS would constitute a permanent establishment under the US/Indian 1990 convention on avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.

The Authority ruled that:

• MSAS is not the PE of the applicant in India under the provisions of article 5(1) of the Treaty;
• MSAS would not constitute an agency PE of the applicant under article 5(4) of the Treaty;
• MSAS would be regarded as the PE of the applicant in India under Article 5(2)(l) of the Treaty if it were to send some of its employees to India for undertaking stewardship activities as described in paragraph 3 in Annexure II for a period beyond ninety days;
• MSAS would be regarded as the PE of the applicant in India under Article 5(2)(l) of the Treaty if it were to send some of its employees to India on deputation in the employment of MSAS for a period beyond ninety days;
• based on the facts and circumstances of the case, as long as MSAS, being the PE of the applicant in India, is remunerated for its services at arm's length by the applicant/Morgan group and as long as all its actual income is brought to tax, no further income can be attributed in the hands of the PE of the applicant.

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