DIT v Morgan Stanley and Co

Facts

• Morgan Stanley and Co (US) set up Morgan Stanley Advantage Services (MSAS) in India
• MSAS provided back-office support, data processing, and research services to Morgan Stanley
• MSAS was a separate Indian company, separately assessed and taxed in India
• The DIT treated MSAS as Morgan Stanley's PE in India and sought to tax Morgan Stanley's global income attributable to India
• Transfer pricing documentation showed MSAS was compensated at arm's length

Issues

1. Whether an Indian subsidiary providing support services creates a PE for the parent company under the DTAA
2. Whether arm's length compensation to the subsidiary negates PE attribution
3. How to attribute profits to a PE if one is found to exist

Held

• A subsidiary is a separate legal entity; it is not automatically the PE of its parent
• Where the subsidiary is compensated at arm's length for all services rendered, no further income can be attributed to the parent
• The arm's length principle under transfer pricing, when satisfied, leaves no residual income to attribute to a PE
• Morgan Stanley was not taxable in India through MSAS as PE

Ratio Decidendi

The PE concept requires a "fixed place of business" or a "dependent agent" acting on behalf of the enterprise. An independent subsidiary compensated at arm's length is neither. Transfer pricing at arm's length ensures that the subsidiary has been fully compensated for the economic activity performed in India; no further attribution to the parent is possible without double taxation.