tax notes international - Tuck School of Business - Dartmouth College

which the business of an enterprise is wholly or partly
carried on — was not satisfied regarding the backoffice
activities.
Moreover, the Court considered that the back-office
services to be provided by MSAS fall under article
5(3)(e) of the India-U.S. treaty, which excludes the
characterization of a PE regarding ‘‘the maintenance
of a fixed place of business solely for the purpose of
advertising, for the supply of information, for scientific
research or for other activities which have a preparatory
or auxiliary character, for the enterprise.’’ 77
Concerning the existence of an agency PE, the Supreme
Court of India concluded that there was no PE
because MSAS did not have authority to enter into or
conclude contracts (which were entered and concluded
in the United States). 78
Moreover, regarding the stewards seconded by
MSCo to work in India as employees of MSAS, the
Supreme Court of India disagreed with the ruling provided
by the AAR and held that their activity did not
lead to the constitution of a PE within the meaning of
article 5(2)(l) of the India-U.S. treaty. According to the
Court, the stewardship activities did not constitute a
service provided by MSCo to MSAS, rather, ‘‘MSCo is
merely protecting its own interests in the competitive
world by ensuring the quality and confidentiality of
MSAS services.’’ 79 The underlying idea is that the enterprise
must provide a service to a third party to
qualify as a PE — a PE does not arise when the enterprise
is providing a service to itself. Under the Court’s
view, as no service was being provided to a third party
by the stewards, no PE was found to exist.
However, regarding the deputationists deployed by
MSCo to work in India as employees of MSAS, the
Supreme Court of India held that they did not become
employee of MSAS; they retained their employment
lien with MSCo and therefore constituted a service PE
in the sense of article 5(2)(l) of the India-U.S. treaty.
The Court found that MSAS was therefore a service
PE in India regarding the services performed by the
deputationists deployed by MSCo. 80
Once the Supreme Court of India concluded that
MSCo had a service PE in India, the question was
how much profit could be attributed to that PE. The
Court first made reference to the ruling provided in the
AAR that when the nonresident compensates a PE at
arm’s length no further profits could be attributable to
India. Then the judges presented their agreement with
this ruling:
77 Id. at 15, 16, and 18.
78 Id. at 16.
79 Id. at 20-21.
80 Id. at 21-22.
The impugned ruling is correct in principle insofar
as an associated enterprise, that also constitutes
a PE, has been remunerated on an arm’s
length basis taking into account all the risk-taking
functions of the enterprise. In such cases nothing
further would be left to be attributed to the PE.
The situation would be different if the transfer
pricing analysis does not adequately reflect the
functions performed and the risks assumed by the
enterprise. In such a situation, there would be a
need to attribute profits to the PE for those
functions/risks that have not been considered. 81
The widespread interpretation of this case law supports
that it is in line with the single taxpayer approach
since it provides that no further profit is left to be attributed
to the PE once the dependent agent has received
an arm’s-length reward for the service provided.
Nevertheless, there is a dissenting view headed by
Hans Pijl (and shared by me) that considers this decision
as favoring the authorized OECD approach. 82
Indeed, a careful reading of the decision’s reasoning
reveals that the Supreme Court of India left open the
possibility of a further profit attribution to the PE as
long as there are other functions performed or risks
assumed by the enterprise that are not reflected in the
dependent agent remuneration. This conclusion results
from the final part of the decision: ‘‘The situation
would be different if the transfer pricing analysis does
not adequately reflect the functions performed and the
risks assumed by the enterprise. In such a situation,
there would be a need to attribute profits to the PE for those
functions/risks that have not been considered.’’ 83 (Emphasis
added.) This is clearly in line with, if not a definition
of, the authorized OECD approach.
It can be derived from the decision that no further
profit was attributed to the PE in India precisely because
no other functions or risks were identified in the
framework of the activities carried out by that PE, not
because the Supreme Court of India opted as a matter
of principle for the single taxpayer approach.
It is interesting that this decision is always promoted
as being one of the most important precedents in favor
of the single taxpayer approach when it really invalidates
it.
All the conflicting views presented above result from
the confusing wording of the decision in its concluding
section. Although the wording of the decision is somewhat
ambiguous, I feel it safe to conclude that this is a
81 Id. at 46.
SPECIAL REPORTS
82 Hans Pijl, ‘‘Morgan Stanley: Issues Regarding Permanent
Establishments and Profit Attribution in Light of the OECD
View,’’ Bull. for Int’lTax’n (May 2008), pp. 174-182.
83 Supreme Court of India, July 9, 2007, decision 2114/07
and 2415/07, p. 46.
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 437
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