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