http://JUDIS.NIC.IN

SUPREME COURT OF INDIA

Page 1 of 23

CASE NO.:

Appeal (civil) 2914 of 2007

PETITIONER:

M/s DIT (International Taxation), Mumbai

RESPONDENT:

M/s Morgan Stanley & Co. INC

DATE OF JUDGMENT: 09/07/2007

BENCH:

Dr. Arijit Pasayat & S.H. Kapadia

JUDGMENT:

J U D G M E N T

CIVIL APPEAL No. 2914 OF 2007

(arising out of S.L.P. (C) No. 12907 of 2006)

with

CIVIL APPEAL No. 2915 OF 2007

(arising out of S.L.P. (C) No. 16163 of 2006)

M/s Morgan Stanley & Co. INC. \005 Appellant

versus

Director of Income Tax, Mumbai \005Respondent

KAPADIA, J.

Leave granted.

2. In these civil appeals we are concerned with the articles

in Double Tax Avoidance Agreement ("DTAA") between India

and United States which have implication on transfer pricing

legislation. The said Treaty either advocates application of

arm’s length principle or provides a mechanism for avoiding

double taxation on income.

3. Morgan Stanley Group (MS Group) is one of the world’s

largest diversifying financial services companies. It is a world

wide leader in investment banking and it is ranked amongst

the top institutions in merger and acquisitions, underwriting

of equity and equity and related transactions. It has a major

presence in major securities market, with traders in numerous

countries around the world offering a unique distribution of

products. It has three main lines of business, namely

securities investment management and investment banking

and credit services. Morgan Stanley and Company (for short,

’MSCo’) is an investment bank engaged in the business of

providing financial advisory services, corporate lending and

securities underwriting. One of the group companies of

Morgan Stanley, Morgan Stanley Advantages Services Pvt. Ltd.

(for short, ’MSAS’) entered into an agreement for providing

certain support services to MSCo. MSCo outsourced some of

its activities to MSAS. The said MSAS was set up to support

the main office functions in equity and fixed income research,

account reconciliation and providing IT enabled services such

as back office operation, data processing and support centre to

MSCo.

4. On 19.5.2005 MSCo (Applicant) filed its advance ruling

application in Form 34-C inviting its advance ruling on the

points enumerated hereinbelow. The basic question relating to

the transaction between the applicant and MSAS on which

http://JUDIS.NIC.IN

SUPREME COURT OF INDIA

Page 2 of 23

advance ruling was sought was two fold namely, whether the

applicant was having a PE in India under Article 5(1) of the

DTAA on account of the services rendered by MSAS under the

Services Agreement dated April 14, 2005 entered into by MSAS

with the applicant and if so, the amount of income attributable

to such PE.

5. By the impugned ruling delivered on 13.2.2006 by the

Authority for Advance Ruling (for short, ’AAR’) it was held,

inter alia, that the applicant cannot be regarded as having a

fixed place of business PE under Article 5(1) of the DTAA; that

MSAS cannot be regarded as an agency PE under Article 5(4)

of the DTAA; that the applicant would be regarded as having a

PE in India under Article 5(2)(l) if it were to send some of its

employees to India as stewards or as deputationists in the

employment of MSAS. Against this ruling of the AAR the

applicant and the Department have come to this Court in

appeal by way of special leave petition. According to the

Department the applicant should be regarded as having a

fixed place in India under Article 5(1) as the applicant

proposes to carry on its business through MSAS in India.

According to the Department MSAS was the PE of the MSCo in

India. They had a fixed place of business in Mumbai.

According to the Department the nature of the activities

proposed to be performed by MSAS in Mumbai indicated that

the said company represented the business presence of the

MSCo in I