Mumbai ITAT rules Service PE created by activities of employees deputed to India, not taxable as FIS

This tax alert summarizes a recent ruling of the Mumbai Income Tax Appellate Tribunal (ITAT) in the case of Morgan Stanley International (Taxpayer) on the issue of taxability of payments received under a secondment arrangement. The ITAT held that the employees deputed to India were “real” employees of the Taxpayer who were rendering services in India on behalf of the Taxpayer and such employees created a Service Permanent Establishment (Service PE) in India under the India-US Double tax avoidance agreement (DTAA). Once a Service PE is created, the provisions of taxing income as “Fees for Included Services” (FIS) under the India-US DTAA will not apply.  Payments made by Indian companies for the services rendered by such employees would be taxable as business income of the Taxpayer as computed under the provisions of the India-US DTAA.

 

The ITAT clarifies that where a PE is created due to presence of employees in India, income from such arrangement would not be taxable as Fees for Technical Services (FTS)/ FIS. The ITAT distinguished the ruling of Delhi High Court in the case of Centrica on this issue by observing that the provision dealing with specific exclusion of PE profits from the scope of FIS article of the India-US DTAA was not brought to the notice of the HC. Taxpayers may consider the impact of this ITAT ruling for evaluating the taxability in similar arrangements.