MORGAN STANLEY AND CO INTERNATIONAL LIMITED Vs. STATE

JUDGEMENT

(1.) THE applicant, Morgan Stanley & Go. International Ltd., is a non-resident company. It is incorporated under the laws of U.K. and is a tax resident of U.K. It is a part of the Morgan Stanley Group. With the object of investing in Indian stock market, the applicant got registered with Securities and Exchange Board of India (SEBI) as a foreign institutional investor (FII) on 23rd Nov., 1994. THE object clause of the applicant, inter alia, recites to acquire, hold, dispose of, subscribe for, issue, underwrite, place, manage assets belonging to others which include, advise on, enter into contracts for transactions in relation to or involving and in any other way deal with or arrange dealings with or perform any service or function in relation to shares, stocks, debentures, loans, bonds....... options, futures.......... or any combination of the foregoing. Accordingly, the applicant has been investing in Indian stock markets and the income thereof is being offered for tax as capital gains. THE applicant has been carrying on business in derivatives in other countries. Derivative products have been introduced in India in a phased manner starting with index futures contracts in June, 2000, index options and stock options in June, 2001 and July, 2001, respectively. In November, 2001, stock futures were also introduced. THE exchange traded derivative contracts have a maximum of three months trading cycle. Now, the applicant proposes to expand its business in derivative trading operations in India, which it is already carrying on outside India. For this purpose, it obtained permission of the Reserve Bank of India (RBI). In connection with this business, the applicant would avail services of certain independent parties like brokers, custodians and bankers. THE broker will execute the contract online. THE custodian and the banker would keep the custody of contracts, clear the trades on exchanges, receive and disburse cash and maintain adequate records but none of them will have any authority to conclude any contract on behalf of the applicant without any instructions. THEy would render the services to the applicant in the ordinary course of their business and the applicant would be one of their several clients.

(2.) The Government of Republic of India and the Government of United Kingdom of Great Britain and Northern Ireland concluded an Agreement for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains, which came into force on 26th Oct. 1993, vide notification dt. 11th Feb., 1994 (hereinafter referred to as "Treaty"). As per Section 90 of the IT Act (for short the "Act") r/w Circular No. 333 issued by the CBDT, a non-resident can opt to be governed by the provisions of the Act or the Treaty, whichever is more beneficial to it. The applicant being resident of U.K and entitled to the benefit of the 'Treaty' chose to be governed by the provisions of the Treaty between India and U.K. It is stated that the income derived by the applicant from the derivatives trading should be treated as its business income and it is so considered in U.K. Article 7 of the Treaty makes the business income taxable in India if the applicant carries on business through a permanent establishment (PE) in India as defined in Article 5 of the Treaty. It is clarified that the applicant does not have any fixed place of business to carry on business in India and that service providers like brokers, custodians and bankers would not be dealing exclusively with the applicant and cannot be considered as its dependent agent in India. The applicant cannot, therefore, be said to have a PE in India.

(3.) IN a case of a resident of another country with which INdia has DTAA (Treaty) to determine his tax liability, the proper approach should be to ascertain whether such a non-resident is taxable under the Act; if, so, to consider, to what extent the liability has been beneficially dealt with under the Treaty. If however, the non-resident is not taxable under the Act, the matter ends there and it would not be necessary to look into the provisions of the Treaty. Where, however, taxability of the non-resident under the Act is not in issue, his tax liability has to be determined under the provisions of the Treaty.