Supreme Court Ruling On Outsourcing: Part One

This article examines the ruling of the Supreme Court in Morgan Stanley and the ramifications of that case for the interpretation of the treaty article on permanent establishments and the attribution of profit to a permanent establishment in an international context. Other Indian court cases that shed light on these issues are also considered.

1. Introduction

The concept of a permanent establishment (PE) is one of the most critical issues in treaty-based international tax law. This is true because virtually all modern tax treaties use the PE as the main instrument to establish a jurisdiction to levy tax over unincorporated business activities of a foreign enterprise in the source country. A foreign enterprises profits from its unincorporated business activities in the source country are taxable only if that enterprise has a presence by way of a PE in that country. Art. 5 of both the OECD Model