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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 India. The Department also submitted that MSAS was legally and financially dependent upon the applicant and consequently MSAS constituted an agency PE of the applicant under Article 5(4) of the DTAA. Both these contentions were rejected by the AAR vide the above impugned ruling. However, it has been ruled by the AAR that MSAS should be regarded as constituting a service PE under Article 5(2)(l) as it proposed to send its employees to India for undertaking stewardship activities and for undertaking to send some of its employees to India as deputationists in the employment of MSAS. It is against this ruling of the AAR that the applicant has come to this Court by way of appeal. On the second question the AAR ruled that the Transactional Net Margin Method (TNMM) was the most appropriate method for the determination of the Arm's Length Price (ALP) in respect of the service agreement dated 14.4.2005 between the applicant and the MSAS and as the said method meets the test of arm's length as prescribed under Section 92-C of the 1961 Act, no further income was attributable in the hands of MSAS in India. The said ruling of the AAR on the question of income attributable to the PE is the subject matter of challenge by the Department. EXISTENCE OF P.E. IN INDIA

13. However, the question which arises for determination in the present case is the nature of activities performed by stewards and deputationists deployed by MSCo to work in India as employees of MSAS. Under Article 5(2)(l) furnishing of services through the fixed place in India can constitute a P.E. The AAR in the impugned ruling has held that the stewards and deputationists are proposed to be sent by the MSCo from U.S. According to the AAR there is a flow of service from the MSCo to the MSAS when the former deputes its own employees to work in India in MSAS. Therefore, according to the AAR the service Agreement between MSCo and MSAS dated 14.4.2005 would fall under Article 5(2)(l) and consequently the transfer pricing regulation would apply for evaluating the charges payable by MSCo to MSAS in India for such service contract. This ruling has been challenged by the applicant.

14. Article 5(2)(l) of the DTAA applies in cases where the MNE furnishes services within India and those services are furnished through its employees. In the present case we are concerned with two activities namely stewardship activities and the work to be performed by deputationists in India as employees of MSAS. A customer like an MSCo who has world wide operations is entitled to insist on quality control and confidentiality from the service provider. For example in the case of software P.E. a server stores the data which may require confidentiality. A service provider may also be required to act according to the quality control specifications imposed by its customer. It may be required to maintain confidentiality. Stewardship activities involve briefing of the MSAS staff to ensure that the output meets the requirements of the MSCo. These activities include monitoring of the outsourcing operations at MSAS. The object is to protect the interest of the MSCo. These stewards are not involved in day to day management or in any specific services to be undertaken by MSAS. The stewardship activity is basically to protect the interest of the customer. In the present case as held hereinabove the MSAS is a service P.E. It is in a sense a service provider. A customer is entitled to protect its interest both in terms of confidentiality and in terms of quality control. In such a case it cannot be said that MSCo has been rendering the services to MSAS. In our view MSCo is merely protecting its own interests in the competitive world by ensuring the quality and confidentiality of MSAS services. We do not agree with the ruling of the AAR that the stewardship activity would fall under Article 5(2)(l). To this extent we find merit in the civil appeal filed by the appellant (MSCo) and accordingly its appeal to that extent stands partly allowed.

15. As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the U.N. Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under Article 5(2)(l). We find no infirmity in the ruling of the ARR on this aspect. In the above situation, MSCo is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a Service PE in India (MSAS). Accordingly, the civil appeal filed by the Department stands partly allowed.