Income Tax Act, 1961: ss.2(24), 90 – Double Taxation Avoidance Agreement (DTAA) – Respondent, a company incorporated in the UAE was engaged in offering remittance services for transferring amounts from UAE to various places in India – RBI granted permission to respondent u/s.29(1)(a) of FERA for opening liaison office in India – Pursuant thereto, respondent set up liason offices in India – Crucial activities of the liaison offices were of downloading particulars of remittances through electronic media and then printing cheques/drafts drawn on the banks in India, and then courier or dispatch to the beneficiaries in India, in accordance with the instructions of the NRI remitter – While doing so, the liaison office remained connected with its main server in UAE and the information residing thereat accessed by the liaison office in India for remitting funds to the beneficiaries in India – As per the Authority for Advance Rulings, income from the activities carried out by the liaison offices were deemed to be accrued in India – High Court quashed the impugned ruling holding that the nature of activities carried on by the respondent in the liaison offices being only of preparatory and auxillary character were clearly excluded by virtue of deeming provision – On appeal, held: Permission by the RBI to respondent u/s.29(1)(a) of the FERA clearly showed that it did not allow respondent to enter into a contract with anyone in India, but only allowed it to provide service of delivery of cheques/drafts drawn on the banks in India – Even the permitted activities were subject to conditions which included not to render any consultancy or any other service, directly or indirectly, with or without any consideration – The conditions made it amply clear that the office in India would not undertake any other activity of trading, commercial or industrial, nor enter into any business contracts in its own name without prior permission of the RBI – The liaison office could not even charge commission/fee or receive any remuneration or income in respect of the activities undertaken by it in India – Thus, the activities of liason office(s) of the respondent in India were circumscribed by the permission given by the RBI and were in the nature of preparatory or auxiliary character and, therefore, covered by Art. 5(3)(e) of the DTAA – As a result, the fixed place used by the respondent as liaison office in India, would not qualify the definition of Permanent Establishment (PE) in terms of Arts. 5(1) and 5(2) of the DTAA on account of non-obstante and deeming clause in Article 5(3) of the DTAA – It must follow that the respondent was not carrying on any business activity in India as such, but only dispensing with the remittances as per the instructions given by the NRI remitters in UAE – The transaction(s) had completed with the remitters in UAE, and no charges towards fee/commission could be collected by the liaison office in India in that regard – Thus, no income as specified in s.2(24) of the 1961 Act is earned by the liaison office in India and moreso because, the liaison office is not a PE in terms of Article
5 of DTAA.
Dismissing the appeal, the Court
HELD: 1.1 Article 5(3) of the DTAA opens with a nonobstante clause and also contains a deeming provision. It predicates that notwithstanding the preceding provisions of the concerned Article, which would mean clauses 1 and 2 of Article 5, it would still not be a PE, if any of the clauses in Article 5(3) are applicable. For that, the functional test regarding the activity in question would be essential. [Para 8][743-G-H; 748-A-B]
1.2 The crucial activities in the instant case are of downloading particulars of remittances through electronic media and then printing cheques/drafts drawn on the banks in India, which, in turn, are couriered or dispatched to the beneficiaries in India, in accordance with the instructions of the NRI remitter. While doing so, the liaison office of the respondent in India remains connected with its main server of the respondent in UAE and the information residing thereat is accessed by the liaison offices in India for the purpose of remittance of funds to the beneficiaries in India by the NRI remitters. [Para 8][745-B-C]
2. The permission given by the RBI to the respondent under Section 29(1)(a) of the 1973 Act, on 24.9.1996 show that the RBI had agreed for establishing a liaison office of the respondent at Cochin, initially for a period of three years to enable the respondent to (i) respond quickly and economically to enquiries from correspondent banks with regard to suspected fraudulent drafts; (ii) undertake reconciliation of bank accounts held in India; (iii) act as a communication centre receiving computer (via modem) advices of mail transfer T.T. stop payments messages, payment details etc., originating from respondent’s several branches in UAE and transmitting to its Indian correspondent banks; (iv) printing Indian Rupee drafts with facsimile signature from the Head Office and counter signature by the authorised signatory of the Head Office at Cochin; and (v) following up with the Indian correspondent banks. These are the limited activities which the respondent has been permitted to carry on within India. This permission does not allow the respondent-assessee to enter into a contract with anyone in India, but only to provide service of delivery of cheques/drafts drawn on the banks in India. Notably, even the permitted activities are required to be carried out by the respondent subject to conditions specified in clause 3 of the permission, which includes not to render any consultancy or any other service, directly or indirectly, with or without any consideration and further that the liaison office in India shall not borrow or lend any money from or to any person in India without prior permission of RBI. The conditions make it amply clear that the office in India will not undertake any other activity of trading, commercial or industrial, nor shall it enter into any business contracts in its his own name without prior permission of the RBI. The liaison office of the respondent in India cannot even charge commission/fee or receive any remuneration or income in respect of the activities undertaken by the liaison office in India. From the onerous stipulations specified by the RBI, it could be safely concluded, as opined by the High Court, that the activities of liason office(s) of the respondent in India are circumscribed by the permission given by the RBI and are in the nature of preparatory or auxiliary character and, therefore, covered by Article 5(3)(e). As a result, the fixed place used by the respondent as liaison office in India, would not qualify the definition of PE in terms of Articles 5(1) and 5(2) of the DTAA on account of non-obstante and deeming clause in Article 5(3) of the DTAA. Having said thus, it must follow that the respondent was not carrying on any business activity in India as such, but only dispensing with the remittances by downloading information from the main server of respondent in UAE and printing cheques/drafts drawn on the banks in India as per the instructions given by the NRI remitters in UAE. The transaction(s) had completed with the remitters in UAE, and no charges towards fee/commission could be collected by the liaison office in India in that regard. To put it differently, no income as specified in Section 2(24) of the 1961 Act is earned by the liaison office in India and moreso because, the liaison office is not a PE in terms of Article 5 of DTAA, (as it is only carrying on activity of a preparatory or auxiliary character). The concomitant is - no tax can be levied or collected from the liaison office of the respondent in India in respect of the primary business activities completed consummated by the respondent in UAE. The activities to be carried on by the liaison office of the respondent in India as permitted by the RBI, clearly demonstrated that the liaison office of the respondent in India must steer away from engaging in any primary business activity and in establishing business connection as such. It can carry on activities of preparatory or auxiliary nature only.
In that case, the deeming provisions in Sections 5 and 9 of the 1961 Act can have no bearing whatsoever. [Paras 9, 10, 11][745-D-H;746-A-C; 748-F-H; 749-A-C]
Union of India & Anr. v. Azadi Bachao Andolan & Anr. (2004) 10 SCC 1 : [2003] 4 Suppl. SCR 222 – relied on.
Commissioner of Income Tax, Punjab v. R.D. Aggarwal & Company & Anr. AIR 1965 SC 1526 : [1965] 1 SCR
660 ; Anglo- French Textile Co. Ltd., by Agents, M/s. Best & Company Ltd., Madras v. Commissioner of Income Tax, Madras AIR 1953 SC 105 : [1953] SCR
454 ; Commissioner of Income Tax, AP-IIT v.
Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP) ; Commissioner of Income Tax IT v. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal) ; Leonhardt Andra Und Partner, GmbH v. Commissioner of Income Tax (2001)
249 ITR 418 (Cal) ; Commissioner of Income Tax v. R.M. Muthaiah (1993) 202 ITR 508 (Karn). Arabian Express Line Ltd. of United Kingdom & Ors. v. Union of India (1995) 212 ITR 31 (Guj); DIT (International Taxation), Mumbai v. Morgan Stanley & Co. Inc. (2007)
7 SCC 1: [2007] 8 SCR 52; Assistant Director of Income Tax-1, New Delhi v. E-Funds IT Solution Inc. (2018) 13 SCC 294 : [2017] 1 SCR 157 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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