Supreme Court

Union of India & Anr. Versus U.A.E. Exchange Centre

MANU/SC/0411/2020

24.04.2020

Direct Taxation

UAE Exchange Centre’s liaison office in India would not constitute a ‘Permanent Establishment’, thus not liable to pay tax as per provisions of IT Act and DTAAs signed between two nations

The Respondent is a limited company incorporated in the United Arab Emirates (UAE). It is engaged in offering, among others, remittance services for transferring amounts from UAE to various places in India. It had applied for a permission under Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973 (“the 1973 Act”), pursuant to which approval was granted by the Reserve Bank of India (“the RBI”) vide letter dated 24th September, 1996. The Department issued four notices to the Respondent pertaining to assessment years 2000-2001, 2001-2002, 2002-2003 and 2003-2004.

The Respondent, therefore, carried the matter before the High Court for quashing of the Ruling of the Authority dated 26th May, 2004, quashing of stated notices and for a direction to the Appellants not to tax the Respondent in India because no income had accrued to it or is deemed to have accrued to it in India from its activities of liaison offices in India. The High Court, after adverting to indisputable facts, noted that the Authority committed manifest error in appreciating the relevant facts and materials on record and more particularly, misread the purport of Section 90 of the 1961 Act and the settled legal position that, Double Taxation Avoidance Agreements (the DTAA) ought to override the provisions of the Act (the 1961 Act). The tax liability of the Respondent was required to be assessed on the basis of the provisions in the stated treaty, namely, DTAA.

The core issue that needs to be answered in present appeal is whether the stated activities of the Respondent-assessee would qualify the expression “of preparatory or auxiliary character”.

The permission granted by RBI 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. 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 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 in question of the liaison 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. That finding reached by the High Court is unexceptionable.

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. 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).

No tax can be levied or collected from the liaison office of the Respondent in India in respect of the primary business activities consummated by the Respondent in UAE. The activities carried on by the liaison office of the Respondent in India as permitted by the RBI, clearly demonstrate that the Respondent 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. Accordingly, the appeal is dismissed.

Tags : Liaison office Tax Liability

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