Deemed accrual and permanent establishment rules applied to remittance activities where liaison offices performed core business functions.

Income from India-related remittance operations was treated as deemed to accrue or arise in India where the liaison offices did more than clerical support and performed an essential part of the second remittance mode by downloading beneficiary data, printing instruments and dispatching them in India. That business activity created a real and intimate connection with the Indian operations, making the income attributable to those activities taxable in India under section 9. For treaty purposes, the liaison offices were not confined to preparatory or auxiliary functions because they formed a significant part of the core business function, so they constituted a permanent establishment for the second remittance mode.

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Issues: Whether income from the applicant's India-related remittance activities was deemed to accrue or arise in India, and whether the liaison offices constituted a permanent establishment excluded from the treaty by reason of their auxiliary character.

Analysis: The applicant's remittance business was carried on in the United Arab Emirates, but the liaison offices in India performed more than mere clerical support in the second mode of remittance. They downloaded beneficiary data, printed cheques or drafts, and dispatched them to beneficiaries in India, thereby completing an essential part of the contractual performance. On these facts, there was a real and intimate business connection between the overseas business and the Indian activities, so that income was deemed to accrue or arise in India to the extent reasonably attributable to the Indian operations under section 9. Under the treaty, a fixed place of business used solely for preparatory or auxiliary activities is excluded from the definition of permanent establishment, but the second mode of remittance was not merely auxiliary because it formed a significant part of the main business function.

Conclusion: Income was held to be deemed to accrue in India from the activities carried out by the liaison offices, and the liaison offices constituted a permanent establishment for the second mode of remittance, so the question was answered in favour of the Revenue and against the assessee.

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