Relevant References.

Income Tax, 1961

Section 5(2)(b), Section 9(1)(i), Section 90

Circular No.789

DTAA with UAE

Article 5, Article 7, Article 9

Facts of the Case

 [U.A.E. EXCHANGE CENTRE LTD. Versus U.O.I. & ANR. [2009 -TMI - 32984 - DELHI HIGH COURT]

"2.2 The petitioner is a limited liability company incorporated in the United Arab Emirates ('UAE'), with its head office at Abu Dhabi. The petitioner is engaged, among others, in offering remittance services for transferring of monies from UAE to various places in India. In order to facilitate the said purpose, the petitioner had opened liaison offices in India on 01.01.1997 under a licence granted by the Reserve Bank of India ('RBI') vide its communication dated 24.09.1996. As per the RBI communication dated 24.09.1996, the petitioner's liaison offices, in India, are permitted to undertake only the following activities:-

(i) responding to enquiries from correspondent banks with respect to drafts issued;

(ii) undertaking reconciliation of bank accounts held in India with correspondent banks under Drafts Drawing Arrangement;

(iii) acting as a communication centre receiving computer advices of mail transfer from UAE and transmitting to the Indian correspondent banks;

(iv) printing drafts and dispatching the same to the addressees and;

(v) following up with the Indian correspondent banks.

2.3 By the very same communication, the RBI has specifically prohibited the petitioner's liaison offices, in India, from charging any commission or fee or from receiving or earning any remittances from any activity undertaken by them. Furthermore, the expenses of the liaison offices in India are required to be met exclusively out of the funds received from abroad through normal banking channels."

2.4 Pursuant to the aforesaid permission granted by the RBI, the petitioner set up its first liaison office in Cochin, in the State of Kerala, in January, 1997. At present, the petitioner has liaison offices in Cochin, Chennai, New Delhi, Mumbai and Jalandhar in India.

2.5 It is the stand of the petitioner both before the authority below, as well as, before this court, that, through its six liaison offices, in India, it provides certain 'auxiliary' services to Non-Resident Indians ('NRI') in UAE to remit funds either on their account or for the benefit of their relatives/dependents. For the said purpose, a contract between the NRI remitter and the petitioner is executed in UAE, whereupon the NRI hands over his or her funds for remittance to the petitioner at any of the centres/outlets/camps of the petitioner in UAE. Each such transaction is a separate contract between the NRI remitter and the petitioner; governed by the UAE laws. Upon funds being collected, the petitioner makes an electronic remittance of the funds on behalf of its NRI customers' in either of the two ways: (i) funds are remitted by telegraphic transfer through banking channels; or (ii) on the request of the NRI remitter, the petitioner sends instruments/cheques though its liaison offices to the beneficiaries in India designated by the NRI remitter.

2.6 In the second option, the liaison offices in India download the particulars of remittances through the electronic media and then print cheques/drafts drawn on the banks in India, which, in turn, are couriered/despatched to the beneficiaries in India, in accordance, with the instructions of the NRI remitter. In order to facilitate downloading of the information with regard to remittances, the liaison office in India, are connected with the main server of the petitioner in UAE. This information, which is contained in the main server is accessed by the liaison offices in India for the purpose of remittances of funds to the beneficiaries in India by the NRI remitters.

2.7. However, the point to be noted, is that, in either situation, that is, whether the option exercised by the NRI remitter for remittance of the funds is through telegraphic transfer of funds to a bank in India or, through a liaison office in India; the petitioner collects a fixed charge of Dirhams 15 in UAE. There is no additional or extra charge payable by the customer to the petitioner if the customer choses the second option.

2.8 On the aforesaid basis, as averred in the writ petition, the petitioner, in compliance of provisions of Section 139 of the Act, has been filing its return of income since, the assessment year 1998-99 right through till assessment year 2003-04. In all these years, returns have been filed showing 'Nil" income as according to the petitioner, no income accrued or deemed to have accrued in India both under the Act, as well as, the agreement entered into between the Government of Republic of India and the Government of UAE which is ubiquitously known as the Double Taxation Avoidance Agreement (in short 'DTAA'). The point to be noted at this stage is that the Government of India entered into a DTAA with the government of UAE in pursuance of its powers under Section 90 of the Act, for the purposes of avoidance of 'Double Taxation and Prevention of Fiscal Evasion', with respect to, taxes and income on capital; which stood notified vide Notification No.G.S.R.No.710(E) dated 18.11.1993."

Ruling by AAR

In its ruling [2009 -TMI - 32091 - AUTHORITY FOR ADVANCE RULINGS], AAR held that:

10.1 The admitted facts in this case are that the petitioner is offering remittance services to NRIs in UAE. The contracts pursuant to which funds are handed over by the NRIs to the petitioner in UAE are entered into between the petitioner and the NRI remitter in UAE. The funds are collected from the NRI remitter by the petitioner in UAE. A one time fee of Dirhams 15 is levied and collected by the petitioner from the NRI remitter in UAE. The funds are transmitted to the beneficiaries of the NRI remitter, in India, either by telegraphic transfer through normal banking channels via banks in India or are remitted by involving the liaison offices of the petitioner in India, who in turn, download the information and particulars necessary for remittance by using computers in India which are connected to the servers in UAE, by drawing cheques on banks in India in couriering/despatching the same to the beneficiaries of the NRI remitter in India.

11. The Authority in paragraph 11 of the impugned ruling held that downloading of information by the liaison offices in India with regard to the beneficiaries of the NRI remitters in India and thereupon the act of the cheques or drafts being drawn on banks in India, in the name of beneficiaries and their despatch through couriers to the beneficiaries constitutes an activity, which enabled the petitioner to complete the transaction of remittance, in terms of the contract entered into with the NRIs. From this the Authority has concluded, that there is, therefore, a real and intimate relationship between the business carried on by the petitioner, for which, it receives commission in UAE. Furthermore, the Authority has held that the activities of the liaison offices of downloading of information, printing and preparation of cheques and drafts, and sending the same to the beneficiaries in India, contribute directly or indirectly to the earning of income by the petitioner by way of commission. It also held that there is continuity between the business of the petitioner in UAE and the activities carried on by the liaison offices in India. On this basis, the Authority concluded that the income shall be deemed to accrue or arise to the petitioner in UAE from 'business connection' in India.

Decision of the Honorable High Court: (Relevant abstracts)

1. In our view, the Authority has misconstrued the provisions of Section 90 of the Act which empowers the Central Government to enter into an agreement with the Government outside India for the purposes of granting relief in respect of aspects referred to in sub-section (1) clauses (a) to (d).
2. AAR has committed an error by holding that, "This was based on the reasoning that without remittances of funds to the beneficiaries in India performance under the contract would not have been complete and thus, the downloading of data, preparation of cheques for remitting the amount, despatching the same through courier by the liaison offices, constituted an important part of the main work, which was, remitting the amount to the beneficiaries as desired by the NRIs. Based on this reasoning, the Authority came to the conclusion that the work of the liaison offices in India, being a significant part of the main work of UAE establishment, the liaison office of the petitioner, in India, would constitute a 'permanent establishment' within the provisions of the DTAA."
3. We are living in an era where the world is described euphemistically as 'flat' or even a global village. Organisations and companies operate transnationally. There is an eagerness to bring to tax by States income, by employing deeming fictions so that incomes which ordinarily do not accrue or arise within the taxing State are brought within the States' tax net.
4. In view of the fact that the ruling rendered by the Authority proceeded on a wrong premise, inasmuch as, it firstly examined the case from the point of view of Section 5(2)(b) and Section 9(1)(1) of the Act, while it was required to look at the provisions of DTAA for ascertaining the petitioner's liability to tax and, secondly, it ignored the plain meaning of the terms of exclusionary clause, i.e., Article 5(3)(e), while examining as to whether by setting up a liaison office in India would result in setting up a permanent establishment within the meaning of DTAA, the decision of the Authority in these circumstances, being contrary to, the well established principles, as well as, provisions of law, would amount to an error apparent on the face of the record and hence, amenable to a writ of certiorari.
5. In our view, the activity carried on by the liaison offices in India did not, in any manner, whatsoever, contribute directly or indirectly to the earning of profits or gains by the petitioner in UAE. As indicated above, every aspect of the transaction was concluded in UAE. The commission for the services of remittances offered by the petitioner was also earned in UAE. The activity performed by the liaison offices in India was only supportive of the transaction carried on in UAE. It did not contribute to the earning of profits or gains by the petitioner in UAE. The reasoning of the Authority in paragraph 11 of the impugned order does not commend to us.
6. In the circumstances, we quash the impugned order of the Authority.

Full text of the case:

[U.A.E. EXCHANGE CENTRE LTD. Versus U.O.I. & ANR. [2009 -TMI - 32984 - DELHI HIGH COURT]

Quashed decision of AAR

Another part of this Commentary:

Whether AAR is a Tribunal? Power of High Court to accept writ petition against AAR's Ruling by exercising extra ordinary jurisdiction under Article 226!