TaxTMI 
TaxTMI 
2020 (4) TMI 794
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....o. FID(I)/137/10-I-05-02/3975 (Activity)/96-97 BY AIR MAIL/REGISTERED A.D. U.A.E. Exchange Centre L.L.C., Post Box 170, Abu Dhabi, UAE. 24 Sep 1996 Dear Sirs, Permission under Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973 for opening a liaison office in India Please refer to your application dated Nil and the correspondence resting with your letter Ref. UAEEC/HO/479/96 dated 9th August, 1996 on the captioned subject. 2. We advise that we are agreeable to your establishing a liaison office at Cochin initially for a period of three years to enable you to i) respond quickly and economically to enquiries from correspondent banks with regard to suspected fraudulent drafts, ii) to undertake reconciliation of bank accounts held in India, iii) to act as a communication centre receiving computer (via Modem) advices of mail transfer T.T. stop payments messages, payments details etc., originating from your several branches in UAE and transmitting to your Indian correspondent banks, iv) Printing Indian Rupee drafts with facsimile signature from the Head Office and counter signa....
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....head office account in the books of your liaison office in India, we hereby grant you our approval to maintain such an account subject to the conditions that the credits to the account should represent the funds received from head office through normal banking channels for meeting the expenses of the office and no other amount should be credited without prior permission of the Reserve Bank. Similarly debits to this account could be raised only for meeting the local expenses of the office. Audited transcript of the head office account may be forwarded to our Cochin Regional Office alongwith the annual accounts mentioned above. 5. It is further clarified that the permission granted hereby is limited to and for the purpose of the provisions of Section 29 ibid only and shall not be construed in any way as regularising, condoning or in any manner validating any irregularities, contraventions or other lapses if any under the provisions of any other law for the time being in force. 6. Please note to furnish to us the postal address of your liaison office in due course for our record. You may also note to address the correspondence in future to our Cochin Regional Office.....
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.... couriered or dispatched to the beneficiaries in India, in accordance with the instructions of the NRI remitter. While doing this, the liaison office of the respondent remains connected with its main server in UAE, as the information is contained in the main server thereat, which could be accessed by the liaison office in India for the purpose of remittance of funds to the beneficiaries in India by the NRI remitters. 3. It is stated that, in compliance with Section 139 of the 1961 Act, the respondent had been filing its returns of income, since the assessment year 1998-1999 until 2003-2004, showing NIL income, as according to the respondent, no income had accrued or deemed to have accrued to it in India, both under the 1961 Act, as well as, the agreement entered into between the Government of the Republic of India and the Government of the UAE, which is known as Double Taxation Avoidance Agreement (for short, "DTAA"). This agreement (DTAA) has been entered into between the two sovereign countries in exercise of powers under Section 90 of the 1961 Act, for the purpose of avoidance of double taxation and prevention of fiscal evasion, with respect to taxes and income on capital. Th....
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....pondent were not carried out in India. In such a situation, to attract the provisions referred to above, it must be shown that - (i) the applicant has 'business connections' in India; and (ii) the income of the business can be deemed to accrue or arise in India from such operations, as are carried out in India. After analysing this aspect and explanation 2 to Section 9(1)(i) inserted by the Finance Act, 2003, it noted the decision of this Court in Commissioner of Income Tax, Punjab vs. R.D. Aggarwal & Company & Anr. AIR 1965 SC 1526 and culled out the essential features of expression "business connection" as follows:- "10. In the light of above discussion, the essential features of "business connection" may be summed up as follows: - (a) a real and intimate relation must exist between the trading activities by a non-resident carried on outside India and the activities within India: (b) the relation contributes directly or indirectly to the earning of income by the non-resident in his business; (c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the....
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....aintaining of a fixed place of business solely for the purpose of carrying on for an enterprise any other activity of a preparatory or auxiliary character, Mr. Ranina placed before us extracts from various dictionaries to show the meaning of the word 'auxiliary'. It is unnecessary to refer to them here. Suffice it to say that the word 'auxiliary' in common English usage means helping, assisting or supporting the main activity. We have, therefore, to ascertain whether the activities carried on in the liaison offices in India, are only supportive of the main business or form one of the main functions of the business. The applicant enters into a contract with a NRI to remit to the nominated banks or the nominated beneficiaries in India the amount which is the Indian rupee equivalent of foreign currency handed over to it. It is true that the contract is entered into in UAE and the amount to be remitted as well as the commission is also received in UAE. The contract is, therefore executed in UAE. To fulfill its obligation under the contract the applicant remits the amount in either of the following two modes: By establishment in UAE - (i) by telegraphic instructions fr....
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....respondent in India, which were attributable to the PE, namely, the liaison offices in India, would be taxable in India even under the DTAA, and answered the question affirmatively against the respondent-assessee. 4. Following the impugned ruling of the Authority, dated 26.5.2004, the Department issued four notices of even date i.e. 19.7.2004 under Section 148 of the 1961 Act addressed to the respondent pertaining to assessment years 2000-2001, 2001-2002, 2002-2003 and 2003-2004 respectively. The respondent, therefore, carried the matter before the High Court of Delhi at New Delhi (for short, "the High Court") by way of Writ Petition No. 14869/2004, inter alia, for quashing of the ruling of the Authority dated 26.5.2004, 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 ....
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....ary' character in terms of Article 5(3)(e) of the Act as the option of remitting of funds through the liaison offices in India was exercised by the NRI remitter which was "nothing short of, as in the words of the parties, performing contract of remitting the amounts". The Authority, thus, held that while, in respect of all remittances of funds by telegraphic transfer through banking channels, the role of the liaison offices in India of an 'auxiliary' character, the same was not true in respect of remittance of funds through liaison offices in India. 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, dispatching 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 Indi....
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....and in this case in particular, sub-clause (e) have to be given a wider and liberal play. Once an activity is construed as being subsidiary or in aid or support of the main activity it would, according to us, fall within the exclusionary clause. To say that a particular activity was necessary for completion of the contract is, in a sense saying the obvious as every other activity which an enterprise undertakes in earning profits is with the ultimate view of giving effect to the obligations undertaken by an enterprise vis-a-vis its customer. If looked at from that point of view, then, no activity could be construed as preparatory or of an 'auxiliary' character. On this aspect of the matter, the Supreme Court in the case of DIT (International Taxation) vs. Morgan Stanley & Co; 2007(7) SCC 1 amongst other issues was called upon to decide as to whether back office operations carried on by Morgan Stanley Company for one of its Morgan Stanley Advantages Services Pvt. Ltd would qualify as having a permanent establishment in India. The Supreme Court, while holding that back office operations fall within the exclusionary clause Article 5(3)(e) of Indo-US Double Taxation DTAA, which is, iden....
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....supportive of the transaction carried on in UAE. The High Court also took note of explanation 2 to Section 9(1)(i) and observed that the same reinforces the fact that in order to have a business connection, in respect of a business activity carried on by non-resident through a person situated in India, it should involve more than what is supportive or subsidiary to the main function referred to in clauses (a) to (c). The High Court eventually quashed the impugned ruling of the Authority and also the notices issued by the Department under Section 148 of the 1961 Act, since the notices were based on the ruling which was being set aside. The High Court, however, gave liberty to the appellants to proceed against the respondent on any other ground, as may be permissible in law. 5. Feeling aggrieved, the Department has assailed the decision of the High Court by way of the present appeal arising from SLP(C) No. 31276/2011. 6. We have heard Mr. Arijit Prasad, learned senior counsel for the appellants and Mr. H.P. Ranina, learned counsel for the respondent. 7. Both sides have more or less reiterated the stand taken before the Authority and the High Court. After cogitating over the ....
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....come under Section 5 of the Act, then there was no purpose of making those sections "subject to the provisions of the Act". The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of DTACs which would automatically override the provisions of the Income Tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of DTAC." (emphasis supplied) In view of this exposition, which squarely applies to the fact situation of the present case, we must answer the question under consideration in light of the purport of provisions in DTAA, which has been executed by the Government of India and the Government of UAE, and has come into force consequent to publication vide notification dated 18.11.1993. The recitals of the said notification read thus: - "Income-tax Act, 1961:Notification under section 90: Agreement Between the Government of the Republic of India and the Government of the United Arab Emirates for the avoidance of double taxation and the prevention of fi....
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....after referred to as "U.A.E. tax"); (b) In India: (i) the income-tax including any surcharge thereon; (ii) the surtax; and (iii) the wealth-tax (hereinafter referred to as "Indian tax"). 3. This Agreement shall also apply to any identical or substantially similar taxes on income or capital which are imposed at Federal or State level by either Contracting State in addition to, or in place of, the taxes referred to in paragraph 2 of this Article. The competent authorities of the Contracting States shall notify each other of any substantial changes which are made in their respective taxation laws." Article 3 refers to General Definitions and the meaning of the concerned expression contained in the agreement, unless the context otherwise requires. Article 4 pertains to "Resident of the Contracting State". The other Articles which may have bearing on the question posed before us are Articles 5 and 7, dealing with "Permanent Establishment (PE)" and "Business Profits" respectively, which read thus: - "Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term "permanent establishment" means a fi....
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....of such persons are limited to the purchase of goods or merchandise for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph. Article 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting St....
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...., to the extent attributable to the PE of the respondent in India. For that, we may have to revert back to Article 5, which deals with and defines the "Permanent Establishment (PE)". A fixed place of business through which the business of an enterprise is wholly or partly carried on is regarded as a PE. The term "Permanent Establishment (PE)" would include the specified places referred to in clause 2 of Article 5. It is not in dispute that the place from where the activities are carried on by the respondent in India is a liaison office and would, therefore, be covered by the term PE in Article 5(2). However, Article 5(3) of the DTAA opens with a non-obstante 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. The High Court has opined that the respondent was carrying on stated activities in the fixed place of business in India of a preparatory or auxiliary character. Indeed, the expression "bu....
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....in UAE and the information residing thereat is accessed by the liaison office in India for the purpose of remittance of funds to the beneficiaries in India by the NRI remitters. These are combination of virtual and physical activities unlike the virtual activity of funds being remitted by telegraphic transfer through banking channels. As regards the latter, it is not the case of the Department that the same would be covered and amenable to tax liability by virtue of deeming provision in the 1961 Act. 9. While answering the question as to whether the activity in question can be termed as other than that "of preparatory or auxiliary character", we need to keep in mind the limited permission given by the RBI to the respondent under Section 29(1)(a) of the 1973 Act, on 24.9.1996. From paragraph 2 of the stated permission, it is evident 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 comm....
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....graphs 10 to 14, observed thus: - "10. In our view, the second requirement of Article 5(1) of DTAA is not satisfied as regards back office functions. We have examined the terms of the Agreement along with the advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from reading of the above Agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing IT enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a PE stood constituted one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AAR that in the present case Article 5(1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of Article 5(1) is not attracted. 11. Lastly, as rightly held by AAR there is no agency PE as the PE in India had no ....
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....non obstante clause. It states that notwithstanding what is stated in Article 5(1) or under Article 5(2) the term PE shall not include maintenance of a fixed place of business solely for advertisement, scientific research or for activities which are preparatory or auxiliary in character. In the present case we are of the view that the abovementioned back office functions proposed to be performed by MSAS in India falls under Article 5(3)(e) of DTAA. Therefore, in our view in the present case MSAS would not constitute a fixed place PE under Article 5(1) of DTAA as regards its back office operations." (emphasis supplied) Learned counsel for the appellant, however, attempted to distinguish this judgment on the argument that this case dealt with the issue of service PE. According to him, the Court must examine the full transactions of the respondent to determine whether the work done by the respondent-assessee was one of a backup office work or auxiliary work. Insofar as the nature of activities carried on by the respondent through the liaison office in India, as permitted by the RBI, we have upheld the conclusion of the High Court that the same were in the nature of "prepar....
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....tax in respect of what they earned from the aforesaid fixed place PE in India. The CIT (Appeals) dismissed the appeals of the assessees holding that Article 5 was attracted, not only because there was a fixed place where the assessees carried on their business, but also because they were "service PEs" and "agency PEs" under Article 5. In an appeal to the ITAT, the ITAT held that the CIT (Appeals) was right in holding that a "fixed place PE" and "service PE" had been made out under Article 5, but said nothing about the "agency PE" as that was not argued by the Revenue before the ITAT. However, the ITAT, on a calculation formula different from that of the CIT (Appeals), arrived at a nil figure of income for all the relevant assessment years. The appeal of the assessees to the High Court proved successful and the High Court, by an elaborate judgment, has set aside the findings of all the authorities referred to above, and further dismissed the cross-appeals of the Revenue. Consequently, the Revenue is before us in these appeals." The Court, after analysing the decisions and the concerned report produced before it, observed in paragraph 22 as follows: - "22. This report wou....
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....rise. It is perhaps for this reason that the assessing officer did not give any finding on this score." (emphasis supplied) As aforesaid, we agree with the finding recorded by the High Court about the nature and character of stated activities carried on by the liaison offices of the respondent and in our view, the High Court justly reckoned the same as being of preparatory or auxiliary character, falling under Article 5(3)(e). 13. The High Court has also examined the matter in the context of explanation to Section 9(1)(i) of the 1961 Act. Prior to enactment of Finance Act, 2003 (32 of 2003), Section 9(1)(i) read thus: - "Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India: - (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Explanation.- For the purposes of this clause- (a) in the case of a business of which all the operations are not....