AI Drafter 
TaxTMI 
TaxTMI 
2024 (12) TMI 1067
X X X X Extracts X X X X
X X X X Extracts X X X X
....AY] as contemplated under Article 5 of the Double Taxation Avoidance Agreement [DTAA] between India and the United States of America [USA]. The appeals themselves pertain to AYs 2001-02 [ITA 1288/2006], 2002-03 [ITA 126/2016], 2003-04 [ITA 141/2016] 2004-05 [ITA 724/2016], 2006-07 [ITA 597/2019], 2007-08 [ITA 237/2019], 2008-09 [ITA 235/2019], 2011-12 [ITA 192/2019], 2013-14 [ITA 111/2024] and 2015-16 [ITA 110/2024]. 2. The Tribunal had rendered its principal decision on 10 March 2006 while dealing with the appeal pertaining to AY 2001-02 and which decision has been followed in the subsequent years. We had in terms of our order dated 20 July 2009 admitted ITA 1288/2006 on the following question of law:- "Whether on facts, income earned from customers outside India is liable to tax in India under AADT with USA" The remainder of the appeals subsequently came to be tagged with ITA 1288/2006 and were admitted on similar questions of law. 3. From the material placed before us as well as the submissions addressed by learned counsels appearing for respective sides, the following would appear to be the uncontested facts and which we for the sake of convenience glean from ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s the permission granted, it also established an office in India and posted a representative therein. This office was described to be the Liaison Office [LO], manned by one manager and supporting staff. 8. As per the disclosures made, the respondent-assessee had made a declaration before the RBI that the said LO would not represent any party other than Western Union Financial Services. The annexure to that application enumerated the following activities/services which would be undertaken by the LO:- "The Liaison office shall undertake the following liaison activities/services: (a) Distribute brochures and literature describing the activities of Western Union Financial Services, Inc. ("Western Union"). (b) Maintain liaison contact with government authorities and officials of the government, its agencies and other organizations and associations. (c) Maintain and develop the relationship of mutual understanding and co-operation between Western Union and India. (d) Address seminars on Western Union's activities. (e) Put interested parties in direct contact with Wester Union's principal offices. (f) Explore legal, commerc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es/services rendered by it or otherwise in India. (iii) The entire expenses of the office in India will be met exclusively out the funds received from abroad through normal banking channels. (iv) The office in India shall not borrow or lend any money from/to any person in India without our prior permission. (v) The office in India shall not acquire, hold (otherwise than by way of lease for a period not exceeding five years) transfer or dispose off any immovable property in India without obtaining prior permission of the Reserve Bank of India under Section 31 of the Foreign Exchange Regulation Act, 1973. (vi) The office in India will furnish to our Mumbai Regional office (on a yearly basis): (a) a certificate from the auditors to the effect that during the year no income was earned by/or accrued to the office in India; (b) details of remittances received from abroad duly supported by Foreign Inward Remittance Certificate; (c) certified copy of the audited final accounts of the office in India; and (d) annual report of the work done by the office in India, stating therein the details of actual export or import, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... India being equivalent to USD 2,663,472/-. On 13 January 2003, the Income Tax Department is stated to have issued a notice to the respondent-assessee calling upon it to file its Income Tax Returns. The respondent-assessee initially questioned the assumption of jurisdiction, as would be evident from its letter of 03 October 2003. However, notwithstanding that objection being raised, it ultimately furnished a return of income on 08 December 2003 declaring its income as 'nil'. 12. The Assessing Officer [AO], however, assessed the total income to be INR 4,90,22,316/-, as a consequence of which notices under Section 143 (2) came to be issued on 04 March 2004. The AO, while framing the order of assessment essentially came to hold as under. It firstly opined that the income of the respondent-assessee had accrued and arisen in India and would consequently be exigible to tax. It further held that the respondent-assessee would be liable to tax under the provisions of the DTAA. 13. Tested on the anvil of the activities that occurred in India, the AO came to conclude that not only did the respondent have a fixed place of business and which constituted a "Fixed Place" Permanent Establish....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion 2 to Section 9(1) stood satisfied. However, it held against the appellants insofar as the question of Fixed Place PE was concerned. It further proceeded to hold that the LO would not satisfy the tests enumerated in Article 5 of the DTAA and the activities undertaken by it would be liable to be viewed as being merely "preparatory" or "auxiliary" in character. 18. From the record we find that a decision of the Authority for Advance Rulings [AAR] in UAE Exchange Centre LLC, In re. (2004) 268 ITR 9 (AAR) was also cited. The applicant in that case also was engaged in money transfer business and had adopted a similar model of remitting money to India through its LOs. The LOs were stated to have engaged in downloading of data pertaining to the beneficiaries in India, printing of cheques and dispatching the same to the beneficiaries. It was on the basis of these facts that the AAR had proceeded to hold that the LOs constituted a PE in India. 19. However and was noticed by the Tribunal, the AAR had observed that the role of the LO must involve performing the contract of remittance of amounts at least in part before it could be said to be a PE of the foreign enterprise. The Tribuna....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of transactions and thus the placement of that dedicated software would result in the establishments of the Indian agents being liable to be viewed as a Fixed Placed PE. It was then argued that the Indian agents were in turn entitled to appoint sub-agents to carry on the business of the respondent and this too would be a factor which would render the conclusions of the Tribunal unsustainable. 25. Refuting those submissions, Mr. Vohra, learned senior counsel appearing for the respondents, firstly urged us to dismiss the appeals outrightly since according to learned senior counsel, the determination of whether a PE exists or not is essentially a question of fact. According to Mr. Vohra, the Tribunal being the final fact finding authority having come to the conclusion that no PE existed, the same would clearly not give rise to any substantial question of law. 26. Mr. Vohra then cited for our consideration the decision of the Supreme Court in Formula One World Championship Limited v. Commissioner of Income Tax, International Taxation-3, Delhi and Another (2017) 15 SCC 602 and which, according to learned senior counsel, had identified the principal elements for a Fixed Place PE be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....blishment are excluded as mentioned in Article 5 (3), which would not be PEs. Otherwise, sub-article (2) uses the word "include" which means that not only the places specified therein are to be treated as PEs, the list of such PEs is not exhaustive. In order to bring any other establishment which is not specially mentioned, the requirements laid down in sub-article (1) are to be satisfied. Twin conditions which need to be satisfied are: (a) existence of a fixed place of business; and (b) through that place business of an enterprise is wholly or partly carried out ." 27. Learned senior counsel then took us through the decision rendered by this Court in Director of Income Tax v. E-Funds IT Solution 2014 SCC OnLine Del 555 and which had underscored the requirement of the core business of the foreign enterprise being carried out through an identified fixed place in order to constitute a Fixed Place PE. Our attention was drawn to the following paragraphs of that decision:- "53. Reference to core of auxiliary or preliminary activity is relevant when we apply para 3 of Article 5 or when sub-clause (a) to para 4 to Article 5 is under consideration. The fact that the subsidiary ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....les 5 (1), 5 (4) or 5 (5) will create a PE and not the said facts as highlighted in the impugned orders. Therefore, we will now examine the facts found and refer to Articles 5 (4) and 5 (5) of DTAA." 28. Mr. Vohra also laid emphasis on the fact that the legal position as enunciated by this Court ultimately came to be affirmed by the Supreme Court in Assistant Director of Income Tax-I, New Delhi v. E-Funds IT Solution Inc. (2018) 13 SCC 294 and where the law was explained in the following terms:- "16. The Income Tax Act, in particular Section 90 thereof, does not speak of the concept of a PE. This is a creation only of the DTAA. By virtue of Article 7 (1) of the DTAA, the business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were PEs in India, in which event their business income, to the extent to which it is attributable to such PEs, would be taxable in India. Article 5 of the DTAA set out hereinabove provides for three distinct types of PEs with which we are concerned in the present case: fixed place of business PE under Articles 5 (1) and 5 (2) (a) to 5 (2) (k); service PE under Article 5 (2) (l) and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rong link between the land and the taxing powers of the State. This territorial link serves as the basis not only for the distributive rules which are tied to the existence of PE but also for a considerable number of other distributive rules and, above all, for the assignment of a person to either contracting State on the basis of residence (Article 1, read in conjunction with Article 4 OECD and UN MC).' 37. We would also like to extract below the definition to the expression "place" by Vogel, which is as under: 'A place is a certain amount of space within the soil or on the soil. This understanding of place as a three-dimensional zone rather than a single point on the earth can be derived from the French version (installation fixe) as well as the term "establishment". As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may qualify as a PE only if they are fixed on the soil. This requirement, however, stems from the term "fixed" rather than the term "place", given that a place (or space) does not necessarily consist of a piece of land. On the contrary, the term "establishment" makes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aty, however, the company will be regarded as a resident of State B only [Article 4(3) OECD and UN MC]. In the absence of both actual facilities and a dependent agent in State A, income of this company will be taxed only in State B under the 1st sentence of Article 7 (1) OECD and UN MC. There is no minimum size of the place of work. If the qualifying business activities consist (in full or in part) of human activities by the taxpayer, his employees or representatives, the mere space needed for the physical presence of these individuals will be sufficient if it were available. Article 5 (5) OECD MC and Article 5 (5)(a) UN MC and the notion of agent PEs were superfluous! This can be illustrated by the example of a salesman who regularly visits a major customer to take orders and conduct negotiations in the purchasing Director's office. The OECD MC Comm. has convincingly denied the existence of a PE, based on the implicit understanding that the relevant geographical unit is not just the chair where the salesman sits, but the entire office of the customer, and the office is not at the disposal of the enterprise for which the salesman is working.' 38. Taking cu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... control threshold should be designed. While the OECD MC Comm. suggests that it is sufficient to require not more than the type and extent of control necessary for the specific business activity which the taxpayer wants to exercise in the source State, the Canadian and Indian decisions advocate for stricter standards for the control threshold. The OECD MC shows a paramount tendency (though no strict rule) that PEs should be treated like subsidiaries [cf. Article 24(3) OECD and UN MC], and that facilities of a subsidiary would rarely been unusable outside the office hours of one of its customers (i.e. a third person), the view of the two courts is still more convincing. Along these lines, a POB will usually exist only where the taxpayer is free to use the POB: - at any time of his own choice; - for work relating to more than one customer; and - for his internal administrative and bureaucratic work. In all, the taxpayer will usually be regarded as controlling the POB only where he can employ it at his discretion. This does not imply that the standards of the control test should not be flexible and adaptive. Generally, the less inv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment is, therefore, correct on this score." 29. According to Mr. Vohra, the issues which are sought to be canvassed no longer survive and nor do they merit any exposition by this Court in light of the decision of the Supreme Court in UAE Exchange. Mr. Vohra submitted that the facts as they obtained in UAE Exchange are identical to those which form the subject matter of these appeals and thus following the principles culled out by the Supreme Court, the arguments advanced by the appellants are wholly unmerited. 30. Mr. Vohra then submitted that the assumption of the LO carrying on business activities in India is factually flawed and had come to be rendered by the AO as well as the CIT (A) in ignorance of Article 5 (3) (e) of the India-USA DTAA and the fundamental functions and attributes which must be found to vest in an agent before a DAPE could be said to have come into being. 31. Elaborating on that aspect, Mr. Vohra also vehemently assailed the view expre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Vohra argued that the software was merely a tool employed to facilitate the verification of details and its role being confined to enabling the Indian agents to undertake that exercise and communicate with the mainframe computers and servers of the respondents situate outside India. Learned senior counsel thus submitted that it would be wholly incorrect for the installation of that software to be viewed as giving rise to the creation of a Fixed Place PE. It is these rival submissions which arise for consideration 35. Although, the Tribunal has come to hold against the respondent-assessee insofar as the issue of business connection is concerned, we do not find any legal imperative to engage with that question since the same is undisputedly concerned with Section 9 of the Act and thus relating to income which could be said to be deemed to have accrued or arisen in India. We thus propose to confine and focus our discussion in evaluating the correctness of the view expressed by the Tribunal primarily on the anvil of the DTAA. 36. Having chronicled the submissions which were addressed by respective sides before us, we proceed further and firstly take up for consideration Article 5....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ge, display, or occasional delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 5 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if: (a) he has and habitually exercises in the first-mentioned State an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s addressed in the backdrop of the various functions which were discharged by that LO upto 2005. The Tribunal has taken due note of the nature of permission which was accorded by RBI relating to the functioning of the LO and which enabled it to engage in activities such as distribution of brochures and literature, educating and informing parties with respect to the nature of activities of Western Union Financial Services, liaising with governmental authorities and officials, addressing seminars on its activities, putting interested parties in contact with Western Union Financial Services and exploring legal, commercial and regulatory feasibility of setting up subsidiaries and affiliates. 39. The permission granted by RBI proscribed the LO from undertaking any commercial trading or industrial activity in India, signing any commercial agreements, participating in any commercial trading or industrial activity or for that matter negotiating any related contracts. From the activity report which was submitted by that LO to the RBI, we note that it had asserted that it had merely acted as a communication link between the agents and Western Union Financial Services. It had also made due....
X X X X Extracts X X X X
X X X X Extracts X X X X
....becomes apparent from a reading of para 32 of that decision and which is extracted hereinbelow:- "32. In our opinion, this view is clearly erroneous. 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 State's tax net. It is in this context that the expression "permanent establishment" appearing in the DTAA has to be viewed. In the case of the DTAA under consideration in the present case under article 5 read with article 7, profits of an enterprise are liable to tax in India if an enterprise were to carry on business through a permanent establishment, meaning thereby fixed place of business through which business of an enterprise is wholly or partly carried on. Under article 5 (2) (c), amongst others, permanent establishment includes an office. However, article 5 (3) which opens with a non obstante clause, is illustrative of instances where under the DTAA various activities have ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... [2007] 292 ITR 416 ; [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 the Indo-US DTAA, which is, identical to the DTAA under consideration in the present case, came to the conclusion that back office operations came within the purview of article 5 (3) (e). It is laid down by the Supreme Court in the case of Morgan Stanley [2007] 292 ITR 416 ; [2007] 7 SCC 1 that in ascertaining what would constitute a "permanent establishment" within the meaning of article 5 (1) of the Indo-US DTAA, one had to undertake what is called a functional and factual analysis of each of the activities undertaken by an establishment. In that case, the Supreme Court came to the conclusion that the entity located in India which was engaged in only supporting the front office functions of Morgan Stanley and Co., a non-resident, in fixed income and equity research and information technolog....
X X X X Extracts X X X X
X X X X Extracts X X X X
....with anyone in India, but only to provide service of delivery of cheques/drafts drawn on the banks in India. 32. Notably, 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 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. 33. From the onerous stipulations specified by 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 g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....siness of an MNE is wholly or partly carried out. The definition of the word PE in Section 92-F(iii) is inclusive, however, it is not under Article 5 (1) of the Treaty. It is for this reason that Article 5 (2) of DTAA herein refers to places included as PE of the MNE. One such place is mentioned in Article 5 (2)(l) which deals with furnishing of services. 13. The concept of PE was introduced in the 1961 Act as part of the statutory provisions of transfer pricing by the Finance Act of 2001. In Section 92-F(iii) the word "enterprise" is defined to mean '92-F. (iii) ... a person (including a permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to the production, ...' Under CBDT Circular No. 14 of 2001 it has been clarified that the term PE has not been defined in the Act but its meaning may be understood with reference to DTAA entered into by India. Thus, the intention was to rely on the concept and definition of PE in DTAA. However, vide the Finance Act, 2002 the definition of PE was inserted in the Income Tax Act, 1961 (for short "the IT Act") vide Section 92-F(iii-a) which states that the PE ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....acter" 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. 36. 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 the 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 more so 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 Indi....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., after analysing the decisions and the report concerned produced before it, observed in para 22 as follows: (SCC p. 320) "22. This report would show that no part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear from the above that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment [CIT v. E-Funds IT Solution, (2014) 9 HCC (Del) 70 : (2014) 364 ITR 256] is, therefore, correct on this score." (emphasis supplied) 39. We may usefully refer to paras 24 and 26 of the reported decision in E-Funds IT Solution Inc. [CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294], which read thus: (SCC pp. 322-23) "24. It has already been seen that none of the customers of the assessees are located in India or have received any services in India. This being the case, it is clear that the very first ingredient contained in Article 5 (2)(l) is not satisfied. Ho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct the following paragraphs from Progress Rail:- "67. Mr. Datar had with his characteristic erudition and clarity not only sketched out the well-recognised principles governing the question of a permanent establishment, he had also placed for our consideration various academic texts and treatises to enable us to obtain a broader perspective on the concept of a permanent establishment. We, however, deem it apposite to additionally notice some of the principles which stand enunciated in Klaus Vogel's seminal work on Double Taxation Conventions [Klaus Vogel on Double Taxation Conventions, Edited by Ekkehart Reimer and Alexander Rust, Wolters Kluwer, 5th edition, 2022.]. While explaining the "control" test which would be determinative for the purposes of acknowledging the existence of a place of business under the sufficient command of an entity situate in one of the contracting States, the learned author observes as under: "110. For all types of business activities, control can be based on legal titles or factual circumstances. Legal control might be derived from ownership or any other right, including equitable rights under common law if the respective right con....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Secondly, functional integration presupposes that the taxpayer 'wholly or partly carrie(s) on' his business (article 5 (1) OECD MC; the OECD MC Comm. uses the verb 'carried out' synonymously (No. 35 OECD MC Comm. on article 5)). However, like 'business' and 'enterprise' (cf. supra m. No. 27 et seq.), these words do not function as a substantive filter either. While early draft Model Conventions contained the condition that the fixed POR should have a productive character, this requirement was never adopted by the OECD Model (see No. 35 OECD MC Comm. on article 5). None of the current MCs provide a specific productivity test. It follows that place of business may constitute a permanent establishment even if they perform activities which mainly or exclusively expenditures to show for. 137. Likewise, the 'carrying-on' requirement does not imply an activity in the sense of an active and visible work. It includes even stand-by services and omissions. This gains significant relevance where the omission is profitable (e.g., in the case of a place of business earning money in the source State simply by fulfilling, for whichever period of time, a non-competition agreement relat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ermanent establishment definition. Especially if one thinks of an activity as a human behaviour, one can now (unlike before 1977) easily subsume unmanned facilities under the permanent establishment definition (see supra m. No. 45 and see, e.g., No. 127 OECD MC Comm. on article 5). 143. On the other hand, the requirement of an instrumental character of the place of business has become irrefutable. Even stronger than the English amendment ('through which' instead of 'in which'), the corresponding modification of the French text ('par l'intermediaire de laquelle' instead of 'ou') has stressed the functional integration of the place of business in the business. 144. The OECD MC Comm. has weakened the meaning of 'through' since 2003. The Commentary holds the view that the requirement of a functional integration is met as soon as the taxpayer exercises the business in a fixed place of business which is at his disposal (No. 20 OECD MC Comm. on article 5 (added on January 28, 2003)). This is the reason for the characterisation of the famous painter example (i.e., the fictitious case of a painter who, for two years, spends three days a week in the large office buildin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....art of, the essential and significant part of the activity of the enterprise as a whole. It is unlikely that an activity that requires a significant proportion of the assets or employees of the enterprise could be considered as having an auxiliary character.... 69. (Collect information) The second part of sub-paragraph (d) relates to a fixed place of business that is used solely to collect information for the enterprise. An enterprise will frequently need to collect information before deciding whether and how to carry on its core business activities in a State. If the enterprise does so without maintaining a fixed place of business in that State, sub-paragraph (d) will obviously be irrelevant. If, however, a fixed place of business is maintained solely for that purpose, sub-paragraph (d) will be relevant and it will be necessary to determine whether the collection of information goes beyond the preparatory or auxiliary threshold. Where, for example, an investment fund sets up an office in a State solely to collect information on possible investment opportunities in that State, the collecting of information through that office will be a preparatory activity. The same conclu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....usiness of enterprise (2). 305. The amount of value added by either enterprise is the same, and so is the potential tax revenue in the source State. An absolute standard suggests equal treatment of cases (1) and (2). 306. However, the ordinary meaning of both 'preparatory' and 'auxiliary' requires the identification of a point of reference. One may say that the absolute standards are based on an analysis of the function of the core activity in relation to the entire chain of economic value added. It is more convincing, however, to apply relative standards in the sense that the value added is considered on a micro rather than a macro level, that is, that the core activity should be compared to the entirety of all activities exercised by the enterprise. This relative view would deny a permanent establishment in case (1), and assume a permanent establishment in case (2). This view is shared by No. 60 of OECD MC Comm. on article 5 as well as by most authors. 307. It seems to your author, however, that the strict and exclusive application of relative standards would not do justice to cases where an enterprise of type (1) above (supra m. No. 283) is so large th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntracts are subject to approval by the head office or another permanent establishment." 46. We had in Progress Rail noticed some of the seminal decisions which had been rendered by various Courts while seeking to define the concept of a Fixed Place PE. The discussion on Fixed Place PE as appearing in Progress Rail is extracted below:- "85. That leads us to examine the correctness of the opinion as formed with respect to the Noida factory and the Varanasi office constituting a fixed place permanent establishment. Decades before global commerce attained the degree of complexity which attaches to it today, the Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust [(1983) 144 ITR 146 (AP); 1983 SCC OnLine AP 287; (1984) 38 CTR 1 (AP); (1983) 15 Taxman 72 (AP).], and which decision constitutes the locus classicus on the subject, explained the concept of a "permanent establishment" as postulating a substantial element of presence of a foreign enterprise in another country. The presence, as Jagannadha Rao, J. explained, had to additionally meet the test of an enduring and permanent nature. It was this seminal decision which propounded the concept of "virtual projection"....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is that such physically located premises have to be 'at the disposal' of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as 'at the disposal' of the enterprise when the enterprise has right to use the said place and has control thereupon.... Taking cue from the word 'through' in the article, Vogel has also emphasised that the place of business qualifies only if the place is 'at the disposal' of the enterprise. According to him, the enterprise will not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable extent. He hastens to add that there are no absolute standards for the modalities and intensity of control. Rather, the standards depend on the type of business activity at issue. According to him, 'disposal' is the power (or a certain fraction thereof) to use the place of business directly.... ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enterprise. At the same time, it is also clarified that the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of that enterprise.... As per article 5 of the Double Taxation Avoidance Agreement, the permanent establishment has to be a fixed place of business 'through' which business of an enterprise is wholly or partly carried on. Some examples of fixed place are given in article 5 (2), by way of an inclusion. Article 5 (3), on the other hand, excludes certain places which would not be treated as permanent establishment, i.e., what is mentioned in clauses (a) to (f) as the 'negative list'. A combined reading of sub-articles (1), (2) and (3) of article 5 would clearly show that only certain forms of establishment are excluded as mentioned in article 5 (3), which would not be permanent establishments. Otherwise, sub-article (2) uses the word 'include' which means that not only the places specified therein are to be treated as permanent establishments, the list of such permanent establishments is not exhaustive. In order to bring any other establishment which is not specifically mentioned, the requirements la....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ltd., (2020) 426 ITR 1 (SC); (2020) 7 SCC 347.] In Morgan Stanley and Co. Inc. [DIT (International Taxation) v. Morgan Stanley and Co. Inc., (2007) 292 ITR 416 (SC); (2007) 7 SCC 1.], and where the following pertinent observations came to be rendered (page 421 of 292 ITR): "With globalisation, many economic activities spread over to several tax jurisdictions. This is where the concept of permanent establishment becomes important under article 5 (1). There exists a permanent establishment if there is a fixed place through which the business of an enterprise, which is multinational enterprise (MNE), is wholly or partly carried on. In the present case MSCo is a multinational entity. As stated above it has out sourced some of its activities to MSAS in India. A general definition of permanent establishment in the first part of article 5 (1) postulates the existence of a fixed place of business whereas the second part of article 5 (1) postulates that the business of MNE is carried out in India through such fixed place. One of the questions which we are called upon to decide is whether the activities to be undertaken by MSAS consist of back office operations of MSCo and if so whe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld have had to be shown that the "control" of that space answered the test of considerable extent. We recall Vogel describing this particular genre of a permanent establishment as being akin to an "instrument (equalling or resembling an operating asset) for his entrepreneurial activity". The concept of "virtual projection" is concerned with a functional integration between the two units and which would mean an establishment which has been virtually used for all purposes to carry out the paramount business activity of the petitioner. None of these factors are either alluded to or appear to have been borne in consideration before arriving at the conclusion that the Indian establishment constituted a fixed place permanent establishment. xxxx xxxx xxxx 94. We also take note of the judgment in Formula One World Championship Ltd. [Formula One World Championship Ltd. v. CIT (International Taxation), (2017) 394 ITR 80 (SC); (2017) 15 SCC 602; (2017) 295 CTR 12 (SC); (2017) 248 Taxman 192 (SC).] and where it was significantly observed that a permanent establishment must qualify and meet the tests of stability, productivity and dependence. Of equal significance were the ob....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection or supply of information. We also bear in consideration the Supreme Court in Morgan Stanley and Co. Inc. [DIT (International Taxation) v. Morgan Stanley and Co. Inc., (2007) 292 ITR 416 (SC); (2007) 7 SCC 1.] having held that market research or analysis, data processing support or for that matter, account reconciliation are essentially back office functions and support services and which would not be sufficient to acknowledge a fixed place permanent establishment existing. 98. That takes us then to further test the stand as struck by the respondents and to examine the correctness of their conclusion that the activities undertaken by the Indian subsidiary could not be said to be of a "preparatory" or "auxiliary" character. The decision of the Supreme Court in Morgan Stanley and Co. Inc. [DIT (International Taxation) v. Morgan Stanley and Co. Inc., (2007) 292 ITR 416 (SC); (2007) 7 SCC 1.], while explaining the meaning to be ascribed to support services and activities of a "preparatory" or an "auxiliary" nature enunciates the legal position in the following terms (page 425 of 292 ITR): "In our view, the second requirement of article 5 (1) of the Double Taxati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....83 ITR 648 (Delhi); 2016 SCC OnLine Del 571.], and where it was pertinently observed (page 672 of 383 ITR): "The language of sub-paragraph (e) of paragraph (3) of article 5 of the Double Taxation Avoidance Agreement is similar to the language of sub-paragraph (e) of paragraph (4) of article 5 of the Model Conventions framed by Organization for Economic Co-operation and Development, United Nations as well as the United States of America. The rationale for excluding a fixed place of business maintained solely for the purposes of carrying on activity of a preparatory or auxiliary character has been explained by Professor Dr. Klaus Vogel. In his commentary on 'Double Taxation Conventions, Third Edition', he states that 'It is recognised that such a place of business may well contribute to the productivity of the enterprise, but the services it performs are so remote from the actual realisation of profits that it is difficult to allocate any profit to the fixed place of business in question. Examples are fixed places of business solely for the purpose of advertising or for the supply of information or for scientific research or for the servicing of a patent or a know-how contra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ablishment would not be satisfied." 48. Having noticed the precedents which have explained the meaning liable to be ascribed to the words "preparatory" and "auxiliary", the first aspect which merits evaluation is whether the LO could have fulfilled the description of a Fixed Place PE. From the host of activities and functions which that office of the respondent was discharging and undertaking, it is manifest it was only engaged in activities relating to liaising with governmental authorities, training of personnel and undertaking various other peripheral functions in aid of the business of Western Union Financial Services. The gamut of activities which it undertook cannot thus be described to be the undertaking of an essential or significant part of the principal business activity of Western Union Financial Services. 49. For the purposes of being acknowledged as a PE, the said office would have had to qualify the provisions of sub-paras 1 and 2 of Article 5. It would thus have to be held to be a 'fixed place' through which the business of the enterprise was being wholly or partly carried out. In order to constitute a Fixed Place PE, it would have to satisfy the tests of virtu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther contravened any of those proscriptions or undertaken activity in violation of the restrictions which applied. The appellants have woefully failed to establish and prove that the LO was, in fact, undertaking trading activity or pursuing commercial interests as an arm or an adjunct of Western Union Financial Services. 55. Since the activities undertaken were far removed from the core business of the Western Union Financial Services enterprise, it is the tests of "preparatory" and "auxiliary" as embodied in Article 5 (3) (e) which stand met and satisfied. This we hold since it is by now well settled that activities such as market research, promotional activities, training or deployment of software would clearly not breach the threshold of auxiliary functions as are envisaged under the DTAA. 56. That then takes us to the argument based on the criterion of DAPE being met under the DTAA. The said contention would have to be evaluated on the basis of Article 5 (4) and which speaks of entities who may be connected with the enterprise in the other Contracting State and not being an agent of independent status. It is only once such entities are found to be acting in the Contractin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stems maintained by the Indian agents. 59. A software is clearly not a place of management, a branch, office, factory or a workshop. In fact, a plain reading of paras 1 and 2 of Article 5 leaves us in no doubt that the said covenant is concerned with tangible premises and establishments in which business activities may be undertaken. An intangible property, which software is, clearly lacks the physical attributes which underlie and constitute an integral part of the concept of PE as embodied in paras 1 and 2 of Article 5. 60. At this juncture, we deem it apposite to notice some of the salient principles emanating from Klaus Vogel's work on Double Taxation Conventions [Klaus Vogel on Double Taxation Conventions, Edited by Ekkehart Reimer and Alexander Rust, Wolters Kluwer, 5th edition, Vol. 1, 2022]. The Klaus Vogel Commentary, albeit in the context of electronic commerce, renders the following illuminating observations with respect to whether software and computer equipment could constitute a PE:- "122. [E-commerce operations as PE] There has been some discussion as to whether the mere use in electronic commerce operations of computer equipment in a country could con....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erprise carrying on business through a web site has the server at its own disposal, for example it owns (or leases) and operates the server on which the web site is stored and used, the place where that server is located could constitute a permanent establishment of the enterprise if the other requirements of the Article are met. 125. [Requirement of fixation] Computer equipment at a given location may only constitute a permanent establishment if it meets the requirement of being fixed. In the case of a server, what is relevant is not the possibility of the server being moved, but whether it is in fact moved. In order to constitute a fixed place of business, a server will need to be located at a certain place for a sufficient period of time so as to become fixed within the meaning of paragraph 1. 126. [Facilities at disposal] Another issue is whether the business of an enterprise may be said be wholly or partly carried on at a location where the enterprise such as equipment such as a server at its disposal. The question of whether the business of an enterprise is wholly or partly carried on through such equipment needs to be examined on a case-by-case basis, havin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 130. [Constitution of core functions] What constitutes core functions for a particular enterprise clearly depends on the nature of the business carried on by that enterprise. For instance, some ISPs are in the business of operating their own servers for the purpose of hosting web sites or other applications for other enterprises. For these ISPs, the operation of their servers in order to provide services to customers is an essential part of their commercial activity and cannot be considered preparatory or auxiliary. A different example is that of an enterprise (sometimes referred to as an 'e-tailer') that carries on the business of selling products through the Internet, In that case, the enterprise is not in the business of operating servers and the mere fact that it may do so at a given location is not enough to conclude that activities performed at that location are more than preparatory and auxiliary. What needs to be done in such a case is to examine the nature of the activities performed at that location in light of the business carried on by the enterprise. If these activities are merely preparatory or auxiliary to the business of selling products on the Intern....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... software is stored can meet that threshold, with or without the presence of personnel. However, this is subject to the computer equipment itself meeting the requirement of being 'fixed' and of the equipment and place being at the disposal of the enterprise and of the activities themselves not being of a 'preparatory' or 'auxiliary' nature. 62. The Vogel Commentary, while examining the concept of a 'place' under Article 5 takes the categorical position that purely intangible property, such as software, cannot constitute a PE:- "A place is a certain amount of space (no. 11 OECD MC Comm. on Article 5) within the 20 soil or on the soil. This understanding of place as a three-dimensional zone rather than a single point on the earth can be derived from the French version ('installation fixe') as well as the term 'establishment'. As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may qualify as a PE only if they are fixed on the soil (for details, see infra m.no. 50 et seq.). This requirement, however, stems from the term 'fixed' rather than the term 'place', gi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....does not constitute a PE (no. 123 OECD MC Comm. on Article 5)......" 63. One cannot also lose sight of the fact that the software only constituted a medium of communication and which enabled the Indian agents to talk and communicate with the servers of Western Union housed in USA. The 'Voyager' software merely enabled the Indian agents to verify details and correlate data relevant to the remittance. There was no installation of hardware in the premises of those agents or for that matter a placement of their premises or a part thereof at the disposal of Western Union. We are thus unconvinced that the deployment of the software is entitled to be viewed as having resulted in the creation of a PE. This issue in any case stands answered against the appellants by our Court in E-Funds. 64. We then propose to evaluate some of the decisions which were cited for our consideration by Mr. Chawla. Mr. Chawla had heavily relied upon the judgment of our Court in Rolls Royce PLC v. Director of Income-tax, International Taxation (and vice versa) 2011 SCC OnLine Del 3659 in order to buttress his submission that the LO constituted a Fixed Place PE. In Rolls Royce PLC, our Court on facts had cle....
X X X X Extracts X X X X
X X X X Extracts X X X X
....only then communicated to the appellant. Thus, as per Para 4(c) of Article 5, the dependent agent habitually secures orders wholly for the enterprise itself and hence, is deemed to be a permanent establishment of the appellant. The contention of appellant that the role of RRIL is merely of a post office is, therefore, unacceptable in view of the facts of the case as evidenced by various documents and correspondence found during the course of survey. It can, therefore be summarized that in the light of the facts as well as documents mentioned above, RRIL's presence n India is a permanent establishment of appellant because: (a) It is a fixed place of business at the disposal of the Rolls Royce Pic and its group companies in India through which their business are carried on. (b) The activity of this fixed place is not a preparatory or auxiliary, but is a core activity of marketing, negotiating, selling of the product. This is a virtual extension/projection of its customer facing business unit, who has the responsibility to sell the products belonging to the group. (c) RRIL acts almost like a sales office of RR Pic and its group companies. (d) RR....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tly to the head office and it is the head office which directly sends goods to the buyers, would not be sufficient to hold that the work done by the liaison office is only liaison and it does not constitute a permanent establishment as defined in article 5 of the Double Taxation Avoidance Agreement. In fact, the Assessing Officer has clearly set out what was discovered during the investigation and the same has been properly appreciated by the Tribunal and it came to the conclusion that though the liaison office was set up in Bangalore with the permission of the Reserve Bank of India and in spite of the conditions being stipulated in the said permission preventing the liaison office from carrying on commercial activities, they have been carrying on commercial activities. 20. It was further contended that the Reserve Bank of India has not taken any action and, therefore, such interference is not justified. Once the material on record clearly establishes that the liaison office is undertaking an activity of trading and, therefore, entering into business contracts, fixing price for sale of goods and merely because the officials of the liaison office are not signing any written....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment, in the matter of compliance with environmental and other local regulations by the manufacturers - suppliers and in ensuring that the payments made by the applicant reach the suppliers. The applicant is obviously in the business of designing, manufacturing and selling branded products, brands over which it has exclusive rights. In the matter of manufacturing of products as per design, quality and in implementing policy, the liaison office is actually doing the work of the applicant. The activities of the liaison office are not confined to India. It also facilitates the doing of business by the applicant with entities in Egypt and Bangladesh. A person in the business of designing manufacturing and selling cannot be taken to earn a profit only by a sale of goods. The goods as designed and styled by the applicant cannot be sold without it being got manufactured and procured in the manner designed and contemplated by the applicant. It will be unrealistic to take the view that all the activities other than the actual sale of the goods are not integral part of the business of the applicant and have no role in the profit being made by the applicant by the sale of its branded products....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd arising and accruing in New South-Wales' xxxx xxxx xxxx 32. It is true that in terms of the permission taken from the Reserve Bank of India, the liaison office can undertake purely liaison activities, viz., to inspect the quality, to ensure shipments and to act as a communication channel between Head office and parties in India and will not take up any other activity of a trading, commercial or industrial nature. The liaison office, on the applicant's own showing is also engaged in identifying suppliers, recommending them for acceptance, getting competitive quotations from suppliers, recommending their acceptance and so on. In addition, it is also doing the work of the applicant in Egypt and Bangladesh. Whether all these activities will also come within the permission granted by the Reserve Bank of India, need not be considered here. Suffice it is to say that one has to test the effect of the activities admittedly undertaken by the liaison office in the context of Article 5 of DTAA to adjudge whether it would be a permanent establishment within that Article. On the basis of our reasoning as above, we are satisfied that the liaison office in question would quali....