# UNION OF INDIA & ANR v. U.A.E. EXCHANGE CENTRE

- **Citation:** [2020] 4 S.C.R. 719
- **Court:** Supreme Court of India
- **Decided:** 2020-04-24
- **Case number:** Civil Appeal No. 9775 of 2011
- **Bench:** A. M. Khanwilkar, Ajay Rastogi
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-anr-v-u-a-e-exchange-centre-34450
- **Pages:** 36

## Headnote

Income Tax Act, 1961: ss.2(24), 90 - Double Taxation
Avoidance Agreement (DTAA) - Respondent, a company
incorporated in the UAE was engaged in offering remittance services
for transferring amounts from UAE to various places in India - RBI
granted permission to respondent u/s.29(1)(a) of FERA for opening
liaison office in India - Pursuant thereto, respondent set up liason
offices in India - Crucial activities of the liaison offices were of
downloading particulars of remittances through electronic media
and then printing cheques/drafts drawn on the banks in India, and
then courier or dispatch to the beneficiaries in India, in accordance
with the instructions of the NRI remitter - While doing so, the liaison
office remained connected with its main server in UAE and the
information residing thereat accessed by the liaison office in India
for remitting funds to the beneficiaries in India - As per the Authority
for Advance Rulings, income from the activities carried out by the
liaison offices were deemed to be accrued in India - High Court
quashed the impugned ruling holding that the nature of activities
carried on by the respondent in the liaison offices being only of
preparatory and auxillary character were clearly excluded by virtue
of deeming provision - On appeal, held: Permission by the RBI to
respondent u/s.29(1)(a) of the FERA clearly showed that it did not
allow respondent to enter into a contract with anyone in India, but
only allowed it to provide service of delivery of cheques/drafts drawn
on the banks in India - Even the permitted activities were subject to
conditions which included not to render any consultancy or any
other service, directly or indirectly, with or without any consideration
- The conditions made it amply clear that the office in India would
not undertake any other activity of trading, commercial or industrial,
nor enter into any business contracts in its own name without prior
permission of the RBI - The liaison office could not even charge
commission/fee or receive any remuneration or income in respect of
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the activities undertaken by it in India - Thus, the activities of liason
office(s) of the respondent in India were circumscribed by the
permission given by the RBI and were in the nature of preparatory
or auxiliary character and, therefore, covered by Art. 5(3)(e) of the
DTAA - As a result, the fixed place used by the respondent as liaison
office in India, would not qualify the definition of Permanent
Establishment (PE) in terms of Arts. 5(1) and 5(2) of the DTAA on
account of non-obstante and deeming clause in Article 5(3) of the
DTAA - It must follow that the respondent was not carrying on any
business activity in India as such, but only dispensing with the
remittances 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 - Thus, no income as specified
in s.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.
Dismissing the appeal, the Court
HELD: 1.1 Article 5(3) of the DTAA opens with a nonobstante 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. [Para 8][743-G-H; 748-A-B]
1.2 The crucial activities in the instant case are of
downloading particulars of remittances through electronic media
and then printing cheques/drafts drawn on the banks in India,
which, in turn, are couriered or dispatched to the beneficiaries in
India, in accordance with the instructions of the NR

## Text

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UNION OF INDIA & ANR.
v.
U.A.E. EXCHANGE CENTRE
(Civil Appeal No. 9775 of 2011)
APRIL 24, 2020
[A. M. KHANWILKAR AND AJAY RASTOGI, JJ.]
Income Tax Act, 1961: ss.2(24), 90 - Double Taxation
Avoidance Agreement (DTAA) - Respondent, a company
incorporated in the UAE was engaged in offering remittance services
for transferring amounts from UAE to various places in India - RBI
granted permission to respondent u/s.29(1)(a) of FERA for opening
liaison office in India - Pursuant thereto, respondent set up liason
offices in India - Crucial activities of the liaison offices were of
downloading particulars of remittances through electronic media
and then printing cheques/drafts drawn on the banks in India, and
then courier or dispatch to the beneficiaries in India, in accordance
with the instructions of the NRI remitter - While doing so, the liaison
office remained connected with its main server in UAE and the
information residing thereat accessed by the liaison office in India
for remitting funds to the beneficiaries in India - As per the Authority
for Advance Rulings, income from the activities carried out by the
liaison offices were deemed to be accrued in India - High Court
quashed the impugned ruling holding that the nature of activities
carried on by the respondent in the liaison offices being only of
preparatory and auxillary character were clearly excluded by virtue
of deeming provision - On appeal, held: Permission by the RBI to
respondent u/s.29(1)(a) of the FERA clearly showed that it did not
allow respondent to enter into a contract with anyone in India, but
only allowed it to provide service of delivery of cheques/drafts drawn
on the banks in India - Even the permitted activities were subject to
conditions which included not to render any consultancy or any
other service, directly or indirectly, with or without any consideration
- The conditions made it amply clear that the office in India would
not undertake any other activity of trading, commercial or industrial,
nor enter into any business contracts in its own name without prior
permission of the RBI - The liaison office could not even charge
commission/fee or receive any remuneration or income in respect of
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the activities undertaken by it in India - Thus, the activities of liason
office(s) of the respondent in India were circumscribed by the
permission given by the RBI and were in the nature of preparatory
or auxiliary character and, therefore, covered by Art. 5(3)(e) of the
DTAA - As a result, the fixed place used by the respondent as liaison
office in India, would not qualify the definition of Permanent
Establishment (PE) in terms of Arts. 5(1) and 5(2) of the DTAA on
account of non-obstante and deeming clause in Article 5(3) of the
DTAA - It must follow that the respondent was not carrying on any
business activity in India as such, but only dispensing with the
remittances 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 - Thus, no income as specified
in s.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.
Dismissing the appeal, the Court
HELD: 1.1 Article 5(3) of the DTAA opens with a nonobstante 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. [Para 8][743-G-H; 748-A-B]
1.2 The crucial activities in the instant case are of
downloading particulars of remittances through electronic media
and then printing cheques/drafts drawn on the banks in India,
which, in turn, are couriered or dispatched to the beneficiaries in
India, in accordance with the instructions of the NRI remitter.
While doing so, the liaison office of the respondent in India
remains connected with its main server of the respondent in UAE
and the information residing thereat is accessed by the liaison
offices in India for the purpose of remittance of funds to the
beneficiaries in India by the NRI remitters. [Para 8][745-B-C]
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2. The permission given by the RBI to the respondent
under Section 29(1)(a) of the 1973 Act, on 24.9.1996 show 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 communication centre receiving
computer (via modem) advices of mail transfer T.T. stop payments
messages, payment details etc., originating from respondent's
several branches in UAE and transmitting to its Indian
correspondent banks; (iv) printing Indian Rupee drafts with
facsimile signature from the Head Office and counter signature
by the authorised signatory of the Head Office at Cochin; and (v)
following up with the Indian correspondent banks. These are the
limited activities which the respondent has been permitted to
carry on within India. This permission 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. Notably, even 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 his 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 of liason 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 and, therefore, covered by Article 5(3)(e). As a result,
the fixed place used by the respondent as liaison office in India,
UNION OF INDIA & ANR. v. U.A.E. EXCHANGE CENTRE
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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. 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 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 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). The concomitant is - no tax
can be levied or collected from the liaison office of the respondent
in India in respect of the primary business activities completed
consummated by the respondent in UAE. The activities to be
carried on by the liaison office of the respondent in India as
permitted by the RBI, clearly demonstrated that the liaison office
of the respondent in India 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 whatsoever. [Paras 9, 10,
11][745-D-H;746-A-C; 748-F-H; 749-A-C]
Union of India & Anr. v. Azadi Bachao Andolan & Anr.
(2004) 10 SCC 1 : [2003] 4 Suppl. SCR 222 - relied
on.
Commissioner of Income Tax, Punjab v. R.D. Aggarwal
& Company & Anr. AIR 1965 SC 1526 : [1965] 1 SCR
660 ; Anglo- French Textile Co. Ltd., by Agents,
M/s. Best & Company Ltd., Madras v. Commissioner of
Income Tax, Madras AIR 1953 SC 105 : [1953] SCR
454 ; Commissioner of Income Tax, AP-IIT v.
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Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP) ;
Commissioner of Income Tax IT v. Davy Ashmore India
Ltd. (1991) 190 ITR 626 (Cal) ; Leonhardt Andra Und
Partner, GmbH v. Commissioner of Income Tax (2001)
249 ITR 418 (Cal) ; Commissioner of Income Tax v.
R.M. Muthaiah (1993) 202 ITR 508 (Karn). Arabian
Express Line Ltd. of United Kingdom & Ors. v. Union
of India (1995) 212 ITR 31 (Guj); DIT (International
Taxation), Mumbai v. Morgan Stanley & Co. Inc. (2007)
7 SCC 1: [2007] 8 SCR 52; Assistant Director of Income
Tax-1, New Delhi v. E-Funds IT Solution Inc. (2018) 13
SCC 294 : [2017] 1 SCR 157 - referred to.
Case Law Reference
[1965] 1 SCR 660
referred to
Para 3
[2003] 4 Suppl. SCR 222
relied on
Para 4
[1953] SCR 454
referred to
Para 4
[2007] 8 SCR 52
referred to
Para 10
[2017] 1 SCR 157
referred to
Para 12
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 9775
of 2011.
From the Judgment and Order dated 13.02.2009 of the High Court
of Delhi at New Delhi in W.P. (C) No. 14869 of 2004.
Arijit Prasad, Sr. Adv., Ms. Niranjana Singh, Ms. Purnima Bhat,
Ms. Anil Katiyar, B.V Balaram Das, Advs. for the Appellants.
H.P. Ranina, Vishnu B. Saharya, Viresh B. Saharya, Vivek B.
Saharya, Akshat Agarwal, M/s. Saharya & Co., Advs. for the
Respondent.
The Judgment of the Court was delivered by
A. M. KHANWILKAR, J.
1. 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 (for short, "the 1973 Act"), pursuant to
UNION OF INDIA & ANR. v. U.A.E. EXCHANGE CENTRE
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which approval was granted by the Reserve Bank of India (for short,
"the RBI") vide letter dated 24.9.1996. The same reads thus: -
"Telegrams
RESERVE BANK OF INDIA
Post Box No. 1055
"RESERVE BANK"
EXCHANGE CONTROL DEPARTMENT
Fax No.: 022-2665330
BOMBAY
 CENTRAL OFFICE
 022-2654121
 CENTRAL OFFICE BUILDING
Please quote Ref. in Reply BOMBAY - 400 023.
Ref. No. EC Co. 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.,
24 Sep 1996
Post Box 170,
Abu Dhabi,
UAE.
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 signature by the authorised signatory of the Office at
Cochin, v) following up with the Indian correspondent banks.
3. Please note that this permission has been granted subject to the
following conditions:
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i)
Except the above mentioned work, the office in India will
not undertake any other activity of a trading, commercial
or industrial nature nor shall it enter into any business
contracts in its own name without our prior permission.
ii)
No commission/fees will be charged or any other
remuneration received/income earned by the office in India
for any activity undertaken by it as listed in para 2 of this
letter or otherwise in India.
iii)
The entire expenses of the office in India will be met
exclusively out of the funds received from abroad through
normal banking channels
iv)
The Liaison 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 of 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 Liaison office in India will furnish to our Cochin 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 Inward Remittance Certificates;
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 remittances received
from NRI through your office during period in respect
of which the office had rendered liaison services.
e) The number of staff engaged/appointed and duties
assigned to each staff.
UNION OF INDIA & ANR. v. U.A.E. EXCHANGE CENTRE
[A. M. KHANWILKAR, J.]
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vii)
The incharge of the liaison office in India will not have
signing/commitment powers except than those which are
required for normal functioning of liaison office on behalf
of the Head Office.
viii)
The liaison office will not render any consultancy or any
other services directly/indirectly, with or without any
consideration.
4. In case you desire to open a 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.
7. Please acknowledge receipt.
Yours faithfully,
Sd/-
(Prashant Saran)
Deputy General Manager"
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2. The respondent set up its first liaison office in Cochin, Kerala
(India) in January, 1997 and thereafter, in Chennai, New Delhi, Mumbai
and Jalandhar in India. The activities carried on by the respondent from
the said liaison offices are stated to be in conformity with the terms and
conditions prescribed by the RBI in its letter dated 24.9.1996. The entire
expenses of the liaison offices in India are met exclusively out of funds
received from UAE through normal banking channels. Indisputably, it is
asserted by the respondent that its liaison offices undertake no activity
of trading, commercial or industrial, as the case may be. The respondent
has no immovable property in India otherwise than by way of lease for
operating the liaison offices. No fee/commission is charged or received
in India by any of the liaison offices for services rendered in India. It is
claimed that no income accrues or arises or deemed to accrue or arise,
directly or indirectly, through or from any source in India from liaison
offices within the meaning of Section 5 or Section 9 of the Income Tax
Act, 1961 (for short, "the 1961 Act"). According to the respondent, the
remittance services are offered by the respondent to Non-Resident
Indians (for short, "NRIs") in UAE. The contract pursuant to which the
funds are handed over by the NRI to the respondent in UAE, is entered
between the respondent and the NRI remitter in UAE. The funds are
collected from the NRI remitter by the respondent in UAE by charging
one-time fee of Dirhams 15. After collecting the funds from the NRI
remitter, the respondent makes an electronic remittance of the funds on
behalf of its NRI customer in two ways:-
(i) by telegraphic transfer through bank channels; or
(ii) On the request of the NRI remitter, the respondent sends
instruments/cheques through its liaison offices to the beneficiaries in
India, designated by the NRI remitter.
The dispute arises in respect of the second mode of remittance
through the liaison offices in India. That is on account of the activity
undertaken in the liaison office in India of downloading the particulars of
remittances through electronic media and printing cheques/drafts drawn
on the banks in India, which, in turn, are 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
UNION OF INDIA & ANR. v. U.A.E. EXCHANGE CENTRE
[A. M. KHANWILKAR, J.]
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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. The DTAA has been notified vide notification No. GSR No.
710(E) dated 18.11.1993. As noted earlier, returns were filed on regular
basis by the respondent, which were accepted by the Department without
any demur. However, as some doubt was entertained, the respondent
filed an application under Section 245Q(1) of the 1961 Act before the
Authority for Advance Rulings (Income Tax), New Delhi (for short,
"the Authority"), which was numbered as AAR No. 608/2003 and sought
ruling of the Authority on the following question: -
"Whether any income is accrued/deemed to be accrued in India
from the activities carried out by the Company in India?"
The Authority, vide its ruling dated 26.5.2004 answered the question
in the affirmative, namely, "Income shall be deemed to accrue in India
from the activity carried out by the liaison offices of the applicant in
India." For so holding, the Authority opined that in view of the deeming
provision in Sections 2(24), 4 and 5 read with Section 9 of the 1961 Act,
the respondent-assessee would be liable to pay tax under the 1961 Act,
as it had carried on business in India through a "permanent establishment"
(for short, "PE") situated in India and the profits of the enterprise needed
to be taxed in India, but only so much of that, as is attributable to the
liaison offices in India (PE). The Authority, amongst others, first examined
the facts of the case to ascertain as to whether any income accrues/
arises or is deemed to accrue/arise to the respondent in India under
Sections 2(24), 5(2) and 9(1)(i) of the 1961 Act. It noted that the business
of the respondent was being carried on in UAE; a contract for remitting
the amounts is entered into with NRIs and is executed outside India; and
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even the commission for remitting the amounts is also earned by the
respondent outside India, therefore, ostensibly no income accrues/arises,
or is deemed to accrue or arise in India. It then adverted to explanation
to Section 9(1)(i) and observed that all income accruing or arising, whether
directly or indirectly, through or from any business connection in India,
or from any property in India, or through any assets or source of income
in India or through transfer of capital assets situate in India, shall be
deemed to accrue in India. It went on to observe that in the present
case, it was evident that all the operations of the business of the respondent
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.1 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 nonresident outside India and the activity in India, would furnish a
strong indication of business connection."
It then observed in paragraph 11 of the ruling, as follows: -
"11. Admittedly, the applicant is having liaison offices in India.
They attend to the complaints of the clients in cases where
remittances are sent directly to banks in India UAE. In addition,
in cases where the applicant has to remit the amounts to the
beneficiaries in India, as per the directions of the NRIs, the liaison
1 AIR 1965 SC 1526
UNION OF INDIA & ANR. v. U.A.E. EXCHANGE CENTRE
[A. M. KHANWILKAR, J.]
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offices down load the information from the internet, print cheques/
drafts in the name of the beneficiaries in India send them through
couriers to various places in India. Without the latter activity, the
transaction of remittance of the amounts in terms of the contract
with the NRIs would not be complete. The commission which the
applicant receives for remitting the amount covers not only the
business activities carried on in UAE but also the activity of
remittance of the amount to the beneficiary in India by cheques/
drafts through courier which is being attend to by the liaison
offices. There is, therefore, a real relation between the business
carried on by the applicant for which it receives commission in
UAE and the activities of, the liaison offices, downloading of
information, printing and preparation of cheques/drafts and sending
the same to the beneficiaries in India, which contributes directly
or indirectly to the earning of the income by the applicant by way
of commission. There is also continuity between the business of
the applicant in UAE and the activities carried on by the liaison
offices. Therefore, it follows that income shall be deemed to
accrue/arise to the applicant in UAE from 'business connection'
in India. However, the deemed accrual of income to the applicant
from the business connection in India in view the Explanation (I)
would be only such part of the income as is reasonably attributable
to the operations which are carried out in India......."
The Authority also took note of Articles 5 and 7 of DTAA and
then noted in paragraph 14 as follows: -
"......The moot question is whether the exclusionary clause (e)
of para 3 is attracted; if so, whether the liaison offices would
stand excluded from the meaning of the expression 'permanent
establishment'. Clause (e) of para 3 says that the expression
'permanent establishment' shall be deemed not to include the
maintaining 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
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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 from Abu Dhabi through banking
channels or by liaison offices in India-
(ii) by dispatching through courier the instruments of cheques/
drafts prepared by liaison offices to the beneficiaries at various
places in India.
In so far as the first mode is concerned, the amount is remitted
telegraphically by transferring directly from UAE through bank
channel to various places in India and in such remittances the
liaison offices have no role to play except attending to the
complaints, if any, in India regarding the remittances in cases of
fraud etc. This is undoubtedly a work of auxiliary character.
However, where is undoubtedly a work of auxiliary character.
However, where the applicant adopts the second mode for remitting
the amounts in India -an activity approved by the RBI - the liaison
offices of the applicant play an important role. They down load
the data from internet with regard to the amount to be remitted,
the names and addresses of the beneficiaries and then print cheques/
drafts and dispatch them to the addresses of the beneficiaries in
India through courier. The role of liaison offices in remitting the
amounts by adopting the second mode, is nothing short of
performing the contract of remitting the amounts at least in part.
This case presents a good example of an auxiliary activity to the
main activities and an essential activity in performance of
contractual obligation. Whereas in the first mode, the activity
undertaken by the liaison offices in India may be said to be auxiliary
in character, the same cannot be said of the second mode. Down
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loading the data, preparing cheques for remitting the amount,
dispatching the same through courier by the liaison offices is an
important part of the main work itself because without remitting
the amount to the beneficiaries as desired by the NRIs,
performance of the contract will not be complete. So the activities
of the liaison offices in the second mode remittance, cannot be
said to be work of auxiliary character. It is indeed a significant
part of the main work of UAE establishment. It follows that the
liaison offices of the applicant in India for the purposes of the
second mode of remittance of amount would be a 'permanent
establishment' within the meaning of the expression in DTAA."
The Authority accordingly concluded that so much of the profits
as shall be deemed to accrue or arise to the 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 and the
settled legal position that the DTAA ought to override the provisions of
the Act (the 1961 Act). In other words, the tax liability of the respondent
was required to be assessed on the basis of the provisions in the stated
treaty, namely, DTAA. The High Court adverted to the exposition in
Union of India & Anr. vs. Azadi Bachao Andolan & Anr.2 in
paragraphs 28 and 29 and then observed as follows: -
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"11.2 In the present case, the liability to tax under the DTAA is
governed by Article 7. Sub-section (1) of Article 7 of the DTAA
categorically provides that profits of an enterprise of a contracting
State shall be taxable only in that State, unless the enterprise carries
on business, in the other State, through a permanent establishment
situated thereof. 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 that, as is attributable to the permanent
establishment. Therefore, the liability on account of tax, of an
enterprise of either of the contracting State, in India, would arise
if the enterprise in issue, i.e., the petitioner, had a permanent
establishment in India. The provisions of Section 5(2) (b) and
Section 9(1)(1) of the Act would have, in our view, no applicability.
Discussion with respect to the 'business connection' in the
impugned ruling was, in our view, unnecessary. The Authority
had to determine only whether the petitioner carried on business
in India through a permanent establishment. For this purpose it
was required to examine the definition of permanent establishment
as contained in Article 5 of DTAA read with Article 5(3)(e). There
is no dispute raised by the petitioner that it maintains liaison offices
in India and hence, would fall within the definition of permanent
establishment in accordance with the provisions of Article 5(2)(c).
The petitioner, however, has contended both before the Authority
and before us that it falls within the exclusionary clause contained
in Article 5(3)(e) in as much as the activity carried on by the
liaison offices in India, has an 'auxiliary' character. On this aspect
of the matter the discussion and reasoning by the Authority is
contained in paragraphs 12 to 15 of the impugned ruling. The
Authority came to the conclusion that the activity carried on by
the liaison offices in India did not have an 'auxiliary' 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
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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 India, would constitute a 'permanent establishment'
within the provisions of the DTAA."
And again, whilst analysing the scope of Articles 5 and 7 of the
DTAA in paragraph 12 of the impugned judgment, the High Court noted
thus: -
"12.......In the case of 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 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 whereunder the DTAA various activities have been deemed as ones
which would not fall within the ambit of the expression 'permanent
establishment'. One such exclusionary clause is found in Article
5(3)(e) which is: maintenance of fixed place of business solely
for the purpose of carrying on, for the enterprise, any other activity
of a preparatory or auxiliary character. The plain meaning of the
word 'auxiliary' is found in Black's Law Dictionary 7th Edition at
page 130 which reads as "aiding or supporting, subsidiary". The
only activity of the liaison offices in India is simply to download
information which is contained in the main servers located in UAE
based on which cheques are drawn on banks in India whereupon
the said cheques are couriered or dispatched to the beneficiaries
in India, keeping in mind the instructions of the NRI remitter. Can
such an activity be anything but auxiliary in character. Plainly to
our minds, the instant activity is in 'aid' or 'support' of the main
activity. The error into which, according to us, the Authority has
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fallen is in reading Article 5(3)(e) as a clause which permits making
a value judgment as to whether the transaction would or would
not have been complete till the role played by liaison offices in
India was fulfilled as represented by the petitioner to their NRI
remitter. According to us, what has been lost sight of, is that, by
invoking the clause with regard to permanent establishment, we
would, by a deeming fiction tax an income which otherwise neither
arose nor accrued in India - when looked at from this point of
view, the exclusionary clause contained in Article 5(3) 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, identical to 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
(supra) 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 & Co., a non-resident, in
fixed income and equity research and information technology
enabled services such as data processing support centre, technical
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services and reconciliation of accounts being back office operators
would not fall with Article 5(1) of the Indo-US DTAA."
Accordingly, the High Court was of the opinion that the Authority
proceeded on a wrong premise by first examining the efficacy of Section
5(2)(b) and Section 9(1)(i) of the 1961 Act instead of applying the
provisions in Articles 5 and 7 of the DTAA for ascertaining the
respondent's liability to tax. Further, the nature of activities carried on by
the respondent-assessee in the liaison offices being only of preparatory
and auxiliary character, were clearly excluded by virtue of deeming
provision. The High Court distinguished the decisions relied upon by the
Authority in Anglo-French Textile Co. Ltd., by Agents, M/s. Best &
Company Ltd., Madras vs. Commissioner of Income Tax, Madras3
and R.D. Aggarwal & Company (supra).