INCOME TAX ACT, 1961

Section 90 Section 2(24) Section 4/5/9

Income deemed to accrue or arise in India - Under section 9(1)(vi) - Fixed place of business i.e. liaison office in India deemed to no PE by virtue of concerned DTAA -

Non-resident assessee offered remittance services NRIs in UAE. It had set up its first liasion offices in Cochin, Chennai, New Delhi, Mumbai and Jalandhar Activities carried on by assessee from said liaison offices were stated to be in conformity with terms and conditions prescribed by RBI entire expenses of liaison offices in India were met exclusively out of funds received from UAE through normal banking channles. The contract pursuant to which funds were handed over by NRI to assessee in UAE, was entered between assessee and NRI remitter in UAE. The funds were collected from NRI remitter by assessee in UAE by charging one-time fee of Dirhams 15. After collecting funds from NRI remitter, assessee mades 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. Dispute arose in respect of second mode of remittance through liaison offices in India. That was on account of activity undertaken in liaison office in India of downloading the particulars of remittances through electronic media and printing cheques/drafts drawn on banks in India, which, in turn, were couriered or dispatched to beneficiaries in India, in accordance with instructions of NRI remitter. While doing this, liaison office of assessee remained connected with its main server in UAE, as information was contained in the main server thereat, which could be accessed by liaison office in India for the purpose of remittance of funds to the beneficiaries in India by NRI remitters. According to assessee no income had accrued or deemed to have accrued to it in India, both under the Act, as well as, between India and UAE. AAr held that in view of deeming provision in sections 2(24), 4 and 5 read with section assessee was liable to pay tax under the Act,a s it had carried on business in India through a 'permanent establishment' (PE) situated in India and profits of the enterprise had to be taxed in India, but only so much of that, as was attributable to liaison offices in India (PE). Assessee carried the matter before High by way of Writ Petition No. for quashing of ruling of AAR. High Court, after adverting to indisputable facts, noted that aAuthority committed manifest error in appreciating the relevant facts and materials on record and more particularly, misread the purport of section 90 and settled legal position that DTAA ought to override provisions of the Act. Revenue challenged this. Held: Section 90 is specifically intended to enable and empower Central Government to issue a notification for implementation of terms of a DTAA. When that happens, provisions of such an agreement with resepct to cases to which they apply, would operate even if inconsistent with provisions of IT Act. Accordingly, issue had to be answered on the basis of stipulations in DTAA notified in exercise of powers conferred under section 90. Assessee was not carrying on any business activity in India as such, but only dispensing with remittances by downloading information from main server of assessee in UAE and printing cheques/drafts drawn on the banks in India as per the instructions given by NRI remitters in UAE. Transaction(s) had completed with remitters in UAE, and no charges towards fee/commission could be collected by liaison office in India in that regard. To put it differently, no income as specified in section 2(24) was earned by liaison office in India and more so because, liaison office was not a PE in terms of article 5 of DTAA (as it was only carrying on activity of a preparatory or auxiliary character. Activities carried on by liaison office of assessee in India as permitted by RBI, clearly demonstrated that assessee must steer away from engaging in any primary business activity and in establishing business connection as such. It could carry on activities of preparatory or auxiliary nature only. In that case, deeming provisions in sections 5 and 9 had no bearing whatsoever. Even if activity(ies) of liaison office of assessee in India was regarded as business activity, the same being 'of preparatory or auxiliary character'; by virtue of Article 5(3)(e) DTAA, between India and UAE, the fixed place of business (liaison office) of assessee in India otherwise a PE, was deemed to be expressly excluded from being so. And since by a legal fiction it was deemed not to be a PE of assessee in India, it was not amenable to tax liability in terms of article 7 of DTAA. Accordingly, there could be no taxation in India.

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