DTAA | Foreign Company Providing Software To Its Agents In India Doesn't Mean It Has 'Permanent Establishment' In India: Delhi HC

PE is defined under Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and the United States of America as- a fixed place of business through which businesses of an enterprise are wholly or partly carried on.

A foreign entity's PE in India would exigible to tax. Some examples of fixed places 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 PE.

In the case at hand, the issue before the Court was whether the Voyager software provided by Western Union Financial Services Inc. (a non-resident company registered in the USA) to its agents in India would constitute PE, for the purposes of taxation in India.

In its 72-page judgment, a division bench of Justices Yashwant Varma and Ravinder Dudeja said it is unable to countenance the contention that installation of the software in the premises of the Indian agents should be acknowledged as being sufficient to recognize a Fixed Place PE.

It said, “...Paras 1 and 2 of Article 5 essentially envisaging places and premises of business. Neither para 1 nor para 2 appear to ostensibly contemplate an intangible property as constituting a Fixed Place PE...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.”

The Revenue through Assessing Officer had initially held that income of the Western Union accrued in India and would be exigible to tax under DTAA.

It stated that the software installed in the office of the Indian agents and the facility of connectivity provided would lend credence to the premises of those agents being viewed as a PE.

The company on the other hand 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 situated outside India.

After ITAT ruled in favour of Western Union, Revenue approached the High Court.

At the outset, the High Court observed that the software only constituted a medium of communication which enabled the Indian agents to talk and communicate with the servers of Western Union housed in the 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,” it said.

The Court then referred to international tax expert Klaus Vogel's commentary on Double Taxation Conventions as per which, while software itself may not constitute tangible property, the computer equipment within which such software is stored can meet that threshold, with or without the presence of personnel.

However, the High Court opined, this is subject to (i) the computer equipment itself meeting the requirement of being 'fixed', (ii) the equipment and place being at the disposal of the enterprise, and (iii) the activities themselves not being of a 'preparatory' or 'auxiliary' nature.

“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,” the High Court said and dismissed Revenue's appeal.

Case title: Director Of Income Tax Intn'l v. Western Union Financial Services Inc. (and batch)

Case no.: ITA 1288/2006

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