No Income Tax Liability For UAE Exchange In India As Its Liaison Offices Are Not 'Permanent Establishments' Under DTAA : SC [Read Judgment]

In a major tax relief to UAE Exchange, the Supreme Court has ruled that no income tax can be levied on its liaison offices in India in respect of the principal business carried by it in United Arab Emirates.

Dismissing an appeal filed by the Income Tax Department against a judgment of the Delhi High Court, the SC held that no income is earned by the liaison offices in India. It was further held that the liaison offices of UAE Exchange do not come within the meaning of "Permanent Establishment as per the provisions of the Income Tax Act, 1961 and the relevant Double Taxation Avoidance Agreements (DTAAs).

A bench comprising Justices A M Khanwilkar and Ajay Rastogi held that UAE Exchange "was not carrying on any business activity in India as such, but only dispensing with the remittances by downloading information from the main server 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 India in respect of the primary business activities consummated by the respondent in UAE", the court held.

The Court noted that the liaison offices were functioning in India based on the permissions granted by the Reserve Bank of India under the FERA, as per which UAE Exchange 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.

Therefore, the Court held that the deeming provisions in Sections 5 and 9 of the Income Tax Act Act regarding "accrual of income" in India are not attracted.

The genesis of the dispute was the ruling given by the Authority for Advance Ruling in 2003 that "Income shall be deemed to accrue in India from the activity carried out by the liaison offices of UAE Exchange 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, UAE Exchange would be liable to pay tax under the 1961 Act, as it had carried on business in India through a "permanent establishment"  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). 

Following this, the Income Tax department issued four assessment notices in 2004 with respect to four previous financial years. Challenging these notices, the UAE Exchange filed writ petition in the Delhi High Court.

The HC allowed the writ petition holding that the liaison offices would not be PE as per the DTAA, and that the clauses of the DTAA will override the provisions of Income Tax Act. The DTAA between India and UAE had stated that PEs would be amenable to income tax. However, as per Article 5(3)(e) of the DTAA, "the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character", will not constitute "PE".

Challenging the HC verdict, the department came in appeal before the SC.

The SC observed that the nature of activities carried on by the respondent through the liaison office in India was in the nature of "preparatory or auxiliary character" and, therefore, covered by Article 5(3)(e) of the DTAA between India and UAE.

"since the stated activities of the liaison offices of the respondent in India are of preparatory or auxiliary character, the same would fall within the excepted category under Article 5(3)(e) of the DTAA. Resultantly, it cannot be regarded as a PE within the sweep of Article 7 of DTAA", the bench observed.

In this regard, the Court specifically took note of the restrictions imposed by the RBI.

"The conditions( of RBI) 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 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 in question of the liaison 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. That finding reached by the High Court is unexceptionable".

Section 9 IT Act not attracted

The SC also held that the deeming provision regarding accrual of income in India under Section 9 of the Income Tax Act was not attracted in the case.

The bench observed in that regard as follows :

"even if the stated activity(ies) of the liaison office of the respondent in India is regarded as business activity, as noted earlier, the same being "of preparatory or auxiliary character"; by virtue of Article 5(3)(e) of the DTAA, the fixed place of business (liaison office) of the respondent in India otherwise a PE, is deemed to be expressly excluded from being so. And since by a legal fiction it is deemed not to be a PE of the respondent in India, it is not amenable to tax liability in terms of Article 7 of the DTAA"

Case Details
Title : Union of India vs UAE Exchange
Case No : Civil Appeal No. 9775 of 2011
Coram : Justices A M Khanwilkar and Ajay Rastogi
Appearances : Senior Adv Arijit Prasad (for appellant)
                         Adv H P Ranina for respondent

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