UNION OF INDIA & ANR. versus EXCHANGE CENTRE on 24 April 2020

[2020] 4 S.C.R. 719

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 TaxationAvoidance Agreement (DTAA) – Respondent, a companyincorporated in the UAE was engaged in offering remittance servicesfor transferring amounts from UAE to various places in India – RBIgranted permission to respondent u/s.29(1)(a) of FERA for openingliaison office in India – Pursuant thereto, respondent set up liasonoffices in India – Crucial activities of the liaison offices were ofdownloading particulars of remittances through electronic mediaand then printing cheques/drafts drawn on the banks in India, andthen courier or dispatch to the beneficiaries in India, in accordancewith the instructions of the NRI remitter – While doing so, the liaisonoffice remained connected with its main server in UAE and theinformation residing thereat accessed by the liaison office in Indiafor remitting funds to the beneficiaries in India – As per the Authorityfor Advance Rulings, income from the activities carried out by theliaison offices were deemed to be accrued in India – High Courtquashed the impugned ruling holding that the nature of activitiescarried on by the respondent in the liaison offices being only ofpreparatory and auxillary character were clearly excluded by virtueof deeming provision – On appeal, held: Permission by the RBI torespondent u/s.29(1)(a) of the FERA clearly showed that it did notallow respondent to enter into a contract with anyone in India, butonly allowed it to provide service of delivery of cheques/drafts drawnon the banks in India – Even the permitted activities were subject toconditions which included not to render any consultancy or anyother service, directly or indirectly, with or without any consideration– The conditions made it amply clear that the office in India wouldnot undertake any other activity of trading, commercial or industrial,nor enter into any business contracts in its own name without priorpermission of the RBI – The liaison office could not even chargecommission/fee or receive any remuneration or income in respect of

719

A

B

CDEFGH

Athe activities undertaken by it in India – Thus, the activities of liasonoffice(s) of the respondent in India were circumscribed by thepermission given by the RBI and were in the nature of preparatoryor auxiliary character and, therefore, covered by Art. 5(3)(e) of theDTAA – As a result, the fixed place used by the respondent as liaisonoffice in India, would not qualify the definition of PermanentBEstablishment (PE) in terms of Arts. 5(1) and 5(2) of the DTAA onaccount of non-obstante and deeming clause in Article 5(3) of theDTAA – It must follow that the respondent was not carrying on anybusiness activity in India as such, but only dispensing with theremittances as per the instructions given by the NRI remitters inCUAE – The transaction(s) had completed with the remitters in UAE,and no charges towards fee/commission could be collected by theliaison office in India in that regard – Thus, no income as specifiedin s.2(24) of the 1961 Act is earned by the liaison office in Indiaand moreso because, the liaison office is not a PE in terms of Article5 of DTAA.D

Dismissing the appeal, the Court

HELD: 1.1 Article 5(3) of the DTAA opens with a non-obstante clause and also contains a deeming provision. Itpredicates that notwithstanding the preceding provisions of theEconcerned Article, which would mean clauses 1 and 2 of Article5, it would still not be a PE, if any of the clauses in Article 5(3) areapplicable. For that, the functional test regarding the activity inquestion would be essential. [Para 8][743-G-H; 748-A-B]

Conclusion

1.2 The crucial activities in the instant case are ofFdownloading particulars of remittances through electronic mediaand then printing cheques/drafts drawn on the banks in India,which, in turn, are couriered or dispatched to the beneficiaries inIndia, in accordance with the instructions of the NRI remitter.While doing so, the liaison office of the respondent in Indiaremains connected with its main server of the respondent in UAEGand the information residing thereat is accessed by the liaisonoffices in India for the purpose of remittance of funds to thebeneficiaries in India by the NRI remitters. [Para 8][745-B-C]

2. The permission given by the RBI to the respondentunder Section 29(1)(a) of the 1973 Act, on 24.9.1996 show thatthe RBI had agreed for establishing a liaison office of therespondent at Cochin, initially for a period of three years to enablethe respondent to (i) respond quickly and economically toenquiries from correspondent banks with regard to suspectedfraudulent drafts; (ii) undertake reconciliation of bank accountsheld in India; (iii) act as a communication centre receivingcomputer (via modem) advices of mail transfer T.T. stop paymentsmessages, payment details etc., originating from respondent’sseveral branches in UAE and transmitting to its Indiancorrespondent banks; (iv) printing Indian Rupee drafts withfacsimile signature from the Head Office and counter signatureby the authorised signatory of the Head Office at Cochin; and (v)following up with the Indian correspondent banks. These are thelimited activities which the respondent has been permitted tocarry on within India. This permission does not allow therespondent-assessee to enter into a contract with anyone in India,but only to provide service of delivery of cheques/drafts drawnon the banks in India. Notably, even the permitted activities arerequired to be carried out by the respondent subject to conditionsspecified in clause 3 of the permission, which includes not torender any consultancy or any other service, directly or indirectly,with or without any consideration and further that the liaison officein India shall not borrow or lend any money from or to any personin India without prior permission of RBI. The conditions make itamply clear that the office in India will not undertake any otheractivity of trading, commercial or industrial, nor shall it enterinto any business contracts in its his own name without priorpermission of the RBI. The liaison office of the respondent inIndia cannot even charge commission/fee or receive anyremuneration or income in respect of the activities undertakenby the liaison office in India. From the onerous stipulationsspecified by the RBI, it could be safely concluded, as opined bythe High Court, that the activities of liason office(s) of therespondent in India are circumscribed by the permission givenby the RBI and are in the nature of preparatory or auxiliarycharacter and, therefore, covered by Article 5(3)(e). As a result,the fixed place used by the respondent as liaison office in India, AB

C

D

E

F

GH

AB

C

D

E

F

GH

Awould not qualify the definition of PE in terms of Articles 5(1) and5(2) of the DTAA on account of non-obstante and deeming clausein Article 5(3) of the DTAA. Having said thus, it must follow thatthe respondent was not carrying on any business activity in Indiaas such, but only dispensing with the remittances by downloadinginformation from the main server of respondent in UAE andBprinting cheques/drafts drawn on the banks in India as per theinstructions given by the NRI remitters in UAE. Thetransaction(s) had completed with the remitters in UAE, and nocharges towards fee/commission could be collected by the liaisonoffice in India in that regard. To put it differently, no income asCspecified in Section 2(24) of the 1961 Act is earned by the liaisonoffice in India and moreso because, the liaison office is not a PEin terms of Article 5 of DTAA, (as it is only carrying on activity ofa preparatory or auxiliary character). The concomitant is - no taxcan be levied or collected from the liaison office of the respondent in India in respect of the primary business activities completedDconsummated by the respondent in UAE. The activities to becarried on by the liaison office of the respondent in India aspermitted by the RBI, clearly demonstrated that the liaison officeof the respondent in India must steer away from engaging in anyprimary business activity and in establishing business connectionEas such. It can carry on activities of preparatory or auxiliary natureonly.

In that case, the deeming provisions in Sections 5 and 9 ofthe 1961 Act can have no bearing whatsoever. [Paras 9, 10,11][745-D-H;746-A-C; 748-F-H; 749-A-C]FUnion of India & Anr. v. Azadi Bachao Andolan & Anr.(2004) 10 SCC 1 : [2003] 4 Suppl. SCR 222 – reliedon.

Commissioner of Income Tax, Punjab v. R.D. Aggarwal& Company & Anr. AIR 1965 SC 1526 : [1965] 1 SCRG660 ; Anglo- French Textile Co. Ltd., by Agents,M/s. Best & Company Ltd., Madras v. Commissioner ofIncome Tax, Madras AIR 1953 SC 105 : [1953] SCR454 ; Commissioner of Income Tax, AP-IIT v.

H

Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP) ;Commissioner of Income Tax IT v. Davy Ashmore IndiaLtd. (1991) 190 ITR 626 (Cal) ; Leonhardt Andra UndPartner, GmbH v. Commissioner of Income Tax (2001)249 ITR 418 (Cal) ; Commissioner of Income Tax v.R.M. Muthaiah (1993) 202 ITR 508 (Karn). ArabianExpress Line Ltd. of United Kingdom & Ors. v. Unionof India (1995) 212 ITR 31 (Guj); DIT (InternationalTaxation), Mumbai v. Morgan Stanley & Co. Inc. (2007)7 SCC 1: [2007] 8 SCR 52; Assistant Director of IncomeTax-1, New Delhi v. E-Funds IT Solution Inc. (2018) 13SCC 294 : [2017] 1 SCR 157 – referred to.

A

B

C

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 9775of 2011.

E

From the Judgment and Order dated 13.02.2009 of the High Courtof 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.

F

H.P. Ranina, Vishnu B. Saharya, Viresh B. Saharya, Vivek B.Saharya, Akshat Agarwal, M/s. Saharya & Co., Advs. for theRespondent.

The Judgment of the Court was delivered by G

A. M. KHANWILKAR, J.

1. The respondent is a limited company incorporated in the UnitedArab Emirates (UAE). It is engaged in offering, among others, remittanceservices for transferring amounts from UAE to various places in India.It had applied for a permission under Section 29(1)(a) of the ForeignExchange Regulation Act, 1973 (for short, “the 1973 Act”), pursuant to H

A

B

C

D

E

F

G

H

which approval was granted by the Reserve Bank of India (for short,“the RBI”) vide letter dated 24.9.1996. The same reads thus: - 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 1996Post Box 170,Abu Dhabi, UAE.

Dear Sirs,

Permission under Section 29(1)(a) of the Foreign ExchangeRegulation Act, 1973 for opening a liaison office in India

Please refer to your application dated Nil and the correspondenceresting 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 liaisonoffice at Cochin initially for a period of three years to enable youto i) respond quickly and economically to enquiries fromcorrespondent banks with regard to suspected fraudulent drafts,ii) to undertake reconciliation of bank accounts held in India, iii) toact as a communication centre receiving computer (via Modem)advices of mail transfer T.T. stop payments messages, paymentsdetails etc., originating from your several branches in UAE andtransmitting to your Indian correspondent banks, iv) Printing IndianRupee drafts with facsimile signature from the Head Office andcounter signature by the authorised signatory of the Office atCochin, v) following up with the Indian correspondent banks.

3. Please note that this permission has been granted subject to thefollowing conditions:

i)Except the above mentioned work, the office in India willAnot undertake any other activity of a trading, commercialor industrial nature nor shall it enter into any businesscontracts in its own name without our prior permission.

ii)No commission/fees will be charged or any otherremuneration received/income earned by the office in IndiaBfor any activity undertaken by it as listed in para 2 of thisletter or otherwise in India.

iii)The entire expenses of the office in India will be metexclusively out of the funds received from abroad throughnormal banking channels C

iv)The Liaison office in India shall not borrow or lend anymoney from/to any person in India without our priorpermission.

v)The office in India shall not acquire, hold (otherwise thanby way of lease for a period not exceeding five years),transfer or dispose of any immovable property in Indiawithout obtaining prior permission of the Reserve Bank ofIndia under Section 31 of the Foreign Exchange RegulationAct, 1973.

D

E

vi)The Liaison office in India will furnish to our Cochin RegionalOffice (on a yearly basis):

a) a certificate from the auditors to the effect that duringthe year no income was earned by/or accrued to theoffice in India; F

b) details of remittances received from abroad dulysupported by Inward Remittance Certificates;

c) certified copy of the audited final accounts of the officein India; and

d) annual report of the work done by the office in India,stating therein the details of actual remittances receivedfrom NRI through your office during period in respectof which the office had rendered liaison services.

G

e) The number of staff engaged/appointed and dutiesassigned to each staff.

H

A

B

C

D

E

F

G

H

vii)The incharge of the liaison office in India will not havesigning/commitment powers except than those which arerequired for normal functioning of liaison office on behalfof the Head Office.

viii)The liaison office will not render any consultancy or anyother services directly/indirectly, with or without anyconsideration.

4. In case you desire to open a head office account in the booksof your liaison office in India, we hereby grant you our approvalto maintain such an account subject to the conditions that thecredits to the account should represent the funds received fromhead office through normal banking channels for meeting theexpenses of the office and no other amount should be creditedwithout prior permission of the Reserve Bank. Similarly debits tothis account could be raised only for meeting the local expensesof the office. Audited transcript of the head office account maybe forwarded to our Cochin Regional Office alongwith the annualaccounts mentioned above.

5. It is further clarified that the permission granted hereby is limitedto and for the purpose of the provisions of Section 29 ibid only andshall not be construed in any way as regularising, condoning or inany manner validating any irregularities, contraventions or otherlapses if any under the provisions of any other law for the timebeing in force.

6. Please note to furnish to us the postal address of your liaisonoffice in due course for our record. You may also note to addressthe correspondence in future to our Cochin Regional Office.

7. Please acknowledge receipt.

Yours faithfully,

Sd/-

(Prashant Saran)

Deputy General Manager”

2. The respondent set up its first liaison office in Cochin, Kerala(India) in January, 1997 and thereafter, in Chennai, New Delhi, Mumbaiand Jalandhar in India. The activities carried on by the respondent fromthe said liaison offices are stated to be in conformity with the terms andconditions prescribed by the RBI in its letter dated 24.9.1996. The entireexpenses of the liaison offices in India are met exclusively out of fundsreceived from UAE through normal banking channels. Indisputably, it isasserted by the respondent that its liaison offices undertake no activityof trading, commercial or industrial, as the case may be. The respondenthas no immovable property in India otherwise than by way of lease foroperating the liaison offices. No fee/commission is charged or receivedin India by any of the liaison offices for services rendered in India. It isclaimed that no income accrues or arises or deemed to accrue or arise,directly or indirectly, through or from any source in India from liaisonoffices within the meaning of Section 5 or Section 9 of the Income TaxAct, 1961 (for short, “the 1961 Act”). According to the respondent, theremittance services are offered by the respondent to Non-ResidentIndians (for short, “NRIs”) in UAE. The contract pursuant to which thefunds are handed over by the NRI to the respondent in UAE, is enteredbetween the respondent and the NRI remitter in UAE. The funds arecollected from the NRI remitter by the respondent in UAE by chargingone-time fee of Dirhams 15. After collecting the funds from the NRIremitter, the respondent makes an electronic remittance of the funds onbehalf 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 sendsinstruments/cheques through its liaison offices to the beneficiaries inIndia, designated by the NRI remitter.

The dispute arises in respect of the second mode of remittancethrough the liaison offices in India. That is on account of the activityundertaken in the liaison office in India of downloading the particulars ofremittances through electronic media and printing cheques/drafts drawnon the banks in India, which, in turn, are couriered or dispatched to thebeneficiaries in India, in accordance with the instructions of the NRIremitter. While doing this, the liaison office of the respondent remainsconnected with its main server in UAE, as the information is containedin the main server thereat, which could be accessed by the liaison office AB

C

DE

F

G

H

Ain India for the purpose of remittance of funds to the beneficiaries inIndia by the NRI remitters.

3. It is stated that, in compliance with Section 139 of the 1961Act, the respondent had been filing its returns of income, since theassessment year 1998-1999 until 2003-2004, showing NIL income, asBaccording to the respondent, no income had accrued or deemed to haveaccrued to it in India, both under the 1961 Act, as well as, the agreemententered into between the Government of the Republic of India and theGovernment of the UAE, which is known as Double Taxation AvoidanceAgreement (for short, “DTAA”). This agreement (DTAA) has beenentered into between the two sovereign countries in exercise of powersCunder Section 90 of the 1961 Act, for the purpose of avoidance of doubletaxation and prevention of fiscal evasion, with respect to taxes and incomeon capital. The DTAA has been notified vide notification No. GSR No.710(E) dated 18.11.1993. As noted earlier, returns were filed on regularbasis by the respondent, which were accepted by the Department withoutDany demur. However, as some doubt was entertained, the respondentfiled an application under Section 245Q(1) of the 1961 Act before theAuthority for Advance Rulings (Income Tax), New Delhi (for short,“the Authority”), which was numbered as AAR No. 608/2003 and soughtruling of the Authority on the following question: - E“Whether any income is accrued/deemed to be accrued in Indiafrom the activities carried out by the Company in India?”

The Authority, vide its ruling dated 26.5.2004 answered the questionin the affirmative, namely, “Income shall be deemed to accrue in Indiafrom the activity carried out by the liaison offices of the applicant inFIndia.” For so holding, the Authority opined that in view of the deemingprovision 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 neededto be taxed in India, but only so much of that, as is attributable to theGliaison offices in India (PE). The Authority, amongst others, first examinedthe facts of the case to ascertain as to whether any income accrues/arises or is deemed to accrue/arise to the respondent in India underSections 2(24), 5(2) and 9(1)(i) of the 1961 Act. It noted that the businessof the respondent was being carried on in UAE; a contract for remittingHthe amounts is entered into with NRIs and is executed outside India; and

even the commission for remitting the amounts is also earned by therespondent outside India, therefore, ostensibly no income accrues/arises,or is deemed to accrue or arise in India. It then adverted to explanationto Section 9(1)(i) and observed that all income accruing or arising, whetherdirectly or indirectly, through or from any business connection in India,or from any property in India, or through any assets or source of incomein India or through transfer of capital assets situate in India, shall bedeemed to accrue in India. It went on to observe that in the presentcase, it was evident that all the operations of the business of the respondentwere not carried out in India. In such a situation, to attract the provisionsreferred to above, it must be shown that – (i) the applicant has ‘businessconnections’ in India; and (ii) the income of the business can be deemedto accrue or arise in India from such operations, as are carried out inIndia. 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 inCommissioner 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 tradingactivities by a non-resident carried on outside India and theactivities within India:

(b) the relation contributes directly or indirectly to the earningof income by the non-resident in his business;

(c) a course of dealing or continuity of relationship and not amere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish astrong 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 whereremittances are sent directly to banks in India UAE. In addition,in cases where the applicant has to remit the amounts to thebeneficiaries in India, as per the directions of the NRIs, the liaison AB

C

D

E

F

G

H

A

Aoffices down load the information from the internet, print cheques/drafts in the name of the beneficiaries in India send them throughcouriers to various places in India. Without the latter activity, thetransaction of remittance of the amounts in terms of the contractwith the NRIs would not be complete. The commission which theapplicant receives for remitting the amount covers not only theBbusiness activities carried on in UAE but also the activity ofremittance of the amount to the beneficiary in India by cheques/drafts through courier which is being attend to by the liaisonoffices. There is, therefore, a real relation between the businesscarried on by the applicant for which it receives commission inCUAE and the activities of, the liaison offices, downloading ofinformation, printing and preparation of cheques/drafts and sendingthe same to the beneficiaries in India, which contributes directlyor indirectly to the earning of the income by the applicant by wayof commission. There is also continuity between the business ofthe applicant in UAE and the activities carried on by the liaisonDoffices. Therefore, it follows that income shall be deemed toaccrue/arise to the applicant in UAE from ‘business connection’in India. However, the deemed accrual of income to the applicantfrom the business connection in India in view the Explanation (I)would be only such part of the income as is reasonably attributableEto the operations which are carried out in India…….”

The Authority also took note of Articles 5 and 7 of DTAA andthen 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 wouldFstand excluded from the meaning of the expression ‘permanentestablishment’. Clause (e) of para 3 says that the expression‘permanent establishment’ shall be deemed not to include themaintaining of a fixed place of business solely for the purpose ofcarrying on for an enterprise any other activity of a preparatoryGor auxiliary character, Mr. Ranina placed before us extracts fromvarious dictionaries to show the meaning of the word ‘auxiliary’.It is unnecessary to refer to them here. Suffice it to say that theword ‘auxiliary’ in common English usage means helping, assistingor supporting the main activity. We have, therefore, to ascertainwhether the activities carried on in the liaison offices in India, are H

only supportive of the main business or form one of the mainfunctions of the business. The applicant enters into a contractwith a NRI to remit to the nominated banks or the nominatedbeneficiaries in India the amount which is the Indian rupeeequivalent of foreign currency handed over to it. It is true that thecontract is entered into in UAE and the amount to be remitted aswell as the commission is also received in UAE. The contract is,therefore executed in UAE. To fulfill its obligation under thecontract the applicant remits the amount in either of the followingtwo modes:

By establishment in UAE –

(i) by telegraphic instructions from Abu Dhabi through bankingchannels or by liaison offices in India-

(ii) by dispatching through courier the instruments of cheques/drafts prepared by liaison offices to the beneficiaries at variousplaces in India.

In so far as the first mode is concerned, the amount is remittedtelegraphically by transferring directly from UAE through bankchannel to various places in India and in such remittances theliaison offices have no role to play except attending to thecomplaints, if any, in India regarding the remittances in cases offraud 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 remittingthe amounts in India -an activity approved by the RBI – the liaisonoffices of the applicant play an important role. They down loadthe 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 inIndia through courier. The role of liaison offices in remitting theamounts by adopting the second mode, is nothing short ofperforming the contract of remitting the amounts at least in part.This case presents a good example of an auxiliary activity to themain activities and an essential activity in performance ofcontractual obligation. Whereas in the first mode, the activityundertaken by the liaison offices in India may be said to be auxiliaryin character, the same cannot be said of the second mode. Down AB

C

D

E

F

G

H

Aloading the data, preparing cheques for remitting the amount,dispatching the same through courier by the liaison offices is animportant part of the main work itself because without remittingthe amount to the beneficiaries as desired by the NRIs,performance of the contract will not be complete. So the activitiesof the liaison offices in the second mode remittance, cannot beBsaid to be work of auxiliary character. It is indeed a significantpart of the main work of UAE establishment. It follows that theliaison offices of the applicant in India for the purposes of thesecond mode of remittance of amount would be a ‘permanentestablishment’ within the meaning of the expression in DTAA.”

C

C

The Authority accordingly concluded that so much of the profitsas shall be deemed to accrue or arise to the respondent in India, whichwere attributable to the PE, namely, the liaison offices in India, would betaxable in India even under the DTAA, and answered the questionaffirmatively against the respondent-assessee.

D4. Following the impugned ruling of the Authority, dated 26.5.2004,the Department issued four notices of even date i.e. 19.7.2004 underSection 148 of the 1961 Act addressed to the respondent pertaining toassessment years 2000-2001, 2001-2002, 2002-2003 and 2003-2004respectively. The respondent, therefore, carried the matter before theEHigh Court of Delhi at New Delhi (for short, “the High Court”) by wayof Writ Petition No. 14869/2004, inter alia, for quashing of the ruling ofthe Authority dated 26.5.2004, quashing of stated notices and for adirection to the appellants not to tax the respondent in India because noincome had accrued to it or is deemed to have accrued to it in India fromits activities of liaison offices in India. The High Court, after adverting toFindisputable facts, noted that the Authority committed manifest error inappreciating the relevant facts and materials on record and moreparticularly, misread the purport of Section 90 of the 1961 Act and thesettled legal position that the DTAA ought to override the provisions ofthe Act (the 1961 Act). In other words, the tax liability of the respondentGwas required to be assessed on the basis of the provisions in the statedtreaty, namely, DTAA. The High Court adverted to the exposition inUnion of India & Anr. vs. Azadi Bachao Andolan & Anr.[2]inparagraphs 28 and 29 and then observed as follows: -

“11.2 In the present case, the liability to tax under the DTAA isgoverned by Article 7. Sub-section (1) of Article 7 of the DTAAcategorically provides that profits of an enterprise of a contractingState shall be taxable only in that State, unless the enterprise carrieson business, in the other State, through a permanent establishmentsituated thereof. If the enterprise carries on business as aforesaid,the profits of the enterprise may be taxed in the other State, butonly so much of that, as is attributable to the permanentestablishment. Therefore, the liability on account of tax, of anenterprise of either of the contracting State, in India, would ariseif the enterprise in issue, i.e., the petitioner, had a permanentestablishment in India. The provisions of Section 5(2) (b) andSection 9(1)(1) of the Act would have, in our view, no applicability.Discussion with respect to the ‘business connection’ in theimpugned ruling was, in our view, unnecessary. The Authorityhad to determine only whether the petitioner carried on businessin India through a permanent establishment. For this purpose itwas required to examine the definition of permanent establishmentas contained in Article 5 of DTAA read with Article 5(3)(e). Thereis no dispute raised by the petitioner that it maintains liaison officesin India and hence, would fall within the definition of permanentestablishment in accordance with the provisions of Article 5(2)(c).The petitioner, however, has contended both before the Authorityand before us that it falls within the exclusionary clause containedin Article 5(3)(e) in as much as the activity carried on by theliaison offices in India, has an ‘auxiliary’ character. On this aspectof the matter the discussion and reasoning by the Authority iscontained in paragraphs 12 to 15 of the impugned ruling. TheAuthority came to the conclusion that the activity carried on bythe liaison offices in India did not have an ‘auxiliary’ character interms of Article 5(3)(e) of the Act as the option of remitting offunds through the liaison offices in India was exercised by theNRI remitter which was “nothing short of, as in the words ofthe parties, performing contract of remitting the amounts”.The Authority, thus, held that while, in respect of all remittancesof funds by telegraphic transfer through banking channels, therole of the liaison offices in India of an ‘auxiliary’ character, thesame was not true in respect of remittance of funds through liaisonoffices in India. This was based on the reasoning that without AB

C

D

E

F

G

H

A

Aremittances of funds to the beneficiaries in India performanceunder the contract would not have been complete and thus, thedownloading of data, preparation of cheques for remitting theamount, 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.BBased on this reasoning, the Authority came to the conclusionthat the work of the liaison offices in India, being a significant partof the main work of UAE establishment, the liaison office of thepetitioner, in India, would constitute a ‘permanent establishment’within the provisions of the DTAA.”

CAnd again, whilst analysing the scope of Articles 5 and 7 of theDTAA in paragraph 12 of the impugned judgment, the High Court notedthus: -

“12.…...In the case of DTAA under consideration in the presentcase under Article 5 read with Article 7, profits of an enterpriseDare liable to tax in India if an enterprise were to carry on businessthrough permanent establishment, meaning thereby fixed place ofbusiness through which business of an enterprise is wholly or partlycarried on. Under Article 5(2)(c), amongst others, permanentestablishment includes an office. However, Article 5(3) whichEopens with a non-obstante clause, is illustrative of instances where-under the DTAA various activities have been deemed as oneswhich would not fall within the ambit of the expression ‘permanentestablishment’. One such exclusionary clause is found in Article5(3)(e) which is: maintenance of fixed place of business solelyfor the purpose of carrying on, for the enterprise, any other activityFof a preparatory or auxiliary character. The plain meaning of theword ‘auxiliary’ is found in Black’s Law Dictionary 7th Edition atpage 130 which reads as “aiding or supporting, subsidiary”. Theonly activity of the liaison offices in India is simply to downloadinformation which is contained in the main servers located in UAEGbased on which cheques are drawn on banks in India whereuponthe said cheques are couriered or dispatched to the beneficiariesin India, keeping in mind the instructions of the NRI remitter. Cansuch an activity be anything but auxiliary in character. Plainly toour minds, the instant activity is in ‘aid’ or ‘support’ of the mainactivity. The error into which, according to us, the Authority has H

H

fallen is in reading Article 5(3)(e) as a clause which permits makinga value judgment as to whether the transaction would or wouldnot have been complete till the role played by liaison offices inIndia was fulfilled as represented by the petitioner to their NRIremitter. According to us, what has been lost sight of, is that, byinvoking the clause with regard to permanent establishment, wewould, by a deeming fiction tax an income which otherwise neitherarose nor accrued in India – when looked at from this point ofview, the exclusionary clause contained in Article 5(3) and in thiscase in particular, sub-clause (e) have to be given a wider andliberal play. Once an activity is construed as being subsidiary or inaid or support of the main activity it would, according to us, fallwithin the exclusionary clause. To say that a particular activitywas necessary for completion of the contract is, in a sense sayingthe obvious as every other activity which an enterprise undertakesin earning profits is with the ultimate view of giving effect to theobligations undertaken by an enterprise vis-a-vis its customer. Iflooked at from that point of view, then, no activity could beconstrued as preparatory or of an ‘auxiliary’ character. On thisaspect 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 towhether back office operations carried on by Morgan StanleyCompany for one of its Morgan Stanley Advantages ServicesPvt. Ltd would qualify as having a permanent establishment inIndia. The Supreme Court, while holding that back office operationsfall within the exclusionary clause Article 5(3)(e) of Indo-USDouble Taxation DTAA, which is, identical to DTAA underconsideration in the present case, came to the conclusion thatback 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 ‘permanentestablishment’ within the meaning of Article 5(1) of the Indo-USDTAA, one had to undertake what is called a functional and factualanalysis of each of the activities undertaken by an establishment.In that case the Supreme Court came to the conclusion that theentity located in India which was engaged in only supporting thefront office functions of Morgan Stanley & Co., a non-resident, infixed income and equity research and information technologyenabled services such as data processing support centre, technical A

BC

DE

F

G

H

736SUPREME COURT REPORTS

Aservices and reconciliation of accounts being back office operatorswould not fall with Article 5(1) of the Indo-US DTAA.”

Accordingly, the High Court was of the opinion that the Authorityproceeded on a wrong premise by first examining the efficacy of Section5(2)(b) and Section 9(1)(i) of the 1961 Act instead of applying theBprovisions in Articles 5 and 7 of the DTAA for ascertaining therespondent’s liability to tax. Further, the nature of activities carried on bythe respondent-assessee in the liaison offices being only of preparatoryand auxiliary character, were clearly excluded by virtue of deemingprovision. The High Court distinguished the decisions relied upon by theAuthority in Anglo-French Textile Co. Ltd., by Agents, M/s. Best &CCompany Ltd., Madras vs. Commissioner of Income Tax, Madras[3]and R.D. Aggarwal & Company (supra). Inasmuch as, the ratio inthese decisions, according to the High Court, was that the non-residententity could be taxed only if there was business connection between thebusiness carried on by a non-resident which yields profits or gains andDsome activity in the taxable territory which contributes directly or indirectlyto the earning of those profits or gains. The High Court then concludedthat the activity carried on by the liaison offices of the respondent inIndia did not in any manner contribute directly or indirectly to the earningof profits or gains by the respondent in UAE and more so, every aspectof the transaction was concluded in UAE, whereas, the activityEperformed by the liaison offices in India was only supportive of thetransaction carried on in UAE. The High Court also took note ofexplanation 2 to Section 9(1)(i) and observed that the same reinforcesthe fact that in order to have a business connection, in respect of abusiness activity carried on by non-resident through a person situated in FIndia, it should involve more than what is supportive or subsidiary to themain function referred to in clauses (a) to (c). The High Court eventuallyquashed the impugned ruling of the Authority and also the notices issuedby the Department under Section 148 of the 1961 Act, since the noticeswere based on the ruling which was being set aside. The High Court, however, gave liberty to the appellants to proceed against the respondentGon any other ground, as may be permissible in law.

5. Feeling aggrieved, the Department has assailed the decision ofthe High Court by way of the present appeal arising from SLP(C) No.31276/2011.H3 AIR 1953 SC 105

6. We have heard Mr. Arijit Prasad, learned senior counsel forthe appellants and Mr. H.P. Ranina, learned counsel for the respondent.

7. Both sides have more or less reiterated the stand taken beforethe Authority and the High Court. After cogitating over the rivalsubmissions and the opinion recorded by the Authority and the HighCourt, the core issue that needs to be answered in this appeal is: whetherthe stated activities of the respondent-assessee would qualify theexpression “of preparatory or auxiliary character”? Having regard tothe nature of activities carried on by the respondent-assessee, as heldby the Authority, it would appear that the respondent was engaged in“business” and had “business connections”, for which, by virtue ofdeeming provision and the sweep of Sections 2(24), 4 and 5 read withSection 9 of the 1961 Act including the exposition in Anglo-FrenchTextile Co. Ltd. (supra) and R.D. Aggarwal & Company (supra), itwould be a case of income deemed to accrue or arise in India to therespondent.

8. However, in the present case, the matter in issue will have tobe answered on the basis of the stipulations in DTAA notified in exerciseof powers conferred under Section 90 of the 1961 Act. This position isno more res integra in view of the dictum in Azadi Bachao Andolan(supra). The efficacy of Section 90 of the 1961 Act has been delineatedby this Court after adverting to the decisions in Commissioner of IncomeTax, AP-I vs. Vishakhapatnam Port Trust[4], Commissioner of IncomeTax vs. Davy Ashmore India Ltd.[5], Leonhardt Andra And Partner,GmbH vs. Commissioner of Income Tax[6], Commissioner of IncomeTax vs. R.M. Muthaiah[7]and Arabian Express Line Ltd. of UnitedKingdom & Ors. vs. Union of India[8], whereafter the Court went on toobserve in paragraph 28, as follows: - “28. A survey of the aforesaid cases makes it clear that the judicialconsensus in India has been that Section 90 is specifically intendedto enable and empower the Central Government to issue anotification for implementation of the terms of a Double TaxationAvoidance Agreement. When that happens, the provisions of 4 (1983) 144 ITR 146 (AP)

5 (1991) 190 ITR 626 (Cal)

6 (2001) 249 ITR 418 (Cal)

7 (1993) 202 ITR 508 (Kant)

8 (1995) 212 ITR 31 (Guj)

AB

C

DE

F

G

H

Asuch an agreement, with respect to cases to which theyapply, would operate even if inconsistent with the provisionsof the Income Tax Act. We approve of the reasoning in thedecisions which we have noticed. If it was not the intention of thelegislature to make a departure from the general principle ofchargeability to tax under Section 4 and the general principle ofBascertainment of total income under Section 5 of the Act, thenthere was no purpose of making those sections “subject to theprovisions of the Act”. The very object of grafting the said twosections with the said clause is to enable the Central Governmentto issue a notification under Section 90 towards implementationCof the terms of DTACs which would automatically override theprovisions of the Income Tax Act in the matter of ascertainmentof chargeability to income tax and ascertainment of total income,to the extent of inconsistency with the terms of DTAC.”

D

In view of this exposition, which squarely applies to the factsituation of the present case, we must answer the question underconsideration in light of the purport of provisions in DTAA, which hasbeen executed by the Government of India and the Government of UAE,and has come into force consequent to publication vide notification datedE18.11.1993. The recitals of the said notification read thus: - “Income-tax Act, 1961:Notification under section 90:Agreement Between the Government of the Republic ofIndia and the Government of the United Arab Emiratesfor the avoidance of double taxation and the preventionFof fiscal evasion with respect to taxes on income and oncapital Notification G.S.R. No. 710(E), dated 18th November, 1993

Whereas the annexed agreement between the Government ofthe United Arab Emirates and the Government of the Republic ofGIndia for the avoidance of double taxation and prevention of fiscalevasion with respect to taxes on income and on capital has enteredinto force on the 22nd September, 1993, after the notification byboth the Contracting States to each other of the completion of theproceedings required by laws for bringing into force of the said H

agreement in accordance with paragraph 1 of Article 30 of thesaid Agreement:

Now, therefore, in exercise of the powers conferred by section90 of the Income-tax Act, 1961 (43 of 1961), section 24A of theCompanies (Profits) Surtax Act, 1964 (7 of 1964), and section44A of the Wealth-tax Act, 1957 (27 of 1957), the CentralGovernment hereby directs that all the provisions of the saidagreement shall be given effect to in the Union of India.

ANNEXURE

AN AGREEMENT BETWEEN THE GOVERNMENT OFTHE REPUBLIC OF INDIA AND THE GOVERNMENT OFTHE UNITED ARAB EMIRATES FOR THE AVOIDANCEOF DOUBLE TAXATION AND THE PREVENTION OFFISCAL EVASION WITH RESPECT TO TAXES ONINCOME AND ON CAPITAL.

The Government of the Republic of India and the Government ofthe United Arab Emirates Desiring to promote mutual economic relations by concluding anAgreement for the avoidance of double taxation and the preventionof fiscal evasion with respect to taxes on income and on capital.

Have agreed as follows:”

Article 1 of the DTAA bears title “Personal Scope” predicatingthat the agreement shall apply to persons who are residents of one orboth of the contracting States. Article 2 deals with “Taxes Covered”, towhich the agreement would apply. Article 2 reads thus: - “Article 2

TAXES COVERED

1. There shall be regarded as taxes on income and on capital alltaxes imposed on total income, on total capital, or on elements ofincome of capital including taxes on gains from alienation ofmovable or immovable property as well as on capital appreciation.

2. The existing taxes to which the Agreement shall apply are:

(a) In United Arab Emirates:

A

B

C

DE

F

G

H

740SUPREME COURT REPORTS

A

(i) Income-tax;

(ii) Corporation tax;

(iii) Wealth-tax

(hereinafter referred to as “U.A.E. tax”); B

(b) In India:

(i) the income-tax including any surcharge thereon;

(ii) the surtax; and

(iii) the wealth-tax

C

(hereinafter referred to as “Indian tax”).

3. This Agreement shall also apply to any identical or substantiallysimilar taxes on income or capital which are imposed at Federalor State level by either Contracting State in addition to, or in placeof, the taxes referred to in paragraph 2 of this Article. TheDcompetent authorities of the Contracting States shall notify eachother of any substantial changes which are made in their respectivetaxation laws.”

Article 3 refers to General Definitions and the meaning of theconcerned expression contained in the agreement, unless the contextEotherwise requires. Article 4 pertains to “Resident of the ContractingState”. The other Articles which may have bearing on the question posedbefore us are Articles 5 and 7, dealing with “Permanent Establishment (PE)” and “Business Profits” respectively, which read thus: - “Article 5

F

PEMANENT ESTABLISHMENT

1. For the purposes of this Agreement, the term “permanentestablishment” means a fixed place of business through whichthe business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” includes especially:

G

a. a place of management;

b. a branch;

c. an office;

H

d. a factory; e. a workshop;

f. a mine, an oil or gas well, a quarry or any other place ofextraction of natural resources;

g. a farm or plantation;

h. a building site or construction or assembly project orsupervisory activities in connection therewith, but only wheresuch site, project or activity continues for a period of morethan 9 months;

i. the furnishing of services including consultancy services byan enterprise of a Contracting State through employees or otherpersonnel in the other Contracting State, provided that suchactivities continue for the same project or connected projectfor a period or periods aggregating to more than 9 months withinany twelve-month period.

3. Notwithstanding the preceding provisions of this Article, theterm “permanent establishment” shall be deemed not to include:

a. the use of facilities solely for the purpose of storage, displayor delivery of goods or merchandise belonging to the enterprise;

b. the maintenance of a stock of goods or merchandise belongingto the enterprise solely for the purpose of storage, display ordelivery;

c. the maintenance of a stock of goods or merchandise belongingto the enterprise solely for the purpose of processing by anotherenterprise;

d. the maintenance of a fixed place of business solely for thepurpose of purchasing goods or merchandise, or of collectinginformation, for the enterprise;

e. the maintenance of a fixed place of business solely for thepurpose of carrying on, for the enterprise, any other activity ofa preparatory or auxiliary character.

4. Notwithstanding the provisions of paragraphs 1 and 2, where aperson - other than an agent of independent status to whomparagraph 5 applies - is acting on behalf of an enterprise and has, A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

and habitually exercises in a Contracting State an authority toconclude contracts on behalf of the enterprise, that enterpriseshall be deemed to have a permanent establishment in that Statein respect of any activities which that person undertakes for theenterprise, unless the activities of such persons are limited to thepurchase of goods or merchandise for the enterprise.

5. An enterprise of a Contracting State shall not be deemed tohave a permanent establishment in the other Contracting Statemerely because it carries on business in that other State through abroker, general commission agent or any other agent of anindependent status, provided that such persons are acting in theordinary course of their business. However, when the activitiesof such an agent are devoted wholly or almost wholly on behalf ofthat enterprise, he will not be considered an agent of an independentstatus within the meaning of this paragraph.

Article 7

BUSINESS PROFITS

1. The profits of an enterprise of a Contracting State shall betaxable only in that State unless the enterprise carries on businessin the other Contracting State through a permanent establishmentsituated therein. If the enterprise carries on business as aforesaid,the profits of the enterprise may be taxed in the other State butonly so much of them as is attributable to that permanentestablishment.

2. Subject to the provisions of paragraph 3, where an enterpriseof a Contracting State carries on business in the other ContractingState through a permanent establishment situated therein, thereshall in each Contracting State be attributed to that permanentestablishment the profits which it might be expected to make if itwere a distinct and separate enterprise engaged in the same orsimilar activities under the same or similar conditions and dealingwholly independently with the enterprise of which it is a permanentestablishment.

3. In determining the profits of a permanent establishment, thereshall be allowed as deductions expenses which are incurred forthe purposes of the business of the permanent establishment, including executive and general administrative expenses soincurred, whether in the State in which the permanent establishmentis situated or elsewhere.

4. In so far as it has been customary in a Contracting State todetermine the profits to be attributed to a permanent establishmenton the basis of an apportionment of the total profits of the enterpriseto its various parts, nothing in paragraph 2 shall preclude thatContracting State from determining the profits to be taxed by suchan apportionment as may be customary; the methods ofapportionment adopted shall, however, be such that, the resultshall be in accordance with the principles contained in this Article.

5. No profits shall be attributed to a permanent establishment byreason of the mere purchase by the permanent establishment ofgoods or merchandise for the enterprise.

6. For the purposes of the preceding paragraphs, the profits to beattributed to the permanent establishment shall be determined bythe same method year by year unless there is good and sufficientreason to the contrary.

7. Where profits include items of income which are dealt withseparately in other Articles of this Agreement, then the provisionsof those Articles shall not be affected by the provisions of thisArticle.”

Keeping in view the finding recorded by the High Court, we mayproceed on the basis that the respondent-assessee had a fixed place ofbusiness through which the business of the respondent was being whollyor partly carried on. That, however, would not be conclusive until a furtherfinding is recorded that the respondent had a PE situated in India, so asto attract Article 7 dealing with business profits to become taxable inIndia, to the extent attributable to the PE of the respondent in India. Forthat, we may have to revert back to Article 5, which deals with anddefines the “Permanent Establishment (PE)”. A fixed place of businessthrough which the business of an enterprise is wholly or partly carriedon is regarded as a PE. The term “Permanent Establishment (PE)”would include the specified places referred to in clause 2 of Article 5. Itis not in dispute that the place from where the activities are carried onby the respondent in India is a liaison office and would, therefore, becovered by the term PE in Article 5(2). However, Article 5(3) of the AB

C

DE

F

G

H

ADTAA opens with a non-obstante clause and also contains a deemingprovision. It predicates that notwithstanding the preceding provisions ofthe concerned Article, which would mean clauses 1 and 2 of Article 5, itwould 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 beessential. The High Court has opined that the respondent was carryingBon stated activities in the fixed place of business in India of a preparatoryor auxiliary character. Indeed, the expression “business” has been definedin the 1961 Act, as follows: - “2. Definitions.- In this Act, unless the context otherwise requires,- Cxxx xxx xxx

(13) “business” includes any trade, commerce or manufacture orany adventure or concern in the nature of trade, commerce ormanufacture;”

The expression “business connection” can be discerned fromDSection 9(1), as also, the meaning of expression “business activity”. Wewill advert to those provisions a little later and for the time being, assumethat the stated activities of the respondent are business activities. However,since the stated activities of the liaison offices of the respondent in Indiaare of preparatory or auxiliary character, the same would fall within theEexcepted category under Article 5(3)(e) of the DTAA. Resultantly, itcannot be regarded as a PE within the sweep of Article 7 of DTAA.The expression “preparatory” is not defined in the 1961 Act or the DTAA.The dictionary meaning of that expression can be traced to term“preparatory work” and “travaux préparatoires”, which in the Black’sLaw Dictionary (Eleventh Edition), read thus:-F

“preparatory work.

travaux préparatoires. Materials used in preparing the ultimateform of an agreement or statute, and esp. of an international treaty;the draft or legislative history of a treaty.”

GThe expression “auxiliary” is also not defined in the 1961 Act orthe DTAA. In common parlance, the meaning of that expression ispredicated in Concise Oxford English Dictionary (Twelfth Edition), whichreads thus: - “Auxiliary- adj. providing additional help or support. n. anHauxiliary person or thing. N. Amer. A group of volunteers whoassist a church, hospital, etc. with charitable activities.”

In Black’s Law Dictionary (Eleventh Edition), the term “auxiliary”is defined as follows: - “Auxiliary adj. 1. Aiding or supporting. 2. Subsidiary.

3. Supplementary.”

The crucial activities in the present case are of downloadingparticulars of remittances through electronic media and then printingcheques/drafts drawn on the banks in India, which, in turn, are courieredor dispatched to the beneficiaries in India, in accordance with theinstructions of the NRI remitter. While doing so, the liaison office of therespondent in India remains connected with its main server in UAE andthe information residing thereat is accessed by the liaison office in Indiafor the purpose of remittance of funds to the beneficiaries in India by theNRI remitters. These are combination of virtual and physical activitiesunlike the virtual activity of funds being remitted by telegraphic transferthrough banking channels. As regards the latter, it is not the case of theDepartment that the same would be covered and amenable to tax liabilityby virtue of deeming provision in the 1961 Act.

9. While answering the question as to whether the activity inquestion can be termed as other than that “of preparatory or auxiliarycharacter”, we need to keep in mind the limited permission given by theRBI to the respondent under Section 29(1)(a) of the 1973 Act, on24.9.1996. From paragraph 2 of the stated permission, it is evident thatthe RBI had agreed for establishing a liaison office of the respondent atCochin, initially for a period of three years to enable the respondent to (i)respond quickly and economically to enquiries from correspondent bankswith regard to suspected fraudulent drafts; (ii) undertake reconciliationof bank accounts held in India; (iii) act as a communication centrereceiving computer (via modem) advices of mail transfer T.T. stoppayments messages, payment details etc., originating from respondent’sseveral branches in UAE and transmitting to its Indian correspondentbanks; (iv) printing Indian Rupee drafts with facsimile signature fromthe Head Office and counter signature by the authorised signatory ofthe Office at Cochin; and (v) following up with the Indian correspondentbanks. These are the limited activities which the respondent has beenpermitted to carry on within India. This permission does not allow therespondent-assessee to enter into a contract with anyone in India, butonly to provide service of delivery of cheques/drafts drawn on the banksin India. Notably, the permitted activities are required to be carried out A

BC

DE

F

GH

Aby the respondent subject to conditions specified in clause 3 of thepermission, which includes not to render any consultancy or any otherservice, directly or indirectly, with or without any consideration and furtherthat the liaison office in India shall not borrow or lend any money fromor to any person in India without prior permission of RBI. The conditionsmake it amply clear that the office in India will not undertake any otherBactivity of trading, commercial or industrial, nor shall it enter into anybusiness contracts in its own name without prior permission of the RBI.The liaison office of the respondent in India cannot even chargecommission/fee or receive any remuneration or income in respect of theactivities undertaken by the liaison office in India. From the onerousCstipulations specified by the RBI, it could be safely concluded, as opinedby the High Court, that the activities in question of the liaison office(s) ofthe respondent in India are circumscribed by the permission given by theRBI and are in the nature of preparatory or auxiliary character. Thatfinding reached by the High Court is unexceptionable.

D10. The High Court had justly adverted to the exposition of thisCourt in DIT (International Taxation), Mumbai vs. Morgan Stanley& Co. Inc.[9], which dealt with the case of an assessee having set upoffice in India to support the main office functions in fixed income andequity research and in providing IT enabled services such as back officeoperations, data processing and support centres to the entity in UnitedEStates. This Court, in paragraphs 10 to 14, observed thus: - “10. In our view, the second requirement of Article 5(1) of DTAAis not satisfied as regards back office functions. We have examinedthe terms of the Agreement along with the advance rulingapplication made by MSCo inviting AAR to give its ruling. It isFclear from reading of the above Agreement/application that MSASin India would be engaged in supporting the front office functionsof MSCo in fixed income and equity research and in providing ITenabled services such as data processing support centre andtechnical services as also reconciliation of accounts. In order toGdecide whether a PE stood constituted one has to undertakewhat is called as a functional and factual analysis of each ofthe activities to be undertaken by an establishment. It isfrom that point of view, we are in agreement with the ruling ofAAR that in the present case Article 5(1) is not applicable as the H9 (2007) 7 SCC 1

H9 (2007) 7 SCC 1

said MSAS would be performing in India only back officeoperations. Therefore to the extent of the above back officefunctions the second part of Article 5(1) is not attracted.

11. Lastly, as rightly held by AAR there is no agency PE asthe PE in India had no authority to enter into or concludethe contracts. The contracts would be entered into in theUnited States. They would be concluded in US. Theimplementation of those contracts only to the extent of backoffice functions would be carried out in India, and therefore,MSAS would not constitute an agency PE as contended onbehalf of the Department.

12. In DTAA, the term PE means a fixed place of business throughwhich the business 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 thisreason that Article 5(2) of DTAA herein refers to places includedas 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 ofthe statutory provisions of transfer pricing by the Finance Act of2001. In Section 92-F(iii) the word “enterprise” is defined to mean “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 thatthe term PE has not been defined in the Act but its meaning maybe understood with reference to DTAA entered into by India.Thus the intention was to rely on the concept and definition of PEin DTAA. However, vide the Finance Act, 2002 the definition ofPE was inserted in the Income Tax Act, 1961 (for short “the ITAct”) vide Section 92-F(iii-a) which states that the PE shallinclude a fixed place of business through which the business ofMNE is wholly or partly carried on. This is where the differencelies between the definition of the word PE in the inclusivesense under the IT Act as against the definition of the wordPE in the exhaustive sense under DTAA. This analysis isimportant because it indicates the intention of Parliament AB

C

D

E

F

G

H

Ain adopting an inclusive definition of PE so as to coverservice PE, agency PE, software PE, construction PE, etc.

14. There is one more aspect which needs to be discussed,namely, exclusion of PE under Article 5(3). Under Article5(3)(e) activities which are preparatory or auxiliary inBcharacter which are carried out at a fixed place of businesswill not constitute a PE. Article 5(3) commences with a nonobstante clause. It states that notwithstanding what is statedin Article 5(1) or under Article 5(2) the term PE shall notinclude maintenance of a fixed place of business solely foradvertisement, scientific research or for activities whichCare preparatory or auxiliary in character. In the present casewe are of the view that the abovementioned back office functionsproposed to be performed by MSAS in India falls under Article5(3)(e) of DTAA. Therefore, in our view in the present case MSASwould not constitute a fixed place PE under Article 5(1) of DTAADas regards its back office operations.”

Learned counsel for the appellant, however, attempted to distinguishthis judgment on the argument that this case dealt with the issue ofservice PE. According to him, the Court must examine the full transactionsEof the respondent to determine whether the work done by the respondent-assessee was one of a backup office work or auxiliary work. Insofar asthe nature of activities carried on by the respondent through the liaisonoffice in India, as permitted by the RBI, we have upheld the conclusionof the High Court that the same were in the nature of “preparatory orFauxiliary character” and, therefore, covered by Article 5(3)(e). As aresult, 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 Article5(3) of the DTAA.

G11. Having said thus, it must follow that the respondent was notcarrying on any business activity in India as such, but only dispensingwith the remittances by downloading information from the main serverof respondent in UAE and printing cheques/drafts drawn on the banksin India as per the instructions given by the NRI remitters in UAE. Thetransaction(s) had completed with the remitters in UAE, and no chargesHtowards fee/commission could be collected by the liaison office in India in that regard. To put it differently, no income as specified in Section2(24) of the 1961 Act is earned by the liaison office in India and moresobecause, the liaison office is not a PE in terms of Article 5 of DTAA (asit is only carrying on activity of a preparatory or auxiliary character).The concomitant is - no tax can be levied or collected from the liaisonoffice of the respondent in India in respect of the primary businessactivities consummated by the respondent in UAE. The activities carriedon by the liaison office of the respondent in India as permitted by theRBI, clearly demonstrate that the respondent must steer away fromengaging in any primary business activity and in establishing businessconnection as such. It can carry on activities of preparatory or auxiliarynature only. In that case, the deeming provisions in Sections 5 and 9 ofthe 1961 Act can have no bearing whatsoever.

12. Our attention was invited to the dictum in AssistantDirector of Income Tax-1, New Delhi vs. E-Funds IT Solution Inc.[10].Paragraph 2 of the said decision would clearly indicate the backgroundin which the issue was answered by this Court. The same reads thus: - “2. The assessing authority decided that the assessees had apermanent establishment (hereinafter referred to as “PE”) as theyhad a fixed place where they carried on their own business inDelhi, and that, consequently, Article 5 of the India US DoubleTaxation Avoidance Agreement of 1990 (hereinafter referred toas “DTAA”) was attracted. Consequently, the assessees wereliable to pay tax in respect of what they earned from the aforesaidfixed place PE in India. The CIT (Appeals) dismissed the appealsof the assessees holding that Article 5 was attracted, not onlybecause there was a fixed place where the assessees carried ontheir business, but also because they were “service PEs” and“agency PEs” under Article 5. In an appeal to the ITAT, the ITATheld that the CIT (Appeals) was right in holding that a “fixedplace PE” and “service PE” had been made out under Article 5,but said nothing about the “agency PE” as that was not argued bythe Revenue before the ITAT. However, the ITAT, on a calculationformula different from that of the CIT (Appeals), arrived at a nilfigure of income for all the relevant assessment years. The appealof the assessees to the High Court proved successful and theHigh Court, by an elaborate judgment, has set aside the findings A

B

C

D

E

F

G

H

[2020] 4 S.C.R.

Aof all the authorities referred to above, and further dismissed thecross-appeals of the Revenue. Consequently, the Revenue is beforeus in these appeals.”

The Court, after analysing the decisions and the concerned reportproduced before it, observed in paragraph 22 as follows: - B

“22. This report would show that no part of the main businessand revenue earning activity of the two American companiesis carried on through a fixed business place in India whichhas been put at their disposal. It is clear from the abovethat the Indian company only renders support services whichCenable the assessees in turn to render services to theirclients abroad. This outsourcing of work to India would notgive rise to a fixed place PE and the High Court judgmentis, therefore, correct on this score.”

DWe may usefully refer to paragraphs 24 and 26 of the reporteddecision, which read thus: - “24. It has already been seen that none of the customers ofthe assessees are located in India or have received anyservices in India. This being the case, it is clear that theEvery first ingredient contained in Article 5(2)(l) is notsatisfied. However, the learned Attorney General, relying uponPara 42.31 of the OECD Commentary, has argued that serviceshave to be furnished within India, which does not mean that theyhave to be furnished to customers in India. Para 42.31 of theOECD Commentary reads as under:F

“42.31. … Whether or not the relevant services are furnishedto a resident of a State does not matter; what matters is thatthe services are performed in the State through an individualpresent in that State.”

xxx xxx xxx

G

26. We entirely agree with the approach of the High Court in thisregard. Para 42.31 of the OECD Commentary does not meanthat services need not be rendered by the foreign assessees inIndia. If any customer is rendered a service in India, whetherHresident in India or outside India, a “service PE” would be established in India. As has been noticed by us hereinabove, nocustomer, resident or otherwise, receives any service in India fromthe assessees. All its customers receive services only in locationsoutside India. Only auxiliary operations that facilitate such servicesare carried out in India. This being so, it is not necessary to advertto the other ground, namely, that “other personnel” would coverpersonnel employed by the Indian company as well, and that theUS companies through such personnel are furnishing services inIndia. This being the case, it is clear that as the very first part ofArticle 5(2)(l) is not attracted, the question of going to any otherpart of the said article does not arise. It is perhaps for this reasonthat the assessing officer did not give any finding on this score.”

As aforesaid, we agree with the finding recorded by the HighCourt about the nature and character of stated activities carried on bythe liaison offices of the respondent and in our view, the High Courtjustly reckoned the same as being of preparatory or auxiliary character,falling under Article 5(3)(e).

13. The High Court has also examined the matter in the contextof explanation to Section 9(1)(i) of the 1961 Act. Prior to enactment ofFinance Act, 2003 (32 of 2003), Section 9(1)(i) read thus: - “Income deemed to accrue or arise in India.

9. (1) The following incomes shall be deemed to accrue or arisein India: -

(i) all income accruing or arising, whether directly or indirectly,through or from any business connection in India, or throughor from any property in India, or through or from any asset orsource of income in India, or through the transfer of a capitalasset situate in India.

Explanation.— For the purposes of this clause— (a) in thecase of a business of which all the operations are not carriedout in India, the income of the business deemed under thisclause to accrue or arise in India shall be only such part of theincome as is reasonably attributable to the operations carriedout in India; AB

C

D

E

F

G

H

A(b) in the case of a non-resident, no income shall be deemed toaccrue or arise in India to him through or from operations whichare confined to the purchase of goods in India for the purpose ofexport;

(c) in the case of a non-resident, being a person engaged in theBbusiness of running a news agency or of publishing newspapers,magazines or journals, no income shall be deemed to accrue orarise in India to him through or from activities which are confinedto the collection of news and views in India for transmission outof India; C(d) in the case of a non-resident, being—

(1) an individual who is not a citizen of India; or

(2) a firm which does not have any partner who is a citizen ofIndia or who is resident in India; or D(3) a company which does not have any shareholder who is acitizen of India or who is resident in India, no income shall bedeemed to accrue or arise in India to such individual, firm orcompany through or from operations which are confined tothe shooting of any cinematograph film in India.

…………………..”EAfter the enactment of Finance Act, 2003, explanation 2 came tobe inserted after the renumbered explanation 1 to clause (i) ofsub-Section (1) of Section 9 with effect from 1.4.2004. The samereads thus: - F“Income deemed to accrue or arise in India.9. (1) The following incomes shall be deemed to accrue or arisein India: -

(i) all income accruing or arising, whether directly or indirectly,through or from any business connection in India, or throughGor from any property in India, or through or from any asset orsource of income in India, or through the transfer of a capitalasset situate in India.

Explanation 1.-xxxxxxxxx

H

Explanation 2.– For the removal of doubts, it is hereby declaredthat “business connection” shall include any business activitycarried out through a person who, acting on behalf of the non-resident,- (a) has and habitually exercises in India, an authority toconclude contact on behalf of the non-resident, unless hisactivities are limited to the purchase of goods or merchandisefor the non-resident; or (b) has no such authority, but habitually maintains in India astock of goods or merchandise from which he regularly deliversgoods or merchandise on behalf of the non-resident; or

(c) habitually secures orders in India, mainly or wholly for thenon-resident or that non-resident and other non-residentscontrolling, controlled by, or subject to the same commoncontrol, as that non-resident:

Provided that such business connection shall not include anybusiness activity carried out through a broker, generalcommission agent or any other agent having an independentstatus, if such broker, general commission agent or any otheragent having an independent status is acting in the ordinarycourse of his business:

Provided further that where such broker, general commissionagent or any other agent works mainly or wholly on behalf ofa non-resident (hereafter in this proviso referred to as theprincipal non-resident) or on behalf of such non-resident andother non-residents which are controlled by the principal non-resident or have a controlling interest in the principle non-resident or are subject to the same common control as theprincipal non-resident, he shall not be deemed to be a broker,general commission agent or an agent of an independentstatus.”

The meaning of expressions “business connection” and “businessactivity” has been articulated. However, even if the stated activity(ies)of the liaison office of the respondent in India is regarded as businessactivity, as noted earlier, the same being “of preparatory or auxiliarycharacter”; by virtue of Article 5(3)(e) of the DTAA, the fixed place ofbusiness (liaison office) of the respondent in India otherwise a PE, is A

B

C

D

E

F

G

H

Adeemed to be expressly excluded from being so. And since by a legalfiction it is deemed not to be a PE of the respondent in India, it is notamenable to tax liability in terms of Article 7 of the DTAA.

14. Taking any view of the matter, therefore, we find no substancein this appeal. We uphold the conclusions reached by the High Court forBthe reasons stated hitherto.

15. Accordingly, the appeal is dismissed with no order as to costs.Pending interlocutory applications, if any, shall stand disposed of.

CDevika Gujral

Appeal dismissed.

D

E

F

G

H