9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2020 (4) TMI 794 - SC - Income TaxIncome accrued in India - liaison office engaged in remittance services - PE in India - liaison offices in India - India- UAE DTAA - second mode of remittance through the liaison offices in India 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 - HELD THAT - The expression business connection can be discerned from Section 9(1), as also, the meaning of expression business activity . We will advert to those provisions a little later and for the time being, assume that the stated activities of the respondent are business activities. However, 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 expression preparatory is not defined in the 1961 Act or the DTAA. 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 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 2009 (2) TMI 56 - DELHI 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. We agree with the finding recorded by the High Court about the nature and character of stated activities carried on by the liaison offices of the respondent and in our view, the High Court justly reckoned the same as being of preparatory or auxiliary character, falling under Article 5(3)(e). The meaning of expressions business connection and business activity has been articulated. However, 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. We uphold the conclusions reached by the High Court for the reasons stated hitherto.
Issues Involved:
1. Tax liability of the respondent under the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA) between India and UAE. 2. Determination of whether the activities of the respondent's liaison offices in India constitute a "Permanent Establishment" (PE) under DTAA. 3. Applicability of Sections 5(2)(b) and 9(1)(i) of the Income Tax Act, 1961. 4. Interpretation of "preparatory or auxiliary character" under Article 5(3)(e) of the DTAA. Issue-wise Detailed Analysis: 1. Tax Liability of the Respondent under the Income Tax Act, 1961 and DTAA: The respondent, a UAE-based company, set up liaison offices in India with RBI's permission under Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973. The activities in India were limited to non-commercial tasks such as responding to bank queries, reconciling accounts, and printing cheques. The respondent claimed that no income accrued in India under Sections 5 or 9 of the Income Tax Act, 1961, as the liaison offices did not engage in trading or commercial activities. The Authority for Advance Rulings (AAR) initially ruled that income was deemed to accrue in India, but the High Court later quashed this ruling, emphasizing that the DTAA provisions should override the Income Tax Act. 2. Determination of Whether the Activities Constitute a "Permanent Establishment" (PE): The AAR ruled that the respondent's liaison offices constituted a PE in India, making the income attributable to these offices taxable in India. However, the High Court disagreed, stating that the activities of the liaison offices were of a preparatory or auxiliary nature, thus falling under the exclusionary clause of Article 5(3)(e) of the DTAA. The High Court emphasized that the tax liability should be assessed based on the DTAA provisions, which override the Income Tax Act. 3. Applicability of Sections 5(2)(b) and 9(1)(i) of the Income Tax Act, 1961: The AAR initially examined the case under Sections 5(2)(b) and 9(1)(i) of the Income Tax Act, which deal with income deemed to accrue or arise in India through business connections. However, the High Court ruled that these sections were not applicable as the DTAA provisions should take precedence. The High Court noted that the activities of the liaison offices did not directly or indirectly contribute to the earning of profits in India, reinforcing that the DTAA should govern the tax liability. 4. Interpretation of "Preparatory or Auxiliary Character" under Article 5(3)(e) of the DTAA: The High Court and subsequently the Supreme Court concluded that the activities of the liaison offices were of a preparatory or auxiliary nature, as defined in Article 5(3)(e) of the DTAA. This interpretation was based on the limited scope of activities permitted by the RBI, which did not include any trading, commercial, or industrial activities. The Supreme Court upheld the High Court's view that the liaison offices did not constitute a PE under the DTAA, and thus, no tax liability arose in India. Conclusion: The Supreme Court dismissed the appeal, affirming the High Court's decision that the respondent's liaison offices in India did not constitute a PE under the DTAA, and the activities carried out were of a preparatory or auxiliary nature. Consequently, no income was deemed to accrue or arise in India, and the respondent was not liable to pay tax in India for the activities conducted through its liaison offices.
|
