2024 (12) TMI 1067 - HC - Income Tax

Income deemed to accrue or arise in India - income earned from customers outside India is liable to tax in India under DTAA with USA - Fixed Place PE or not? - a non-resident company registered in USA and has been engaged in the business of rendering Money Transfer Services MTS - Whether the activities of the Liaison Office (LO) in India were preparatory or auxiliary in nature.? - HELD THAT - Since the activities undertaken were far removed from the core business of the Western Union Financial Services enterprise, it is the tests of preparatory and auxiliary as embodied in Article 5 (3) (e) which stand met and satisfied. Thus we hold since it is by now well settled that activities such as market research, promotional activities, training or deployment of software would clearly not breach the threshold of auxiliary functions as are envisaged under the DTAA. For the purposes of being held to be a dependant agent, it was incumbent for the appellants to establish that such an entity habitually exercised an authority to conclude contracts. It could have also been proved by the appellants that the LO habitually secured orders for Western Union Financial Services. However, none of these conditions are met in the facts of the present case. In the absence of these conditions being found to exist, it would be wholly incorrect in law for the LO to be classified as a DAPE. Software only constituted a medium of communication and which enabled the Indian agents to talk and communicate with the servers of Western Union housed in 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. This issue in any case stands answered against the appellants by our Court in E-Funds. On an overall conspectus of the various decisions handed down by this Court as well as the Supreme Court insofar as Fixed Place PE and DAPE are concerned as well as the language of Article 5, we have no hesitation in holding that the LO failed to meet the threshold requirements so as to constitute a PE. In summation, we come to the firm conclusion that the LO did not meet the criteria established in sub-paras 1 and 2 of Article 5, so as to constitute a fixed place of business or meet the tests of virtual projection, a takeover of the premises as well as the precepts of control and disposal in order to be a Fixed Place PE. The activities undertaken by the LO even otherwise were clearly auxiliary in character and would thus clearly fall within Article 5 (3) (e) of the DTAA. The LO also did not meet the requirements of a DAPE as per of clauses (a), (b) and (c) of para 4 of Article 5. Furthermore, the software utilised for the purpose of connecting the Indian agents to the mainframe, being intangible property, would invariably be excluded from the threshold of PE. The argument of the premises of the Indian agents constituting a PE is clearly misconceived since these were independent third parties having their own business portfolio. Their premises, in any case, would not satisfy the test of virtual projection. Accordingly and for all the aforesaid reasons, we find ourselves unable to sustain the arguments of the appellants and who had commended us to upset the conclusions rendered by the Tribunal. In our considered opinion, the Tribunal rightly came to the conclusion that the LO of the respondent-assessee did not constitute a PE in India, there was no DAPE and that the software did not result in the creation of a permanent establishment. Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the respondent-assessee had a Permanent Establishment (PE) in India under Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.
2. Whether the activities of the Liaison Office (LO) in India were preparatory or auxiliary in nature.
3. Whether the software installed in the premises of Indian agents constituted a PE.
4. Whether the Indian agents could be considered as Dependent Agent Permanent Establishment (DAPE).

Detailed Analysis:

1. Permanent Establishment (PE) in India:

The primary issue was whether the respondent-assessee, a non-resident company registered in the USA and engaged in Money Transfer Services (MTS), had a PE in India as per Article 5 of the DTAA. The Tribunal had previously held that the respondent-assessee did not have a PE in India. The High Court examined whether the business activities carried out through the LO in India constituted a "fixed place of business" as defined under Article 5 of the DTAA. The Court concluded that the LO did not meet the criteria for a Fixed Place PE because it was not involved in core business activities but only in auxiliary functions like liaising with governmental authorities and training personnel. The activities were found to be preparatory or auxiliary in nature, which are excluded from the definition of PE under Article 5(3)(e) of the DTAA.

2. Nature of Activities of the Liaison Office:

The Court evaluated the activities of the LO, which included liaising with governmental authorities, training agents, and providing software updates. The RBI had granted permission for these activities, explicitly prohibiting any commercial or trading activities. The Court found that the LO's activities were preparatory or auxiliary, as they were supportive of the main business conducted outside India and did not contribute directly to the revenue generation. The LO's role was limited to communication and support, not engaging in the core business of money transfer.

3. Software as a Constituent of PE:

The Court addressed the argument that the software installed in the Indian agents' premises constituted a PE. It was argued that the software played a central role in completing transactions. However, the Court held that software, being intangible property, could not constitute a "fixed place of business" under Article 5. The software merely facilitated communication between Indian agents and the servers located outside India, and its presence did not meet the threshold for a PE as it lacked physical attributes.

4. Dependent Agent Permanent Establishment (DAPE):

The Court examined whether the Indian agents could be considered as DAPE. For an entity to be classified as a DAPE, it must habitually exercise authority to conclude contracts or secure orders for the enterprise. The Court found that the Indian agents were independent third parties, remunerated at arm's length, and did not have the authority to conclude contracts on behalf of the respondent-assessee. Therefore, the conditions for DAPE were not satisfied.

Conclusion:

The Court concluded that the respondent-assessee did not have a PE in India under the DTAA. The activities of the LO were preparatory or auxiliary, the software did not constitute a PE, and the Indian agents did not qualify as DAPE. The appeals were dismissed, and the Tribunal's decision was upheld.