2004 (5) TMI 60 - AAR - Income Tax

Applicant, a limited liability company incorporated in UAE, is engaged in offering, among others, remittance services for transferring amounts from UAE to various places in India - it was granted licence by RBI for the purpose of setting up liaison offices in India - that so much of the profits as shall be deemed to accrue or arise to the applicant in India which are attributable to the PE , namely, the liaison offices in India, would be taxable in India even under the DTAA.

Issues Involved:
1. Whether any income is accrued/deemed to be accrued in India from the activities carried out by the Company in India.
2. Interpretation of sections 5(2) and 9(1)(i) of the Income-tax Act, 1961.
3. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and UAE.
4. Definition and implications of "business connection" in India.
5. Definition and implications of "permanent establishment" (PE) under DTAA.

Issue-wise Detailed Analysis:

1. Whether any income is accrued/deemed to be accrued in India from the activities carried out by the Company in India:
The applicant, a UAE-based company with liaison offices in India, sought a ruling on whether any income is accrued or deemed to be accrued in India from its activities. The liaison offices in India perform activities such as reconciliation of bank accounts, acting as a communication center, printing drafts, and dispatching them to addresses, all under the approval of the Reserve Bank of India (RBI). The applicant argued that no income accrues or arises in India as per sections 5 or 9 of the Income-tax Act, 1961, and the DTAA between India and UAE.

2. Interpretation of sections 5(2) and 9(1)(i) of the Income-tax Act, 1961:
Section 5(2) of the Act states that the total income of a non-resident includes all income received or deemed to be received in India. Section 9(1)(i) deems income to accrue or arise in India through any business connection in India. The ruling examined whether the applicant's activities in India created a "business connection" and if any income could be attributed to these activities.

3. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and UAE:
The DTAA between India and UAE stipulates that the profits of an enterprise of one contracting state shall be taxable only in that state unless the enterprise carries on business in the other state through a permanent establishment (PE). The applicant argued that its liaison offices in India do not constitute a PE as their activities are of a preparatory or auxiliary character.

4. Definition and implications of "business connection" in India:
The ruling referred to various judicial interpretations to define "business connection." It concluded that a real and intimate relation must exist between the trading activities of the non-resident outside India and the activities within India. The activities of the liaison offices in India, such as downloading information, printing cheques/drafts, and dispatching them, were found to contribute directly or indirectly to the earning of income by the applicant. Therefore, the applicant was deemed to have a "business connection" in India.

5. Definition and implications of "permanent establishment" (PE) under DTAA:
The DTAA defines a PE as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The ruling examined whether the liaison offices in India could be excluded from the definition of PE under the DTAA. It was concluded that while some activities of the liaison offices might be auxiliary, the activities related to the second mode of remittance (downloading data, preparing cheques, and dispatching them) were significant parts of the main business. Therefore, the liaison offices constituted a PE in India.

Conclusion:
The ruling concluded that income shall be deemed to accrue in India from the activities carried out by the liaison offices of the applicant. The liaison offices were found to have a "business connection" in India, and their activities constituted a "permanent establishment" under the DTAA. Consequently, the profits attributable to these activities would be taxable in India.

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