9911796707
TMI Blog2004 (5) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... for transferring amounts from UAE to various places in India. It was granted licence by the Reserve Bank of India (RBI) for the purpose of setting up liaison offices in India for undertaking only the following approved activities. * Undertaking reconciliation of bank accounts held in India with correspondent banks under Draft Drawing Arrangement; * Acting as a communication centre receiving computer advices of mail transfer from UAE and transmitting to Indian correspondent banks; * Printing drafts and dispatching the same to the addresses. * Following up with the Indian correspondent banks. The applicant set up its first liaison office in Kochi, Kerala (India) in January, 1997. At present, the applicant has liaison offices in Chennai, New Delhi, Mumbai and Jalandur in India. They are carrying on the activities strictly in terms of the conditions specified by the RBI. The entire expenses of the liaison offices in India are met exclusively out of funds received from UAE through normal banking channel. The liaison offices undertake no activity of a trading, commercial or industrial nature. No immovable property is acquired, transferred or disposed of in India (otherwise than by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss, admitted that those activities are other than trading, commercial or industrial in nature. The work carried on in liaison offices, inter alia, relates to down-loading particulars of remittances through electronic media, printing cheques/drafts drawn on the respective branches of banks in India, and sending them to the addresses of the beneficiaries in India in accordance with the instructions of the NRIs. It is pointed out that the establishment of liaison offices helps the applicant to extend its volume of business and such part of income as is attributable to and derived from the services rendered in India, shall be deemed to have accrued/arisen in India; the activities carried out by the liaison offices are connected to the main business of the company and there is a territorial nexus between the applicant and its liaison offices in India. Mr. H.P. Ranina, the learned Advocate for the applicant, submits that : no business or trade is carried on by the applicant in India; all its business is only in the UAE, the contracts with NRIs are executed in UAE where NRIs hand over moneys for remittances in India as also the commission; the applicant remits amounts telegraphically thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India in any previous year by or on behalf of such person. Clause (b) of sub-section (2) which is material here, provides that the total income of a non-resident includes all income, from whatsoever source which accrues or arises or is deemed to accrue or arise in India during such year. The business of the applicant is being carried on in UAE; a contract for remitting the amounts is entered into with NRIs and is executed outside India; the commission for remitting the amounts is also earned by the applicant outside India, therefore, no income accrues/arises, or is deemed to accrue or arise in India in view of the principle that income accrues in the country in which the contract is executed. 7. The provisions of clause (i) of sub-section (1) of section 9 read with Explanation thereto may be referred to here. "9. (1) The following incomes shall be deemed to accrue or arise in India:- * all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, [ * ] or through the transfer of a capital asset situate in India. Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shown that (i) the applicant has 'business connection' in India; and (ii) the income of the business can be deemed to accrue or arise in India from such operations as are carried out in India. In such a situation the Explanation (now Explanation 1) limits the quantum of taxable income so deemed to accrue or arise only to such part of the income as is reasonably attributable to the operations carried out in India. 8. The first important aspect we have to consider is whether the applicant has "business connection" in India. The expression "business connection" was not defined for the purpose of the aforementioned provision, before March 31, 2003. By Finance Act, 2003 two Explanations were inserted after the then existing Explanation which is numbered as Explanation 1 of sub-section (1) of section 9 w.e.f. 1.4.2004. Explanation 2 which is relevant for our purpose defines the expression thus: "Explanation 2 - For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident, - * has and habitually exercises in India, an authority to conclude contracts on behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resident was laid down by the Supreme Court as long back in 1952 in Anglo-French Textile Company Limited (23 ITR 101), Hon'ble Mr. Justice Mahajan (as he then was) speaking for the Court, observed, "an isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of section 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profits, such relationship does constitute a business connection". 10. In the light of above discussion, the essential features of "business connection" may be summed up as follows:- * a real and intimate relation must exist between the trading activities by a non-resident carried on outside India and the activities within India : * the relation contributes directly or indirectly to the earning of income by the non-resident in his business; * a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." A perusal of para (I) alongwith the definition clauses in Article 3, would show that the profits of an enterprise of UAE are taxable in that country provided that enterprise does not carry on business through a permanent establishment (PE) in India. If the enterprise carries on business, through a 'PE' in India its profits may be taxed here but only so much of them as are attributable to that PE. This provision is in line with sub-clause (a) of Explanation (I) to clause (i) of Section (1) of Section 9 of the Act. 13. The expression 'permanent establishment' is defined in Article 5. We shall advert to Paras 1 to 3 thereof, which are relevant for our purpose and are reproduced below: "Article 5: Permanent establishment * For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. * The term "permanent establishment" includes especially: * a place of management; * branch; * an office; * to (i) x x x x x x x x ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iliary' in common English usage means helping, assisting or supporting the main activity. We have, therefore, to ascertain whether the activities carried on in the liaison offices in India , are only supportive of the main business or form one of the main functions of the business. The applicant enters into a contract with a NRI to remit to the nominated banks or the nominated beneficiaries in India the amount which is the Indian rupee equivalent of foreign currency handed over to it. It is true that the contract is entered into in UAE and the amount to be remitted as well as the commission is also received in UAE. The contract is, therefore, executed in UAE. To fulfill its obligation under the contract the applicant remits the amount in either of the following two modes by establishment in UAE - by telegraphic instructions from Abu Dhabi through banking channels or by liaison offices in India - (ii) by dispatching through courier the instruments of cheques/drafts prepared by liaison offices to the beneficiaries at various places in India. In so far as the first mode is concerned, the amount is remitted telegraphically by transferring directly from UAE through bank channel to vari ..... X X X X Extracts X X X X X X X X Extracts X X X X
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