Union Of India vs U.A.E.Exchange Centre on 24 April, 2020


Supreme Court of India

Union Of India vs U.A.E.Exchange Centre on 24 April, 2020

Author: A.M. Khanwilkar

Bench: A.M. Khanwilkar, Dinesh Maheshwari

                                                                1


                                                                                       REPORTABLE

                                      IN THE SUPREME COURT OF INDIA

                                        CIVIL APPELLATE JURISDICTION

                                        CIVIL APPEAL NO. 9775 OF 2011

          Union of India & Anr.                                                           ...Appellant(s)

                                                           Versus

          U.A.E. Exchange Centre                                                          ...Respondent(s)


                                                    JUDGMENT

A.M. Khanwilkar, J.

1. The respondent is a limited company incorporated in the

United Arab Emirates (UAE). It is engaged in offering, among

others, remittance services for transferring amounts from UAE to

various places in India. It had applied for a permission under

Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973 (for

short, “the 1973 Act”), pursuant to which approval was granted by

the Reserve Bank of India (for short, “the RBI”) vide letter dated

24.9.1996. The same reads thus: –

“Telegrams RESERVE BANK OF INDIA Post Box No. 1055
“RESERVBANK” EXCHANGE CONTROL DEPARTMENT Fax No.: 022-2665330
BOMBAY CENTRAL OFFICE 022-2654121
CENTRAL OFFICE BUILDING
Signature Not Verified Please quote Ref. in Reply BOMBAY – 400 023.

Digitally signed by
DEEPAK SINGH
Date: 2020.04.24
16:30:27 IST
Ref. No. EC Co. FID(I)/137/10-I-05-02/3975 (Activity)/96-97
Reason:

BY AIR MAIL/REGISTERED A.D.
2

U.A.E. Exchange Centre L.L.C., 24 Sep 1996
Post Box 170,
Abu Dhabi,
UAE.

Dear Sirs,

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

Please refer to your application dated Nil and the
correspondence resting 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 liaison office at Cochin initially for a period of three years
to enable you to i) respond quickly and economically to
enquiries from correspondent banks with regard to
suspected fraudulent drafts, ii) to undertake
reconciliation of bank accounts held in India, iii) to act as
a communication centre receiving computer (via Modem)
advices of mail transfer T.T. stop payments messages,
payments details etc., originating from your several
branches in UAE and transmitting to your Indian
correspondent banks, iv) Printing Indian Rupee drafts
with facsimile signature from the Head Office and counter
signature by the authorised signatory of the Office at
Cochin, v) following up with the Indian correspondent
banks.

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

i) Except the above mentioned work, the office in India
will not undertake any other activity of a trading,
commercial or industrial nature nor shall it enter
into any business contracts in its own name without
our prior permission.

ii) No commission/fees will be charged or any other
remuneration received/income earned by the office
in India for any activity undertaken by it as listed in
para 2 of this letter or otherwise in India.

iii) The entire expenses of the office in India will be met
exclusively out of the funds received from abroad
through normal banking channels
3

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

v) The office in India shall not acquire, hold (otherwise
than by way of lease for a period not exceeding five
years), transfer or dispose of any immovable
property in India without obtaining prior permission
of the Reserve Bank of India under Section 31 of the
Foreign Exchange Regulation Act, 1973.

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

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

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

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

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

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

vii) The incharge of the liaison office in India will not
have signing/commitment powers except than
those which are required for normal functioning of
liaison office on behalf of the Head Office.

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

4. In case you desire to open a head office account in
the books of your liaison office in India, we hereby grant
you our approval to maintain such an account subject to
the conditions that the credits to the account should
represent the funds received from head office through
normal banking channels for meeting the expenses of the
office and no other amount should be credited without
prior permission of the Reserve Bank. Similarly debits to
this account could be raised only for meeting the local
expenses of the office. Audited transcript of the head
office account may be forwarded to our Cochin Regional
Office alongwith the annual accounts mentioned above.

4

5. It is further clarified that the permission granted
hereby is limited to and for the purpose of the provisions
of Section 29 ibid only and shall not be construed in any
way as regularising, condoning or in any manner
validating any irregularities, contraventions or other
lapses if any under the provisions of any other law for the
time being in force.

6. Please note to furnish to us the postal address of
your liaison office in due course for our record. You may
also note to address the 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,

Mumbai and Jalandhar in India. The activities carried on by the

respondent from the said liaison offices are stated to be in

conformity with the terms and conditions prescribed by the RBI in

its letter dated 24.9.1996. The entire expenses of the liaison

offices in India are met exclusively out of funds received from UAE

through normal banking channels. Indisputably, it is asserted by

the respondent that its liaison offices undertake no activity of

trading, commercial or industrial, as the case may be. The

respondent has no immovable property in India otherwise than by

way of lease for operating the liaison offices. No fee/commission
5

is charged or received in India by any of the liaison offices for

services rendered in India. It is claimed that no income accrues or

arises or deemed to accrue or arise, directly or indirectly, through

or from any source in India from liaison offices within the meaning

of Section 5 or Section 9 of the Income Tax Act, 1961 (for short,

“the 1961 Act”). According to the respondent, the remittance

services are offered by the respondent to Non-Resident Indians (for

short, “NRIs”) in UAE. The contract pursuant to which the funds

are handed over by the NRI to the respondent in UAE, is entered

between the respondent and the NRI remitter in UAE. The funds

are collected from the NRI remitter by the respondent in UAE by

charging one-time fee of Dirhams 15. After collecting the funds

from the NRI remitter, the respondent makes an electronic

remittance of the funds on behalf 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
sends instruments/cheques through its liaison offices to
the beneficiaries in India, designated by the NRI
remitter.

The dispute arises in respect of the second mode of remittance

through the liaison offices in India. That is on account of the

activity undertaken in the liaison office in India of downloading the
6

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. While doing this, the

liaison office of the respondent remains connected with its main

server in UAE, as the information is contained in the main server

thereat, which could be accessed by the liaison office in India for

the purpose of remittance of funds to the beneficiaries in India by

the NRI remitters.

3. It is stated that, in compliance with Section 139 of the 1961

Act, the respondent had been filing its returns of income, since the

assessment year 1998-1999 until 2003-2004, showing NIL

income, as according to the respondent, no income had accrued or

deemed to have accrued to it in India, both under the 1961 Act, as

well as, the agreement entered into between the Government of the

Republic of India and the Government of the UAE, which is known

as Double Taxation Avoidance Agreement (for short, “DTAA”). This

agreement (DTAA) has been entered into between the two sovereign

countries in exercise of powers under Section 90 of the 1961 Act,

for the purpose of avoidance of double taxation and prevention of

fiscal evasion, with respect to taxes and income on capital. The
7

DTAA has been notified vide notification No. GSR No. 710(E) dated

18.11.1993. As noted earlier, returns were filed on regular basis

by the respondent, which were accepted by the Department

without any demur. However, as some doubt was entertained, the

respondent filed an application under Section 245Q(1) of the 1961

Act before the Authority for Advance Rulings (Income Tax), New

Delhi (for short, “the Authority”), which was numbered as AAR No.

608/2003 and sought ruling of the Authority on the following

question: –

“Whether any income is accrued/deemed to be accrued in
India from the activities carried out by the Company in
India?”

The Authority, vide its ruling dated 26.5.2004 answered the

question in the affirmative, namely, “Income shall be deemed to

accrue in India from the activity carried out by the liaison offices

of the applicant in India.” For so holding, the Authority opined

that in view of the deeming provision 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 needed to

be taxed in India, but only so much of that, as is attributable to
8

the liaison offices in India (PE). The Authority, amongst others,

first examined the facts of the case to ascertain as to whether any

income accrues/arises or is deemed to accrue/arise to the

respondent in India under Sections 2(24), 5(2) and 9(1)(i) of the

1961 Act. It noted that the business of the respondent was being

carried on in UAE; a contract for remitting the amounts is entered

into with NRIs and is executed outside India; and even the

commission for remitting the amounts is also earned by the

respondent outside India, therefore, ostensibly no income

accrues/arises, or is deemed to accrue or arise in India. It then

adverted to explanation to Section 9(1)(i) and observed that all

income accruing or arising, whether directly or indirectly, through

or from any business connection in India, or from any property in

India, or through any assets or source of income in India or

through transfer of capital assets situate in India, shall be deemed

to accrue in India. It went on to observe that in the present case,

it was evident that all the operations of the business of the

respondent were not carried out in India. In such a situation, to

attract the provisions referred to above, it must be shown that – (i)

the applicant has ‘business connections’ in India; and (ii) the

income of the business can be deemed to accrue or arise in India
9

from such operations, as are carried out in India. 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 in

Commissioner 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 trading activities by a non-resident
carried on outside India and the activities within
India:

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

(c) 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 and the activity in India, would furnish a
strong 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
where remittances are sent directly to banks in India UAE.
In addition, in cases where the applicant has to remit the
amounts to the beneficiaries in India, as per the directions
of the NRIs, the liaison offices down load the information
from the internet, print cheques/drafts in the name of the
beneficiaries in India send them through couriers to
various places in India. Without the latter activity, the
transaction of remittance of the amounts in terms of the
contract with the NRIs would not be complete. The
commission which the applicant receives for remitting the
amount covers not only the business activities carried on

1
AIR 1965 SC 1526
10

in UAE but also the activity of remittance of the amount to
the beneficiary in India by cheques/drafts through courier
which is being attend to by the liaison offices. There is,
therefore, a real relation between the business carried on
by the applicant for which it receives commission in UAE
and the activities of, the liaison offices, downloading of
information, printing and preparation of cheques/drafts
and sending the same to the beneficiaries in India, which
contributes directly or indirectly to the earning of the
income by the applicant by way of commission. There is
also continuity between the business of the applicant in
UAE and the activities carried on by the liaison offices.

Therefore, it follows that income shall be deemed to
accrue/arise to the applicant in UAE from ‘business
connection’ in India. However, the deemed accrual of
income to the applicant from the business connection in
India in view the Explanation (I) would be only such part
of the income as is reasonably attributable to the
operations which are carried out in India…….”

The Authority also took note of Articles 5 and 7 of DTAA and then

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
would stand excluded from the meaning of the expression
‘permanent establishment’. Clause (e) of para 3 says that
the expression ‘permanent establishment’ shall be deemed
not to include the maintaining of a fixed place of business
solely for the purpose of carrying on for an enterprise any
other activity of a preparatory or auxiliary character, Mr.
Ranina placed before us extracts from various dictionaries
to show the meaning of the word ‘auxiliary’. It is
unnecessary to refer to them here. Suffice it to say that the
word ‘auxiliary’ 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:

11

By establishment in UAE –

(i) 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 various places in India and in
such remittances the liaison offices have no role to play
except attending to the complaints, if any, in India
regarding the remittances in cases of fraud 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 remitting
the amounts in India -an activity approved by the RBI –
the liaison offices of the applicant play an important role.

They down load the 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 in India through
courier. The role of liaison offices in remitting the amounts
by adopting the second mode, is nothing short of
performing the contract of remitting the amounts at least
in part. This case presents a good example of an auxiliary
activity to the main activities and an essential activity in
performance of contractual obligation. Whereas in the first
mode, the activity undertaken by the liaison offices in India
may be said to be auxiliary in character, the same cannot
be said of the second mode. Down loading the data,
preparing cheques for remitting the amount, dispatching
the same through courier by the liaison offices is an
important part of the main work itself because without
remitting the amount to the beneficiaries as desired by the
NRIs, performance of the contract will not be complete. So
the activities of the liaison offices in the second mode
remittance, cannot be said to be work of auxiliary
character. It is indeed a significant part of the main work
of UAE establishment. It follows that the liaison offices of
the applicant in India for the purposes of the second mode
of remittance of amount would be a ‘permanent
establishment’ within the meaning of the expression in
DTAA.”
12

The Authority accordingly concluded that so much of the profits

as shall be deemed to accrue or arise to the respondent in India,

which were attributable to the PE, namely, the liaison offices in

India, would be taxable in India even under the DTAA, and

answered the question affirmatively against the respondent-

assessee.

4. Following the impugned ruling of the Authority, dated

26.5.2004, the Department issued four notices of even date i.e.

19.7.2004 under Section 148 of the 1961 Act addressed to the

respondent pertaining to assessment years 2000-2001, 2001-

2002, 2002-2003 and 2003-2004 respectively. The respondent,

therefore, carried the matter before the High Court of Delhi at New

Delhi (for short, “the High Court”) by way of Writ Petition No.

14869/2004, inter alia, for quashing of the ruling of the Authority

dated 26.5.2004, quashing of stated notices and for a direction to

the appellants not to tax the respondent in India because no

income had accrued to it or is deemed to have accrued to it in India

from its activities of liaison offices in India. The High Court, after

adverting to indisputable facts, noted that the Authority

committed manifest error in appreciating the relevant facts and

materials on record and more particularly, misread the purport of
13

Section 90 of the 1961 Act and the settled legal position that the

DTAA ought to override the provisions of the Act (the 1961 Act). In

other words, the tax liability of the respondent was required to be

assessed on the basis of the provisions in the stated treaty,

namely, DTAA. The High Court adverted to the exposition in Union

of India & Anr. vs. Azadi Bachao Andolan & Anr.2 in

paragraphs 28 and 29 and then observed as follows: –

“11.2 In the present case, the liability to tax under the
DTAA is governed by Article 7. Sub-section (1) of Article 7
of the DTAA categorically provides that profits of an
enterprise of a contracting State shall be taxable only in
that State, unless the enterprise carries on business, in
the other State, through a permanent establishment
situated thereof. If the enterprise carries on business as
aforesaid, the profits of the enterprise may be taxed in the
other State, but only so much of that, as is attributable to
the permanent establishment. Therefore, the liability on
account of tax, of an enterprise of either of the contracting
State, in India, would arise if the enterprise in issue, i.e.,
the petitioner, had a permanent establishment in India.

The provisions of Section 5(2) (b) and Section 9(1)(1) of the
Act would have, in our view, no applicability. Discussion
with respect to the ‘business connection’ in the impugned
ruling was, in our view, unnecessary. The Authority had to
determine only whether the petitioner carried on business
in India through a permanent establishment. For this
purpose it was required to examine the definition of
permanent establishment as contained in Article 5 of
DTAA read with Article 5(3)(e). There is no dispute raised
by the petitioner that it maintains liaison offices in India
and hence, would fall within the definition of permanent
establishment in accordance with the provisions of Article
5(2)(c).
The petitioner, however, has contended both before
the Authority and before us that it falls within the
exclusionary clause contained in Article 5(3)(e) in as much
as the activity carried on by the liaison offices in India, has
an ‘auxiliary’ character. On this aspect of the matter the
discussion and reasoning by the Authority is contained in

2
(2004) 10 SCC 1
14

paragraphs 12 to 15 of the impugned ruling. The Authority
came to the conclusion that the activity carried on by the
liaison offices in India did not have an ‘auxiliary’ character
in terms of Article 5(3)(e) of the Act as the option of
remitting of funds through the liaison offices in India was
exercised by the NRI remitter which was “nothing short
of, as in the words of the parties, performing contract
of remitting the amounts”. The Authority, thus, held
that while, in respect of all remittances of funds by
telegraphic transfer through banking channels, the role of
the liaison offices in India of an ‘auxiliary’ character, the
same was not true in respect of remittance of funds
through liaison offices in India. This was based on the
reasoning that without remittances of funds to the
beneficiaries in India performance under the contract
would not have been complete and thus, the downloading
of data, preparation of cheques for remitting the amount,
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. Based on this reasoning, the
Authority came to the conclusion that the work of the
liaison offices in India, being a significant part of the main
work of UAE establishment, the liaison office of the
petitioner, in India, would constitute a ‘permanent
establishment’ within the provisions of the DTAA.”

And again, whilst analysing the scope of Articles 5 and 7 of the

DTAA in paragraph 12 of the impugned judgment, the High Court

noted thus: –

“12.……In the case of DTAA under consideration in the
present case under Article 5 read with Article 7, profits of
an enterprise are liable to tax in India if an enterprise were
to carry on business through permanent establishment,
meaning thereby fixed place of business through which
business of an enterprise is wholly or partly carried on.
Under Article 5(2)(c), amongst others, permanent
establishment includes an office. However, Article 5(3)
which opens with a non-obstante clause, is illustrative of
instances where-under the DTAA various activities have
been deemed as ones which would not fall within the ambit
of the expression ‘permanent establishment’. One such
exclusionary clause is found in Article 5(3)(e) which is:

maintenance of fixed place of business solely for the
purpose of carrying on, for the enterprise, any other
15

activity of a preparatory or auxiliary character. The plain
meaning of the word ‘auxiliary’ is found in Black’s Law
Dictionary 7th Edition at page 130 which reads as “aiding
or supporting, subsidiary”. The only activity of the liaison
offices in India is simply to download information which is
contained in the main servers located in UAE based on
which cheques are drawn on banks in India whereupon
the said cheques are couriered or dispatched to the
beneficiaries in India, keeping in mind the instructions of
the NRI remitter. Can such an activity be anything but
auxiliary in character. Plainly to our minds, the instant
activity is in ‘aid’ or ‘support’ of the main activity. The error
into which, according to us, the Authority has fallen is in
reading Article 5(3)(e) as a clause which permits making a
value judgment as to whether the transaction would or
would not have been complete till the role played by liaison
offices in India was fulfilled as represented by the
petitioner to their NRI remitter. According to us, what has
been lost sight of, is that, by invoking the clause with
regard to permanent establishment, we would, by a
deeming fiction tax an income which otherwise neither
arose nor accrued in India – when looked at from this point
of view, the exclusionary clause contained in Article 5(3)
and in this case in particular, sub-clause (e) have to be
given a wider and liberal play. Once an activity is
construed as being subsidiary or in aid or support of the
main activity it would, according to us, fall within the
exclusionary clause. To say that a particular activity was
necessary for completion of the contract is, in a sense
saying the obvious as every other activity which an
enterprise undertakes in earning profits is with the
ultimate view of giving effect to the obligations undertaken
by an enterprise vis-a-vis its customer. If looked at from
that point of view, then, no activity could be construed as
preparatory or of an ‘auxiliary’ character. On this aspect 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
to whether back office operations carried on by Morgan
Stanley Company for one of its Morgan Stanley Advantages
Services Pvt. Ltd would qualify as having a permanent
establishment in India. The Supreme Court, while holding
that back office operations fall within the exclusionary
clause Article 5(3)(e) of Indo-US Double Taxation DTAA,
which is, identical to DTAA under consideration in the
present case, came to the conclusion that back 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
16

a ‘permanent establishment’ within the meaning of Article
5(1)
of the Indo-US DTAA, one had to undertake what is
called a functional and factual analysis of each of the
activities undertaken by an establishment. In that case the
Supreme Court came to the conclusion that the entity
located in India which was engaged in only supporting the
front office functions of Morgan Stanley & Co., a non-
resident, in fixed income and equity research and
information technology enabled services such as data
processing support centre, technical services and
reconciliation of accounts being back office operators
would not fall with Article 5(1) of the Indo-US DTAA.”

Accordingly, the High Court was of the opinion that the Authority

proceeded on a wrong premise by first examining the efficacy of

Section 5(2)(b) and Section 9(1)(i) of the 1961 Act instead of

applying the provisions in Articles 5 and 7 of the DTAA for

ascertaining the respondent’s liability to tax. Further, the nature

of activities carried on by the respondent-assessee in the liaison

offices being only of preparatory and auxiliary character, were

clearly excluded by virtue of deeming provision. The High Court

distinguished the decisions relied upon by the Authority in Anglo-

French Textile Co. Ltd., by Agents, M/s. Best & Company Ltd.,

Madras vs. Commissioner of Income Tax, Madras3 and R.D.

Aggarwal & Company (supra). Inasmuch as, the ratio in these

decisions, according to the High Court, was that the non-resident

entity could be taxed only if there was business connection

3
AIR 1953 SC 105
17

between the business carried on by a non-resident which yields

profits or gains and some activity in the taxable territory which

contributes directly or indirectly to the earning of those profits or

gains. The High Court then concluded that the activity carried on

by the liaison offices of the respondent in India did not in any

manner contribute directly or indirectly to the earning of profits or

gains by the respondent in UAE and more so, every aspect of the

transaction was concluded in UAE, whereas, the activity

performed by the liaison offices in India was only supportive of the

transaction carried on in UAE. The High Court also took note of

explanation 2 to Section 9(1)(i) and observed that the same

reinforces the fact that in order to have a business connection, in

respect of a business activity carried on by non-resident through

a person situated in India, it should involve more than what is

supportive or subsidiary to the main function referred to in clauses

(a) to (c). The High Court eventually quashed the impugned ruling

of the Authority and also the notices issued by the Department

under Section 148 of the 1961 Act, since the notices were based

on the ruling which was being set aside. The High Court, however,

gave liberty to the appellants to proceed against the respondent on

any other ground, as may be permissible in law.

18

5. Feeling aggrieved, the Department has assailed the decision

of the High Court by way of the present appeal arising from SLP(C)

No. 31276/2011.

6. We have heard Mr. Arijit Prasad, learned senior counsel for

the appellants and Mr. H.P. Ranina, learned counsel for the

respondent.

7. Both sides have more or less reiterated the stand taken before

the Authority and the High Court. After cogitating over the rival

submissions and the opinion recorded by the Authority and the

High Court, the core issue that needs to be answered in this appeal

is: whether the stated activities of the respondent-assessee would

qualify the expression “of preparatory or auxiliary character”?

Having regard to the nature of activities carried on by the

respondent-assessee, as held by the Authority, it would appear

that the respondent was engaged in “business” and had “business

connections”, for which, by virtue of deeming provision and the

sweep of Sections 2(24), 4 and 5 read with Section 9 of the 1961

Act including the exposition in Anglo-French Textile Co. Ltd.

(supra) and R.D. Aggarwal & Company (supra), it would be a

case of income deemed to accrue or arise in India to the

respondent.

19

8. However, in the present case, the matter in issue will have to

be answered on the basis of the stipulations in DTAA notified in

exercise of powers conferred under Section 90 of the 1961 Act.

This position is no more res integra in view of the dictum in Azadi

Bachao Andolan (supra). The efficacy of Section 90 of the 1961

Act has been delineated by this Court after adverting to the

decisions in Commissioner of Income Tax, AP-I vs.

Vishakhapatnam Port Trust4, Commissioner of Income Tax

vs. Davy Ashmore India Ltd.5, Leonhardt Andra Und Partner,

GmbH vs. Commissioner of Income Tax6, Commissioner of

Income Tax vs. R.M. Muthaiah7 and Arabian Express Line Ltd.

of United Kingdom & Ors. vs. Union of India8, whereafter the

Court went on to observe in paragraph 28, as follows: –

“28. A survey of the aforesaid cases makes it clear that
the judicial consensus in India has been that Section 90 is
specifically intended to enable and empower the Central
Government to issue a notification for implementation of
the terms of a Double Taxation Avoidance Agreement.

When that happens, the provisions of such an
agreement, with respect to cases to which they apply,
would operate even if inconsistent with the provisions
of the Income Tax Act. We approve of the reasoning in
the decisions which we have noticed. If it was not the
intention of the legislature to make a departure from the
general principle of chargeability to tax under Section 4
and the general principle of ascertainment of total income

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)
20

under Section 5 of the Act, then there was no purpose of
making those sections “subject to the provisions of the
Act”. The very object of grafting the said two sections with
the said clause is to enable the Central Government to
issue a notification under Section 90 towards
implementation of the terms of DTACs which would
automatically override the provisions of the Income Tax
Act
in the matter of ascertainment of chargeability to
income tax and ascertainment of total income, to the
extent of inconsistency with the terms of DTAC.”
(emphasis supplied)

In view of this exposition, which squarely applies to the fact

situation of the present case, we must answer the question under

consideration in light of the purport of provisions in DTAA, which

has been executed by the Government of India and the

Government of UAE, and has come into force consequent to

publication vide notification dated 18.11.1993. The recitals of the

said notification read thus: –

“Income-tax Act, 1961:Notification under section 90:
Agreement Between the Government of the Republic
of India and the Government of the United Arab
Emirates for the avoidance of double taxation and
the prevention of fiscal evasion with respect to taxes
on income and on capital

Notification G.S.R. No. 710(E), dated 18th November,
1993
Whereas the annexed agreement between the
Government of the United Arab Emirates and the
Government of the Republic of India for the avoidance of
double taxation and prevention of fiscal evasion with
respect to taxes on income and on capital has entered
into force on the 22nd September, 1993, after the
notification by both the Contracting States to each other
of the completion of the proceedings required by laws for
bringing into force of the said agreement in accordance
with paragraph 1 of Article 30 of the said Agreement:

21

Now, therefore, in exercise of the powers conferred by
section 90 of the Income-tax Act, 1961 (43 of 1961),
section 24A of the Companies (Profits) Surtax Act, 1964
(7 of 1964), and section 44A of the Wealth-tax Act, 1957
(27 of 1957), the Central Government hereby directs that
all the provisions of the said agreement shall be given
effect to in the Union of India.

ANNEXURE
AN AGREEMENT BETWEEN THE GOVERNMENT OF
THE REPUBLIC OF INDIA AND THE GOVERNMENT OF
THE UNITED ARAB EMIRATES FOR THE AVOIDANCE
OF DOUBLE TAXATION AND THE PREVENTION OF
FISCAL EVASION WITH RESPECT TO TAXES ON
INCOME AND ON CAPITAL.

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

Have agreed as follows:”

Article 1 of the DTAA bears title “Personal Scope” predicating that

the agreement shall apply to persons who are residents of one or

both of the contracting States. Article 2 deals with “Taxes

Covered”, to which the agreement would apply. Article 2 reads

thus: –

“Article 2
TAXES COVERED

1. There shall be regarded as taxes on income and on
capital all taxes imposed on total income, on total capital,
or on elements of income of capital including taxes on
gains from alienation of movable 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:

22

                 (i)     Income-tax;
                 (ii)    Corporation tax;
                 (iii)   Wealth-tax

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

(b) In India:

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

(ii) the surtax; and

(iii) the wealth-tax
(hereinafter referred to as “Indian tax”).

3. This Agreement shall also apply to any identical or
substantially similar taxes on income or capital which are
imposed at Federal or State level by either Contracting
State in addition to, or in place of, the taxes referred to in
paragraph 2 of this Article. The competent authorities of
the Contracting States shall notify each other of any
substantial changes which are made in their respective
taxation laws.”

Article 3 refers to General Definitions and the meaning of the

concerned expression contained in the agreement, unless the

context otherwise requires. Article 4 pertains to “Resident of the

Contracting State”. The other Articles which may have bearing on

the question posed before us are Articles 5 and 7, dealing with

“Permanent Establishment (PE)” and “Business Profits”

respectively, which read thus: –

“Article 5
PERMANENT ESTABLISHMENT

1. 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.

2. The term “permanent establishment” includes
especially:

a. a place of management;

23

b. a branch;

c. an office;

d. a factory;

e. a workshop;

f. a mine, an oil or gas well, a quarry or any other
place of extraction of natural resources;
g. a farm or plantation;

h. a building site or construction or assembly project
or supervisory activities in connection therewith, but
only where such site, project or activity continues for
a period of more than 9 months;

i. the furnishing of services including consultancy
services by an enterprise of a Contracting State
through employees or other personnel in the other
Contracting State, provided that such activities
continue for the same project or connected project for
a period or periods aggregating to more than 9 months
within any twelve-month period.

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

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

b. the maintenance of a stock of goods or
merchandise belonging to the enterprise solely for the
purpose of storage, display or delivery;

c. the maintenance of a stock of goods or
merchandise belonging to the enterprise solely for the
purpose of processing by another enterprise;

d. the maintenance of a fixed place of business solely
for the purpose of purchasing goods or merchandise,
or of collecting information, for the enterprise;
e. the maintenance of a fixed place of business solely
for the purpose of carrying on, for the enterprise, any
other activity of a preparatory or auxiliary character.

4. Notwithstanding the provisions of paragraphs 1 and 2,
where a person – other than an agent of independent
status to whom paragraph 5 applies – is acting on behalf
of an enterprise and has, and habitually exercises in a
Contracting State an authority to conclude contracts on
24

behalf of the enterprise, that enterprise shall be deemed
to have a permanent establishment in that State in
respect of any activities which that person undertakes for
the enterprise, unless the activities of such persons are
limited to the purchase of goods or merchandise for the
enterprise.

5. An enterprise of a Contracting State shall not be
deemed to have a permanent establishment in the other
Contracting State merely because it carries on business in
that other State through a broker, general commission
agent or any other agent of an independent status,
provided that such persons are acting in the ordinary
course of their business. However, when the activities of
such an agent are devoted wholly or almost wholly on
behalf of that enterprise, he will not be considered an
agent of an independent status within the meaning of this
paragraph.

Article 7

BUSINESS PROFITS

1. The profits of an enterprise of a Contracting State
shall be taxable only in that State unless the enterprise
carries on business in the other Contracting State through
a permanent establishment situated therein. If the
enterprise carries on business as 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.

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

3. In determining the profits of a permanent
establishment, there shall be allowed as deductions
expenses which are incurred for the purposes of the
business of the permanent establishment, including
executive and general administrative expenses so
incurred, whether in the State in which the permanent
establishment is situated or elsewhere.

25

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

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

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

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

Keeping in view the finding recorded by the High Court, we may

proceed on the basis that the respondent-assessee had a fixed

place of business through which the business of the respondent

was being wholly or partly carried on. That, however, would not

be conclusive until a further finding is recorded that the

respondent had a PE situated in India, so as to attract Article 7

dealing with business profits to become taxable in India, to the

extent attributable to the PE of the respondent in India. For that,

we may have to revert back to Article 5, which deals with and

defines the “Permanent Establishment (PE)”. A fixed place of
26

business through which the business of an enterprise is wholly or

partly carried on is regarded as a PE. The term “Permanent

Establishment (PE)” would include the specified places referred to

in clause 2 of Article 5. It is not in dispute that the place from

where the activities are carried on by the respondent in India is a

liaison office and would, therefore, be covered by the term PE in

Article 5(2). However, Article 5(3) of the DTAA opens with a non-

obstante clause and also contains a deeming provision. It

predicates that notwithstanding the preceding provisions of the

concerned Article, which would mean clauses 1 and 2 of Article 5,

it would 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 be essential. The High Court has opined that the

respondent was carrying on stated activities in the fixed place of

business in India of a preparatory or auxiliary character. Indeed,

the expression “business” has been defined in the 1961 Act, as

follows: –

“2. Definitions.- In this Act, unless the context
otherwise requires,-

xxx xxx xxx

(13) “business” includes any trade, commerce or
manufacture or any adventure or concern in the nature of
trade, commerce or manufacture;”
27

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. The dictionary meaning of that expression can be traced to

term “preparatory work” and “travaux préparatoires”, which in the

Black’s Law Dictionary (Eleventh Edition), read thus:-

“preparatory work. See TRAVAUX PRÉPARATOIRES.

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

The expression “auxiliary” is also not defined in the 1961 Act or

the DTAA. In common parlance, the meaning of that expression is

predicated in Concise Oxford English Dictionary (Twelfth Edition),

which reads thus: –

“Auxiliary- adj. providing additional help or support. n.

an auxiliary person or thing. N. Amer. A group of
28

volunteers who assist 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 downloading

particulars of remittances through electronic media and then

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. While doing

so, the liaison office of the respondent in India remains connected

with its main server in UAE and the information residing thereat

is accessed by the liaison office in India for the purpose of

remittance of funds to the beneficiaries in India by the NRI

remitters. These are combination of virtual and physical activities

unlike the virtual activity of funds being remitted by telegraphic

transfer through banking channels. As regards the latter, it is not

the case of the Department that the same would be covered and

amenable to tax liability by virtue of deeming provision in the 1961

Act.

9. While answering the question as to whether the activity in

question can be termed as other than that “of preparatory or
29

auxiliary character”, we need to keep in mind the limited

permission given by the RBI to the respondent under Section

29(1)(a) of the 1973 Act, on 24.9.1996. From paragraph 2 of the

stated permission, it is evident that the RBI had agreed for

establishing a liaison office of the respondent at Cochin, initially

for a period of three years to enable the respondent to (i) respond

quickly and economically to enquiries from correspondent banks

with regard to suspected fraudulent drafts; (ii) undertake

reconciliation of bank accounts held in India; (iii) act as a

communication centre receiving computer (via modem) advices of

mail transfer T.T. stop payments messages, payment details etc.,

originating from respondent’s several branches in UAE and

transmitting to its Indian correspondent banks; (iv) printing Indian

Rupee drafts with facsimile signature from the Head Office and

counter signature by the authorised signatory of the Office at

Cochin; and (v) following up with the Indian correspondent banks.

These are the limited activities which the respondent has been

permitted to carry on within India. This permission does not allow

the respondent-assessee to enter into a contract with anyone in

India, but only to provide service of delivery of cheques/drafts

drawn on the banks in India. Notably, the permitted activities are
30

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, 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.

10. The High Court had justly adverted to the exposition of this

Court in DIT (International Taxation), Mumbai vs. Morgan
31

Stanley & Co. Inc.9, which dealt with the case of an assessee

having set up office in India to support the main office functions

in fixed income and equity research and in providing IT enabled

services such as back office operations, data processing and

support centres to the entity in United States. This Court, in

paragraphs 10 to 14, observed thus: –

“10. In our view, the second requirement of Article 5(1)
of DTAA is not satisfied as regards back office functions.
We have examined the terms of the Agreement along with
the advance ruling application made by MSCo inviting AAR
to give its ruling. It is clear from reading of the above
Agreement/application that MSAS in India would be
engaged in supporting the front office functions of MSCo in
fixed income and equity research and in providing IT
enabled services such as data processing support centre
and technical services as also reconciliation of accounts.
In order to decide whether a PE stood constituted one
has to undertake what is called as a functional and
factual analysis of each of the activities to be
undertaken by an establishment. It is from that point of
view, we are in agreement with the ruling of AAR that in
the present case Article 5(1) is not applicable as the said
MSAS would be performing in India only back office
operations. Therefore to the extent of the above back office
functions the second part of Article 5(1) is not attracted.

11. Lastly, as rightly held by AAR there is no agency
PE as the PE in India had no authority to enter into or
conclude the contracts. The contracts would be
entered into in the United States. They would be
concluded in US. The implementation of those
contracts only to the extent of back office functions
would be carried out in India, and therefore, MSAS
would not constitute an agency PE as contended on
behalf of the Department.

12. In DTAA, the term PE means a fixed place of
business through which 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

9
(2007) 7
SCC 1
32

5(1) of the Treaty. It is for this reason that Article 5(2) of
DTAA herein refers to places included as 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 of the statutory provisions of transfer pricing by the
Finance Act of 2001. 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
that the term PE has not been defined in the Act but its
meaning may be understood with reference to DTAA
entered into by India. Thus the intention was to rely on the
concept and definition of PE in DTAA. However, vide the
Finance Act, 2002 the definition of PE was inserted in the
Income Tax Act, 1961 (for short “the IT Act”) vide Section
92-F
(iii-a) which states that the PE shall include a fixed
place of business through which the business of MNE is
wholly or partly carried on. This is where the difference
lies between the definition of the word PE in the
inclusive sense under the IT Act as against the
definition of the word PE in the exhaustive sense under
DTAA. This analysis is important because it indicates
the intention of Parliament in adopting an inclusive
definition of PE so as to cover service 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 Article 5(3)(e) activities which are preparatory or
auxiliary in character which are carried out at a fixed
place of business will not constitute a PE. Article 5(3)
commences with a non obstante clause. It states that
notwithstanding what is stated in Article 5(1) or under
Article 5(2) the term PE shall not include maintenance
of a fixed place of business solely for advertisement,
scientific research or for activities which are
preparatory or auxiliary in character. In the present case
we are of the view that the abovementioned back office
functions proposed to be performed by MSAS in India falls
under Article 5(3)(e) of DTAA. Therefore, in our view in the
present case MSAS would not constitute a fixed place PE
under Article 5(1) of DTAA as regards its back office
operations.”
(emphasis supplied)
33

Learned counsel for the appellant, however, attempted to

distinguish this judgment on the argument that this case dealt

with the issue of service PE. According to him, the Court must

examine the full transactions of the respondent to determine

whether the work done by the respondent-assessee was one of a

backup office work or auxiliary work. Insofar as the nature of

activities carried on by the respondent through the liaison office in

India, as permitted by the RBI, we have upheld the conclusion of

the High Court that the same were in the nature of “preparatory or

auxiliary character” and, therefore, covered by Article 5(3)(e). As a

result, 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 Article 5(3) of the DTAA.

11. Having said thus, it must follow that the respondent was not

carrying on any business activity in India as such, but only

dispensing with the remittances by downloading information from

the main server of respondent in UAE and printing cheques/drafts

drawn on the banks in India as per the instructions given by the

NRI remitters in UAE. The transaction(s) had completed with the

remitters in UAE, and no charges towards fee/commission could
34

be collected by the liaison office in India in that regard. To put it

differently, no income as specified in Section 2(24) of the 1961 Act

is earned by the liaison office in India and moreso because, the

liaison office is not a PE in terms of Article 5 of DTAA (as it is only

carrying on activity of a preparatory or auxiliary character). The

concomitant is – no tax can be levied or collected from the liaison

office of the respondent in India in respect of the primary business

activities consummated by the respondent in UAE. The activities

carried on by the liaison office of the respondent in India as

permitted by the RBI, clearly demonstrate that the respondent

must steer away from engaging in any primary business activity

and in establishing business connection as such. It can carry on

activities of preparatory or auxiliary nature only. In that case, the

deeming provisions in Sections 5 and 9 of the 1961 Act can have

no bearing whatsoever.

12. Our attention was invited to the dictum in Assistant

Director of Income Tax-1, New Delhi vs. E-Funds IT Solution

Inc.10. Paragraph 2 of the said decision would clearly indicate the

background in which the issue was answered by this Court. The

same reads thus: –

10

(2018) 13 SCC 294
35

“2. The assessing authority decided that the assessees
had a permanent establishment (hereinafter referred to as
“PE”) as they had a fixed place where they carried on their
own business in Delhi, and that, consequently, Article 5 of
the India US Double Taxation Avoidance Agreement of
1990 (hereinafter referred to as “DTAA”) was attracted.

Consequently, the assessees were liable to pay tax in
respect of what they earned from the aforesaid fixed place
PE in India. The CIT (Appeals) dismissed the appeals of the
assessees holding that Article 5 was attracted, not only
because there was a fixed place where the assessees
carried on their business, but also because they were
“service PEs” and “agency PEs” under Article 5. In an
appeal to the ITAT, the ITAT held that the CIT (Appeals)
was right in holding that a “fixed place PE” and “service
PE” had been made out under Article 5, but said nothing
about the “agency PE” as that was not argued by the
Revenue before the ITAT. However, the ITAT, on a
calculation formula different from that of the CIT (Appeals),
arrived at a nil figure of income for all the relevant
assessment years. The appeal of the assessees to the High
Court proved successful and the High Court, by an
elaborate judgment, has set aside the findings of all the
authorities referred to above, and further dismissed the
cross-appeals of the Revenue. Consequently, the Revenue
is before us in these appeals.”

The Court, after analysing the decisions and the concerned report

produced before it, observed in paragraph 22 as follows: –

“22. This report would show that no part of the main
business and revenue earning activity of the two
American companies is carried on through a fixed
business place in India which has been put at their
disposal. It is clear from the above that the Indian
company only renders support services which enable
the assessees in turn to render services to their clients
abroad. This outsourcing of work to India would not
give rise to a fixed place PE and the High Court
judgment is, therefore, correct on this score.”
(emphasis supplied)
36

We may usefully refer to paragraphs 24 and 26 of the reported

decision, which read thus: –

“24. It has already been seen that none of the
customers of the assessees are located in India or have
received any services in India. This being the case, it
is clear that the very first ingredient contained in
Article 5(2)(l) is not satisfied. However, the learned
Attorney General, relying upon Para 42.31 of the OECD
Commentary, has argued that services have to be
furnished within India, which does not mean that they
have to be furnished to customers in India. Para 42.31 of
the OECD Commentary reads as under:

“42.31. … Whether or not the relevant services are
furnished to a resident of a State does not matter;

what matters is that the services are performed in the
State through an individual present in that State.”

xxx xxx xxx

26. We entirely agree with the approach of the High
Court in this regard. Para 42.31 of the OECD Commentary
does not mean that services need not be rendered by the
foreign assessees in India. If any customer is rendered a
service in India, whether resident in India or outside
India, a “service PE” would be established in India. As
has been noticed by us hereinabove, no customer, resident
or otherwise, receives any service in India from the
assessees. All its customers receive services only in
locations outside India. Only auxiliary operations that
facilitate such services are carried out in India. This being
so, it is not necessary to advert to the other ground,
namely, that “other personnel” would cover personnel
employed by the Indian company as well, and that the US
companies through such personnel are furnishing services
in India. This being the case, it is clear that as the very first
part of Article 5(2)(l) is not attracted, the question of going
to any other part of the said article does not arise. It is
perhaps for this reason that the assessing officer did not
give any finding on this score.”
(emphasis supplied)

As aforesaid, we agree with the finding recorded by the High Court

about the nature and character of stated activities carried on by
37

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).

13. The High Court has also examined the matter in the context

of explanation to Section 9(1)(i) of the 1961 Act. Prior to enactment

of Finance 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
arise in India: –

(i) 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.— For the purposes of this clause—

(a) in the case of a business of which all the
operations are not carried out in India, the
income of the business deemed under this clause
to accrue or arise in India shall be only such part
of the income as is reasonably attributable to the
operations carried out in India;

(b) in the case of a non-resident, no income
shall be deemed to accrue or arise in India to him
through or from operations which are confined to
the purchase of goods in India for the purpose of
export;

(c) in the case of a non-resident, being a
person engaged in the business of running a news
agency or of publishing newspapers, magazines or
journals, no income shall be deemed to accrue or
arise in India to him through or from activities
which are confined to the collection of news and
views in India for transmission out of India;

                 (d)   in the case of a non-resident, being—
                       (1)    an individual who is not a citizen of
                       India; or
                                   38


                      (2)    a firm which does not have any
                      partner who is a citizen of India or who is
                      resident in India; or
                      (3)    a company which does not have any
                      shareholder who is a citizen of India or
                      who is resident in India,
                      no income shall be deemed to accrue or

arise in India to such individual, firm or
company through or from
operations which are confined to the
shooting of any cinematograph film in
India.

…………………..”
After the enactment of Finance Act, 2003, explanation 2 came to

be inserted after the renumbered explanation 1 to clause (i) of sub-

Section (1) of Section 9 with effect from 1.4.2004. The same reads

thus: –

“Income deemed to accrue or arise in India.

9. (1) The following incomes shall be deemed to accrue or
arise in India: –

(i) 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 1.- xxx xxx xxx
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,-

(a) has and habitually exercises in India, an
authority to conclude contact on behalf of the non-
resident, unless his activities are limited to the
purchase of goods or merchandise for the non-
resident; or

(b) has no such authority, but habitually
maintains in India a stock of goods or merchandise
from which he regularly delivers goods or
merchandise on behalf of the non-resident; or
39

(c) habitually secures orders in India, mainly or
wholly for the non-resident or that non-resident and
other non-residents controlling, controlled by, or
subject to the same common control, as that non-
resident:

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

Provided further that where such broker, general
commission agent or any other agent works mainly
or wholly on behalf of a non-resident (hereafter in
this proviso referred to as the principal non-
resident) or on behalf of such non-resident and
other 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 the principal non-

resident, he shall not be deemed to be a broker,
general commission agent or an agent of an
independent status.”

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.

40

14. Taking any view of the matter, therefore, we find no

substance in this appeal. We uphold the conclusions reached by

the High Court for the reasons stated hitherto.

15. Accordingly, the appeal is dismissed with no order as to costs.

Pending interlocutory applications, if any, shall stand disposed of.

…………………………….J.
(A.M. Khanwilkar)

…………………………….J.
(Ajay Rastogi)
New Delhi;

April 24, 2020.



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