1 REPORTABLE IN 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. respondent is limited company incorporated in 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 permission under Section 29(1)(a) of Foreign Exchange Regulation Act, 1973 (for short, 1973 Act ), pursuant to which approval was granted by Reserve Bank of India (for short, RBI ) vide letter dated 24.9.1996. 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 Foreign Exchange Regulation Act, 1973 for opening liaison office in India Please refer to your application dated Nil and correspondence resting with your letter Ref. UAEEC/HO/479/96 dated 9th August, 1996 on captioned subject. 2. We advise that we are agreeable to your establishing liaison office at Cochin initially for 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 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 Head Office and counter signature by authorised signatory of Office at Cochin, v) following up with Indian correspondent banks. 3. Please note that this permission has been granted subject to following conditions: i) Except above mentioned work, office in India will not undertake any other activity of 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 office in India for any activity undertaken by it as listed in para 2 of this letter or otherwise in India. iii) entire expenses of office in India will be met exclusively out of funds received from abroad through normal banking channels 3 iv) Liaison office in India shall not borrow or lend any money from/to any person in India without our prior permission. v) office in India shall not acquire, hold (otherwise than by way of lease for period not exceeding five years), transfer or dispose of any immovable property in India without obtaining prior permission of Reserve Bank of India under Section 31 of Foreign Exchange Regulation Act, 1973. vi) Liaison office in India will furnish to our Cochin Regional Office (on yearly basis): a) certificate from auditors to effect that during year no income was earned by/or accrued to office in India; b) details of remittances received from abroad duly supported by Inward Remittance Certificates; c) certified copy of audited final accounts of office in India; and d) annual report of work done by office in India, stating therein details of actual remittances received from NRI through your office during period in respect of which office had rendered liaison services. e) number of staff engaged/appointed and duties assigned to each staff. vii) incharge of 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 Head Office. viii) 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 head office account in books of your liaison office in India, we hereby grant you our approval to maintain such account subject to conditions that credits to account should represent funds received from head office through normal banking channels for meeting expenses of office and no other amount should be credited without prior permission of Reserve Bank. Similarly debits to this account could be raised only for meeting local expenses of office. Audited transcript of head office account may be forwarded to our Cochin Regional Office alongwith annual accounts mentioned above. 4 5. It is further clarified that permission granted hereby is limited to and for purpose of 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 provisions of any other law for time being in force. 6. Please note to furnish to us postal address of your liaison office in due course for our record. You may also note to address correspondence in future to our Cochin Regional Office. 7. Please acknowledge receipt. Yours faithfully, Sd/- (Prashant Saran) Deputy General Manager 2. 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. activities carried on by respondent from said liaison offices are stated to be in conformity with terms and conditions prescribed by RBI in its letter dated 24.9.1996. entire expenses of liaison offices in India are met exclusively out of funds received from UAE through normal banking channels. Indisputably, it is asserted by respondent that its liaison offices undertake no activity of trading, commercial or industrial, as case may be. respondent has no immovable property in India otherwise than by way of lease for operating liaison offices. No fee/commission 5 is charged or received in India by any of 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 meaning of Section 5 or Section 9 of Income Tax Act, 1961 (for short, 1961 Act ). According to respondent, remittance services are offered by respondent to Non-Resident Indians (for short, NRIs ) in UAE. contract pursuant to which funds are handed over by NRI to respondent in UAE, is entered between respondent and NRI remitter in UAE. funds are collected from NRI remitter by respondent in UAE by charging one-time fee of Dirhams 15. After collecting funds from NRI remitter, respondent makes electronic remittance of funds on behalf of its NRI customer in two ways:- (i) by telegraphic transfer through bank channels; or (ii) On request of NRI remitter, respondent sends instruments/cheques through its liaison offices to beneficiaries in India, designated by NRI remitter. dispute arises in respect of second mode of remittance through liaison offices in India. That is on account of activity undertaken in liaison office in India of downloading 6 particulars of remittances through electronic media and printing cheques/drafts drawn on banks in India, which, in turn, are couriered or dispatched to beneficiaries in India, in accordance with instructions of NRI remitter. While doing this, liaison office of respondent remains connected with its main server in UAE, as information is contained in main server thereat, which could be accessed by liaison office in India for purpose of remittance of funds to beneficiaries in India by NRI remitters. 3. It is stated that, in compliance with Section 139 of 1961 Act, respondent had been filing its returns of income, since assessment year 1998-1999 until 2003-2004, showing NIL income, as according to respondent, no income had accrued or deemed to have accrued to it in India, both under 1961 Act, as well as, agreement entered into between Government of Republic of India and Government of UAE, which is known as Double Taxation Avoidance Agreement (for short, DTAA ). This agreement (DTAA) has been entered into between two sovereign countries in exercise of powers under Section 90 of 1961 Act, for purpose of avoidance of double taxation and prevention of fiscal evasion, with respect to taxes and income on capital. 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 respondent, which were accepted by Department without any demur. However, as some doubt was entertained, respondent filed application under Section 245Q(1) of 1961 Act before Authority for Advance Rulings (Income Tax), New Delhi (for short, Authority ), which was numbered as AAR No. 608/2003 and sought ruling of Authority on following question: - Whether any income is accrued/deemed to be accrued in India from activities carried out by Company in India? Authority, vide its ruling dated 26.5.2004 answered question in affirmative, namely, Income shall be deemed to accrue in India from activity carried out by liaison offices of applicant in India. For so holding, Authority opined that in view of deeming provision in Sections 2(24), 4 and 5 read with Section 9 of 1961 Act, respondent-assessee would be liable to pay tax under 1961 Act, as it had carried on business in India through permanent establishment (for short, PE ) situated in India and profits of enterprise needed to be taxed in India, but only so much of that, as is attributable to 8 liaison offices in India (PE). Authority, amongst others, first examined facts of case to ascertain as to whether any income accrues/arises or is deemed to accrue/arise to respondent in India under Sections 2(24), 5(2) and 9(1)(i) of 1961 Act. It noted that business of respondent was being carried on in UAE; contract for remitting amounts is entered into with NRIs and is executed outside India; and even commission for remitting amounts is also earned by 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 present case, it was evident that all operations of business of respondent were not carried out in India. In such situation, to attract provisions referred to above, it must be shown that (i) applicant has business connections in India; and (ii) income of 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 Finance Act, 2003, it noted decision of this Court in Commissioner of Income Tax, Punjab vs. R.D. Aggarwal & Company & Anr.1 and culled out essential features of expression business connection as follows:- 10. In light of above discussion, essential features of business connection may be summed up as follows: - (a) real and intimate relation must exist between trading activities by non-resident carried on outside India and activities within India: (b) relation contributes directly or indirectly to earning of income by non-resident in his business; (c) course of dealing or continuity of relationship and not mere isolated or stray nexus between business of non-resident outside India and activity in India, would furnish strong indication of business connection. It then observed in paragraph 11 of ruling, as follows: - 11. Admittedly, applicant is having liaison offices in India. They attend to complaints of clients in cases where remittances are sent directly to banks in India UAE. In addition, in cases where applicant has to remit amounts to beneficiaries in India, as per directions of NRIs, liaison offices down load information from internet, print cheques/drafts in name of beneficiaries in India send them through couriers to various places in India. Without latter activity, transaction of remittance of amounts in terms of contract with NRIs would not be complete. commission which applicant receives for remitting amount covers not only business activities carried on 1 AIR 1965 SC 1526 10 in UAE but also activity of remittance of amount to beneficiary in India by cheques/drafts through courier which is being attend to by liaison offices. There is, therefore, real relation between business carried on by applicant for which it receives commission in UAE and activities of, liaison offices, downloading of information, printing and preparation of cheques/drafts and sending same to beneficiaries in India, which contributes directly or indirectly to earning of income by applicant by way of commission. There is also continuity between business of applicant in UAE and activities carried on by liaison offices. Therefore, it follows that income shall be deemed to accrue/arise to applicant in UAE from business connection in India. However, deemed accrual of income to applicant from business connection in India in view Explanation (I) would be only such part of income as is reasonably attributable to operations which are carried out in India . Authority also took note of Articles 5 and 7 of DTAA and then noted in paragraph 14 as follows: - moot question is whether exclusionary clause (e) of para 3 is attracted; if so, whether liaison offices would stand excluded from meaning of expression permanent establishment . Clause (e) of para 3 says that expression permanent establishment shall be deemed not to include maintaining of fixed place of business solely for purpose of carrying on for enterprise any other activity of preparatory or auxiliary character, Mr. Ranina placed before us extracts from various dictionaries to show meaning of word auxiliary . It is unnecessary to refer to them here. Suffice it to say that word auxiliary in common English usage means helping, assisting or supporting main activity. We have, therefore, to ascertain whether activities carried on in liaison offices in India, are only supportive of main business or form one of main functions of business. applicant enters into contract with NRI to remit to nominated banks or nominated beneficiaries in India amount which is Indian rupee equivalent of foreign currency handed over to it. It is true that contract is entered into in UAE and amount to be remitted as well as commission is also received in UAE. contract is, therefore executed in UAE. To fulfill its obligation under contract applicant remits amount in either of 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 instruments of cheques/drafts prepared by liaison offices to beneficiaries at various places in India. In so far as first mode is concerned, amount is remitted telegraphically by transferring directly from UAE through bank channel to various places in India and in such remittances liaison offices have no role to play except attending to complaints, if any, in India regarding remittances in cases of fraud etc. This is undoubtedly work of auxiliary character. However, where is undoubtedly work of auxiliary character. However, where applicant adopts second mode for remitting amounts in India -an activity approved by RBI liaison offices of applicant play important role. They down load data from internet with regard to amount to be remitted, names and addresses of beneficiaries and then print cheques/drafts and dispatch them to addresses of beneficiaries in India through courier. role of liaison offices in remitting amounts by adopting second mode, is nothing short of performing contract of remitting amounts at least in part. This case presents good example of auxiliary activity to main activities and essential activity in performance of contractual obligation. Whereas in first mode, activity undertaken by liaison offices in India may be said to be auxiliary in character, same cannot be said of second mode. Down loading data, preparing cheques for remitting amount, dispatching same through courier by liaison offices is important part of main work itself because without remitting amount to beneficiaries as desired by NRIs, performance of contract will not be complete. So activities of liaison offices in second mode remittance, cannot be said to be work of auxiliary character. It is indeed significant part of main work of UAE establishment. It follows that liaison offices of applicant in India for purposes of second mode of remittance of amount would be permanent establishment within meaning of expression in DTAA. 12 Authority accordingly concluded that so much of profits as shall be deemed to accrue or arise to respondent in India, which were attributable to PE, namely, liaison offices in India, would be taxable in India even under DTAA, and answered question affirmatively against respondent- assessee. 4. Following impugned ruling of Authority, dated 26.5.2004, Department issued four notices of even date i.e. 19.7.2004 under Section 148 of 1961 Act addressed to respondent pertaining to assessment years 2000-2001, 2001- 2002, 2002-2003 and 2003-2004 respectively. respondent, therefore, carried matter before High Court of Delhi at New Delhi (for short, High Court ) by way of Writ Petition No. 14869/2004, inter alia, for quashing of ruling of Authority dated 26.5.2004, quashing of stated notices and for direction to appellants not to tax 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. High Court, after adverting to indisputable facts, noted that Authority committed manifest error in appreciating relevant facts and materials on record and more particularly, misread purport of 13 Section 90 of 1961 Act and settled legal position that DTAA ought to override provisions of Act (the 1961 Act). In other words, tax liability of respondent was required to be assessed on basis of provisions in stated treaty, namely, DTAA. High Court adverted to 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 present case, liability to tax under DTAA is governed by Article 7. Sub-section (1) of Article 7 of DTAA categorically provides that profits of enterprise of contracting State shall be taxable only in that State, unless enterprise carries on business, in other State, through permanent establishment situated thereof. If enterprise carries on business as aforesaid, profits of enterprise may be taxed in other State, but only so much of that, as is attributable to permanent establishment. Therefore, liability on account of tax, of enterprise of either of contracting State, in India, would arise if enterprise in issue, i.e., petitioner, had permanent establishment in India. provisions of Section 5(2) (b) and Section 9(1)(1) of Act would have, in our view, no applicability. Discussion with respect to business connection in impugned ruling was, in our view, unnecessary. Authority had to determine only whether petitioner carried on business in India through permanent establishment. For this purpose it was required to examine definition of permanent establishment as contained in Article 5 of DTAA read with Article 5(3)(e). There is no dispute raised by petitioner that it maintains liaison offices in India and hence, would fall within definition of permanent establishment in accordance with provisions of Article 5(2)(c). petitioner, however, has contended both before Authority and before us that it falls within exclusionary clause contained in Article 5(3)(e) in as much as activity carried on by liaison offices in India, has auxiliary character. On this aspect of matter discussion and reasoning by Authority is contained in 2 (2004) 10 SCC 1 14 paragraphs 12 to 15 of impugned ruling. Authority came to conclusion that activity carried on by liaison offices in India did not have auxiliary character in terms of Article 5(3)(e) of Act as option of remitting of funds through liaison offices in India was exercised by NRI remitter which was nothing short of, as in words of parties, performing contract of remitting amounts . Authority, thus, held that while, in respect of all remittances of funds by telegraphic transfer through banking channels, role of liaison offices in India of auxiliary character, same was not true in respect of remittance of funds through liaison offices in India. This was based on reasoning that without remittances of funds to beneficiaries in India performance under contract would not have been complete and thus, downloading of data, preparation of cheques for remitting amount, dispatching same through courier by liaison offices, constituted important part of main work, which was, remitting amount to beneficiaries as desired by NRIs. Based on this reasoning, Authority came to conclusion that work of liaison offices in India, being significant part of main work of UAE establishment, liaison office of petitioner, in India, would constitute permanent establishment within provisions of DTAA. And again, whilst analysing scope of Articles 5 and 7 of DTAA in paragraph 12 of impugned judgment, High Court noted thus: - 12. ...In case of DTAA under consideration in present case under Article 5 read with Article 7, profits of enterprise are liable to tax in India if enterprise were to carry on business through permanent establishment, meaning thereby fixed place of business through which business of enterprise is wholly or partly carried on. Under Article 5(2)(c), amongst others, permanent establishment includes office. However, Article 5(3) which opens with non-obstante clause, is illustrative of instances where-under DTAA various activities have been deemed as ones which would not fall within ambit of expression permanent establishment . One such exclusionary clause is found in Article 5(3)(e) which is: maintenance of fixed place of business solely for purpose of carrying on, for enterprise, any other 15 activity of preparatory or auxiliary character. plain meaning of word auxiliary is found in Black s Law Dictionary 7th Edition at page 130 which reads as aiding or supporting, subsidiary . only activity of liaison offices in India is simply to download information which is contained in main servers located in UAE based on which cheques are drawn on banks in India whereupon said cheques are couriered or dispatched to beneficiaries in India, keeping in mind instructions of NRI remitter. Can such activity be anything but auxiliary in character. Plainly to our minds, instant activity is in aid or support of main activity. error into which, according to us, Authority has fallen is in reading Article 5(3)(e) as clause which permits making value judgment as to whether transaction would or would not have been complete till role played by liaison offices in India was fulfilled as represented by petitioner to their NRI remitter. According to us, what has been lost sight of, is that, by invoking clause with regard to permanent establishment, we would, by deeming fiction tax income which otherwise neither arose nor accrued in India when looked at from this point of view, exclusionary clause contained in Article 5(3) and in this case in particular, sub-clause (e) have to be given wider and liberal play. Once activity is construed as being subsidiary or in aid or support of main activity it would, according to us, fall within exclusionary clause. To say that particular activity was necessary for completion of contract is, in sense saying obvious as every other activity which enterprise undertakes in earning profits is with ultimate view of giving effect to obligations undertaken by enterprise vis-a-vis its customer. If looked at from that point of view, then, no activity could be construed as preparatory or of auxiliary character. On this aspect of matter, Supreme Court in 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 permanent establishment in India. Supreme Court, while holding that back office operations fall within exclusionary clause Article 5(3)(e) of Indo-US Double Taxation DTAA, which is, identical to DTAA under consideration in present case, came to conclusion that back office operations came within purview of Article 5(3)(e). It is laid down by Supreme Court in case of Morgan Stanley (supra) that in ascertaining what would constitute 16 permanent establishment within meaning of Article 5(1) of Indo-US DTAA, one had to undertake what is called functional and factual analysis of each of activities undertaken by establishment. In that case Supreme Court came to conclusion that entity located in India which was engaged in only supporting front office functions of Morgan Stanley & Co., 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 Indo-US DTAA. Accordingly, High Court was of opinion that Authority proceeded on wrong premise by first examining efficacy of Section 5(2)(b) and Section 9(1)(i) of 1961 Act instead of applying provisions in Articles 5 and 7 of DTAA for ascertaining respondent s liability to tax. Further, nature of activities carried on by respondent-assessee in liaison offices being only of preparatory and auxiliary character, were clearly excluded by virtue of deeming provision. High Court distinguished decisions relied upon by 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, ratio in these decisions, according to High Court, was that non-resident entity could be taxed only if there was business connection 3 AIR 1953 SC 105 17 between business carried on by non-resident which yields profits or gains and some activity in taxable territory which contributes directly or indirectly to earning of those profits or gains. High Court then concluded that activity carried on by liaison offices of respondent in India did not in any manner contribute directly or indirectly to earning of profits or gains by respondent in UAE and more so, every aspect of transaction was concluded in UAE, whereas, activity performed by liaison offices in India was only supportive of transaction carried on in UAE. High Court also took note of explanation 2 to Section 9(1)(i) and observed that same reinforces fact that in order to have business connection, in respect of business activity carried on by non-resident through person situated in India, it should involve more than what is supportive or subsidiary to main function referred to in clauses (a) to (c). High Court eventually quashed impugned ruling of Authority and also notices issued by Department under Section 148 of 1961 Act, since notices were based on ruling which was being set aside. High Court, however, gave liberty to appellants to proceed against respondent on any other ground, as may be permissible in law. 18 5. Feeling aggrieved, Department has assailed decision of High Court by way of present appeal arising from SLP(C) No. 31276/2011. 6. We have heard Mr. Arijit Prasad, learned senior counsel for appellants and Mr. H.P. Ranina, learned counsel for respondent. 7. Both sides have more or less reiterated stand taken before Authority and High Court. After cogitating over rival submissions and opinion recorded by Authority and High Court, core issue that needs to be answered in this appeal is: whether stated activities of respondent-assessee would qualify expression of preparatory or auxiliary character ? Having regard to nature of activities carried on by respondent-assessee, as held by Authority, it would appear that respondent was engaged in business and had business connections , for which, by virtue of deeming provision and sweep of Sections 2(24), 4 and 5 read with Section 9 of 1961 Act including exposition in Anglo-French Textile Co. Ltd. (supra) and R.D. Aggarwal & Company (supra), it would be case of income deemed to accrue or arise in India to respondent. 19 8. However, in present case, matter in issue will have to be answered on basis of stipulations in DTAA notified in exercise of powers conferred under Section 90 of 1961 Act. This position is no more res integra in view of dictum in Azadi Bachao Andolan (supra). efficacy of Section 90 of 1961 Act has been delineated by this Court after adverting to 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 Court went on to observe in paragraph 28, as follows: - 28. survey of aforesaid cases makes it clear that judicial consensus in India has been that Section 90 is specifically intended to enable and empower Central Government to issue notification for implementation of terms of Double Taxation Avoidance Agreement. When that happens, provisions of such agreement, with respect to cases to which they apply, would operate even if inconsistent with provisions of Income Tax Act. We approve of reasoning in decisions which we have noticed. If it was not intention of legislature to make departure from general principle of chargeability to tax under Section 4 and 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 Act, then there was no purpose of making those sections subject to provisions of Act . very object of grafting said two sections with said clause is to enable Central Government to issue notification under Section 90 towards implementation of terms of DTACs which would automatically override provisions of Income Tax Act in matter of ascertainment of chargeability to income tax and ascertainment of total income, to extent of inconsistency with terms of DTAC. (emphasis supplied) In view of this exposition, which squarely applies to fact situation of present case, we must answer question under consideration in light of purport of provisions in DTAA, which has been executed by Government of India and Government of UAE, and has come into force consequent to publication vide notification dated 18.11.1993. recitals of said notification read thus: - Income-tax Act, 1961:Notification under section 90: Agreement Between Government of Republic of India and Government of United Arab Emirates for avoidance of double taxation and 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 annexed agreement between Government of United Arab Emirates and Government of Republic of India for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and on capital has entered into force on 22nd September, 1993, after notification by both Contracting States to each other of completion of proceedings required by laws for bringing into force of said agreement in accordance with paragraph 1 of Article 30 of said Agreement: 21 Now, therefore, in exercise of powers conferred by section 90 of Income-tax Act, 1961 (43 of 1961), section 24A of Companies (Profits) Surtax Act, 1964 (7 of 1964), and section 44A of Wealth-tax Act, 1957 (27 of 1957), Central Government hereby directs that all provisions of said agreement shall be given effect to in Union of India. ANNEXURE AGREEMENT BETWEEN GOVERNMENT OF REPUBLIC OF INDIA AND GOVERNMENT OF UNITED ARAB EMIRATES FOR AVOIDANCE OF DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL. Government of Republic of India and Government of United Arab Emirates Desiring to promote mutual economic relations by concluding Agreement for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and on capital. Have agreed as follows: Article 1 of DTAA bears title Personal Scope predicating that agreement shall apply to persons who are residents of one or both of contracting States. Article 2 deals with Taxes Covered , to which 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. existing taxes to which 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) income-tax including any surcharge thereon; (ii) surtax; and (iii) 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, taxes referred to in paragraph 2 of this Article. competent authorities of 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 meaning of concerned expression contained in agreement, unless context otherwise requires. Article 4 pertains to Resident of Contracting State . other Articles which may have bearing on 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 purposes of this Agreement, term "permanent establishment" means fixed place of business through which business of enterprise is wholly or partly carried on. 2. term "permanent establishment" includes especially: a. place of management; 23 b. branch; c. office; d. factory; e. workshop; f. mine, oil or gas well, quarry or any other place of extraction of natural resources; g. farm or plantation; h. building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for period of more than 9 months; i. furnishing of services including consultancy services by enterprise of Contracting State through employees or other personnel in other Contracting State, provided that such activities continue for same project or connected project for period or periods aggregating to more than 9 months within any twelve-month period. 3. Notwithstanding preceding provisions of this Article, term permanent establishment" shall be deemed not to include: a. use of facilities solely for purpose of storage, display or delivery of goods or merchandise belonging to enterprise; b. maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of storage, display or delivery; c. maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of processing by another enterprise; d. maintenance of fixed place of business solely for purpose of purchasing goods or merchandise, or of collecting information, for enterprise; e. maintenance of fixed place of business solely for purpose of carrying on, for enterprise, any other activity of preparatory or auxiliary character. 4. Notwithstanding provisions of paragraphs 1 and 2, where person - other than agent of independent status to whom paragraph 5 applies - is acting on behalf of enterprise and has, and habitually exercises in Contracting State authority to conclude contracts on 24 behalf of enterprise, that enterprise shall be deemed to have permanent establishment in that State in respect of any activities which that person undertakes for enterprise, unless activities of such persons are limited to purchase of goods or merchandise for enterprise. 5. enterprise of Contracting State shall not be deemed to have permanent establishment in other Contracting State merely because it carries on business in that other State through broker, general commission agent or any other agent of independent status, provided that such persons are acting in ordinary course of their business. However, when activities of such agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered agent of independent status within meaning of this paragraph. Article 7 BUSINESS PROFITS 1. profits of enterprise of Contracting State shall be taxable only in that State unless enterprise carries on business in other Contracting State through permanent establishment situated therein. If enterprise carries on business as aforesaid, profits of enterprise may be taxed in other State but only so much of them as is attributable to that permanent establishment. 2. Subject to provisions of paragraph 3, where enterprise of Contracting State carries on business in other Contracting State through permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment profits which it might be expected to make if it were distinct and separate enterprise engaged in same or similar activities under same or similar conditions and dealing wholly independently with enterprise of which it is permanent establishment. 3. In determining profits of permanent establishment, there shall be allowed as deductions expenses which are incurred for purposes of business of permanent establishment, including executive and general administrative expenses so incurred, whether in State in which permanent establishment is situated or elsewhere. 25 4. In so far as it has been customary in Contracting State to determine profits to be attributed to permanent establishment on basis of apportionment of total profits of enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining profits to be taxed by such apportionment as may be customary; methods of apportionment adopted shall, however, be such that, result shall be in accordance with principles contained in this Article. 5. No profits shall be attributed to permanent establishment by reason of mere purchase by permanent establishment of goods or merchandise for enterprise. 6. For purposes of preceding paragraphs, profits to be attributed to permanent establishment shall be determined by same method year by year unless there is good and sufficient reason to contrary. 7. Where profits include items of income which are dealt with separately in other Articles of this Agreement, then provisions of those Articles shall not be affected by provisions of this Article. Keeping in view finding recorded by High Court, we may proceed on basis that respondent-assessee had fixed place of business through which business of respondent was being wholly or partly carried on. That, however, would not be conclusive until further finding is recorded that respondent had PE situated in India, so as to attract Article 7 dealing with business profits to become taxable in India, to extent attributable to PE of respondent in India. For that, we may have to revert back to Article 5, which deals with and defines Permanent Establishment (PE) . fixed place of 26 business through which business of enterprise is wholly or partly carried on is regarded as PE. term Permanent Establishment (PE) would include specified places referred to in clause 2 of Article 5. It is not in dispute that place from where activities are carried on by respondent in India is liaison office and would, therefore, be covered by term PE in Article 5(2). However, Article 5(3) of DTAA opens with non- obstante clause and also contains deeming provision. It predicates that notwithstanding preceding provisions of concerned Article, which would mean clauses 1 and 2 of Article 5, it would still not be PE, if any of clauses in Article 5(3) are applicable. For that, functional test regarding activity in question would be essential. High Court has opined that respondent was carrying on stated activities in fixed place of business in India of preparatory or auxiliary character. Indeed, expression business has been defined in 1961 Act, as follows: - 2. Definitions.- In this Act, unless context otherwise requires,- xxx xxx xxx (13) business includes any trade, commerce or manufacture or any adventure or concern in nature of trade, commerce or manufacture; 27 expression business connection can be discerned from Section 9(1), as also, meaning of expression business activity . We will advert to those provisions little later and for time being, assume that stated activities of respondent are business activities. However, since stated activities of liaison offices of respondent in India are of preparatory or auxiliary character, same would fall within excepted category under Article 5(3)(e) of DTAA. Resultantly, it cannot be regarded as PE within sweep of Article 7 of DTAA. expression preparatory is not defined in 1961 Act or DTAA. dictionary meaning of that expression can be traced to term preparatory work and travaux pr paratoires , which in Black s Law Dictionary (Eleventh Edition), read thus:- preparatory work. See TRAVAUX PR PARATOIRES. travaux pr paratoires. Materials used in preparing ultimate form of agreement or statute, and esp. of international treaty; draft or legislative history of treaty. expression auxiliary is also not defined in 1961 Act or DTAA. In common parlance, meaning of that expression is predicated in Concise Oxford English Dictionary (Twelfth Edition), which reads thus: - Auxiliary- adj. providing additional help or support. n. auxiliary person or thing. N. Amer. group of 28 volunteers who assist church, hospital, etc. with charitable activities. In Black s Law Dictionary (Eleventh Edition), term auxiliary is defined as follows: - Auxiliary adj. 1. Aiding or supporting. 2. Subsidiary. 3. Supplementary. crucial activities in present case are of downloading particulars of remittances through electronic media and then printing cheques/drafts drawn on banks in India, which, in turn, are couriered or dispatched to beneficiaries in India, in accordance with instructions of NRI remitter. While doing so, liaison office of respondent in India remains connected with its main server in UAE and information residing thereat is accessed by liaison office in India for purpose of remittance of funds to beneficiaries in India by NRI remitters. These are combination of virtual and physical activities unlike virtual activity of funds being remitted by telegraphic transfer through banking channels. As regards latter, it is not case of Department that same would be covered and amenable to tax liability by virtue of deeming provision in 1961 Act. 9. While answering question as to whether activity in question can be termed as other than that of preparatory or 29 auxiliary character , we need to keep in mind limited permission given by RBI to respondent under Section 29(1)(a) of 1973 Act, on 24.9.1996. From paragraph 2 of stated permission, it is evident that RBI had agreed for establishing liaison office of respondent at Cochin, initially for period of three years to enable 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 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 Head Office and counter signature by authorised signatory of Office at Cochin; and (v) following up with Indian correspondent banks. These are limited activities which respondent has been permitted to carry on within India. This permission does not allow respondent-assessee to enter into contract with anyone in India, but only to provide service of delivery of cheques/drafts drawn on banks in India. Notably, permitted activities are 30 required to be carried out by respondent subject to conditions specified in clause 3 of permission, which includes not to render any consultancy or any other service, directly or indirectly, with or without any consideration and further that liaison office in India shall not borrow or lend any money from or to any person in India without prior permission of RBI. conditions make it amply clear that 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 RBI. liaison office of respondent in India cannot even charge commission/fee or receive any remuneration or income in respect of activities undertaken by liaison office in India. From onerous stipulations specified by RBI, it could be safely concluded, as opined by High Court, that activities in question of liaison office(s) of respondent in India are circumscribed by permission given by RBI and are in nature of preparatory or auxiliary character. That finding reached by High Court is unexceptionable. 10. High Court had justly adverted to exposition of this Court in DIT (International Taxation), Mumbai vs. Morgan 31 Stanley & Co. Inc.9, which dealt with case of assessee having set up office in India to support 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 entity in United States. This Court, in paragraphs 10 to 14, observed thus: - 10. In our view, second requirement of Article 5(1) of DTAA is not satisfied as regards back office functions. We have examined terms of Agreement along with advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from reading of above Agreement/application that MSAS in India would be engaged in supporting 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 PE stood constituted one has to undertake what is called as functional and factual analysis of each of activities to be undertaken by establishment. It is from that point of view, we are in agreement with ruling of AAR that in present case Article 5(1) is not applicable as said MSAS would be performing in India only back office operations. Therefore to extent of above back office functions second part of Article 5(1) is not attracted. 11. Lastly, as rightly held by AAR there is no agency PE as PE in India had no authority to enter into or conclude contracts. contracts would be entered into in United States. They would be concluded in US. implementation of those contracts only to extent of back office functions would be carried out in India, and therefore, MSAS would not constitute agency PE as contended on behalf of Department. 12. In DTAA, term PE means fixed place of business through which business of MNE is wholly or partly carried out. definition of word PE in Section 92-F(iii) is inclusive, however, it is not under Article 9 (2007) 7 SCC 1 32 5(1) of Treaty. It is for this reason that Article 5(2) of DTAA herein refers to places included as PE of MNE. One such place is mentioned in Article 5(2)(l) which deals with furnishing of services. 13. concept of PE was introduced in 1961 Act as part of statutory provisions of transfer pricing by Finance Act of 2001. In Section 92-F(iii) word enterprise is defined to mean person (including permanent establishment of such person) who is, or has been, or is proposed to be, engaged in any activity, relating to production, Under CBDT Circular No. 14 of 2001 it has been clarified that term PE has not been defined in Act but its meaning may be understood with reference to DTAA entered into by India. Thus intention was to rely on concept and definition of PE in DTAA. However, vide Finance Act, 2002 definition of PE was inserted in Income Tax Act, 1961 (for short IT Act ) vide Section 92-F(iii-a) which states that PE shall include fixed place of business through which business of MNE is wholly or partly carried on. This is where difference lies between definition of word PE in inclusive sense under IT Act as against definition of word PE in exhaustive sense under DTAA. This analysis is important because it indicates intention of Parliament in adopting 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 fixed place of business will not constitute PE. Article 5(3) commences with non obstante clause. It states that notwithstanding what is stated in Article 5(1) or under Article 5(2) term PE shall not include maintenance of fixed place of business solely for advertisement, scientific research or for activities which are preparatory or auxiliary in character. In present case we are of view that 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 present case MSAS would not constitute fixed place PE under Article 5(1) of DTAA as regards its back office operations. (emphasis supplied) 33 Learned counsel for appellant, however, attempted to distinguish this judgment on argument that this case dealt with issue of service PE. According to him, Court must examine full transactions of respondent to determine whether work done by respondent-assessee was one of backup office work or auxiliary work. Insofar as nature of activities carried on by respondent through liaison office in India, as permitted by RBI, we have upheld conclusion of High Court that same were in nature of preparatory or auxiliary character and, therefore, covered by Article 5(3)(e). As result, fixed place used by respondent as liaison office in India, would not qualify definition of PE in terms of Articles 5(1) and 5(2) of DTAA on account of non-obstante and deeming clause in Article 5(3) of DTAA. 11. Having said thus, it must follow that respondent was not carrying on any business activity in India as such, but only dispensing with remittances by downloading information from main server of respondent in UAE and printing cheques/drafts drawn on banks in India as per instructions given by NRI remitters in UAE. transaction(s) had completed with remitters in UAE, and no charges towards fee/commission could 34 be collected by liaison office in India in that regard. To put it differently, no income as specified in Section 2(24) of 1961 Act is earned by liaison office in India and moreso because, liaison office is not PE in terms of Article 5 of DTAA (as it is only carrying on activity of preparatory or auxiliary character). concomitant is - no tax can be levied or collected from liaison office of respondent in India in respect of primary business activities consummated by respondent in UAE. activities carried on by liaison office of respondent in India as permitted by RBI, clearly demonstrate that 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, deeming provisions in Sections 5 and 9 of 1961 Act can have no bearing whatsoever. 12. Our attention was invited to dictum in Assistant Director of Income Tax-1, New Delhi vs. E-Funds IT Solution Inc.10. Paragraph 2 of said decision would clearly indicate background in which issue was answered by this Court. same reads thus: - 10 (2018) 13 SCC 294 35 2. assessing authority decided that assessees had permanent establishment (hereinafter referred to as PE ) as they had fixed place where they carried on their own business in Delhi, and that, consequently, Article 5 of India US Double Taxation Avoidance Agreement of 1990 (hereinafter referred to as DTAA ) was attracted. Consequently, assessees were liable to pay tax in respect of what they earned from aforesaid fixed place PE in India. CIT (Appeals) dismissed appeals of assessees holding that Article 5 was attracted, not only because there was fixed place where assessees carried on their business, but also because they were service PEs and agency PEs under Article 5. In appeal to ITAT, ITAT held that CIT (Appeals) was right in holding that fixed place PE and service PE had been made out under Article 5, but said nothing about agency PE as that was not argued by Revenue before ITAT. However, ITAT, on calculation formula different from that of CIT (Appeals), arrived at nil figure of income for all relevant assessment years. appeal of assessees to High Court proved successful and High Court, by elaborate judgment, has set aside findings of all authorities referred to above, and further dismissed cross-appeals of Revenue. Consequently, Revenue is before us in these appeals. Court, after analysing decisions and concerned report produced before it, observed in paragraph 22 as follows: - 22. This report would show that no part of main business and revenue earning activity of two American companies is carried on through fixed business place in India which has been put at their disposal. It is clear from above that Indian company only renders support services which enable assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to fixed place PE and High Court judgment is, therefore, correct on this score. (emphasis supplied) 36 We may usefully refer to paragraphs 24 and 26 of reported decision, which read thus: - 24. It has already been seen that none of customers of assessees are located in India or have received any services in India. This being case, it is clear that very first ingredient contained in Article 5(2)(l) is not satisfied. However, learned Attorney General, relying upon Para 42.31 of 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 OECD Commentary reads as under: 42.31. Whether or not relevant services are furnished to resident of State does not matter; what matters is that services are performed in State through individual present in that State. xxx xxx xxx 26. We entirely agree with approach of High Court in this regard. Para 42.31 of OECD Commentary does not mean that services need not be rendered by foreign assessees in India. If any customer is rendered service in India, whether resident in India or outside India, 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 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 other ground, namely, that other personnel would cover personnel employed by Indian company as well, and that US companies through such personnel are furnishing services in India. This being case, it is clear that as very first part of Article 5(2)(l) is not attracted, question of going to any other part of said article does not arise. It is perhaps for this reason that assessing officer did not give any finding on this score. (emphasis supplied) As aforesaid, we agree with finding recorded by High Court about nature and character of stated activities carried on by 37 liaison offices of respondent and in our view, High Court justly reckoned same as being of preparatory or auxiliary character, falling under Article 5(3)(e). 13. High Court has also examined matter in context of explanation to Section 9(1)(i) of 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) 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 transfer of capital asset situate in India. Explanation. For purposes of this clause (a) in case of business of which all operations are not carried out in India, income of business deemed under this clause to accrue or arise in India shall be only such part of income as is reasonably attributable to operations carried out in India; (b) in case of non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to purchase of goods in India for purpose of export; (c) in case of non-resident, being person engaged in business of running 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 collection of news and views in India for transmission out of India; (d) in case of non-resident, being (1) individual who is not citizen of India; or 38 (2) firm which does not have any partner who is citizen of India or who is resident in India; or (3) company which does not have any shareholder who is 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 shooting of any cinematograph film in India. .. After enactment of Finance Act, 2003, explanation 2 came to be inserted after renumbered explanation 1 to clause (i) of sub- Section (1) of Section 9 with effect from 1.4.2004. same reads thus: - Income deemed to accrue or arise in India. 9. (1) 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 transfer of capital asset situate in India. Explanation 1.- xxx xxx xxx Explanation 2. For removal of doubts, it is hereby declared that business connection shall include any business activity carried out through person who, acting on behalf of non-resident,- (a) has and habitually exercises in India, authority to conclude contact on behalf of non- resident, unless his activities are limited to purchase of goods or merchandise for non- resident; or (b) has no such authority, but habitually maintains in India stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of non-resident; or 39 (c) habitually secures orders in India, mainly or wholly for non-resident or that non-resident and other non-residents controlling, controlled by, or subject to same common control, as that non- resident: Provided that such business connection shall not include any business activity carried out through broker, general commission agent or any other agent having independent status, if such broker, general commission agent or any other agent having independent status is acting in 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 non-resident (hereafter in this proviso referred to as principal non- resident) or on behalf of such non-resident and other non-residents which are controlled by principal non-resident or have controlling interest in principle non-resident or are subject to same common control as principal non- resident, he shall not be deemed to be broker, general commission agent or agent of independent status. meaning of expressions business connection and business activity has been articulated. However, even if stated activity(ies) of liaison office of respondent in India is regarded as business activity, as noted earlier, same being of preparatory or auxiliary character ; by virtue of Article 5(3)(e) of DTAA, fixed place of business (liaison office) of respondent in India otherwise PE, is deemed to be expressly excluded from being so. And since by legal fiction it is deemed not to be PE of respondent in India, it is not amenable to tax liability in terms of Article 7 of DTAA. 40 14. Taking any view of matter, therefore, we find no substance in this appeal. We uphold conclusions reached by High Court for reasons stated hitherto. 15. Accordingly, 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. Union of India & Anr. v. U.A.E. Exchange Centre